THE INVENTORY CONCEPT

The Inventory Concept:

The dictionary meaning of the word inventory is “Stock of goods”. The term ‘Inventory’ refers to the commodities supplied to an undertaking for the purpose of consumption in the process of manufacture or for transformation into products.

To the finance executive, ‘Inventory’ can be taken as the value of raw materials, consumables, spares, work in progress and finished goods in which the company’s working capital funds have been invested.

Inventories constitute the most significant part of current assets of a larger majority of companies in India. On an average inventories are approximately 60% of current assets in public ltd companies in India. Because of the large size of inventories maintained by firms, a considerable amount funds is required to the committed to them. It is, therefore absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment.

A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. It is possible for a company to reduce its levels of inventories to a considerable degree, e.g.: 10 to 20 %, without any adverse effect on production and sales, by using simple inventory planning and control techniques.

The reduction in ‘excessive’ inventories carries a favorable impact on a company’s profitability

Classification of inventories

Classification of Inventories:-

The Inventories in an Industrial concern is generally classified as following:

·         Raw material Inventory - This is used in manufacturing. When the demand arises, they are drawn from stores and processed or use value is added during the process and finally finished product comes out.

·         Semi finished goods - When the material being processed, it may have to wait between two processes, such materials are known as semi finished goods or semi finished material or Work in process inventory.

·         Components - The parts used in assembly of product, are known as components. When these components are purchased from outside, it is known as bought out components or bought out material.

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·         Spare parts Inventory - When manufacturing or servicing facility breakdown, it is to be repaired. In such case, the defective or worn-out parts of the machine are to be replaced by new one. These new parts of the machine are known as spares or spare parts.

·         Obsolete Inventory - When any facility becomes unserviceable, and it is to be replaced by a new one, after replacing, the old machine/facility is to disposed. Such machines, which have become useless, are termed as obsolete inventory.

·         Waste, Scrap and Rejects - This type of inventory occurs in manufacturing firms or in service organizations. While processing material, chips are produced and it is of no use for the organization and it is to be disposed. Similarly, defective components, which cannot be reprocessed (rejects) and materials which cannot be used in any way in the organization (waste), all these are to be disposed. They may not be having any use value for the organization, but they may be reprocessed by some other organizations to produce a useful product.