What Is Inventory?
Inventory is the amount of goods that are available for sale. Some types of inventory include raw materials, finished goods, and work-in-progress. Inventory can be used as a measure of supply and demand in economics. The term is also applied to stocks of products held by businesses or private individuals. In business, inventory is generally considered any asset that has been purchased on credit, and the purchase price is not yet paid off in cash (i.e., it's not "sold").
A Complete Guide To Understanding Inventory
Why Is Inventory Important?
Inventory is important for any business. It's one of the key factors in making sure your company can quickly and easily grow its product line, and make a profit in the process. Without an adequate amount of inventory, it can be difficult to raise capital, answer customer inquiries, and maintain steady production. Having too little stock also causes a reduction in value as customers may not feel that they're getting the most for their money. The right amount of inventory will allow you to minimize these problems while maximizing your profits.
How To Manage Inventory?
Managing inventory can be a daunting task. Even if you have the best technology, there will always be an answer to "how much do I need?" How do you know when it's time to buy more? This guide will walk you through the steps of inventory management and provide strategies that are proven to work. Inventories are rarely managed on a fixed-quantity basis, with quantities assigned at the beginning of production. Inventory levels vary over time based on demand, with some retailers following a preset system for replenishing inventories without regard for fixed quantity/stockouts. The retailer can decide when to order new inventory based on predicted demand, or set a maximum quantity. The first approach has the risk of stockouts and uneven levels of stock in stores; the second approach leaves open too many variables for problems, and the third approach allows the retailer to balance customer service and cost efficiency.
Inventory management is not always easy
Zip Inventory’s complete guide to inventory management is an essential guide for anyone who needs to know how to manage their inventory
What Are The Types Of Inventory?
The inventory of a company is what they have available to sell to their customers. Inventory is important because it allows companies to plan how much product they will need and make sure that they are selling what people want. Inventory management is an important part of the success of a company, especially with the changing market. Here's how one can differentiate the different types of inventory, especially when it comes to physical inventory.
This inventory is available to be used in your manufacturing process. They can either be sourced from a supplier or a by-product of a process. The concept of raw materials as inventory items exists only in the manufacturing industry and not elsewhere.
Work In Progress Goods-
These are the unsaleable inventory items that are in the process of being made saleable, like raw materials and finished goods. This includes any unsaleable material currently in between these two states of manufacturing.
Inventory management is a key business function
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Finished goods and "inventory" as a generic word are used interchangeably at times, especially in the non-manufacturing industry. These are all the items that manufacturers sell to their upstream vendors or retailers. It is important to remember that "finished" is relative and can be seen in different ways by different companies. One company's finished product may be another company's base manufacturing component.
Merchandise inventory is all the goods sold by a manufacturer at a higher cost than they were originally bought. Usually, retailers and resellers like wholesalers own merchandise inventory, as they buy it intending to sell it for more money.
This is the inventory in the supply chain that's in transit. For example, manufacturing companies with complex overseas shipment or retailers with multiple warehouses shipping them items will always have a certain amount of items not physically possessed by anyone.
Safety stock is an inventory of goods that's kept in order to protect against any unexpected delays from suppliers, be it raw materials or finished products. This helps ensure a smooth flow of products if the supply chain breaks down and guarantees no one has to wait for too long when their item eventually arrives. Other similar types of inventory include-
- Cycle Stock- This is the inventory a business must have on hand to meet expected supply and demand.
- Buffer Stock- This is the inventory needed to protect businesses from lost revenue and customers from poor experiences.
- Anticipation Inventory- If a business knows that certain periods of time will have more demand than expected, then production is made in advance to account for the extra inventory. The holidays are an example of this.
MRO (Maintenance, Repair and Operations) Inventory-
In the manufacturing process, all materials and supplies used in production are grouped together as MRO inventory. This is important to know because it ensures proper planning for parts needed during a production run to ensure that the inventory turnover is on track.
Vendor-Managed Inventory (VMI)-
VMI is a system where the seller does the buyer's inventory management for them. It allows buyers to focus on sales and marketing, while sellers take care of customer service.
Calculating Inventory And What Should You Know About It?
Inventory Management is key to managing capital and customer satisfaction. Too much inventory will mean capital will be tied up unnecessarily and too little of certain items may lead to a loss in profits or the risk of losing money. An average inventory calculation evens out such sudden spikes in either direction and delivers a more stable indicator of inventory readiness. It is averaged over two or more accounting periods. To calculate the average inventory over a year, add the stock counts at the end of each month and then divide that by how many months there are. Remember to also include the base month in fiscal year averages which means dividing it by 13 months rather than 12. The average inventory is also a key component of understanding how quickly you're able to turn inventory into sales. This is done with the Inventory Turnover Ratio (ITR) and Days Sales of Inventory (DSI).
Inventory Turnover Ratio-
Inventory turnover, also called inventory turn rate, is a measurement that compares the amount of product a company has on hand to how many times it sells. This indicates how well managed your business's inventory levels are and can be an important metric for businesses because it helps identify efficiency issues in management as well as profitability gaps with target goals. The ITR can be calculated by dividing the cost of goods sold by the average inventory for a particular period.
Days Sales Of Inventory (DSI)-
DSI indicates the amount of time in days required for a company to turn its inventory, including goods that are not yet complete into sales. A lower average DSI is preferred as it implies a shorter duration to clear off unfinished inventories. To find out the DSI, you need to divide the average inventory by the cost of goods sold and then multiply that number with 365.
Why Do You Need Inventory Management?
Large and small businesses need inventory management to keep track of every product. From a single item to 500,000, inventory management helps you to be able to see how much is in stock for each area and why it is out of stock. Inventory management can help companies save money because they don't have to waste resources purchasing items that are out of stock. In addition, the information provided by inventory management helps with forecasting and planning to spend on goods. With so many benefits, it is a must for any business. If you're thinking that you need to do this manually, and think it's hard, there is a much easier, and more cost-efficient solution. Try out an inventory software like Zipinventory. With its multiple features that are time-saving and efficient, this Inventory Management helps you run your business optimally and successfully.
The inventory management process is a necessary one, but it can be time-consuming and frustrating
Zip Inventory’s guide is an easy-to-read guide that covers everything from how inventory works to how to manage it