Inventories are tangible assets held for:
► Sale in the ordinary course of business.
► In the process of production or manufacture
► In the form of materials and supplies to be consumed in the process of production or manufacture
There are different types of Inventoties used in the ordinary course of business operation of an organization:
► Raw Material (RM)
► Work in Progress (WIP)
► Finished Goods (FG)
Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy. Competent inventory management also seeks to control the costs associated with the inventory, both from the perspective of the total value of the goods included and the tax burden generated by the cumulative value of the inventory.
Balancing the various tasks of Inventory Management means paying attention to three key aspects of any inventory. The first aspect has to do with time. In terms of materials acquired for inclusion in the total inventory, this means understanding how long it takes for a supplier to process an order and execute a delivery. Inventory management also demands that a solid understanding of how long it will take for those materials to transfer out of the inventory be established. Knowing these two important lead times makes it possible to know when to place an order and how many units must be ordered to keep production running smoothly.