Inventory can be defined as the array of finished goods or goods used in production. These goods are either stored in-house or in a warehouse so that a business can meet demand and fulfill orders. For some manufacturers, inventory may look like raw materials and work-in-process. For others, it may be a supply of finished goods.
Lets’s explore eight different types of inventory that exist.
Work-in-Process (WIP) is a term used to describe partially finished goods that are waiting to be completed. This includes raw materials, labor, and overhead costs. WIP contributes to the inventory asset account and these costs are transferred to finished goods, and then to cost of sales. This form of inventory includes components, assemblies, and subassemblies.
Cycle stock inventory is the portion that seller rotates through to satisfy regular sales orders. It is related to the decision to
Pipeline stock refers to goods that haven’t been sold, but aren’t possessed by the company, either. This form of inventory can be best understood as “in transit” because it exists within the transportation network and distribution system.
Anticipation inventory refers to the inventory companies keep on-hand to meet sales demand. There are times when manufacturers will intentionally hold large quantities of inventory because they anticipate certain events will take place. It’s partially caused by the uncertainty that comes along with consumer demand. An example of this is stocking up on barbeque grills before Spring. It is simply a way to cover projected trends and consumer fluctuations based on seasons, vacations, and sales promotions.
Hedge inventory is inventory that is held to protect against a future event or disruption in supply. For example, a strike, vendor shutdown, government change, or any other predicted event. The purpose of this type of stock is to manage costs and create a competitive advantage if potential external circumstances go awry
Buffer and safety stock are sometimes used interchangeably. Buffering protects supply chain nodes from variances in supply and demand. It protects against unforeseeable fluctuations in demand and/or supply. Safety stock describes the extra stock that is maintained to mitigate the risk of stockouts, or shortfalls in raw material or packaging, that are caused by uncertainties in supply and demand. When a business has an adequate level of safety stock they can continue operations according to their plan. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and acts as an insurance against stockouts.
One form of buffering is referred to as decoupling, which separates supply from demand to optimizes processes. Decoupling uses buffer inventory between operations so that there are no severe fluctuations in production rate that will hold up the next operation.
A finished good is a completed part that is ready for a customer order. An inventory of finished goods is a stock of completed products that have been inspected and passed all other necessary requirements. They are transferred from work-in-process into this final stage and can now be sold to final users, which include retailers, distributors, or consumers.
This form of stock refers to maintenance, repair, and operating supplies that are used to support and maintain production processes and infrastructure. Examples of MRO inventory include oils, lubricants, coolants, packing material, tools, nuts, bolts, and screws.