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types of inventoryBusinesses function due to many variables. Customer satisfaction is agreeably the most important; without customers there exists no business. So what is needed to ensure customers? A constant availability of supply is first and foremost. Supply and Demand- to create demand, you need to have a supply. So what keeps the supply up? Inventory systems. Without proper inventory, you cannot be sure how much product you have and therefore may not be prepared to fill orders. Managing supply chain is important in all businesses. In retail, for example, managing the supply chain will help you keep up with orders and product distribution to stay ahead of demand. You can see inventory management in this instructional course on Retail Supply Chain Management. For warehouse distribution and factory suppliers it is important to learn the five types of inventory before you lose products or customers. Five types of inventory for supply are used in business, while two are looked at more often by companies today.

A new kind of supply system built around these five inventories is necessary to serve today’s demanding, all-powerful consumer. This system is a network in every sense of the word, with made up of network hardware, networked communication, and networked collaborative management. Eliminating duplicate experts, these new supply networks allow businesses to serve customers faster. With powerful tools of analysis that give better visibility of customer information, they can efficiently leverage business processes from suppliers to recycling companies.

The Five Types of Inventory:

  1. Raw Materials – Raw materials are important for obvious reasons such as the production of goods. The raw goods are what comes from your suppliers and their suppliers. If you do not have a system in place that grants visibility of raw materials, you cannot accurately gauge what you will produce over the next quarter or year. A company can go bankrupt if it doesn’t properly manage its raw-material inventory. For example, a multi-billion dollar business had to shut down business and halt production for four days because they ran out of pallets on which to store and ship their supply. Pallets are very important for shipping and manufacturing companies and if they are ignored, then the business suffers.
  2. Work in Progress – The second type of inventory is composed of the goods currently being produced in your, or a contract manufacturer’s company. Because many companies used to overlook this element, Enterprise Resource Planning (ERP) systems have been implemented to completely track all goods, those even being converted from raw to production, to accurately track profits and assist in the planning of future raw-material purchases.
  3. Finished Goods – This type of inventory is usually controlled by your distributors or by your warehouse. For companies that have many distributors of their product it is important for them to know how much of their product is on the market. Especially when in the case of car manufacturers. It is hard to manufacture for multiple distributors when there is no visibility of your finished goods.
  4. Service Inventory – Distribution inventory barely holds a candle compared to the difficulties of service industry, on of the most difficult of the five types of inventory. Crucial to business, service inventory needs proper management. Global mandates such as recycling and energy regulations need to be managed. You can gather information about failed products, using failure analysis to design better products and be able to leverage parts sales.
  5. Transportation – A supply train of different inventories connected by transportation is the traditional definition of a supply chain, although this has changed now though. Talk to an accountant about the product in-transit and he or she will let you know that the products are in the books or in the books of your trading partners. Accounting for about 5% to 20% of your inventory, this often goes overlooked because the inventory cannot be seen. Being on a plane, truck, or boat does not erase it from your inventory and in-transit inventory is very important to keep track of. If shipments are delayed near the end of accounting periods and there is not appropriate visibility of those products you may receive a supply shipment at the end which would destroy your revenue because in-transit revenue was not accounted for.

Accounting for businesses is important for more than financial purposes as accountants can help an owner have an idea about inventory and profit margins. Inventory is pending profit and needs to be treated as so. Learning about financial accounting can be very important and useful for any business owner because it allows you to be able to read the data that makes up your revenue, profit, and loss sheets to understand exactly where your money goes. Learn more with an introduction to financial accounting. Here you will learn to manage your books, which will help you understand inventory and help in choosing the proper methods of inventory for your company. Using the five types of inventory will create a data chain that is instantly updated up and down the supply chain. In this new-age marketplace, on-the-fly adjustments must be made to retain control over your supply base and if you do not keep up with this inventory supply chain you will lose customers and potentially lose your business. To learn more directly about inventory, you can take a course to help those learning inventory with inventory management specialists.

Learn the fundamentals with an introductory course on inventory fundamentals, more advanced techniques with the r-12 advanced inventory course, or take a hybrid of the two that covers all aspects with the full inventory course from Oracle Applications. These various courses can allow you to fully understand the five types of inventory and more. You will become adept in inventory management and will understand its true uses.

Just understanding inventory management is not enough though. To properly utilize what you learn, you can use applications like magneto, an inventory management system in this video walk-through of the Magneto Inventory Management System where you will learn to how to manage and create products in the system so that you can create visibility up and down your supply chain. Gaining perspective from these courses will help you grow into a more well-rounded business owner granting you respect from your employees down the supply chain and respect for yourself as most business owners overlook the need for educating themselves in the areas of accounting, inventory, and production.

Getting ahead of your competition is not a secret formula that you need to discover, but one you create yourself. The secret? Knowledge. Knowledge of the five types of inventory can also help you keep tabs on your competition with more accurate estimations and keep you a step ahead. The more you know, the better the advantage you have over your opposition and in this dog-eat-dog world of business and consumerism, the extra edge you gain from this knowledge will become paramount to your success. On demand control of your supply leads to control of your demand. Real-time inventory control has become more important with the advancement of technology and it will continue to grow until those who do not understand their inventories will fail and inevitably fall. Keep growing with technology and the times and utilize your supply chain to grow your customer base with these resources and a strong and positive attitude. Your business and its success directly mirrors the confidence you exude to your market. This confidence comes from knowledge. The more you know, the more confident your words sound and the more sound your decision making becomes.

Page Last Updated: February 2020

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