Inventories exist because its items must be on hand to perform a process such as fulfilling customer orders or manufacturing a batch of products. One way to gain a better appreciation for why inventory is such a necessity to businesses everywhere, is to examine its different uses.
Types of Inventory
1. Safety or Buffer Inventory
Safety inventory provides a buffer against uncertainty. There is often an uncertainty of demand for one’s products. Without safety inventory, there would be lots of missed opportunities when unexpected demand spikes aren’t fulfilled because of insufficient stock. Supply uncertainties are another reason for maintaining safety inventory. A supplier might fail to deliver on time because of any number of reasons. For example, the transport of the goods might get delayed because of weather problems or a traffic accident. Maintaining buffer inventory protects against stockouts and ensures product availability and avoid lost sales.
2. Raw Materials Inventory
If you are a manufacturer or practice delayed differentiation to minimise your safety stock of finished goods, you would have a raw materials inventory. The raw materials could be subassemblies, sub-components, or possibly elemental things like minerals, metals, and wood. It’s the ‘stuff’ required to make your finished product. This allows you to assemble or manufacture your goods without the delay of acquiring your raw materials. Proper stock control to determine inventory levels in real-time is one of the recommended best practices. Raw materials inventory ensures uninterruped production and smooth operations. By effectively managing this inventory, companies can optimise cost, minimise disruptions, and achieve better production efficiency.
3. Anticipation Inventory
When a business anticipates an event that will require more inventory than usual, it acquires anticipation inventory (also known as seasonal stock or speculative inventory). For example, a business may anticipate increased demand because a competitor will go out of business and will build up inventory for that event. Inventory may be increased because a supplier is going out of business or because the supplier plans to increase its prices in the future. Anticipation inventory can mean a higher carrying cost like warehouse space and insurance. A large amount of such inventory can also make it less flexible to adapt to sudden changes in the market.
4. Cycle Inventory
Cycle inventory covers normal demand. It’s ordered from suppliers in batches, the size of which is determined by factors such as supplier lead times, bulk pricing, shipping costs, and order processing costs. When the batch is used up and gets replaced again, it has ‘turned over’. Businesses seek to maximise inventory turnover while minimising the associated costs. Cycle inventory does not include safety inventory which covers “abnormal” demand or supply problems. Effective cycle inventory management optimises cost and smooth operations.
5. Finished Goods Inventory
Finished goods inventory is the product you keep on hand so that you can immediately respond to customer orders without the delays of ordering or manufacturing the goods requested in the order. Its purpose is to maintain good customer satisfaction levels.
6. Decoupling Inventory
Finished goods are often produced by the flow of materials through a chain of operations or manufacturing centres. Each operation processes the material in some way before the material proceeds to the next operation centre. Decoupling inventory allows the operation centres to work independently of each other. In this way, temporary bottlenecks don’t affect downstream operations. Having decoupled inventory at strategic points allows downstream production stages to continue operating even with a temporary slowdown or disruption upstream. This helps to reduce production disruptions and reduce bullwhip effect.
For more information on how to maximise the use of different inventory types, give us a call for a no-obligation chat.
