Inventory


Inventory or stock is a quantity of the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Inventory management is a discipline primarily about specifying the shape and placement of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials.
The concept of inventory, stock or work in process has been extended from manufacturing systems to service businesses and projects, by generalizing the definition to be "all work within the process of production—all work that is or has occurred prior to the completion of production". In the context of a manufacturing production system, inventory refers to all work that has occurred—raw materials, partially finished products, finished products prior to sale and departure from the manufacturing system. In the context of services, inventory refers to all work done prior to sale, including partially process information.

Business inventory

Reasons for keeping stock

There are five basic reasons for keeping an inventory:
  1. Time: The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time. However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance.
  2. Seasonal demand: Demands varies periodically, but producers capacity is fixed. This can lead to stock accumulation, consider for example how goods consumed only in holidays can lead to accumulation of large stocks on the anticipation of future consumption.
  3. Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
  4. Economies of scale: Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.
  5. Appreciation in value: In some situations, some stock gains the required value when it is kept for some time to allow it reach the desired standard for consumption, or for production. For example, beer in the brewing industry.
All these stock reasons can apply to any owner or product.

Special terms used in dealing with inventory management

  • Stock Keeping Unit SKUs are clear, internal identification numbers assigned to each of the products and their variants. SKUs can be any combination of letters and numbers chosen, just as long as the system is consistent and used for all the products in the inventory. An SKU code may also be referred to as product code, barcode, part number or MPN.
  • "New old stock" is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.
  • ABC analysis is a method of classifying inventory items based on their contribution to total sales revenue. This can be used to prioritize inventory management efforts and ensure that businesses are focusing on the most important items.

    Typology

  1. Buffer/safety stock: Safety stock is the additional inventory that a company keeps on hand to mitigate the risk of stockouts or delays in supply chain. It is the extra stock that is kept in reserve above and beyond the regular inventory levels. The purpose of safety stock is to provide a buffer against fluctuations in demand or supply that could otherwise result in stockouts.
  2. Reorder level: Reorder level refers to the point when a company place an order to re-fill the stocks. Reorder point depends on the inventory policy of a company. Some companies place orders when the inventory level is lower than a certain quantity. Some companies place orders periodically.
  3. Cycle stock: Used in batch processes, cycle stock is the available inventory, excluding buffer stock.
  4. De-coupling: Buffer stock held between the machines in a single process which serves as a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process.
  5. Anticipation stock: Building up extra stock for periods of increased demand—e.g., ice cream for summer.
  6. Pipeline stock: Goods still in transit or in the process of distribution; e.g., they have left the factory but not arrived at the customer yet. Often calculated as: Average Daily / Weekly usage quantity X Lead time in days + Safety stock.

    Inventory examples

While accountants often discuss inventory in terms of goods for sale, organizations—manufacturers, service-providers and not-for-profits—also have inventories that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore difficult to keep the costs associated with holding too much or too little inventory under control.
While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:
  • Raw materials: Materials and components scheduled for use in making a product.
  • Work in process : Materials and components that have begun their transformation to finished goods. These are used in process of manufacture and as such these are neither raw material nor finished goods.
  • Finished goods: Goods ready for sale to customers.
  • Goods for resale: Returned goods that are salable.
  • Stocks in transit: The materials which are not at the seller's location or buyers' location but in between are "stocks in transit". Or we could say, the stocks which left the seller's plant but have not reached the buyer, and are in transit.
  • Consignment stocks: The inventories where goods are with the buyer, but the actual ownership of goods remains with the seller until the goods are sold. Though the goods were transported to the buyer, payment of goods is done once the goods are sold. Hence such stocks are known as consignment stocks.
  • Maintenance supply.
For example:

Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids, labels, and anything else that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors, to grocery stores, and even perhaps to consumers through arrangements like factory stores and outlet centers.

Capital projects

The partially completed work is a measure of inventory built during the work execution of a capital project, such as encountered in civilian infrastructure construction or oil and gas. Inventory may not only reflect physical items but also knowledge work-in-process.

Defence inventory

Specific problems arise in the defence field regarding the maintenance of adequate stocks of supplies and spare parts to take account of unknown deployment requirements while avoiding risks of obsolescence. For example, the UK's Ministry of Defence acknowledged in 2013 that it faced "serious problems... in the management of its inventory", holding more stocks than were required, failing to dispose of unneeded inventory, and wasting public money as a result, and around the same time, in March 2012, obsolescence within the Indian Army's air defence inventory was noted by Chief of the Army Staff General V. K. Singh in a letter to former Prime Minister Manmohan Singh.

Virtual inventory

A "virtual inventory" enables a group of users to share common parts, especially where their availability at short notice may be critical but they are unlikely to required by more than a few bank members at any one time. Virtual inventory also allows distributors and fulfilment houses to ship goods to retailers direct from stock, regardless of whether the stock is held in a retail store, stock room or warehouse. Virtual inventories allow participants to access a wider mix of products and to reduce the risks involved in carrying inventory for which expected demand does not materialise.

Costs associated with inventory

There are several costs associated with inventory:

Purpose

Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory", that is, inventory that would be left over of another product when the first product runs out. Holding excess inventory is sub-optimal because the money spent to obtain and the cost of holding it could have been utilized better elsewhere, i.e. to the product that just ran out.
The secondary goal of inventory proportionality is inventory minimization. By integrating accurate demand forecasting with inventory management, rather than only looking at past averages, a much more accurate and optimal outcome is expected. Integrating demand forecasting into inventory management in this way also allows for the prediction of the "can fit" point when inventory storage is limited on a per-product basis.