Inventory is considered the life blood of the industries and it is defined as a store or stock of goods. Usually these goods on the inventory are maintained near a business’s location or on hand so that the company may meet demand easily and quickly. In case of retail establishment companies, if the firm does not have on stock a required item, customers may look elsewhere to have their needs satisfied. In case of the manufacturing companies, they also must maintain some inventory of work in process and raw materials to keep the factory running. In addition, in order to meet the demand manufacturing companies must maintain some supply of finished goods on their inventory.
Since inventory is the most important working capital component, an excess or shortage of inventory is always harmful for a company. The term inventory denotes different components of the stock on hand at a particular time and comprises goods in the process of manufacturing, raw materials, as well as finished goods. For accounting purposes, an inventory has a primary significance and it is used in order to ascertain the correct income for a particular period. This way, inventory plays an essential part determining the profit of a business.
Inventory is also important for the financial sector, where it is defined as the sum of the value of the stock of finished goods as well as fuel and lubricants, raw materials, maintenance consumables, spare parts, and semi-processed materials at any given point of time.
There are many usable definitions of the term inventory. The term refers to the components that make up a product as well as the stockpiles of the product offered for sales by a company. It may also refer to the movable articles that go into the flow of trade.
Sometimes, a company may be forced to keep larger inventory than is necessary in order to keep the factory running and meet the demand under current conditions. Especially in a volatile environment with dynamic demand, an on-hand inventory is used as a buffer against unexpected demand changes. This buffer inventory, besides its role to keep the company flexible and adaptable on the market, can also serve to protect it if upon inspection the supplier quality is found substandard or a supplier fails to deliver at the required time. Without a buffer inventory either of this situations would otherwise leave the firm unable to meet the demand and without the necessary raw materials. There are also other reasons for maintaining an unnecessarily large inventory, such as ordering more in advance of an expected price increase or buying in bulk to take advantage of quantity discounts.
The theory groups inventory type in the following five classifications: raw materials, work in progress, finished goods, service inventory, and transportation (in-transit inventory).
As an inventory category, raw materials are those items that are used in the manufacturer’s production process in order to build sub assemblies, components, or finished products. These raw materials may be extracted materials or commodities that the company or its subsidiary has extracted, produced or just purchased from outside the organization. Even if the raw materials items are considered as finished goods by a supplier or partially assembled, the purchaser company may still classify them as raw materials if used as such in its production process. Typically, raw materials are various commodities such as minerals, ore, chemicals, petroleum, steel, grain, wood, paint, and food items. However, if they are purchased outside the firm, items such as key stock, ball bearings, nuts and bolts, seats, casters, wheels, axles, bars and even engines may be also regarded as raw materials. In general, raw materials are all those items that are used by a company to manufacture components and finished products.
Work in process
Work in process is an inventory category made up of all the materials, assemblies, subassemblies, and parts or components that are waiting to be processed or are being processed within the system. This generally includes all materials on stock, from raw material up to material processed and awaiting final inspection before inclusion in finished goods. Work in process also includes any item that has a parent even if it is not a raw material. For instance, in manufacturing a rolling cart product, work in process consists of leg assemblies, legs, tops, frames, and casters.
In the inventory, the finished goods category is comprised from completed items that are ready for a customer order. A finished good is any product that doesn’t have a parent. The finished goods inventory can be defined as the stock of completed products. These items have been inspected and passed the requirements of the final inspection so that they can be transferred into finished goods inventory out of work in process. Those finished goods can be sold to wholesalers, retailers, held in anticipation of a customer order, sol directly to their final user, or sent to distribution centers.
Operating supplies, service, repair, and maintenance goods are used to maintain and support the infrastructure and the production process. These items make up the service inventory or the MRO goods. These items are not a direct part of the finished product but they are rather consumed as a result of the production process. Examples of service goods include janitorial supplies, coolants, lubricants, oils, gloves, uniforms, tools, packing material, screws, nuts and bolts, key stock, and shim stock. Part of the MRO goods inventory are also considered the office supplies such as toner, copier paper, pens and pencils, and staples.
Transportation or in transit inventory
The need to transport material or items from one location to another creates transit inventories. In getting items from one location to another there is some transportation time involved and during this transportation process those goods are considered in transit inventory. This can also be referred to as pipeline inventory. In order to go from a regional warehouse to a retail facility, merchandise shipped by rail or truck can sometimes take days or even weeks. Especially in the case of large companies such as automobile manufacturers, freight consolidators are employed to pool into one shipping source their transit inventories coming from various locations, in order to take advantage of economies of scale.
According to the purpose they serve, inventories can be classified further in buffer inventory, transit inventory, decoupling inventory, anticipation inventory, MRO goods inventory, and cycle inventory. Some of these categories are also are known by other names, such as seasonal inventory, safety inventory, and speculative inventory.
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