Simplifying things, inventory refers to things that are being temporarily stored because they are not quite ready to go elsewhere. Inventory can be things that your organization plans to sell in its current conditions. Inventory can be things that your organization plans to incorporate into something else that it is making. And inventory can be things that your organization plans to use to support its own operations.
Table 1: Types of Inventory
Types of Inventory:
Finished Goods Inventory
When inventory is in a condition that it can be sold to a customer – and your organization plans to do exactly that – it is referred to finished goods inventory. Finished goods inventory might be possessed by a manufacturer, who completed work on the goods, or by a distributor/retailer (for the purpose of this class, we will consider them to be in the same category), who simply acquires goods and resells them without doing any work on the goods whatsoever.
When inventory is in a partially-finished condition and a manufacturer has more work to do to be able to sell a finished product to its customers, that inventory is called work-in-process inventory. Consider a chair that has not yet had its legs installed or an airplane that has not had its seats put in. Distributors and retailers do not do work on their inventory. They just buy it and sell it so work-in-process inventory generally does not apply to them.
Raw Material Inventory
Raw material inventory is the item that the manufacturer has not started to incorporate into its manufacturing process yet. Think of ingredients for food items, pieces of steel for an automobile, or anything else that is planned to be used in the production process but remains in the form in which it was delivered by the supplier.
Consumable inventory is not going to be resold or incorporated into something that is sold to a customer, it is going to be used by your organization. Consumable inventory includes things like office supplies, safety goggles for your employees, internal forms, or virtually anything else held in stock that is used strictly to support operations and not be or become part of something that is later sold.
Often “consumable inventory” is also called “Maintenance Repair & Operating inventory” or “MRO inventory” for short. Please make note of that. “MRO” stands for “Maintenance, Repair, and Operating.” You wouldn’t believe how many people ask what it means even after it’s been defined.
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