Understanding the Different Types of Inventory
There are five basic categories of inventory when it comes to which products a company may sell. These are: raw materials, work-in-process (WIP), finished goods, maintenance, and operations (MRO). Roughly speaking, there are four different types of inventory for every category. However, these types are not mutually exclusive. As you may imagine, there can be a lot of within any of these five types of inventory. This is why it is necessary for a company to have a broad view across all five types of inventory to ensure that there are no gaps in its overall inventory management strategy.
The most obvious type of inventory is raw materials, which include goods such as oil, gas, and coal. These goods are purchased on the basis of their ability to create new goods, as well as their ability to perform their function. Examples of raw materials would be copper, which is used to make wires; iron ore, which is used to make tools; and timber, which is used to make buildings. Work-in Progress (WIP), on the other hand, encompasses goods that have been constructed but have not yet been shipped to their intended destination. For example, raw materials in this category could include materials such as plastics, rubber, PVC pipes, or computers.
Work-in Progress is normally broken down by date. It should be noted that some retailers don't break out the WIP inventory until later, once a shipment has been completed. It is important for companies to be aware of what products they might sell and at what stage of the process they are in. For example, it would be more useful to sell electrical components at the beginning of the process rather than trying to sell them at the end. By the same token, it would make no sense to sell finished motor vehicles at the start of a mineral processing facility, because the items have already been processed and the processing has already been completed.
When it comes to determining the classification of finished goods, it is also important to keep in mind that there are different forms of inventory based upon how they are delivered. For instance, freight forwarders must meet demand by delivering goods as quickly as possible to customers. Fulfillment centers must meet demand by storing raw materials in adequate quantities to meet demand from clients who purchase goods from them.
A company that owns a fleet of vehicles, for example, will most likely be required to maintain inventories of the raw materials it uses to operate its business and to deliver finished products to customers. Similarly, a manufacturer that produces light trucks will probably need to maintain inventories of the items used to build those trucks, as well as accurate inventories of the items used to assemble those items. To meet the demand for transportation, however, that manufacturer could also need to meet demand by storing finished products in excess of the amount that is available in its raw material inventory. This could result in the production of goods that exceed the company's inventory capacity. Inventory Based Risk Management (IRM) is the monitoring of the components of an organization's inventory to determine what types of inventory are needed to meet unexpected fluctuations in demand caused by fluctuating market conditions.
There are several other factors that affect the classification and reporting of inventory data. One of the major considerations is the process of decoupling inventory from raw materials to finished goods. Decoupling refers to the separation of raw materials from end-of-life products to allow for lessening of capital expenses and operational expenses. Although this lowers inventory turnover and increases profit margins, it can also lead to increased operating overhead and lower sales revenues. The ability to decouple inventory from raw materials and end-of-life goods allows for the easy tracking of inventories, which reduce costs and increase profit margins for inventory-based IRM activities. To get more enlightened on this topic, see this page: https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/inventory-control.
