Meaning	of	Inventory	
        Inventory	generally	refers	to	the	materials	in	stock.	It	 is	 also	 called	 the	 idle	
        resource	of	an	enterprise.	Inventories	represent	those	items,	which	are	either	
        stocked	for	sale	or	they	are	in	the	process	of	manufacturing	or	they	are	in	the	
        form	of	materials,	which	are	yet	to	be	utilized.	The	interval	between	receiving	
        the	 purchased	 parts	 and	 transforming	 them	 into	 final	 products	 varies	 from	
        industries	 to	 industries	 depending	 upon	 the	 cycle	 time	 of	 manufacture.	 It	 is,	
        therefore,	 necessary	 to	 hold	 inventories	 of	 various	 kinds	 to	 act	 as	 a	 buffer	
        between	 supply	 and	 demand	 for	 efficient	 operation	 of	 the	 system.	 Thus,	 an	
        effective	control	on	inventory	is	a	must	for	smooth	and	efficient	running	of	the	
        production	cycle	with	least	interruptions.	
        Inventory	 is	 the	 lifeblood	of	the	industries.	But	an	excess	or	shortage	of	
        inventory	is	harmful.	It	is	the	most	important	component	of	working	capital.	The	
        term	 inventory	 is	 used	 to	 denote	 the	 stock	 on	 hand	 at	 a	 particular	 time	
        comprising	 raw	 materials,	 goods	 in	 the	 process	 of	 manufacture	 and	 finished	
        goods.	 An	 inventory	 has	 a	 primary	 significance	 for	 accounting	 purposes	 to	
        ascertain	 the	 correct	 income	 for	 a	 particular	 period.	 Inventory	 plays	 a	 very	
        important	part	in	the	determination	of	profit	of	a	business.	
        Reasons	for	Keeping	Inventories	
        1.	To	stabilize	production:	The	demand	for	an	item	fluctuates	because	of	the	
        number	of	factors,	 e.g.,	 seasonality,	 production	 schedule	 etc.	 The	 inventories	
        (raw	materials	and	components)	should	be	made	available	to	the	production	as	
        per	the	demand	failing	which	results	in	stock	out	and	the	production	stoppage	
        takes	place	for	want	of	materials.	Hence,	the	inventory	is	kept	to	take	care	of	this	
        fluctuation	so	that	the	production	is	smooth.	
        2.	 To	 take	 advantage	 of	 price	 discounts:	 Usually	 the	 manufacturers	 offer	
        discount	 for	 bulk	 buying	 and	 to	 gain	 this	 price	 advantage	 the	 materials	 are	
        bought	in	bulk	even	though	it	is	not	required	immediately.	Thus,	inventory	is	
        maintained	to	gain	economy	in	purchasing.	
        3.	To	meet	the	demand	during	the	replenishment	period:	The	lead-time	for	
        procurement	of	materials	depends	upon	many	factors	like	location	of	the	source,	
        demand	supply	condition	etc.	So	inventory	is	maintained	to	meet	the	demand	
        during	the	procurement	(replenishment)	period.	
        4.	To	prevent	loss	of	orders	(sales):	In	this	competitive	scenario,	one	has	to	
        meet	the	delivery	schedules	at	100	per	cent	service	level,	means	they	cannot	
        afford	to	miss	the	delivery	schedule	which	may	result	in	loss	of	sales.	To	avoid	
        this,	the	organizations	have	to	maintain	inventory.	
        5.	To	keep	pace	with	changing	market	conditions:	The	organizations	have	to	
        anticipate	the	changing	market	sentiments	and	they	have	to	stock	materials	in	
        anticipation	of	non-availability	of	materials	or	sudden	increase	in	prices.	
        6.	Other	reasons:	Sometimes	the	organizations	have	to	stock	materials	due	to	
        other	reasons	like	supplier’s	minimum	quantity	condition,	seasonal	availability	
        of	materials	or	sudden	increase	in	prices.	
                          	
                 CLASSIFICATION	OF	INVENTORIES:	
                          	
        The	inventory	may	be	classified	into	the	following	categories:	
        (a)	Raw	Materials	Inventory:	
        Raw	materials	 are	 input	 goods	 intended	 for	 combination	 and/or	 conversion	
        through	the	manufacturing	process	into	semi-finished	or	finished	goods.	They	
        change	their	form	and	become	part	of	the	finished	product.	Thus	raw	materials	
        consist	of	basic	materials	that	have	not	yet	been	committed	to	production	in	a	
        manufacturing	firm.	Raw	materials	involve	materials	that	are	purchased	from	
        firms	to	be	used	in	the	firm’s	production	operations.	The	aim	of	maintaining	raw	
        material	inventory	is	to	uncouple	the	production	function	from	the	purchasing	
        function	so	that	delays	in	shipment	of	raw	materials	do	not	cause	production	
        delays.	
        (b)	Works	in	Process	Inventory:	
        This	 includes	 those	 materials	 that	 have	 been	 committed	 to	 the	 production	
        process	 but	 have	 not	 been	 completed.	 The	 more	 complex	 and	 lengthy	 the	
        production	 process,	 the	 larger	 the	 investment	 in	 work	 in	 process	 inventory.	
        These	are	the	partly	processed	raw	materials	lying	on	the	production	floor.	They	
        may	or	may	not	be	saleable.	These	are	also	called	semi-finished	goods.	It	is	
        unavoidable	 inventory,	 which	 will	 be	 created	 in	 almost	 any	 manufacturing	
        business.	Thus	level	of	this	inventory	should	be	kept	as	low	as	possible.	Since	a	
        lot	of	money	is	blocked	over	here	which	otherwise	can	be	used	to	achieve	better	
        returns.	Speeding	up	the	manufacturing	process,	proper	production	planning,	
        customer	and	supplier	system	integration	etc	can	diminish	the	levels	of	work	in	
        progress.	Lean	management	considers	it	as	waste.	
        (c)	Finished	Goods	Inventory:	
        These	 are	 completed	products	awaiting	sale.	The	purpose	of	finished	goods	
        inventory	is	to	uncouple	the	production	and	sale	functions	so	that	it	is	no	longer	
        necessary	 to	 produce	 the	 goods	 before	 a	 sale	 can	 occur.	 So	 finished	 goods	
        inventory	are	the	final	products	after	the	completion	of	manufacturing	process	
        on	 raw	 materials.	 They	 are	 sold	 in	 the	 market.	 There	 are	 two	 kinds	 of	
        manufacturing	industries.	One,	where	the	product	is	first	manufactured	and	then	
        sold.	Second,	where	the	order	is	received	first	and	then	it	is	manufactured	as	per	
        specifications.	In	the	first	one,	it	is	inevitable	to	keep	finished	goods	inventory	
        whereas	it	can	be	avoided	in	the	second	one.	
        (d)	Packing	material:		
        Packing	material	is	the	inventory	used	for	packing	of	goods.	It	can	be	primary	
        packing	and	secondary	packing.	Primary	packing	is	the	packing	without	which	
        the	goods	are	not	usable.	Secondary	packing	is	the	packing	done	for	convenient	
        transportation	of	goods.	
        (e)	MRO	goods:	
        MRO	stands	for	maintenance,	repair,	and	operating	supplies.	They	are	also	called	
        as	consumables	in	various	parts	of	the	world.	They	are	like	a	support	function.	
        This	includes	those	products,	 which	 are	 accessories	 to	 the	 main	 products	
        produced	for	the	purpose	of	sale.	Stores	and	spares	such	as	bolts,	nuts,	clamps,	
        screws,	etc	are	included	in	MRO	goods.	These	spare	parts	are	generally	bought	
        from	outside.	Maintenance	and	repairs	goods	like	bearings,	lubricating	oil	etc	
        that	are	used	in	the	machinery	used	for	production	also	fall	in	the	same	category.	
        In	addition	to	this,	operating	supplies	mean	the	stationery	etc	used	for	operating	
        the	business.	
        	
        Further	inventory	can	be	classified	on	the	basis	of	functions:	
          • Safety	Stock	
           An	 additional	 quantity	 of	 stock	 kept	 in	inventory	to	protect	against	
           unexpected	fluctuations	in	demands	and/or	supply.	If	demand	is	greater	
           than	forecast	or	supply	is	late,	a	stock	shortage	will	occur.	Safety	stock	is	
           used	 to	 protect	 against	 these	 unpredictable	 events	 and	 prevent	
           disruptions	in	manufacturing.	Safety	stock	is	also	called	buffer	stock.	
          • Lot-size	Inventory	
           In	order	to	take	advantage	of	quantity	price	discounts,	reduce	shipping	
           and	 setup	 costs,	 or	 address	 similar	 considerations,	 items	 are	
           manufactured	 or	 purchased	 in	 quantities	 greater	 than	 needed	
           immediately.	 Since	 it	 is	 more	 economical	 to	 produce	 or	 purchase	 less	
           frequently	and	in	larger	quantity,	inventory	is	established	to	cover	needs	
           in	periods	when	items	are	not	replenished.	Lot-size	inventory	depletes	
           gradually	as	customer	orders	come	in	and	is	replenished	cyclically	when	
           suppliers’	orders	are	received.	
          • De-coupling	Stock	
           Inventory	between	facilities	that	process	materials	at	different	rates.	De-
           coupling	stock	de-couples	facilities	to	prevent	the	disparity	in	production	
           rates	 at	 different	 facilities	 from	 interfering	 with	 any	 one	 facility’s	
           production.	This	inventory	increases	the	utilization	of	facilities.	
          • Pipeline	Inventory	
           Inventory	to	fill	the	transportation	network	and	the	distribution	system	
           including	the	flow	through	intermediate	stocking	points.	This	inventory	
           exists	because	of	the	time	needed	to	move	goods	from	one	location	to	
           another.	 Time	 factors	 involve	 order	 transmission,	 order	 processing,	
           shipping,	transportation,	receiving,	stocking,	etc.	
          • Transportation	Inventory	
           Transportation	inventory	is	part	of	pipeline	inventory.	It	is	inventory	in	
           transit	between	locations.	The	average	amount	of	inventory	in	transit	is:		
           I	=	(	A	/	365)	*	D	
           Where	I	is	the	average	annual	inventory	in	transit,	A	is	annual	usage,	and	
           D	is	transit	time	in	days.	The	transit	inventory	does	not	depend	upon	the