Types of Inventory

Inventory is referred to as the stock of any item or resource used in an organization. The system is the set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be. By convention, manufacturing inventory generally refers to items that contribute to or become part of an organization’s product output. Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies and work-in-progress. In services, inventory generally refers to the tangible goods to be sold and the supplies necessary to administer the service.

The basic purpose of inventory analysis in manufacturing and stock keeping services is to specify  when items should be ordered and how large the order should be. Many organizations are tending enter into long-term relationships with vendors to supply their requirements for probably the entire year. This changes the “when” and “how many to order” to “when” and “how many to deliver”.

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.

Different organizations require different types of inventory. The simplest way to categorize inventory is by what it is:

• raw materials
• work in progress
• finished goods

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

Inventory can also be classified according to its function. Some inventory stock is regarded as safety stock or safety inventory, and may act as a buffer against unexpected demand. Other inventory stock is in transit – on its way from the supplier, for example. And some inventory is seasonal, ordered only at specific times of the year.

When managing inventory in the services sector, there are several characteristics and challenges to keep in mind:

• raw materials may perish – Raw materials and inventories in a service organization include time, food, and rooms, for example. These all enable the organization to provide its service. However, these raw materials have a limited shelf life.
• direct customer contact – Facilities, service providers, and employees have a direct impact on the customer experience. Inventory managers should make sure that inventory is always available when a customer walks in for a service.
• capacity must be planned and managed – A service organization must know its capacity. This is the level of service that it can provide.
• inventory and capacity are linked – When a service organization knows its capacity, it can then ensure that it has the inventory needed for that capacity.