What Can Be Measured Can Be Controlled – for Profit!
Most businesses that supply products carry inventory, which is a stock or store of goods. A company manages its inventory and keeps it at hand so it can meet demands or carry out its daily operations.
The types of managed inventory that a business has depends on the industry. For example, retailers have finished products in stock, and manufacturers use raw materials or work-in-process.
An organization must manage its inventory carefully to ensure that it can fulfill its reason for existence, especially in volatile conditions with fluctuating demand.
In this section, we’re looking at the different types of managed inventory.
Raw Materials
Raw materials are a type of managed inventory that manufacturers use in the production of product components, subassemblies, or finished products.
Raw materials typically consist of commodities, extracted products, elements, or objects that the firm extracted or purchased.
Commodities that organizations implement in their production process as raw materials include things like minerals, ore, wood, steel, and chemicals.
Raw materials can also be finished products like nuts, bolts, wheels, and engines if the firm purchased the inventory to produce components.
Work-in-process
Work-in-process is a type of managed inventory that:
- Is not a raw material,
- Is a component of a parent,
- Is processed or about to be processed in the production system
Work-in-process inventory includes materials, components, subassemblies, assemblies released for initial processing.
This inventory can also be fully processed materials that are awaiting inspection before inclusion in finished products.
Finished Goods
Finished goods are completed products that underwent and passed final inspection and that are ready for order by wholesalers, retailers, or final users. This type of inventory does not have a parent in the production process.
However, the end-user may purchase a single unit to use as a component in another product, for example, car engines that are manufactured as finished goods and sold to wholesalers.
Decoupling Inventory
The machines in a production facility typically don’t have the same output rate. One station can take longer to process parts as the one before it in the production process.
Additionally, some machines may be removed from the production line for repairs or maintenance.
When looking at a functioning line, however, it may appear as if all the machines have a corresponding output and that the production process is flowing smoothly.
Production flows because of decoupling inventory or safety stock that ensures an indirect feed between devices and acts as shock absorbers in a production line.
Decoupling inventory prevents inventory from piling up at slow-moving stations in the production process, eliminating bottlenecks that can affect other stages in the process.
Cycle Inventory
Ordering or producing large quantities, the ordering cost per unit decreases. However, ordering large quantities can increase carrying and holding costs.
Economic order quantity is a concept that businesses follow to balance carrying and holding costs with the costs related to orders or production.
When the costs related to holding and carrying costs are equal, the total cost per unit is at its lowest. Cycle inventory is the excess stock that the business order to achieve this minimization point.
Continue to the second part of this series: Types of Managed Inventory Part 2