Inventory Classification

Inventory Classification

Let’s learn more about Inventory Classification. All organizations (including JIT operations) keep supplies of inventory for reasons, such as maintaining independent operations, meeting variations in product demand, allowing flexibility in production scheduling, providing a safeguard for variation in raw material delivery time, and taking advantage of economic purchase order size.

The inventory of materials may occur at different stages as well as departments of an organization. For instance, a manufacturing organization holds the inventory of raw materials and consumables need for production process, in addition to that of semi-finished goods at different stages held with different departments. The inventory of finished goods remains at plant, stores, distribution centers, etc. until it reaches the market and end consumers. In addition, both raw materials and finished goods in transit at different locations, also constitute the inventory, basis the owner of the inventory at a particular period of time. Organizations also hold inventories of spares for product servicing. Not only this, even defective products, parts and scrap are held as long as they are inventoried in the books of the organization, with an economic value.

Inventories are also held on the basis of ‘Function’

Input	Process	Output
Raw materials	Work-in-process	Finished goods
Consumables needed for processing / manufacturing, such as fuel, nuts & bolts, stationary, etc	Semi-finished production at different stages, retained by different departments in an organization, such as production, work-in-process stores, quality control, final assembly, packaging, outbound store, etc	Finished goods inventoried at distribution centers during logistics or supply chain
Items for Maintenance / Consumables	Production waste and scrap	Finished goods in transit
Packaging Materials	Defectives and rejections	Finished goods held with warehouses and dealers
Items purchased locally to be used in production process		Spare stocks & purchased items
		Defectives, rejections and sales returns
		Repaired stocks and component parts
		Sales promotion & sample stocks

The main categories can be summarized as

• raw material, component and packaging stocks– generally used to feed into a production or manufacturing process;
• in-process stocks– sometimes known as work-in-progress (WIP), these consist of part-finished stock that is built up between different manufacturing processes;
• finished products– stocks that are held at the end of the production line normally in a finished goods warehouse and sometimes known as finished goods inventory (FGI);
• pipeline stocks– probably the most common type of stock-holding, these are held in the distribution chain for eventual transfer to the final customer;
• general stores– containing a mixture of products used to support a given operation, for example a large manufacturing plant;
• spare parts– a special category because of the nature of the stock, which pro vides a crucial back-up to a manufacturer’s machinery or plant where any breakdown might be critical, and also held by service and maintenance companies for supply to their customers to support service contracts. Service industries, such as utilities, hospitals and maintenance, repair and overhaul (MRO) providers, invest in spare parts inventory to support their service offer. They have two main stock categories: consumables (nuts, bolts, etc) and repairables (parts that require periodic maintenance or are – repairable).

Within the above categories, stock can again be broken down into other major classification

Working stock. This is likely to be the major element of stock within a distribution depot’s stock-holding, and it should reflect the actual demand for the product.

• Cycle stock. This refers to the major production stock within a production ware house, and it reflects the batch sizes or production run lengths of the manufacturing process. This flow of inward supply and outward demand for a product in a warehouse is oft en depicted as a classic ‘saw-tooth’
• Safety stock – This is the stock that is used to cover the unpredictable daily or weekly fluctuations in demand. It is sometimes known as ‘buffer’ stock, as it creates a buffer to take account of this unpredictability.
• Speculative stock – This can be raw materials that are ‘bought forward’ for financial or supply reasons, or finished stock that is pre-planned to prepare for expected future increases in demand.

Seasonal stock – This is product that is stockpiled to allow for expected large increases in demand. Typically, this would include inventory built up prior to the Christmas demand peak.