Reasons for keeping stock
There are five basic reasons for keeping an inventory
Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time. However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance.
Seasonal Demand: demands varies periodically, but producers capacity is fixed. This can lead to stock accumulation, consider for example how goods consumed only in holidays can lead to accumulation of large stocks on the anticipation of future consumption.
Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.
Appreciation in Value - In some situations, some stock gains the required value when it is kept for some time to allow it reach the desired standard for consumption, or for production. For example; beer in the brewing industry
All these stock reasons can apply to any owner or product.
Special terms used in dealing with inventory management
Stock Keeping Unit (SKU) SKUs are clear, internal identification numbers assigned to each of the products and their variants. SKUs can be any combination of letters and numbers chosen, just as long as the system is consistent and used for all the products in the inventory.[6]
Stockout means running out of the inventory of an SKU.[7]
"New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.
Typology
Buffer/safety stock
Reorder level
Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock)
De-coupling (Buffer stock held between the machines in a single process which serves as a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process)
Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer)
Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet)
Average Daily/Weekly usage quantity X Lead time in days + Safety stock
Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them.
While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:
Raw materials - materials and components scheduled for use in making a product.
Work in process, WIP - materials and components that have begun their transformation to finished goods.
Finished goods - goods ready for sale to customers.
Goods for resale - returned goods that are salable.
Stocks in transit.
Consignment stocks.
Maintenance supply.
For example:
Manufacturing
A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, etc.) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers.
Capital Projects
The partially completed work (or Work in Process) is a measure of inventory built during the work execution of a capital project,[8][9][10] such as encountered in civilian infrastructure construction or oil and gas. Inventory may not only reflect physical items (such as materials, parts, partially-finished sub-assemblies) but also knowledge work-in-process (such as partially completed engineering designs of components and assemblies to be fabricated).
Virtual inventory
A "virtual inventory" (also known as a "bank inventory") enables a group of users to share common parts, especially where their availability at short notice may be critical but they are unlikely to required by more than a few bank members at any one time.[11] Virtual inventory also allows distributors and fulfilment houses to ship goods to retailers direct from stock regardless of whether the stock is held in a retail store, stock room or warehouse.[12]
Costs associated with inventory
There are several costs associated with inventory:
Ordering cost
Setup cost
Holding Cost
Shortage Cost
There are five basic reasons for keeping an inventory
Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time. However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance.
Seasonal Demand: demands varies periodically, but producers capacity is fixed. This can lead to stock accumulation, consider for example how goods consumed only in holidays can lead to accumulation of large stocks on the anticipation of future consumption.
Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.
Appreciation in Value - In some situations, some stock gains the required value when it is kept for some time to allow it reach the desired standard for consumption, or for production. For example; beer in the brewing industry
All these stock reasons can apply to any owner or product.
Special terms used in dealing with inventory management
Stock Keeping Unit (SKU) SKUs are clear, internal identification numbers assigned to each of the products and their variants. SKUs can be any combination of letters and numbers chosen, just as long as the system is consistent and used for all the products in the inventory.[6]
Stockout means running out of the inventory of an SKU.[7]
"New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.
Typology
Buffer/safety stock
Reorder level
Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock)
De-coupling (Buffer stock held between the machines in a single process which serves as a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process)
Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer)
Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet)
Average Daily/Weekly usage quantity X Lead time in days + Safety stock
Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them.
While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:
Raw materials - materials and components scheduled for use in making a product.
Work in process, WIP - materials and components that have begun their transformation to finished goods.
Finished goods - goods ready for sale to customers.
Goods for resale - returned goods that are salable.
Stocks in transit.
Consignment stocks.
Maintenance supply.
For example:
Manufacturing
A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, etc.) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers.
Capital Projects
The partially completed work (or Work in Process) is a measure of inventory built during the work execution of a capital project,[8][9][10] such as encountered in civilian infrastructure construction or oil and gas. Inventory may not only reflect physical items (such as materials, parts, partially-finished sub-assemblies) but also knowledge work-in-process (such as partially completed engineering designs of components and assemblies to be fabricated).
Virtual inventory
A "virtual inventory" (also known as a "bank inventory") enables a group of users to share common parts, especially where their availability at short notice may be critical but they are unlikely to required by more than a few bank members at any one time.[11] Virtual inventory also allows distributors and fulfilment houses to ship goods to retailers direct from stock regardless of whether the stock is held in a retail store, stock room or warehouse.[12]
Costs associated with inventory
There are several costs associated with inventory:
Ordering cost
Setup cost
Holding Cost
Shortage Cost
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