What kind of inventory

Transit inventories result from the need to transport items or material from one location to another, and from the fact that there is some transportation time involved in getting from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility.

Some large firms, such as automobile manufacturers, employ freight consolidators to pool their transit inventories coming from various locations into one shipping source in order to take advantage of economies of scale.

Of course, this can greatly increase the transit time for these inventories, hence an increase in the size of the inventory in transit. As previously stated, inventory is sometimes used to protect against the uncertainties of supply and demand, as well as unpredictable events such as poor delivery reliability or poor quality of a supplier's products.

These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is any amount held on hand that is over and above that currently needed to meet demand. Generally, the higher the level of buffer inventory, the better the firm's customer service.

This occurs because the firm suffers fewer "stock-outs" when a customer's order cannot be immediately filled from existing inventory and has less need to backorder the item, make the customer wait until the next order cycle, or even worse, cause the customer to leave empty-handed to find another supplier. Obviously, the better the customer service the greater the likelihood of customer satisfaction. Oftentimes, firms will purchase and hold inventory that is in excess of their current need in anticipation of a possible future event.

Such events may include a price increase, a seasonal increase in demand, or even an impending labor strike. This tactic is commonly used by retailers, who routinely build up inventory months before the demand for their products will be unusually high i.

For manufacturers, anticipation inventory allows them to build up inventory when demand is low also keeping workers busy during slack times so that when demand picks up the increased inventory will be slowly depleted and the firm does not have to react by increasing production time along with the subsequent increase in hiring, training, and other associated labor costs.

Therefore, the firm has avoided both excessive overtime due to increased demand and hiring costs due to increased demand. It also has avoided layoff costs associated with production cut-backs, or worse, the idling or shutting down of facilities. This process is sometimes called "smoothing" because it smoothes the peaks and valleys in demand, allowing the firm to maintain a constant level of output and a stable workforce.

Very rarely, if ever, will one see a production facility where every machine in the process produces at exactly the same rate. In fact, one machine may process parts several times faster than the machines in front of or behind it. Yet, if one walks through the plant it may seem that all machines are running smoothly at the same time.

It also could be possible that while passing through the plant, one notices several machines are under repair or are undergoing some form of preventive maintenance. Even so, this does not seem to interrupt the flow of work-in-process through the system.

The reason for this is the existence of an inventory of parts between machines, a decoupling inventory that serves as a shock absorber, cushioning the system against production irregularities. As such it "decouples" or disengages the plant's dependence upon the sequential requirements of the system i. The more inventory a firm carries as a decoupling inventory between the various stages in its manufacturing system or even distribution system , the less coordination is needed to keep the system running smoothly.

Naturally, logic would dictate that an infinite amount of decoupling inventory would not keep the system running in peak form. A balance can be reached that will allow the plant to run relatively smoothly without maintaining an absurd level of inventory. The cost of efficiency must be weighed against the cost of carrying excess inventory so that there is an optimum balance between inventory level and coordination within the system. Those who are familiar with the concept of economic order quantity EOQ know that the EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery.

Cycle inventories, sometimes called lot-size inventories, result from this process. Usually, excess material is ordered and, consequently, held in inventory in an effort to reach this minimization point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly as needed.

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support and maintain the production process and its infrastructure. Sign Up. Sign Up Login. What are the 4 types of inventory? Raw Materials Materials that are needed to turn your inventory into a finished product are raw materials.

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Just about everyone at one time or another thinks, I want to get organized. And while they may think they are…. Read More. Small Business. There are so many apps aimed at business owners available now and to be honest, all of the options and…. IT professionals: picture a typical day in the office. The veterinarian stocks up on these items to meet customer demand. Cycle Inventory: As a restaurant uses its last paper napkins, the new refill order arrives. The napkins fit easily in the dedicated storage space.

Its service inventory, therefore, is meals per day. Book Inventory: The theoretical inventory of stock in the inventory record or system, which may differ from the actual inventory when you perform a count. Transit Inventory: An art store orders and pays for 40 tins of a popular pencil set.

The tins are en route from the supplier and, therefore, in transit. However, some people recognize only three types of inventory, leaving out MRO. Understanding the different types of inventory is essential for making sound financial and production planning choices. Raw Materials: Raw materials are the materials a company uses to create and finish products. When the product is completed, the raw materials are typically unrecognizable from their original form, such as oil used to create shampoo.

Components: Components are similar to raw materials in that they are the materials a company uses to create and finish products, except that they remain recognizable when the product is completed, such as a screw.

Work In Progress WIP : WIP inventory refers to items in production and includes raw materials or components, labor, overhead and even packing materials. Packing and Packaging Materials: There are three types of packing materials.

Primary packing protects the product and makes it usable. Secondary packing is the packaging of the finished good and can include labels or SKU information. The tertiary type of packing is bulk packaging for transport.

Safety Stock and Anticipation Stock: Safety stock is the extra inventory a company buys and stores to cover unexpected events. Safety stock has carrying costs, but it supports customer satisfaction. Similarly, anticipation stock comprises raw materials or finished items a business purchases based on sales and production trends.

Decoupling Inventory: Decoupling inventory is the term used for extra items or WIP kept at each production line station to prevent work stoppages. Decoupling inventory is useful if parts of the line work at different speeds and only applies to companies that manufacture goods. Whereas all companies may have safety stock. Cycle Inventory: Companies order cycle inventory in lots to get the right amount of stock for the lowest storage cost.

Service Inventory: A management accounting concept, service inventory refers to how much service a business can provide in a given period. A hotel with 10 rooms, for example, has a service inventory of 70 one-night stays in a given week. Transit inventory may take weeks to move between facilities. Theoretical Inventory: Also called book inventory, theoretical inventory is the least amount of stock a company needs to complete a process without waiting.

Theoretical inventory is used mostly in production and the food industry. Excess Inventory: Also known as obsolete inventory, excess inventory is unsold or unused goods or raw materials. In manufacturing, inventory consists of in-stock items, raw materials and the components used to make goods.

Accounting divides manufacturing stock into raw materials, WIP and finished goods because each type of inventory bears a different cost.

Raw materials typically cost less per unit than do finished items. Every company has stock that supports its regular business. For service companies, this inventory is intangible.

Inventory control helps companies buy the right amount of inventory at the right time. Also called stock control, the process helps optimize inventory levels, reduces storage costs and prevents stockouts. Inventory best practices include careful inventory management. The first best practice is to track inventory. Others include:. Carry Safety Stock: Also known as buffer stock, these products help keep companies from running out of materials or high-demand items.