![]() ![]() In the case of Acme Corp, once the couches are ready, they are stored in a warehouse until a shipping company picks them up and delivers them to customers. In either case, your finished goods inventory should be pretty clear and straightforward to account for and track. Whereas, if you follow the make-to-stock workflow, the inventory will have to be stored in a warehouse until an order comes through. If you follow a make-to-order workflow, then the final product is made and can already be shipped to your customers. Of course, depending on the workflow you adopt, this could mean slightly different things. Finished goodsĪll the items ready to be sold are considered part of your finished goods inventory. So once the metal frames, foam, and leather has been cut to size and the factory has started working on a couch, those materials stop being part of the raw materials and should be considered WIP inventory. It can comprise direct and indirect raw materials - the only thing to note here is that the product is not complete and is a work in progress.Ĭontinuing with the Acme Corp example, let’s assume that every couch has a production time of one week. So these raw materials are categorized as indirect raw materials.Īll the materials that your factory floor has started working on, but the product isn’t quite finished yet, consist of your work-in-progress (WIP) inventory. However, it is pretty hard to quantify how much leather wax or how many staples are used on each couch. The company also requires tools, screws, glue, staples, and leather wax to manufacture the couches. Of course, making a couch isn’t as simple as throwing foam and leather on top of a frame. So Acme categorizes these as its direct raw materials. These are the components that it can easily quantify and price. ![]() However, the main component of the Plush Couch 5000 happens to be one ridiculously large spring that can shoot your target to the stratosphere. ![]() To manufacture each Plush Couch 5000, Acme Corp requires high-quality metal frames, foam, and leather as raw materials. However, these are essential for the production process.įor instance, one of Acme Corp’s top-selling products is its Plush Couch 5000. Indirect raw materials are harder to identify and account for since they can’t be traced to specific batches or units. Indirect raw materials are the components that are not part of the final products but are used during the production process. These materials are easy to quantify and account for per unit or per batch basis. Raw materials can be further classified into two categories:ĭirect raw materials are the components that are used directly in the final product. These materials can be sourced, produced by your company, or procured from a supplier. Raw materials are all the items that your business uses to manufacture finished products. Now that different types of inventory have been laid out, let’s dive deeper into what each category consists of and what to keep in mind when managing them. Knowing which items belong to which category allows you to optimize your operations and account for each step of the production process more efficiently. The four types of inventory are raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and overhaul (MRO) inventory. However, let’s return to the task of classifying inventory. Of course, your business could have already grown to the point where you’d have to skip a step or two to use manufacturing software with built-in inventory management features. Dedicated inventory management softwareĮach step improves on the previous ones and attempts to equip you with the best tools to tame the complexity of managing your workflows and inventory.Simple paper-based solutions (Sticky notes, notepads, etc.).Inventory management systems evolve along the following lines in general: However, as your business grows, so does your inventory and the need to manage it efficiently. When your business is small, you often don’t even need to think about inventory management. Ultimately, inventory is the sum total of all the goods and materials that your business holds for either resale, production, or utilization. This expansion allows the inclusion of materials that will never reach your customers but are vital for your business and hence should be part of your inventory. While this definition is of the most practical importance, it is useful to expand our definition a little bit to include materials and goods that are essential to your production process. This constitutes a strict definition and only includes everything from your raw materials to finished goods that will eventually end up in your customers’ hands. Inventory is the sum of all items intended to be sold by your business. ![]()
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