Understanding Inventory
Inventory refers to the goods and materials that a business holds for production, sale, or delivery to customers. Inventory is reported on the balance sheet as a current asset. Understanding inventory is important for businesses that sell products or use raw materials to make goods.
Types of Inventory
Inventory has four types:
- Raw materials
- Work-in-progress (WIP)
- Finished goods
- Maintenance, repair and overhaul (MRO)
- Raw materials are the basic materials companies use to produce products, like wood for furniture.
- Work-in-Progress inventory includes partly finished goods waiting to be completed or resold, like semi-manufactured aircraft.
- Finished Goods are completed products ready to be shipped and sold, like equipment and clothes.
- MRO includes consumables and equipment needed for manufacturing but not inventory goods themselves.
Inventory Management
An inventory management system is needed to run operations efficiently. With many types of inventory and specific tracking needs, mobile inventory solutions can provide real-time visibility and control, streamlining operations for future growth.
Monitoring different inventory types helps manage businesses and accounting as well. Trading, manufacturing and service firms have varied inventory needs. While services are not inventorial, merchandise and manufacturing companies require close attention.
Efficiently managing inventory can enhance operational efficiency, reduce costs, improve customer satisfaction, and affect a business’s financial position and performance. Inventory serves as a buffer between the supply and demand of products or services. By maintaining inventory, businesses are able to meet customer demands promptly and maintain smooth production.