Every business owner knows the importance of matching supply with demand. If your customer needs a product and you cannot fulfil this need, then you would lose that sale and likely push that customer into the waiting arms of your competitor. This is why having a strong understanding of inventory and inventory management is very important for every business owner. Sadly, not many small business owners can adequately answer the question, “what is inventory in business”.
However, this article will address this issue.
By reading this article, you will find out what inventory in business means.
You would also learn the various types of inventories and other important things that would help you use inventory management to boost your customers’ satisfaction.
So, ensure you stick with us to the end.
With that said, let’s jump right into the topic.
Meaning of Inventory in Business – What is Inventory in Business
Inventory is an umbrella term for items, merchandise, goods, and materials a business has in storage which it plans to sell to make profits.
It refers to goods that business stores to meet demand.
Inventory also refers to the process of listing and counting available stocks.
By monitoring its inventory, a business will know when it is running low on products and need to stock up on them.
This way, they will always be ready or have the capacity to fulfil orders.
This is the basic explanation of this business word.
But inventory can mean different things in different business fields.
To clarify the word, let’s take a quick look at what inventory means in 3 major industries.
Manufacturing
In this industry, you would typically hear terms like production or manufacturing inventory.
Unlike in most industries, manufacturing inventory is not limited to finished goods.
This is because manufacturing companies make and sell products.
Inventory in this industry covers everything from suppliers to raw materials to parts and, finally, the finished products.
Therefore, manufacturing inventory can be classified into three broad groups; raw materials, work-in-progress, and finished goods.
Let’s use a clothing manufacturing company to illustrate this point.
The company would have fabrics, threads, buttons, and so on for its raw materials.
Work-in-progress inventory could be half-ready dresses, shirts without collars or buttons, etc.
And the finished product would be complete dresses, shirts, trousers, etc.
Retail
Here, inventory is any resource or item the retail business has in stock; that is, they are stored and ready to be bought.
They are physical products that retailers store.
This could be anything from groceries, bags, devices, cars, electrical appliances, etc.
Service
This is one very broad industry that includes several other sub-industries.
Every other sub-industry has its peculiar inventory because of the broad service industry.
However, one thing is common about inventories in this industry; they are mostly intangible.
When you pay for a service, you won’t get any physical goods in exchange for cash.
And because what these types of businesses offer is intangible, it is only normal that their inventory is also intangible.
Inventory in this industry includes things like spaces, personnel, procedures, and so on.
Let’s take the hotel and accommodation industry, for instance.
The inventory of a business in this industry will typically be its rooms, the things in the rooms like beds, phones, and so on.
If a room is not in use, then that room will count as unused inventory.
In this scenario, the hotel gives customers access to the rooms and equipment.
However, the customer cannot hold the room physically in his/her hands as something they’ve paid for.
This is why, they’re regarded as intangible assets.
After considering what inventory means across these three industries, you’d see that some core characteristics remain despite their differences.
You can see that inventory is an asset that a business has, whether intangible or tangible.
These assets are also used by businesses to generate revenue and profit.
So, an accurate explanation of this word has to cover these essential factors.
Assets Vs. Inventory – What is Inventory in Business
You should not confuse assets with inventory because they are not the same.
Inventory is what your company sells to generate profit or uses to make goods that you then sell to generate profit.
Assets, on the other hand, are investments that your company uses to run its operations.
You do not sell your assets.
Instead, you use them to run the business.
Assets include equipment, office furniture, building, and so on.
However, in accounting, inventory is seen as a type of asset, a current asset.
This is because a business is meant to sell off its stock within a year.
But if a company does not sell its stock within a year, it stops being a current asset.
It is seen as dead stock and a liability to the company.
So, while a company needs to sell its inventory to generate profit and stay in business, it also qualifies as a type of company asset.
Inventory Management – What is Inventory in Business
It is not enough to just know the meaning of inventory.
Having proper inventory management knowledge is also key for any business owner.
Inventory management is all about keeping proper tabs on your company’s inventory.
It allows a company to effectively buy, receive, store, and sell its products to generate revenue.
Importance of Inventory Management
Your company’s most important asset is your inventory.
If you do not properly care for it, your business can fail.
This is what makes this a very important business process.
It is what will help you maintain profitability and sustainability.
Proper inventory management will help you make sure that you always have enough stock.
Seasoned business owners know that too much stock is just as bad for business as limited stock.
When you have limited or no stock, your customers would likely go to your competitors, affecting the company’s revenue.
In the same way, when you have too much stock when demand is not that high, you would end up holding up your company revenue.
This revenue would have facilitated other business processes that would have brought in profit.
Instead, it will be tied up in unused inventory, not bringing in any revenue for the company yet reducing the chances of it generating revenue elsewhere.
But you can avoid all these with good inventory management.
Types of Inventories – What is Inventory in Business
The different types of inventories are yet another thing that you should know about to manage your business inventory properly.
Knowing this would help you know what type of inventories your business has and how to handle them properly.
There are many inventories, but this article will consider just 11 of them.
With that said, let’s get right into it.
Raw Materials
Any business that produces its goods uses raw materials.
For such businesses, raw materials are vital to their processes.
Without them, the business won’t be able to operate as it should.
They won’t be able to make the goods they would sell to make profits.
This makes raw materials a significant type of inventory for any manufacturing or producing business.
Companies like this have to keep proper track of their raw materials to ensure they always have enough to make their products and satisfy their customers.
Work-in-Progress
Another important type of inventory you would find in a company that produces goods is work-in-progress inventories.
These products are already in progress but aren’t complete yet.
Work-in-progress inventories have different components, including components (parts), subassemblies, assemblies, and vital materials.
Work-in-progress may also include raw materials that are already out for processing.
It covers items used from the start to the end of production.
Finished Goods
Items in this category have typically gone through the entire production process and are ready to be used.
Finished goods are the final products that the company sells.
For instance, if you own a furniture-producing company, your finished product inventory typically includes chairs, tables, cabinets, and so on that customers can buy and take home to use.
Safety Stock
As the name implies, safety stock is the stock businesses keep as their safety nets.
A business that prioritises inventory management will notice changes in different areas and stock up accordingly.
These stocks protect such businesses against several challenges like uncertainties of supply and demand, poor-quality parts, delivery issues, and so on.
Another name for safety stock is buffer inventory.
Let’s say you run a pet store and need about 50 dog collars to meet regular demand.
But instead of stocking 50 dog collars, you stock 60 dog collars.
The additional 10 dog collars are your safety stock.
Safety stock needs mostly depend on the kind of business and its industry.
In some industries, your business can operate smoothly without safety stocks.
While this kind of inventory would be a must in another industry.
To determine whether or not you need safety stock, you should review your business to understand your workflow clearly.
Safety stock can help a business owner avoid several issues, such as:
- Stock-outs (when you can’t fill an order from your current inventory)
- Losing customers because a product is not available and they have to patronize a competitor
- Delayed orders
- Backorders
Not having to deal with all these issues means you would have better customer service.
Your customer’s experience with your brand will be smooth and enjoyable, making them not hesitate to patronize you the next time.
And from customer satisfaction, you’d be able to build customer loyalty.
Decoupling
Decoupling inventory is common in the manufacturing industry.
Usually, all the machines used during production do not run at the same pace.
Some would operate at a faster pace, while others may operate at a slower pace.
This can happen at any stage of the production process.
At other times, some equipment may be faulty and would have to go through maintenance or repairs.
All these irregularities can cause a bottleneck if manufacturers do not have contingency plans.
This is where decoupling stocks come in.
They are supplies, components, and even finished products that manufacturers keep at hand to be used in the next production stage.
This inventory is a cushion to ensure the production process goes smoothly, even during certain irregularities.
This way, if one of the equipment breaks down or lags, the manufacturer already has the materials that the following equipment in the production process can work on.
Hence, equipment 2 does not need to wait for equipment 1 to finish before it can start its operation.
The person operating the second equipment can use the decoupling stock to continue work even though the first equipment isn’t operational.
Smoothing Stock
Otherwise known as anticipation inventory, smoothing stocks are excess stocks that companies keep because they anticipate an event in the future.
It is called smoothing stock because it helps smooth out the fluctuation in demand during a particular time.
It helps companies maintain their output during an increase in demand.
Smoothing stock can also help a company save money in several ways.
For instance, a manufacturing company that has seen that there would be an increase in demand due to an event can start manufacturing more products to meet this demand during the slow months (months when demand isn’t high).
Then, once demand peaks, they would have enough products to meet this demand and would not have to increase their production time.
This would help them maximize their workforce even in their slow months, maximizing their labour capital during this period.
They also won’t need to hire additional labour and spend money training them because they need more hands on deck when demand peaks.
Also, the company can buy supplies to start production when demand is low.
This will help them buy the supplies at a cheaper rate.
If you run a business that often has seasonal demand increase, consider having this type of inventory.
It would not just help you save costs, but it would also ensure you run your business efficiently and smoothly throughout the year.
Packing Material – What is Inventory in Business
As the name suggests, packing material inventory contains items companies use to package and ship their finished products.
This category can be broken into three sub-categories; primary, secondary, and miscellaneous.
Primary Packing
This is the original packaging of the product.
You’d see this packing on a product when it is on display in a retail store.
It is the product’s box or bag or a protective covering.
Secondary Packing
This is used to transport a product or for convenient storage.
For instance, if you sell body lotion, your secondary packing could be the box holding 4 to 5 bottles.
It is in this box that will be shipped to the retail stores.
Miscellaneous Packing
You use these other packing materials to store and transport your product.
Miscellaneous packing includes bubble wraps, pallets, foam peanuts, labels, etc.
Keeping a tab on your packing material is very important.
While the cost of these materials may seem negligible, you may spend way more than necessary on them if you do not pay proper attention to them.
MRO – What is Inventory in Business
MRO is short for maintenance, repair, and operation.
This type of inventory covers items stocked to carry out various production tasks.
Even though these items are used for production, they aren’t usually part of the final product.
Yet, they are very important for the production process as the product may not be possible without them.
MRO supplies include packing materials, gloves, tools, and office supplies such as toner, copier paper, staples, toner, and pens.
Transportation – What is Inventory in Business
This type of inventory is very important for businesses that have to transport their products, materials, and other items between locations.
Transportation stocks are those stocks that are in transit.
Companies have to consider the time it takes for their inventories to move between locations.
This transit window can affect order fulfilment to a considerable extent.
By adequately managing this aspect of its inventory, a company can ensure that everything goes smoothly to ensure it meets its demands.
Services
These inventories are intangible.
They are very crucial to the smooth running of a company’s operations.
You could think of them as the human version of MRO goods.
It mostly covers the workforce of a company.
Properly monitoring your company’s services inventory will make it easier for you to maximize your workforce.
You’d have an easier time organizing your employees’ schedules and tasks.
You would be assured at all times that things are going how they should and that your workers are always readily available.
Cycle Inventory – What is Inventory in Business
Items businesses rely on to meet their daily orders fall under this category.
It is what generates a company’s cash flow.
For instance, let’s use a grocery store to help you understand better.
A grocery store typically has certain products people regularly buy (staple goods).
This includes items like pastry, butter, milk, and so on.
The retailer expects to sell these items regularly.
So they are always readily available.
Therefore, these are the retailer’s cycle inventory.
Conclusion on What is Inventory in Business
Inventory is an umbrella term for items, merchandise, goods, and materials a business has in storage and sells to make profits.
If a company does not have goods in stock, it can lose a lot of sales, which would affect the company’s growth.
This is why you need to prioritise inventory management as a business owner.
Take your time to monitor and optimise your inventories to the best of your ability, and watch how this helps move your company to the next level.
