What is Inventory?
Inventory is the goods and materials that a company holds for sale or that are used in the production of goods to be sold. It is the raw materials, work-in-progress, and finished goods that a company has on hand in order to meet customer demand.
In a merchandising company, either wholesale or retail, inventory is composed of the items that have been purchased in order to be resold to customers. In a supermarket, milk is inventory, but a shopping cart is not.
Types of Inventory
There are several ways to categorize the types of Inventories. But in a manufacturing company, there are 3 different types of inventory:
- Raw Materials: Raw materials are the basic materials or components used in the production of finished goods. For bicycle manufacturers, one of the raw materials is tubular steel.
- Work-in-Progress (WIP): Work-in-progress refers to partially completed products that are in the process of being manufactured.
- Finished Goods: Finished goods are products that have been completed and are waiting to be sold to customers. A completed car rolling off the automobile assembly line is part of the finished goods inventory.
In addition to raw materials, work-in-progress, and finished goods, inventory can also include items such as supplies, spare parts, and other items that are used in the production process or to run the business.
How Inventory Important to the Business
The company may obtain the inventories to maintain an accurate inventory is important for businesses to ensure they have enough stock to meet customer demand and to minimize stockouts and stock surplus.
Maintaining customer satisfaction: By having adequate inventory levels, a business can meet customer demand and avoid stockouts, which can lead to lost sales and a decrease in customer satisfaction.
Smooth operations: Inventory is critical to ensuring smooth operations, as it provides the raw materials and supplies needed to keep production processes running.
To take advantage of bulk purchasing discounts: By purchasing inventory in bulk, businesses can take advantage of volume discounts.
To maintain cash flow: Inventory is often a significant source of working capital for businesses, and having an adequate level of inventory can help maintain cash flow by reducing the need for frequent large purchases.
To mitigate the impact of supply chain disruptions: Maintaining an appropriate level of inventory helps businesses to avoid stockouts and minimize the impact of supply chain disruptions.
In summary, inventory helps businesses operate smoothly, meet customer demand, and respond to changes in the market and supply chain, which ultimately supports their growth and profitability.
Inventory cost consists of all the expenses associated with holding and maintaining inventory, including storage cost, obsolescence cost, handling cost, stock-out cost, and opportunity cost. Inventory management aims to minimize these costs by optimizing inventory levels and ensuring efficient inventory processes by balancing the cost of holding inventory with the cost of stock shortages.
Here are some inventory management strategies that can help businesses can reduce waste, increase efficiency, and improve customer satisfaction by ensuring that inventory is available when and where it is needed:
Implement an inventory tracking system: Using a software system or manual methods to track inventory levels and transactions help ensure accuracy and identify discrepancies early on.
Demand forecasting: Accurately forecasting demand helps ensure that inventory levels are appropriate to meet customer needs without excessive waste.
Just-in-Time (JIT) inventory management: JIT is a method of ordering inventory just as it is needed, reducing the amount of inventory that must be stored. This may need to collaborate with suppliers to ensure timely deliveries and reliability.
Safety stock: Maintaining a safety stock helps prevent stockouts, but having too much safety stock ties up capital and increases storage costs. Finding the right balance is key.
Conduct physical inventory counts: Periodically perform physical counts of inventory to ensure the accuracy of the tracking system.
Inventory turnover ratio: Monitoring the inventory turnover ratio helps to ensure that inventory is not being held for too long and is being sold in a timely manner.
Establish reorder points: Determine when inventory levels have reached a point where a new order should be placed to avoid stock-outs and take action when they fall outside of established parameters.