What is Inventory?

Inventory or stock is the term refers to the goods and materials that a business holds for the goal of resale, production or utilisation.

In a manufacturing industry, inventory is not only the final goods manufactured and ready to sell, but also the raw materials used in manufacturing and the semi-finished goods in the warehouse or on the factory floor.

In a service industry, since there is no exchange of physical stock, the inventory is mostly intangible in nature. So the service industry inventory mostly includes the steps involved before completing a sale. For example: In the hotel business, a vacant room is an inventory for the owner.

What is Inventory? video

Types of Inventory

We can categorize inventory as raw materials, work-in-progress, and finished goods.

Raw materials are unprocessed materials used to produce a good. Examples of raw materials include aluminium and steel for manufacturing cars.

Work-in-progress inventory is the partially finished materials and components that have begun their transformation to finished goods. Half assembled car is an example of work-in-progress inventory.

Finished goods are products that have completed production and are ready for sale to customers. An example of finished goods is cars held by retailers.

What are the Reasons for keeping inventory?

1 The time lags present in the supply chain, from supplier to user at every stage, requires that you keep certain amounts of inventory to use in this lead time.

2.  Demands vary periodically, but manufacturers capacity is fixed. This can lead to stock accumulation, so that goods are available during high demand.

3. “one unit at a time at a place where a user needs it, when he needs it” well, this principle tends to incur lots of costs in terms of logistics. So buying, movement and storing in bulk brings in economies of scale.

4. In some cases, some stock gains the required value when it’s stored for some time to allow it to reach the desired standard for consumption. For example;, beer in the brewing farm.

Sukanta Maiti

I am a Mechanical Engineer by profession, Blogger, and Youtuber by passion. I have been in the engineering field since 2014. I am passionate about sharing all my knowledge about engineering, management, and economics to my readers.

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