Manufacturing companies take raw materials and turn them into finished products. Merchandising companies buy product and resell it. Both types of companies must manage their inventory. If you order too much, you risk obsolescence, spoilage, or inability to sell. If you order too little, you may lose sales you could have made and risk upsetting your customers. This section will help you understand how companies manage their inventory to minimize overall costs.
Most manufacturing organizations usually divide their inventory into raw materials, work in process, finished goods, and goods for sales.
Differentiate the different types of inventory based on it stage of proudction
- 1. Raw materials: Materials and components scheduled for use in making a product.
- 2. Work in process, WIP: Materials and components that have began their transformation to finished goods.
- 3. Finished goods: Goods ready for sale to customers.
- 4. Goods for resale - returned goods that are salable.
- supply chain: A system of organizations, people, technology, activities, information, and resources involved in moving a product or service from supplier to customer
Manufacturing process From raw materials to work in process to finished goods.
1. Raw materials: Materials and components scheduled for use in making a product.
2. Work in process, WIP: Materials and components that have began their transformation to finished goods. These items are not yet completed but either just being fabricated or waiting in a queue for further processing or in a buffer storage. The term is used in production and supply chain management. Optimal production management aims to minimize work in process. Work in process requires storage space, represents bound capital not available for investment, and carries an inherent risk of earlier expiration of shelf life of the products. A queue leading to a production step shows that the step is well buffered for shortage in supplies from preceding steps, but may also indicate insufficient capacity to process the output from these preceding steps. Just-in-time (acronym: JIT) production is a concept to reduce work in process with respect to a continuous configuration of product. Sometimes, outside of a production and construction context "work in process" is used erroneously where the status "work in progress" would be correctly used to describe more broadly work that is not yet a final product.
3. Finished goods: Goods ready for sale to customers. Finished goods is a relative term. In a supply chain management flow; the finished goods of a supplier can constitute the raw material of a buyer.
4. Goods for resale: Returned goods that are salable.
Source: Boundless, https://courses.lumenlearning.com/boundless-finance/chapter/inventory-management/
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