Any company that produces or sells goods, regardless of size, needs to make sure that it has enough inventory available to meet demand. Anticipation inventory by definition refers to the excess inventory kept on hand to accommodate fluctuations in customer demand or periods of sporadic production.

Companies would rather be overprepared and have to markdown or dispose of excess inventory than be underprepared and lose customers because they cannot fulfill their orders.

Managing Inventory Systems

A company's inventory management system is a critical element to its operational efficiency. It must have a process in place for ordering, receiving, storing and shipping inventory. Having an efficient system in place allows companies to better measure when inventory levels need to be adjusted.

Inefficient systems may make it more difficult for companies to predict inventory levels during various periods, which in turn makes it harder to plan properly.

The Need for Anticipatory Inventory

A company cannot sell products it does not have in stock. A company will purchase anticipation inventory to ensure it always has products on hand that it can sell in order to keep the cash flow going. Companies often choose to order anticipatory stock before certain seasonal times because they can expect an increase in demand.

By not preparing for spikes in demand, a business not only puts itself in position to miss out financially, but it may also harm its brand and lose customer loyalty.

A business may also purchase anticipation inventory when it expects a drastic increase in the cost of the items it needs for production.

For example, if a construction company has many projects lined up and they know the price of nails is about to rise, they may order anticipation inventory to save them money in the long-term. Likewise, anticipatory stock may be ordered if a shortage of a particular good is expected in the future. Companies may take advantage of the current availability and buy plenty of anticipatory stock before it runs out – hence the expression "stock up."

Manufacturing Anticipation Inventory

In manufacturing, anticipatory inventory allows businesses to stock up on raw materials used in production. Having this extra inventory on hand lets manufacturers continue operating during times of low demand. When the demand picks back up, the excess inventory will be gradually depleted, and the firm does not have to go through the logistics of increasing production time – such as increases in hiring, training and labor cost – which subsequently saves them money.

The process is occasionally referred to as "smoothing" because it smooths the peaks of increased demand and the valleys of low demand, keeping output levels consistent and the workforce stable.

The Downside to Anticipation Inventory

For certain businesses, like resale companies, carrying anticipation inventory is not ideal and goes against the fundamentals of their business model. Consumers generally dictate when and what resale companies sell, so it is in the company's best interest if they have relatively predictable demand.

Even non-resale companies have to be cautious of their inventory practices because overstocking products that do not sell will only lead to marking down the prices to create shelf space, disposing of expired items and other practices that cost the business money.

It costs money to store inventory, and the longer it sits around, the more expensive it gets and the less likely a customer is to want it. The true cost of inventory includes the inventory itself, costs associated with storing the inventory and the opportunity cost of the money that was used to purchase the inventory.

The more efficient a company is with its inventory purchasing methods, the less money it stands to lose to handling inventory.