Fundamentals: Types of Inventory
In the last lesson, we addressed the basic question of what inventory management and control are and why they matter. The key takeaway:
Knowing what you have and where it is — how much is going out + how much is coming in.
That is the fundamental idea of inventory management and control which we’ll refer to as simply inventory management, inventory control, or IMC for short.
However, before we get too deep into the particulars of how, let’s define a few things.
Types of Stock
Stock vs. Non-stock
- Stock inventory is made up of those items you anticipate having on hand when a customer orders them. How much to keep on hand of each item is the subject of two later articles.
- Non-stock inventory is the stuff you hopefully don’t have on hand. This is generally made up of one-off customer purchases; inventory that comes in and goes right back out. . .except when it doesn’t. Sometimes, special orders get canceled without canceling corresponding purchase orders. Other times, it’s made up of inventory that used to be stock but stopped selling and turned into dead inventory (another term I’ll dig into later on).
- Items can be changed from stock to non-stock or vice versa as demand for the item increases or drops off. Demand is another terms that we’ll discuss in detail later.
Regular vs. Temporary
- Regular items are items with recurring (even if infrequent) usage. A stock item, for example, is a regular item because it will have ongoing transactions against it.
- Temporary items are those that are generally used in one-off situations. Temporary items are common in firms that offer customized light manufacturing.
- A temporary item can become a regular item if unanticipated recurring demand happens. It is unusual for a regular item to become temporary. The reason here is that temporary items are routinely purged from inventory management systems. It’s inadvisable to do this with regular items because sales and purchase histories will be lost.
Inbound vs. Outbound vs. Static vs. Dead
These are terms that describe the movement of product into or out of a warehouse as well as the state of inventory already in the warehouse. Dead inventory is an unfortunate class of inventory that no longer has any movement and must generally be written off and donated or discarded.
For convenience, I’ll use (I) for inbound, (O) for outbound, and (S) for static. Static doesn’t mean inventory that hasn’t moved for an extended period of time. Static refers to inventory point-in-time. Dead inventory will be discussed in more detail at a later date.
- On Hand (S). This is the inventory present in the warehouse at any given moment.
- Allocated (S). Inventory that is associated with any outbound transactions including sales, transfer, or return.
- Backordered (S). This is a term that describes inventory that hasn’t arrived yet from a supplier or hasn’t been allocated to an outbound transaction.
- In Process (O). This is a less common term used to describe inventory involved in manufacturing. It is inventory that is on hand but associated with some type of production or kitting process and therefore is not available for other types of transactions (such as sales).
- On Purchase Order (I). This is the inventory due in from a supplier that is not known to be on backorder.
- On Transfer (I or O). This is intracompany inventory movement, typically from some type of main distribution hub to another facility. It is inbound for the facility receiving it and outbound for the facility shipping it.
- In Transit (S). This is inventory moving between supplier and warehouse, warehouse and customer, or warehouse and warehouse. While technically inbound or outbound, we’ll consider it static because it is subject to damage in transit which then makes it unsellable.
- On Return (I or O). If a customer is returning inventory to you, it is inbound. If you’re turning it to a supplier, it’s outbound.
This isn’t a comprehensive list, but covers some of the most common types that will be considered in day-to-day operations. Special cases will be described and discussed in subsequent lessons.
That’s it! Short, sweet, and to the point. See you next time on Inventory Shorts.