Inventory refers to all of the items, goods, merchandise, and materials held by a company to sell in the market for a profit simply.
Inventory is one of an organization’s most significant assets because inventory turnover is one of the primary sources of revenue generation and consequent earnings for the company’s shareholders.
On a company’s balance sheet, inventory is classified as a current asset and serves as a buffer between manufacturing and order fulfilment.
For instance, if a newspaper vendor uses a vehicle to deliver newspapers to consumers, only the newspapers are considered inventory. The car will be regarded as an asset.
Types of Inventory
- Raw material
All unprocessed items that are processed to make the final product are referred to as raw materials.
Examples of raw materials include:
- Aluminium and steel used in automobiles.
- The flour used in the production of bread by bakeries.
- Crude oil held by refineries and used in various stages of production.
Only in the manufacturing industry do raw materials exist as inventory items. Because there is no processing or manufacturing in the trading industry, there are no raw materials.
Work-in-progress inventory refers to partially finished goods awaiting completion and resale; it is also referred to as inventory on the production floor. Work-in-process items include, for example, a partially assembled airliner or a partially completed yacht.
- Finished goods
Finished goods are items that have been completed and are ready for sale in the market. These items have been through all stages of production and quality control. This inventory is commonly referred to as “merchandise” by retailers. Electronics, clothing, and automobiles are typical examples of merchandise held by retailers.
The process of ordering, storing, and using a company’s inventory is referred to as inventory management. It includes the raw material, component, and finished product management and warehousing and processing of such items.
Balancing the risks of inventory gluts and shortages is particularly difficult for companies with complex supply chains and manufacturing processes.
Advantages of Inventory Management
Having a large amount of inventory for an extended period is usually not beneficial for a business due to storage costs, spoilage costs, and the threat of obsolescence. However, having too little inventory has its drawbacks; for example, the company risks losing market share and profit from potential sales.
Inventory management forecasts and strategies, such as a just-in-time (JIT) inventory system that can help in reducing inventory costs by creating or receiving goods only when they are needed.