What does inventory mean?
The quantity or value of the current stock of a manufacturer or retailer. This can include raw materials and parts that will be used later in the manufacturing process. The managing of inventory is vital for the smooth running of a business, and the science of inventory management is required to ensure that your supply network will work without hiccups.
Inventory management will involve not just controlling the amount of stock that you have but the time necessary for replenishment of stock, asset management, carrying costs of the inventory, forecasting, visibility, physical space for inventory, the return of faulty goods, valuation, and future price forecasting. When you take care to ensure that all these details are taken care of, your inventory will always be balanced and you will never run out of stock. Inventory turnover is considered one of the most important aspects of a business as it is responsible for generating cash, and thus profits.
A businesses inventory is nothing more than the raw materials, parts and finished goods kept on site or in its warehouses. Inventory can also be held on consignment, which is when a third-party holds inventory for a business until the goods have been sold. Inventory is reported as an asset on a business balance sheet, and is a buffer between the manufacturing and order fulfilment stages. Once the inventory has been sold, or used in the manufacturing process, the cost of carrying it flows into the cost of goods sold in the accounting statement.
There are three different types of inventory that can be tracked; raw materials, work in progress, and finished goods. Raw materials are the raw starting materials that fuel the manufacturing process. Raw materials are such things as the metals used by steel or auto companies, or the food and spices used by food processors.
Work in progress is anything that has been partially processed, but is not yet a finished good. This would include an automobile that hasn’t been completely assembled, or raw dough in a bread or cake making factory, among other things.
Finished goods have gone through all manufacturing steps and are ready to be sold to wholesalers, distributers or consumers. Examples include finished automobiles, computers or televisions, and the loaf of bread you buy at your local grocery store.
Businesses realize that holding a large amount of inventory for a long period of time is not good business practice. It can lead to spoilage or obsolescence and can be quite costly. Of course it isn’t good to hold too little inventory either, since the business could miss out on some potential market share and sales. Striking a balance is the key, and this has led to the role of inventory management within manufacturing organizations, with the Just-In-Time (JIT) inventory system being one preferred way of managing inventory levels.