Inventory is a buffer between the production or purchasing of goods (products or materials) by a company and sales of commodities or services by this company. So, inventory is an integral part of the business performing any sales (goods or services) regardless of the company's specialization. Effective inventory management and control is one of the few key components of the business success regardless of whether a company performs sales, equipment service, manufacturing, or another activity.
Manufacturers and retailers that use the just-in-time method of inventory management prefer to keep products and materials in their inventory that they need to produce and sell goods. Such a strategy allows to reduce storage and insurance costs and eliminate costs needed for liquidating excess unused inventory. The JIT method requires organizations to forecast demand very accurately; otherwise, disruptions in the supply chain can occur, and sold, or pre-ordered products will not be delivered to customers.
Manufacturers and retailers that use the just-in-case method of inventory management prefer to have in stock large inventories with the purpose to meet the higher demand. Such a strategy allows them to minimize the possibility that a material or product will be out of stock. The just-in-case method is used by organizations that cannot forecast future demand. Such companies need to hold a higher inventory level (and increase inventory holding and insurance costs) if they do not want to have lost sales because of sold-out inventory.
Inventory control is provided by any company to ensure that it has the right materials on hand to avoid stock-outs and involves the procurement, care, and disposition. And any company needs to find the right level for its inventory. In the case of having too many materials or merchandise in the storehouses, the company has fewer funds and places for new goods and needs to spend money to preserve merchandise, and vice versa, if the business has too little inventory, it may disappoint its customers. Thus, to have a business success, any business owner needs to get the company's inventory management strategy working in harmony.
The raw materials inventory is the parts that the company has currently in stock that haven't been used in finished goods or work-in-process production. Raw materials have two subcategories:
Any company needs to have enough raw materials on hand to ensure that the production process is launched promptly, but not too much as the company is not going to invest in an inordinate amount of inventory. The main purpose of the inventory control in the raw materials is designed to address the balance by frequently ordering the materials in small sizes from vendors.
Work-in-process (WIP) inventory includes materials that have begun their transformation to finished goods but have only been partly converted during the manufacturing process. In other words, these items are unfinished and are currently being worked on or waiting in the buffer storage for further processing.
Work in process goods requires storage space, represents the not available for investment capital, and carries an inherent risk of the earlier expiration of the product shelf life. Many companies strive to keep the real amount of WIP as low as possible for the purpose to reduce the amount of capital tied to the manufacturing process.
Finished goods include items that are completed as to the manufacturing process and are ready for sale to customers. Finished goods inventory is designed to maintain the inventory of the finished goods in the "between the work-in-process and shipping finished goods" step and is critical for increasing the company's output and decreasing its excess products in storage.
Resale goods inventory is the returned goods that are salable. Depending on the company's preference may be included in the "goods for sale" or "finished goods" inventory.
Effective inventory management requires companies the accurately track stocks in physical counts and accounting records. This is the basis for maintaining inventory at the optimal level for better meeting the demand. Inventory management plays a critical role in the business success of any company. Therefore, business owners are looking for different ways of reducing their inventory level, improving raw material flow, and increasing efficiencies through improving inventory management processes. With the purpose of improving merchandise quality, businesses need to provide tight management and traceability of their inventory. Management effectiveness is usually measured by a company's success in reducing its inventory investments, meeting customer service goals, cost containment, and achieving maximum profits.
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