Inventory is the outcome of your business efforts, the products your customers know and love you for, and the goods that earn your profits. This article is a beginner’s guide to understanding how we are seeing inventory in 2022, its categories, and why and how to manage it.
What is Inventory?
Inventory comprises all the goods that are either involved in the manufacturing of the final product or are the final processed items, that are ready to be sold. Inventory items are treated as the current assets on the balance sheet, and these are intermediaries between the manufacturing and order fulfillment processes. Efficient management of inventory leads to higher productivity and profitability, both in terms of net income and increased customer base.
What is the Purpose of Inventory?
Inventory nurtures the retail operations with a potentially continuous supply of materials required both internally (for production needs) and externally (for being purchased as finished goods). Businesses need to effectively manage inventory, by finding a balance in the amount of inventory kept in the warehouses, as to have just enough to meet future customer needs and not extremely elevated amounts that result in huge carrying costs.
What are the Types of Inventory?
The word ‘inventory’ is an umbrella term for an assortment of goods that you use for the product, produce, and sell. There are four main types of inventories: physical inventory, merchandise inventory, digital inventory, and pipeline inventory.
Any sellable good you have on hand that can be counted and weighed in measurements, units, or volumes can be considered physical inventory. It is an asset and usually gets accounted for at the end of an accounting period. When counting physical inventory, every piece of product you have is taken into consideration. It helps keep the inventory records and financial records in check, forecasts the sales and purchases efficiently, and ensures that you always have enough products to meet customer demands. You can either accomplish this with the help of an accounting firm or with a 3PL fulfillment partner with specialized inventory management systems. Physical inventory comprises of:
Raw Materials The unprocessed materials used in production, either as direct components of the final product or as enablers of the process but not parts of the actual processed item.
Work-in-Progress (WIP) The partially finished or unfinished goods are yet to be completely processed and sold. Simply put, WIP comprises everything including overhead costs, labor, etc., that exists in the transitional period between the stages of evolution of goods starting from raw materials until they are processed into finished goods.
Finished Goods Completely processed goods that are ready to be sold and these make up the only inventory that is displayed on your website.
MRO Supplies Maintenance, Repair, and Operating supplies are the goods needed to put together and sell the finished product. Examples of MRO items include basic office equipment and PPEs etc.
The value of goods that your business possesses, be it raw materials or finished products, is known as merchandise inventory. It is the inventory that the business expects to cash soon. Inventory is the essence of a 3PL fulfillment company, and its total financial value is always accounted for, at the end of a fiscal year. It includes all goods that are under the possession of a company, be it the inventory in the warehouse storage, in transit, in raw material form in the warehouse, or ready to be sold.
Having the ability in terms of necessary technology and inventory tracking systems, for monitoring your inventory in real-time, is known as digital inventory. It involves tracking inventory, collecting information, and updating records in real-time for increased visibility, maximizing dock-to-stock efficiency and enhanced order fulfillment.