Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
Business inventory
The reasons for keeping stock
All these stock reasons can apply to any owner or product stage.
• Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in providing the next item for processing. Whilst some processes carry very large buffer stocks, Toyota moved to one (or a few items) and has now moved to eliminate this stock type.
• Safety stock is held against process or machine failure in the hope/belief that the failure can be repaired before the stock runs out. This type of stock can be eliminated by programmes like Total Productive Maintenance
• Overproduction is held because the forecast and the actual sales did not match. Making to order and JIT eliminates this stock type.
• Lot delay stock is held because a part of the process is designed to work on a batch basis whilst only processing items individually. Therefore each item of the lot must wait for the whole lot to be processed before moving to the next workstation. This can be eliminated by single piece working or a lot size of one.
• Demand fluctuation stock is held where production capacity is unable to flex with demand. Therefore a stock is built in times of lower utilisation to be supplied to customers when demand exceeds production capacity. This can be eliminated by increasing the flexibility and capacity of a production line or reduced by moving to item level load balancing.
• Line balance stock is held because different sub-processes in a line work at different rates. Therefore stock will accumulate after a fast sub-process or before a large lot size sub-process. Line balancing will eliminate this stock type.
• Changeover stock is held after a sub-process that has a long setup or change-over time. This stock is then used while that change-over is happening. This stock can be eliminated by tools like SMED.
These classifications apply along the whole Supply chain not just within a facility or plant.
Where these stocks contain the the same or similar items it is often the work practice to hold all these stocks mixed together before or after the sub-process to which they relate. This 'reduces' costs. Because they are mixed-up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes which makes the situation even more acute.
Special terms used in dealing with inventory
• Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore any change in the packaging or product is a new SKU. This level of detailled specification assists in managing inventory.
• Stockout means running out of the inventory of an SKU.[1]
• "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale which was manufactured long ago but that has never been used. Such merchandise may not be produced any more, and the new old stock may represent the only market source of a particular item at the present time.
Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) 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 is simply cash in disguise. If stocks are uncontrolled, you are encouraging theft. Moreover it will be impossible to know the actual level of stocks and therefore impossible to control them.
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, WIP - materials and components that have begun their transformation to finished goods.
• Finished goods - goods ready for sale to customers.
• Goods for resale.
For example:
Manufacturing
A canned food manufacturer's materials inventory includes the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) 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. Its finished good inventory consists of all the cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers.
Logistics or distribution
The logistics chain includes the owners (wholesalers and retailers), manufacturers' agents, and transportation channels that an item passes through between initial manufacture and final purchase by a consumer. At each stage, goods belong (as assets) to the seller until the buyer accepts them. Distribution includes four components:
1. Manufacturers' agents: Distributors who hold and transport a consignment of finished goods for manufacturers without ever owning it. Accountants refer to manufacturers' agents' inventory as "matériel" in order to differentiate it from goods for sale.
2. Transportation: The movement of goods between owners, or between locations of a given owner. The seller owns goods in transit until the buyer accepts them. Sellers or buyers may transport goods but most transportation providers act as the agent of the owner of the goods.
3. Wholesaling: Distributors who buy goods from manufacturers and other suppliers (farmers, fishermen, etc.) for re-sale work in the wholesale industry. A wholesaler's inventory consists of all the products in its warehouse that it has purchased from manufacturers or other suppliers. A produce-wholesaler (or distributor) may buy from distributors in other parts of the world or from local farmers. Food distributors wish to sell their inventory to grocery stores, other distributors, or possibly to consumers.
4. Retailing: A retailer's inventory of goods for sale consists of all the products on its shelves that it has purchased from manufacturers or wholesalers. The store attempts to sell its inventory (soup, bolts, sweaters, or other goods) to consumers.