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Inventory refers to a stock of goods and services held by a business at a given time. These goods and services are either stored within the business premises or in a place near the physical location of the business, such as a warehouse (Koumanakos, 2008). The purpose of maintaining stock at hand is to enable a business to meet the demands of the customers, and hence fulfill its purpose for existence. Example of inventory in a retail store may include; stock of food items such as flour, sugar, milk, groceries, and bread, and stock of non-food items such as detergents and skin care products.
The amount of inventory maintained at a given time has financial implications on a business. For instance, if a business maintains a high level of stock, it would require a lot of money to maintain such stock. Holding cost is money incurred in maintaining inventory. The higher the inventory, the higher the holding cost. As a result, a business ends up spending much of its liquid cash in maintaining the inventory, leaving it with less working capital to meet its daily cash requirements (Koumanakos, 2008). On the other hand, a low inventory level requires low holding cost for maintenance. Therefore, a business is able to utilize the available liquid cash to meet its routine financial needs, hence achieve stable financial performance (Koumanakos, 2008).
There are four different types of inventories maintained by a typical business entity. They include raw materials and supplies, finished goods, work-in-progress, and damaged/rejected/obsolete goods. Raw materials and supplies are stock items, which are converted into finished goods (Inman, 2006). This type of inventory may include items extracted from their natural source, or items already converted into usable form by the suppler or the subsidiary of the business. For example, a business producing clothes may have cotton wool as its raw material, or already processed cotton materials as its raw materials. Finished goods are items of stock, which have been converted into usable form by the business (Inman, 2006). Processed goods only qualify into this category after they have been inspected, and the production department verifies that, they are ready for sale either to their final users or to the intermediaries.
Work-in-progress is made of items undergoing the conversion process (Inman, 2006). This includes all items, which have been transferred from the raw materials’ warehouse to the processing department, waiting to be converted into finished good. Goods, which have already been processed but have not yet been transferred from the processing department to the finished goods’ warehouse, also fall under this category. The damaged/rejected/obsolete category of inventory is made up of a number of items from raw materials, and work-in-progress, to finished goods categories, which have defects, and cannot be carried at a full value (Inman, 2006). Such items of inventory can be destroyed or processed into by-products.
Other types of inventories include goods-in-transit, buffer stock, and anticipatory stock. Goods-in-transit are finished goods, which are in the process of being transferred from the producer to the consumer. Buffer stock is made of items, which a business holds over and above the current requirement, for safety purposes (Inman, 2006). Anticipatory stock is the inventory held by a business, which is in excess of the current need, in anticipation of potential future occurrences such increase in price or increase in demand (Inman, 2006).
The significance of inventory regarding customer service levels is to ensure that a business maintains its inventory in an assemble-to-order environment (Wang, 1999). Inventory maintained in an assemble-to-order status enables a business to meet its customers’ orders requirements promptly. Businesses achieve this by “producing multiple components and keeping them in inventories to be assembled to final products according to customers’ orders requirements” (Wang, 1999).
My own perspective of customer service levels is that, businesses should be in a position to meet their customers’ orders requirements immediately. I once experienced a delay for an electronic garget I had ordered from a local supplier, because the materials required for that specific garget were not processed into assemble-to-order form. I had to wait for the materials to be ordered from the suppler, converted into assemblage form, and then assembled into the garget I had ordered. To prevent the occurrence of such instances, a business can forecast the demand of its products, and then determine appropriate inventory levels to enable it meet customers’ orders on timely basis. Where a business is dealing with sale of products, which require undergoing conversion process before selling them, such a business should determine appropriate levels for holding inventories in assemble-to-order structures.