What is Inventory -Example of Inventory in industries
Inventory – An Introduction
Inventory (also known as stock) refers to goods or materials that are held by an organization for future usage.
Such goods include
(i) raw materials,
(ii) purchased parts,
(iv) sub assemblies,
(vi) finished goods and
One main reason that organisations maintain inventory is that it is rarely possible to forecast / predict sale levels, production times, demand and usage needs exactly. An inventory system is the set of policies and controls that monitors levels of inventory, in order to minimise the inventory cost and to guarantee a smooth operation of the organisation.
The purposes of inventory are:
- To maintain independence of operations
- To meet variation in product demand
- To allow flexibility in production scheduling
- To provide a safeguard for variation in raw material delivery time
- To take advantage of economic purchase order size
Inventory serves as a buffer against uncertain and fluctuating demand / usage and keeps a supply of items available until supplies are received. Therefore an inventory system essentially answers two important questions.
1. How much should be ordered when the inventory for the item is replenished?
2. When should the inventory for a given item be replenished?
It may be understood that all materials involved in an inventory as an organization’s money in transit and hence the overall objective of an effective inventory is to minimize the money that is mobilized across all points and to reduce wastage in total. In that perspective, a more
recent approach is the JIT. Just-in-time (JIT) is a philosophy of material management and control, with a primary objective
of eliminating all sources of waste, including unnecessary inventory. JIT system involves final production or assembly, only when the orders are placed and when demands are exactly known.
Now, let us identify what are all the costs involved in an inventory system. Broadly there are five categories.
1. Holding (or carrying) costs: storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.
2. Ordering costs: typing, calling, transportation, receiving, etc. This cost does not depend on quantity ordered.
3. Shortage costs (stockout costs): the loss due to losing a specific sale, customers goodwill, or future business.
4. Setup (or production change) costs: line conversion, equipment change-over, report preparation, etc.
5. Cost of the item.
Types Of Inventory / Example Of Inventory
Materials flow from suppliers, through a manufacturing organization, to the customers. The progressive states of a material are classified as raw materials, semi-finished goods, finished goods, and work-in-process (WIP).
Purchased items or extracted materials that are converted via the manufacturing process into components and/or products. Raw materials appear in the bottom level of BOM. They are stored in the warehouse and are non-phantom items.
Semi-finished goods are items that have been stored uncompleted, awaiting final operations that will adapt them to different uses or customer specifications. Semi-finished goods are made under the instruction of a shop order, using the components issued by a picking order, and stored in the warehouse when finished. They are the items between the top and bottom levels in a management BOM (rather than engineering BOM) and are non-phantoms. Semi-finished goods are not sold to the customers.
A finished good is a product sold as a completed item or repair part, i.e., any item subject to a customer order or sales forecast. Finished goods are non-phantoms and are stored in the warehouse before they are shipped.
Products in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material waiting for inspection and acceptance as finished goods. WIP inventory is temporarily stored on the shop floor and appears as a phantom in the BOM.
Maintenance, Repair, and Operational Supplies (MRO)
Items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations. These items are used in production but do not become part of the product.
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