The 4 Types Of Inventory In manufacturing And Distribution

All manufacturing and distribution companies work tirelessly to streamline their inventories. An inventory – simply speaking – consists of the record of all materials, parts and products in the control or possession of an organization. Traditionally, all inventories were kept in paper ledgers. These days, modern digital inventory management systems make inventory keeping a far more streamlined an efficient affair. Here is a very brief guide to the four main kinds of inventory seen in production and distribution industries.

Raw Materials

All of the stock of raw materials in the possession of a company, as well as their cost, must be noted in a raw materials inventory. There are two main kinds of raw materials inventory that all manufacturers must keep:

Direct Inventory

This covers materials that form part of the finish product. Dye, for instance, might be inventoried in the ‘direct’ category in a clothing manufacturing plant. It is vitally important that direct inventories are kept accurate so that production can continue at a good pace with high quality.

Indirect Inventory

An indirect inventory covers the raw materials that are used in the creation of products, but not incorporated into the products themselves. Stainless steel used in the machining of production devices, for instance, needs to be included in an indirect raw materials inventory.

Work In Progress

A Work In Progress inventory – otherwise known as a WIP – takes account of the quantity and cost of all materials (and sometimes labor costs) that are being used in the production of products at the end of the accounting or auditing period. WIP inventory management software of the kind offered by Myob makes accounting for these materials much easier. It is extremely important to keep account of all the costs and materials that are not sitting ‘dormant’ in warehouses. So-called ‘fluid’ inventory items are easily lost and can form phantom costs that bring down profits.

Finished Goods

Any products that are ready to be sold or warehoused are considered as finished goods, and must be entered into an up to date finished goods inventory. Finished goods inventories need to be constantly updated – if the goods turnover of a company is fast, the inventory should be updated equally as fast. An accurate finished goods inventory ensures that a company only has to warehouse just as many products as they expect to sell in any given financial period. It allows for the collection of accurate data – incredibly important in developing a lean and profitable business. Inventory data can be used to develop production and warehousing methods that exactly match projected demand.

Maintenance Repair And Operating

A maintenance, repair and operating inventory is used to keep track of all of the items used to keep a business running in the production and distribution industries. Tools, lubricants, spare parts and many more objects are necessary – but they come with associated costs and warehousing restrictions. Keeping track of these items is essential. If maintenance, repair and operating items are allows to run low a business could have to put its operation on hold during breakdowns.

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