inventory

inventory (stock; stock-in-trade) The products or supplies of an organization on hand or in transit at any time. For a manufacturing company the types of inventory are raw materials, work in progress, and finished goods. An inventory count usually takes place at the end of the financial year to confirm that the actual quantities support the figures given in the books of account. The differences between the inventories at the beginning and the end of a period are used in the calculation of cost of sales for the profit and loss account and the end inventory is shown on the balance sheet as a current asset.

2. More broadly, the total accumulation of material resources within an operating system (not only what is held deliberately in stock). It includes all the transformed resources that are locked up in the system, such as work in progress, scrap, rejects, etc. All operations have some inventory, which represents locked-up capital. The task of operations is to ensure that levels are kept to the minimum without affecting the efficiency and effectiveness of the transformation process.

Inventory, in this sense, falls into a number of different categories: • Anticipatory inventory is produced in periods of relatively low demand in anticipation of a later increase in demand. This is only possible if the goods are non-perishable and is only economically viable if the costs of storage are less than the costs of changing production levels to match demand. • Uncoupling inventory is the amount of material held to decouple elements of the transformation system, such as the raw-material supplier from the manufacturer, one machine from another, or the manufacturer from the customer. This provides an element of operational flexibility. • Similar to uncoupling inventory is the buffer inventory, which protects against variations in supply, demand, and lead times. It represents a safety margin and is therefore directly related to the reliability of demand forecasting, etc. • Pipeline inventory is that part of the inventory that is locked up in the system. Because all processes take time, the pipeline is a function of a transformation system rather than performing a function within it. If organizations have to subcontract part of their products or if elements of the system are widely separated geographically, the amount of resource locked up in the pipeline can increase dramatically. Modern process-monitoring systems based on information technology are designed to ensure that the pipeline inventory in particular is kept to a minimum. • Cycle inventory is a function of the economic order quantity (EOQ) calculation and represents a trade-off between minimizing the inventory and the costs of setting up and changing processes. Just-in-time techniques are designed to rely on a minimum EOQ. Clearly there is some overlap between these different types of inventory.