If you have used an inventory management software, you might have already come across at a combo box labeled inventory type wherein there are several types of inventory to choose from. This article will try to discuss each of these inventory types so you will not have to do any more of those tiresome adjustments that accounting will be asking for.
First things first, we need to define inventory. Essentially, inventory is a complete list of items that enumerates all the existing products, goods, or items and their corresponding quantity among other information. These products are usually stored in storage facilities such as warehouses that may be located inside the business premises or at a satellite office. Inventory management is directly intertwined with the business. Maintaining the stock level is crucial in successfully satisfying consumer demand. If the inventory system is employed by a retail, a dwindling inventory supply could mean that customers may be forced to look elsewhere to satisfied their demand. In the manufacturing industry where raw materials are transformed into finished goods, a miss in supply management may halt production for a time and thus incur losses. Furthermore, the finished goods should also match the demand for it thus making it extra tricky to handle the inventory.
It is common practice to keep in stock more than what is actually necessary. There are several reasons why this is employed. One, if the inventory is volatile, which means that the demand can rise and fall sharply and quite often. During the times when the demand spikes, the buffer stock will be able to satisfy the temporary demand. There are also instances where suppliers fail to deliver on time which could hamper sales or operations in case of manufacturing. This buffer supply will ensure that there will not be any downtime due to lacking inventory. Finally, suppliers will also give discounts to customers if they buy in large enough quantities.
On the other hand, you should also make sure that the inventory will not exceed more than what you can handle. Inventory space can be considered an asset and the amount of time that an inventory is idle can be taken in as an expense. There is also the danger of products expiring, spoiling, and worse cross-contaminating other products. If the inventory has an unusually high quantity of a specific item, it could take away from the attempt of broadening the inventory diversity. At some cases, you might even be forced to relocate some of your inventory at a more costly location. And at the worst case, you might even be forced to dispose of these products.
Types of Inventory
Manufacturing businesses use raw materials to create finished products, components or subassemblies. These are materials that could be from extraction, created by a subsidiary manufacturer, or bought through the company purchasing. An example of extraction for inventory is a mining firm digging up gold, copper, or coal from the mountain. Subsidiary manufacturers are often times partner firms which produce raw materials for them to further process. Purchasing raw materials, is done by the firm’s purchasing department or section. Their sole duty is to ensure that the inventory being demanded by their stockroom is bought at reasonable prices through a proper bidding.
An inventory is classified as raw if it holds no value for the company if it has not been processed by them. For instance, even if the product has already been processed, such as refined gold, it will still be considered raw if it is up to the jewelry company to turn the refined gold into necklaces, rings, bracelets or crowns. The rule of thumb is a material is considered raw if the processed good is purchased outside the firm to be further processed by them. There are infinitely many forms of raw materials, from basic ones such as ore, grain, minerals, paper, wood, steel, or oil. To semi-processed products such as motherboards, CPUs, tires, electric fan rotors and so much more.
WIP or Works in Progress
When an inventory is considered to be work in progress, it means it is in a state where the company has already spent an amount into its processing but is not yet a finished product thus it cannot be sold at its desired value.
Depending on the type of material, it can be either too costly or wise to keep a certain amount in the inventory. For instance, it is too costly to keep too many bulky WIP materials such as unfinished cars. Not only do they usually take up more space than that of finished cars, but they would also be more fragile as well. On the other hand, if the finished product has a faster expiry rate than the WIP one, it could be wise to keep it in that form so as to extend its shelf life. There are plenty of examples for these in the service industry where keeping inorganic materials off of organic ones would extend the value of the inorganic materials.
As its name suggests, these inventory items are the ones that are ready for selling. There should always be a certain amount of these in stock in the form of the buffer as these are the products that directly reflects in the interaction with the customers and store.
Normally, however, these products also take more space especially if finished good is an assembly from various materials. For example, a lego set full of hollow parts will occupy far more space than blocks of plastic.
Those are the three major types of inventory. If you are using inventory management software, it is extremely important to put the inventory in the correct bracket as this affects all calculations. Each of these types of inventories are handled differently in computing their various inventory statistics.
Inventory management software will usually differ in the names that these types are called and may also have several other types in the display. It is a good idea to familiarize with each one so as to preserve data integrity of the inventory system.