An inventory is any stock of economic resources that is stored for future use. It is commonly used to indicate materials, raw materials in progress, finished goods, packing materials, spares, etc. stocked in order to meet an expected demand or distribution in future. Even though inventory of materials is an idle resource, in the sense it is not meant for immediate use, it is almost a necessity to maintain some inventories for the smooth functioning of an organization.
From the logistics operations point of view, the decision regarding inventory are extremely crucial. They have a high impact on logistics operations. Inventory decisions are high-risk because without proper inventory assortment, marketing may find that the sales are lost and customer satisfaction will decline. Likewise, inventory planning is very crucial for manufacturing activities as well. Raw material shortages can either shut down a manufacturing line or it may force modification of production schedules. Again, overstocking of inventories can also create problems. Overstocks increase cost and reduce the profitability due to
- increased warehousing requirements
- increased working capital requirements
- deterioration in quality of goods
- fear of obsolescence
- Increased interest amounts, insurance premiums, taxes etc.
Types of Inventories
Several types of inventories are maintained by organizations. Some of the major inventories are:
Raw materials: Raw materials, required for production of finished products are one of the basic components of inventory for a manufacture. Shortage of raw materials can cause production stoppage or change in production Schedule which in turn may result in a shortage of finished goods. Thus sufficient quantities of raw materials need to be stored to cope with uncertain situations. However, where shortage of raw materials can disrupt normal manufacturing operations, excessive inventories can increase inventory carrying costs and reduce profitability.
Finished Goods: Finished goods are another important part of inventories, especially for the wholesalers and manufacturers. While holding finished goods inventory, it is important to have a adequate and not excess stock of inventories as they may incur cost as well as loss if the excess inventory is not sold out in time.
W.I.P.: Work In Progress (W.I.P.) inventory is often maintained between manufacturing operations within a plant to avoid production hold ups in case a critical machine or equipment were to breakdown and also to equalize production flow, since not all manufacturing units produce at the same rate.
Spare parts: Spare part inventories are mainly held for purpose of coping up with untimely breakdowns in machinery and facilities. This may form a minor part of the inventory, however are as necessary as holding raw materials inventory.