Types of Inventory
As we pointed out in the inventory definition, there are different types of inventory businesses hold on to. We can group up the different types of inventory into 4 main parts:
1st Type of Inventory- Raw materials Inventory:
Raw Materials are the most basic materials that businesses need in making their final products. Raw material inventory consists of basic materials that have not yet been committed to production in a manufacturing firm. Raw materials that are purchased from firms to be used in the firm’s production operations range from iron ore awaiting processing into steel to electronic components to be incorporated into computers. The purpose of maintaining raw material inventory is to separate the production function from the purchasing function so that any problem in shipment of raw materials do not cause production delays.
2nd Type of Inventory – Spare Parts:
Spare Parts: This category includes those products, which are complimentary to the main products produced for the purpose of sale. Examples of spare part items are bolts, nuts, clamps, screws etc. These spare parts are usually bought from outside or some times they are manufactured in the company also.
3rd Type of Inventory – Work-in-Process:
Work-in-Process Inventory: This category includes those materials that have had work done on them but have not been completed. The more complex and lengthy the production process, the larger will be the investment in work-in-process inventory. Its purpose is to uncouple the various operations in the production process so that machine failures and work stoppages in one operation will not affect the other operations.
4th Type of Inventory – Finished Good Inventory:
Finished Goods Inventory: These are completed products awaiting sale. The purpose of finished goods inventory is to uncouple the productions and sales functions so that it no longer is necessary to produce the goods before a sale can occur.
The basic flow of production reveals the necessary type of inventory that businesses must keep. Raw materials are turned into work in process which is then transformed into finished goods whilst all throughout being supported by spare parts. There are other types of inventory that some businesses can have such as rejected, damaged or obsolete goods, but the 4 mentioned above cover most industries.
For another perspective on the matter, here is an excerpt from inventory control specialists ww5s.com :
As it sounds, this type of inventory item will be used for the majority of your parts. It will correctly track the inventory received and sold on a first in first out basis, will handle cost of sales, and will warn you when you’re out of stock.
This is used for selling things that are not really inventory items. For example, you could be selling warranty, but because you don’t have warranty in a box to sell, and you’ll never run out of stock, you won’t need to keep inventory control on it. As well, there is no cost of sale adjustments with non-stock items. The system will not calculate how much you paid for the item, and therefore will not try to remove that value from inventory in the general ledger. If you are selling something that does cost you money, you will have to handle these details manually.
You (probably) don’t have technicians hanging from hooks in your back room, so like non-inventory items, the system will not try to remove them from inventory when you sell a labor item. The two differences between Non-Inventory items an Labor items are that you can optionally have the system ask you for the technician code that did the work so that you can print reports showing who did what work. As well, the system will optionally ask for a comment to explain what was done so that the description of the service work can be printed on the invoice.
Note too that you can optionally keep track of how much time was spent and how much time was billed for on a per job basis. At the end of the month, you can then print technician productivity reports to compare total time spent compared to billable hours. In the automotive industry, some mechanics can do the work faster than is what is billed because the billing is based on industry standards.
Consignments can be used to keep track of inventory that you don’t own, but at the time you sell it, you must pay for it. You’ll be able to generate several reports, including a list of inventory that is on consignment but not sold and a list of inventory sold on consignment, but not yet paid for.
Floor Plan Inventory
Floor planning is very similar to consignment, except that you take possession and own the inventory when you receive it, but you don’t have to pay for it until it’s sold, or until it’s been in the store for a negotiated period of time. However, you do own the inventory and do have to pay for it sometime.
Some floor planning companies want the ability to check the inventory serial number by serial number for the larger items, and others may just want to count the number of each model number on hand. Regardless, Windward System Five can handle it.
On the accounts payable side, you will be able to keep track of who you owe the money too (Floor Planning Company) and who you actually bought the inventory from (Supplier) and generate proper histories of each
Products are items such as vehicles that you might service or repair after selling them to the customer. That is, they are an item in the database that can be sold, and when sold, are automatically added to the customer’s list of products that can be worked on.
Examples are vehicles, trucks, recreational vehicles, fridges, air conditioners, and chainsaws. The system will let you keep additional information on these products, such as make, model, year, and other comments, and will also be able to list all the work or repairs performed between two dates.
Windward System Five can also track whole goods such as recreational vehicles by keeping track of the cost of the item before the sale, add ons and pre-delivery inspection items. In addition, the system can generate a “wash out” report one level deep to show the costs and income associated with the trade in.
Those items that need to be tracked by their serial numbers can be marked as serialized inventory. For example, fridges, stoves, computers, and chainsaws might all be serialized. Note that if you plan on servicing these items in the future and keeping track of all work you do on them, they should be entered as products instead of serial numbers.
It must be kept in mind that inventory types are very closely associated and hence inventory management decisions for one can’t be made without thinking about the other types of inventory.