What is Inventory? Definition, Types & Best Practices

Understanding What is Inventory goes beyond just counting physical goods; it’s about making strategic decisions that balance supply and demand. From raw materials to finished products, Inventory management is crucial. Mismanage it, and you might find yourself drowning in excess stock or struggling to meet customer demand. The real skill lies in mastering this balance, and that’s where effective Inventory practices come into play.  

In this blog, we’ll explore the question "What is Inventory?" and break it down into its various categories and share best practices for managing it efficiently. Whether you’re a seasoned business owner or just starting out, mastering Inventory management will help you streamline operations and stay competitive in the market. 

Table of Contents 

1) What Is Inventory? 

2) Types of Inventories 

3) Best Practices for Inventory 

    a) Inventory Management 

    b) Inventory Turnover 

4) Conclusion 

What Is Inventory? 

Inventory refers to the goods, materials, and products that a business holds for resale, production, or maintenance. It is crucial for a business’s ability to meet customer demands without incurring waste costs from excess Inventory. 

a)  Buffer Role: Inventory acts as a buffer, allowing businesses to continue operations despite supply and demand mismatches. 

b) Inventory Management: Effective Inventory management balances the need for sufficient stock with the goal of minimising holding and administrative costs. 

 

 

Types of Inventories 

Inventory is not one-size-fits-all. There are different types of inventories, created to address specific business needs, and comprehension of each can be helpful in better managing stock levels. 

  

Raw Materials  

Raw Material is the unprocessed material source used in the manufacturing process of a product.  

1) Characteristics: 

a) Unprocessed and untransformed. 

b)  Essential for the initial stages of production. 

2) Examples: 

a) Wood and nails for furniture. 

b) Cotton for textile manufacturing. 

Work in Progress  

Work in Progress refers to the partially finished goods that are in the production process.  

1) Characteristics: 

a) Not yet completed for sale. 

b) Includes labour, materials, and overhead costs. 

2) Examples: 

a) Partially assembled cars in an automobile factory. 

b) Half-stitched garments in a clothing factory. 

Finished Goods  

Finished goods are the product at the end of the production process and ready for sale.  

1) Characteristics: 

a) Ready for sale and distribution. 

b) Final product of the production process. 

2) Examples: 

a) Completed furniture pieces. 

b) Packaged food products. 

MRO Inventory  

An MRO Inventory is the stock of supplies and materials needed to maintain the equipment and machinery.  

1) Characteristics: 

a) Not directly part of the final product. 

b) Includes maintenance, repair, and operating supplies. 

2) Examples: 

a) Lubricants for machinery. 

b) Cleaning supplies for factory maintenance. 

Buffer Inventory  

Buffer Inventory is also known as safety stock and should be kept in reserve to protect against unexpected shortage or changes in demand.  

1) Characteristics: 

1) Extra stock to handle variability in demand. 

2) Acts as a cushion against supply chain disruptions. 

2) Examples: 

a) Extra raw materials. 

b) Additional finished goods. 

Cycle Inventory  

Cycle Inventory is that portion of the Inventory a firm constantly orders and uses in normal business running.  

1) Characteristics: 

a) Regularly cycled through based on demand. 

b) Helps in maintaining a balance between supply and demand. 

2) Examples: 

a) Weekly stock of perishable goods. 

b) Monthly supply of office stationery. 

Decoupling Inventory  

Decoupling stock is carried between various stages of manufacture, regardless of the tardiness of some stages. 

1) Characteristics: 

a) Separates different stages of production. 

b) Ensures continuous production flow. 

2) Examples: 

a) Intermediate products in a multi-stage manufacturing process. 

b) Components waiting for assembly. 

Transit Inventory  

Transit Inventory, which is also known as pipeline Inventory, is the goods that are in transit from one place to another. 

1) Characteristics: 

a) Goods moving between locations. 

b) Includes goods in shipping or transportation. 

2) Examples: 

a) Products shipped from a factory to a warehouse. 

b) Goods transported from suppliers to manufacturers. 

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Best Practices for Inventory 

Inventory management is optimised through strategic management practises that focus on procuring the right stock levels to minimise cost and meet delivery to customers. The recommended best practices include: 

Demand Forecasting 

Accurately predicting customer demand is crucial for maintaining optimal stock levels. Demand forecasting involves analysing historical data, market trends, and other factors to predict future demand. This helps businesses avoid the costs associated with both overstocking and understocking. 

a) Analyse historical data and market trends. 

b) Predict future demand to maintain optimal stock levels. 

c) Avoid costs related to overstocking and understocking. 

ABC Analysis 

ABC analysis classifies Inventory based on value. ‘A’ items are high-value with lower sales volume, ‘B’ items have moderate value and sales volume, and ‘C’ items are low-value with high sales volume. This method ensures that management efforts focus more on ‘A’ items, which have a significant impact on revenue. 

a) Classify Inventory into ‘A’, ‘B’, and ‘C’ categories. 

b) Focus management efforts on high-value ‘A’ items. 

c) Improve revenue impact through targeted management. 

Just-In-Time Inventory 

The Just-in-Time (JIT) Inventory approach involves ordering and receiving goods only when needed for production or sale, minimising stock levels. While this reduces storage costs, it requires precise planning to avoid stockouts and delays. 

a) Order goods only when needed. 

b) Minimise stock levels to reduce storage costs. 

c) Ensure accurate planning to prevent stockouts and delays. 

Optimised Vendor Management 

Building strong relationships with suppliers is essential for effective stock management. Optimised vendor management ensures timely deliveries and favourable business terms, leading to cost savings and increased efficiency. 

a) Develop strong supplier relationships. 

b) Ensure timely deliveries and favourable terms. 

c) Achieve cost savings and efficiency. 

Inventory Audits 

Regular Inventory audits ensure accurate and accountable records. Audits compare actual stock levels with recorded levels to identify discrepancies, potential theft, or malpractices. Continuous auditing leads to more accurate Inventory management and better decision-making. 

a) Conduct regular Inventory audits. 

b) Compare actual and recorded stock levels. 

c) Identify discrepancies and improve decision-making. 

Inventory management 

Inventory management involves overseeing the ordering, storage, and usage of a company’s Inventory. It combines various strategies, tools, and techniques to manage supply efficiently, minimising costs and maximising efficiency.  

1) Supervise ordering, storage, and usage of inventory. 

a) Ensure accurate and timely ordering. 

b)  Maintain organised storage facilities. 

c)  Monitor inventory usage to avoid wastage. 

2)  Use strategies and tools to manage supply efficiently. 

a)  Implement demand forecasting techniques. 

b) Utilise ABC analysis for inventory classification. 

c) Adopt Just-In-Time (JIT) inventory practices. 

3) Prevent stockouts and overstocking. 

a) Regularly review inventory levels. 

b) Adjust order quantities based on demand forecasts. 

c) Use safety stock to buffer against uncertainties. 

4) Utilise inventory management systems for automatic tracking and replenishment. 

a) Implement software solutions for real-time inventory tracking. 

b) Set up automated reorder points. 

c) Integrate with other business systems for seamless operations. 

5) Employ advanced technologies like barcode scanners, RFID tracking, and AI-driven analytics. 

a) Use barcode scanners for quick and accurate data entry. 

b) Implement RFID tracking for real-time location monitoring. 

c) Leverage AI-driven analytics for predictive insights and optimisation. 

Inventory Turnover 

Inventory turnover is a key metric that measures how often a company sells and replaces its stock within a specific period. High turnover rates indicate strong sales, while low turnover rates suggest overstocking or slow-selling items. 

1) Measure how often stock is sold and replaced. 

a) Track sales data regularly. 

b) Monitor inventory levels continuously. 

2) High turnover rates indicate strong sales. 

a) Reflects efficient inventory management. 

b) Indicates high demand for products. 

3) Low turnover rates suggest overstocking or slow sales. 

a)  May indicate excess inventory. 

b) Could signal a need for marketing or sales strategies. 

4) Calculate by dividing the cost of goods sold by the average inventory over a specific period. 

a) Use the formula: Inventory Turnover = Cost of Goods Sold / Average Inventory. 

b) Analyse turnover rates to make informed inventory decisions. 

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Conclusion

Inventory is not merely the stock on your shelves; it forms the backbone of a business, bringing out operational efficiency. Be it raw material, work-in-progress, or even finished goods, diverse types of inventories have different functions in product as well as sales. By following this blog on What is Inventory? You can now regularly audit your stocks and build a good rapport with the vendors, which will help the business maintain resiliency and efficiency in its operations. 

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