Business Inventory

The following stock reasons might apply to any stage of the product or any owner.

Buffer Stock: Sometimes the upstream workstation might get delayed in providing the next part that needs to be processed. In that case, a buffer stock is held at each workstation. Depending on the process, the buffer stock might be very large or tiny. In recent years, Toyota has been able to eliminate this type of stock.

Safety Stock: Safety stock is held just in case something goes wrong and a machine or the process fails. Total Productive Maintenance and similar programs can help eliminate this kind of stock.

Overproduction Stock: If the forecast and actual sales did not match up, then overproduction stock might be held. If you want to eliminate this type of inventory, instill a made to order program, or use JIT.

Lot Delay Stock: This kind of stock is generally held because part of the manufacturing process is only designed to work on a per batch basis. Thus, each lot item has to wait for the entire lot to be processed before being moved on to the next workstation. A single piece working can eliminate this aspect of inventory.

Demand Fluctuation Stock: This type of stock is held in instances where a production capacity is not able to flex according to demand. As a result, a stock is built up during lower utilization periods to be supplied to clients when the demand is exceeded by the production capacity. For this stock to be eliminated, a production line’s flexibility and capacity must be increased.

Line balance stock: These kinds of stock build up because of the fact that various sub-processes in a single line may work at different paces. So stock accumulates after a faster sub-process occurs or before a large lot size sub-process takes place.

Changeover stock: When a sub-process has a long set up time, then changeover stock will accumulate. While the change over is occurring, this stock can be used up. Tools such as SMED can help eliminate this changeover stock.

All of these inventory stock classifications apply to the entire supply chain – not just within one particular plant or facility.

Those in supply chain management who have to deal with inventory must learn a set of special vocabulary terms. One of these is SKU, or Stock Keeping Unit. This describes the combination of every single component that goes in to the assembly of a product. Anytime the packaging or product itself undergoes a change, then a new Stock Keeping Unit has been created. Keeping track of this helps one to manage the inventory.

Another important term in inventory is “stock out.” When you run out of the inventory of a Stock Keeping Unit, then the term “stock out” is used.

Another term is NOS, or New Old Stock. This refers to a product that was made a long time ago but has never been used and is now being offered for sale. Sometimes that product is not being produced anymore, and the New Old Stock represents the sole source of a particular product at present.

Accountants often treat inventory in terms of goods to sell. But a lot of organizations, such as non profits and manufacturers and service providers, have a whole store of inventory that is not intended for sale, such as furniture and office supplies. The inventory of manufacturers and distributors and wholesalers tends to gather up in warehouses or similar storage spaces. The inventory for retailers might be kept in a similar warehouse or a shop that is customer accessible. Inventory that is not intended to be sold to customers may be kept in any area of the business. Stock is merely money in disguise. If the stock is not controlled, then theft may occur.

A company that manufactures products will divide their sellable goods in to three different categories: raw materials, meaning those materials that will be used to create a product; work in process, meaning materials that have already begun to be transformed in to sellable goods; and the finished goods themselves, which are already ready to be sold to clients. Finally, there might be goods for re-sell that the company counts as inventory.

When it comes to accounting for inventory, every country has its own laws. In the United States of America, the Financial Accounting Standards Board, among others, regulates inventory laws. The United States Securities and Exchange Commission then enforces the laws. Inventory management can have a major effect on a business’s internal operations via their cost accounting methodologies.

Inventory’s internal costing and valuation can be quite complicated. In the old days, the vast majority of enterprises ran on a one process basis. This is seldom still the case in our technological era. Where these one process businesses still do exist, then an independent market value exists for that product.

In today’s complicated world, with numerous multi stage process organizations, much inventory that is held that would have once been classified as finished goods is now categorized as work in process. The valuation of these goods is a management decision, as there is no market for a partially finished item. The arbitrary valuation of work in process, in combination with the allocation of overheads, has led to some results that are not very desirable.

The inventory of a company can be a mixed blessing. On the one hand, on a balance sheet it counts as an asset. On the other hand, it can tie up funds that might be used for other purposes. It also must be protected, which requires extra money. Inventory might also be a burden on one’s taxes, depending on what the particular country’s tax regulations are on the depreciation of inventory.

On a company’s balance sheet, inventory will appear as a current asset. This is because the company can turn that inventory in to cash via selling it. Some companies might hold larger inventories for this very reason – they can inflate their apparent asset value, as well as their perceived profitability that way.

If a company stocks too little inventory, then they will not be able to take advantage of bigger orders from clients, as they will not be able to deliver. Indeed, here we must come face to face with two conflicting objectives: that of customer service and that of cost control. These interests can and oftentimes do pit the company’s operating and financial managers against their marketing and sales offices. If goods are unavailable at a particular time, this is likely to anger the sales department, who may be working on commission. The solution to this problem is to reduce the time of production to being nearly identical to the delivery time expected by the customer.