WHAT IS INVENTORY and it's DIFFERENT FORMS

INVENTORY

Whenever we are going through any manufacturing industry, whether it is a factory or distributor or retailer, we often refer to a term called “INVENTORY”. All of us have ideas about this term, concepts about this word but what does actually it means in the business term, what are the different forms of Inventory, how it affects the business, we will discuss in this article.

WHAT IS INVENTORY:-

Inventory is basically a NOUN which means, a detailed list of items available.It may be any different forms which we will discuss later. Each and every business has its own inventory and the form of that inventory depends on the nature of the business.This is an accounting term which says that the Raw materials, components, sub-Assemblies, finished goods which a company uses for its production, sale, repair of machines, are all inventory.

Now the next question is, why do companies need to keep inventory? Is it really required? So let us explore that part now.

Stocks 

REASON For Keeping Inventory:-

Experts say “Inventory is a necessary EVIL”. Means, it is evil but companies have to keep stock/inventory. Inventory is a function of variation. As we all know, variation is inevitable in the arena of supply chain, from Up-stream to Down-stream. For example, variation in customer choice, variation in demand, Variation in product mix, Lead time variation at supplier facility, lead time variation in transportation in every point, there is a change of variation which, in turn, generates an uncertainty in the supply chain time frame. Therefore, to cope up with such variation or uncertainties, organizations, in spite of the EVIL part of Inventory, plans to keep inventory.

1. Variation in time:- In every step of the supply chain, from upstream to down-stream, there is an uncertainty in the time and chance of failure to get the things done on time, which asks you to maintain inventory. It can be addressed but prior ordering and keep stock ready at supplier end.

2. Variation in price:- Sometimes, it is a call of the organization to keep excess inventory of some commodities, which are getting consumed at a high rate, to get the price fluctuation benefit. For example, if there is chance of price increase and you buy excess material at low cost and keep the inventory at your end, it will give you a price competitiveness in the product in future.

3. Seasonal demand:- If the capacity of your supplier is fixed and you can predict a high demand in the coming future, it’s always a call to be taken to arrange materials and keep it in stock as inventory. This helps to cater the future demand. For example, during Rainy season, the demand of rain-coats, umbrellas increased & companies which are into the manufacturing of these products, must keep a good amount of stock ahead of time to cater the demand. Same happens during any festive season.

4. Change in customer demand:- As the market is now drastically changing, so the choice of the customers. And everybody wants their product in no time. Therefore, companies need to reduce the delivery time and to do so, all the supply chain time frame must be shortened. If you have materials in your stock, it is easy to respond to these type of issues.

5. Organizational strategic approach:- Most of the companies, now a days are focusing on the core part of their product and want their workforce to concentrate on the key critical items. Therefore, a strategic call is always there to keep the low value high consumption materials in stock in enough quantity.

Different forms of Inventory

DIFFERENT FORMS of INVENTORY:-

There are basically 4 forms of inventories

1. Raw Materials/Components inventory:- These are the stock of materials which are getting used to make the finished product. For example, Iron bar used to make specific iron items. The value of all such items contribute to the Raw material inventory value.

2. Work in progress inventory (WIP):- In the process of manufacturing, the raw materials are getting converted to finished products and in this course, the materials yet to be converted to FG are called WIP or Work in progress inventory. Many time, this value includes the overhead cost also.

3. Finished goods inventory:- All the materials which are in ready to be sold condition are under this category.It consists of all the SKUs which a company generally sales to its customers.

4. Maintenance, Repair and Operations inventory:- In the course of production, there are any machinery which are needed and to keep these machines, many different types of items need to be kept in inventory to manage the maintenance work and sudden breakdown. These are Maintenance and Repair inventories also known as spare parts inventories. Also certain items are not directly required for production but need to kept in inventory to run the operations. These are called operation inventory.

There are also some other type of inventory like 

1. Vendor end inventory:- Items which are in the books of account of the company but lying at vendor end due to subcontracting, repair work etc.

2. In Transit inventory:- in many cases, after invoicing of the items, it comes as the company’s liability even if the materials are in transit. These are known as In Transit Inventories.