In this article, you will learn the main characteristics of what is inventory management and how it can be good or bad.
If used incorrectly, excessive inventory can be a significant waste of warehouse space, resources, and budget.
Inventory is a company resource, possession, property, or asset that have the following three (3) attributes:
i) that is tangible or intangible,
ii) that can be realized for revenue generation or has a value for exchange, or
iii) which is in the process but is meant for sale in the market.
Over and under Inventory is a waste in lean manufacturing.
Inventory is the raw materials, work in progress (WIP), and finished goods stock that is held.
The main causes are the over inventory is associated with overproduction, making more than the customer wants or in advance of customer demand, these two wastes are heavily interlinked.
It is associated or caused by poor layout and lack of balance in the workflow causing inventory to build up before or after different processes.
This is a good indication of poor flow within the processes.
Under inventory is a waste too, since promotes backorders, short orders, high waiting times, high lead times, etc.
Understanding How to Handle an Inventory?
Inventory means the number of products that a company has available for sale.
Also, this definition includes the number of raw materials that a company has available to make their products.
Therefore, Inventory includes all available items, goods, merchandise, and materials held by a business on-hand for selling in the market to earn a profit.
Sometimes it is represented in terms of money since involves a huge amount of business assets on-hands in a warehouse or storage.
Some people see their warehouse as their “bank” in which they have their money locked until the products are sold.
Inventory levels impact the business economy because the turnover of the products represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders.
Discover What is Inventory Management
Inventory is the array of finished goods or goods used in the production held by a company.
Inventory management classifies the current asset on a company’s balance sheet, and control it as a buffer between manufacturing and order fulfillment.
When an inventory item is sold, its carrying cost transfers to the cost of goods sold (COGS) category on the income statement.
Manufacturing Industry Examples
Inventory is the final product manufactured and ready to sell, but also the raw materials necessary in production and the Work-In-Process (WIP) products in the warehouse or on the manufacturing floor.
Example: For a medical devices manufacturer, inventory will include the packets of catheters that are ready to sell, the semi-finished stock of catheters that haven’t been assembled or packed yet, the components set aside for quality checking, and raw materials like wiring, batteries, and tubing.
What are the 8 Types of Inventory?
1. Raw Materials Inventory
Raw materials consist of all components and items that are required to make the final product. In a pharmaceutical manufacturing company, the raw materials are items like active ingredients, vials, and labels that are used in the different stages of production.
Related to raw materials, it is important to realize that raw materials used by a manufacturing company can either be sourced from a supplier or be a by-product of a process.
This type of raw material inventory exists only in the manufacturing industry.
In a service or trading industry in which there is no processing or manufacturing involved, raw material inventory does not exist.
2. WIP Work in Progress Inventory
Work in Process Inventory is called when raw materials are on the manufacturing floor been processed but have not yet been completed, and approved as finished goods. In fact, the work in progress inventory is a category that contains all the items that have been processed but not ready for sale.
3. Finished Goods Inventory
Finished goods inventory considers the final products that are ready for sale in the market. These items have passed through all stages of production and quality checking.
4. MRO Maintenance Repairing and Operating Inventory
MRO Inventory means the stock of items and supplies not related to the bill of materials (BOM) of finished products. Since this type of inventory is typical in manufacturing industries, can be found in some service industries.
Since the MRO items are not used directly in the finished product manufacturing, it is not accounted as inventory items in books of accounts. But it plays a critical role in the day-to-day working of an organization.
MRO supplies are used for maintenance, repair, and upkeep of the machines, tools, and other equipment used in the production process. Some examples of MRO items are gowning, grease, lubricating oil, gaskets, screws, bolts, etc.
5. Buffer Inventory
Buffer inventory (also known as safety stock), consists of the items stored in the warehouse to cushion the impact of unexpected shocks. Buffer inventory aims to compensate for fluctuations and market movements that cannot be predicted and can lead to out-of-stock situations. In this manner, a sudden spike in demand, delay in transport, or labor strike can be managed if sufficient buffer inventory is maintained.
6. Cycle Inventory
Cycle inventory (also known as Recurrent Inventory) consists of the products that are ordered in big lot sizes and on a regular basis. It is particularly useful when a client places an order for a big amount of your products for the whole year but wants to receive it then distributed on a monthly basis. Cycle inventories are usually materials that are directly used in the production or they are part of some regular process.
7. Decoupling Inventory
This type of inventory applies when manufacturing is carried on by multiple machines. The output of one machine is fed into the next machine for further processing. However, the process only works smoothly if all the machines work in tandem. A breakdown in any of the machines can derail the entire process, which is when decoupling inventory comes into the picture. Decoupling inventory consists of items that are kept in reserve to be processed by another machine if the previous machine fails to produce its usual output.
8. Transit Inventory
Transit inventory refers to items that are being moved from one location to another, such as raw materials being transported to the factory by railway or finished goods being transported to the store by truck.
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