The meaning of inventory is ‘stock of goods or a list of goods’. The word inventory is explained differently by various authors. In accounting language, it may mean stock of finished goods only.
In a manufacturing concern it may include raw materials, work in progress and stores etc. To understand the exact meaning of the work ‘inventory’, we may study it from the usage point of view. Inventory includes the following things:
Tools include fixtures, dies, patterns, gauges and hand tools used with machines and operations.
Supplies are items such as abrasive, lubricants used to aid production but do not get into the product.
Raw materials are commodities such as steel, lumber, fabric etc. and purchased parts such as gears, pistons etc. that go into the final product.
Goods in Process are materials that have been partly fabricated but are not as yet completed.
Finished goods are completed items ready for shipment.
The control of inventory is closely related to the functions of production control. Very often in many business and industrial units, the same department handles the twin functions of inventory control and production control because production directly affects the three main types of inventories viz., raw materials & parts, work-in-progress and finished goods.
Raw materials must be ordered to arrive in time for production; the nature of production process determines the size of work-in-process; the output of production must go either into finished goods inventory or directly to the customers.
The primary purpose of having inventories is to meet the demand from indenters or users. The simplest way of satisfying users is to hold large stocks, but holding large stocks will mean high inventory carrying charges (such as storage and deterioration expenses) and possible causes caused by price declines.
Similarly, shortages in inventories interrupt production, making machines and men idle and causing sales lose. Hence, there is a need for inventory control or inventory planning.
The kind of inventory held by different organisations usually consists of:
These consist of raw materials, parts, sub-assemblies and supplies which an organisation purchases from outside source, i.e., suppliers, dealers or manufacturers. These items are purchased and kept in stock before the production commenced or during production of goods. The parts and other supplies are used in manufacturing process.
Finished product inventories mean complete product or finished product ready to be despatched for sale in the market. For example; motor cycle, tyre, scooter etc.
These are materials which do not form a part of final product, but on the other hand, they are consumed in the production process. For instance, oil, spare parts, consumables etc.
These are the semi-finished products during the production cycle. For example, in scooter factory, the stock of bumper, foot rest, tyres and tubes etc.
Production inventories include raw materials, parts and components which become part of the product during the production process e.g., (i) Raw material needed for production or (ii) some special items manufactured in the factory itself.
When the inventory is lying in the showroom of the organisation or it is in the custody of the dealers, it is known as dealer’s inventories.
These are material and supplies inventories which have not been bought and are in transit. It means that it has not been received in the factory.
When a firm anticipates a rise in prices, it may purchase bulk quantities and hold the same until the prices rise. Similarly, products having seasonal demand need to be produced and stocked in anticipation of sales during the season.
Demand fluctuates over time and it is not possible to predict it accurately. Business firms maintain reserve stocks to meet unexpected demand and thereby to avoid the risk of losing sales. These stocks are known as fluctuation inventories.
Goods are bought in large lots to get the benefit of discount. The goods so purchased are stocked until sale or use.
Raw materials and finished goods are sent from one place to another. Some amount of inventory is always in transit. Longer the transportation period, greater is the amount of transportation inventories.