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 What is the definition of inventory?

Inventory is an asset that is owned by a business that has the express purpose of being sold to a customer. This includes items sold to end customers or distributors. It includes raw materials, work in process, and finished goods. The management of inventory is a key concern of all businesses. If a company's inventory level is too low, it risks delays in fulfilling it's customers orders. If the inventory is too high, it is tying up dollars that can be better used in other areas. It also risks obsolescence and spoilage. Successful businesses keep their inventory turns high, but also keep their service level at or above the industry standard.


Many things need to be taken into consideration when planning your inventory.
Here is a very simplified view...

  Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7
On Hand Inventory
100
50
80
80
50
20
-10
Purchase Order Receipt
0
60
0
0
0
0
100
Unshipped Customer Orders
20
0
0
0
0
0
0
Forecast
30
30
30
30
30
30
30
Net Inventory
50
80
50
50
20
-10
60

In the example above, we use the following formula: (On Hand Inventory + Purchase Order Receipt) - (Unshipped Customer Orders + Forecast) = Net Inventory. Notice what happens in Week 6. The Net Inventory is negative, projecting that we will be out of inventory. In this case, you should expedite the Purchase Order Receipt that is scheduled for week 7. Ideally, it should arrive in week 5 or 6, depending on your desired Safety Stock level.
Note: The Unshipped Customer Orders in the above example are above and beyond the Forecast quantity.


Additional Inventory Definitions:
Finished Goods Inventory - items that are in stock and that await sale to your customer. They have completed the manufacturing process and are ready for sale. The proper management of Finished Goods Inventory is a key concern to many businesses.

Lead Time - the amount of time from when you place an order with your vendor, to the time it is delivered to you. This includes the transportation time.

Raw Materials - a substance or material that is used in the manufacturing of finished goods.

ROP (Reorder Point) - The point at which you order additional raw materials or inventory.

Safety Stock - Buffer inventory to account for uncertainty due to fluctuations in demand or lead time. Higher Safety Stock can be used to boost the on time service rate to your customers.

Vendor Managed Inventory - a business model where a manufacturer is responsible for maintaining the inventory at a distributor. The manufacturer has access to the distributors inventory levels and creates the replenishment orders.

WIP (Work in Progress) - material that is in the production process, but is not yet a finished good.

See the links on the left to learn more about inventory turns or other inventory measurements.

 

 

Do you an alternate definition of inventory? If so, please submit it to us: john@supplychainmetric.com
The inventory definition above is the opinion of the webmaster. Other definitions may vary. Please consult multiple sources.

 

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The information on this website is the opinion of the webmaster. We do not guarantee it's correctness. We recommend reviewing numerous sources when researching an inventory definition.


This site is owned and maintained by Michelle Taras & John Taras CPIM, PMP

InventoryTurns.com - additional information on how to calculate inventory turns or inventory turnover.
SupplyChainDefinitions.com - various definitions of supply chain terms

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DangerousTricks.com - video's of people doing extreme stunts.