What is Inventory?
Inventory refers to the items and materials that a business holds with the ultimate goal of resale, production, or utilization. It includes work-in-progress, finished goods, and raw materials used in the manufacturing process. Inventory is stored in a storage facility, such as a warehouse, or displayed on shelves in a retail environment.
According to Shopify:
“Inventory is the name given to the products and materials that a company holds to sell. While it’s tempting to think that inventory only includes stock that’s waiting to ship, it also refers to works-in-progress (products in the process of being made) and raw materials (items used to create more finished products).”
Types of inventory
There are various types of inventory:
- Raw materials
The main components used to produce goods.
- Work-in-Progress (WIP)
Items that are currently being transformed into finished products.
- Finished goods
Completed products ready for sale.
- MRO Supplies
Materials used for operations, maintenance, and repairs, but not included in the final product. MRO = Maintenance, Repair, and Operation.
Why inventory matters
Inventory is important for many reasons, such as:
- Sales fulfillment
It helps meet customer demand on time.
- Cash flow
Too much inventory may squeeze out capital, but an absence can result in lost revenue and unhappy customers.
- Production flow
Inventory is crucial for manufacturers to maintain uninterrupted production flow. It ensures that necessary materials are available to meet production demands without delays.
- Seasonal fluctuations
Effective inventory management is key to navigating seasonal fluctuations, ensuring sufficient stock is available to meet increased demand during holidays and peak seasons.
Challenges of inventory
At first having lots of inventory may seem amazing, but it comes with some challenges such as:
- Storage costs
Storing goods costs money.
- Following trends
Fashions and consumer preferences change. If you stock too much inventory, you could end up with some obsolete goods.
“Shrinkage” in this context, refers to the loss of products between the point of manufacture or purchase from a supplier and the point of sale. This loss may be due to theft (external or internal), damage during handling or transit, spoilage, or administrative errors in inventory management.
- Supply chain complications
Shortages or excesses of inventory can result from disruptions. Supply chain refers to the entire process of producing and delivering a product, from the initial sourcing of materials to the final delivery to consumers.
To manage inventories effectively requires a delicate balance:
- Stock levels
The objective is to maintain optimal stock levels that satisfy demand without resulting in excess inventory or stock shortages.
High turnover may be a sign of effective production or excellent sales. Turnover, in this context, refers to the rate at which inventory is sold and replaced.
- Ordering and reordering
Deciding how much and when to order new stock.
Implementing real-time inventory tracking systems, such as barcodes or RFID tagging, benefits both customers and inventory managers. RFID stands for Radio-Frequency Identification.
With technology nowadays, there are boundless possibilities for optimizing business operations. There are numerous solutions available that harness this technology to refine inventory management processes:
- Inventory software
These systems provide sophisticated tracking, management, and optimization of inventory, ensuring that businesses have a clear overview of their stock at all times.
Innovative tools are available that automate the ordering and restocking processes. This reduces manual effort and minimizes the risk of human error.
- Data analysis
By gathering and analyzing data, it is now possible to predict trends and optimize inventory levels.
Compound words with ‘Inventory’
We can make many compound words/phrases with the term ‘Inventory.’ Here are ten:
The process of ordering, storing, using, and selling a company’s inventory.
A ratio showing how many times a company’s inventory is sold and replaced over a period.
Supervising and regulating the order, storage, and use of components that a company will use in the production of the items it will sell.
The physical verification of the quantities and condition of items held in an inventory, often done periodically.
Monitoring the quantity, location, and status of products within a warehouse or storage facility.
The method used to calculate the value of inventory, such as FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), for financial reporting purposes.
Changes made to the recorded amount of inventory to account for discrepancies such as theft, loss, or damage.
The ability to track inventory levels and movement across various stages of the supply chain in real-time.
Predicting future inventory requirements to optimize inventory levels and meet customer demand.
A line of credit or loan a business takes out using its inventory as collateral, often used to purchase more inventory or support other business operations.
Written by Nicolas Perez Diaz, November 2, 2023