Inventory

Definition: What is inventory?

Inventory is a key metric in business management. It is particularly important not only for logistics but also for accounting. In a general business context, inventory refers to the number of units of a material flow item that are located in a warehouse, production facility, or branch of the company at a specific point in time. Material flow items include, for example, goods, raw materials, finished products, or semi-finished products. To measure the specific quantity of a material flow item, a unit of measure must be defined. This unit of measure is often referred to as the “unit of measure” in the bill of materials. The unit of measure can be the number of items, but it can also be weight, volume, length, or area.

For a long time, the term “inventory” was used synonymously with “stock on hand.” In recent years, however, with the emergence and growing importance of supply chain management , the focus has shifted to total inventory across the procurement, production, and distribution processes. Consequently, the concept of “inventory” has gained importance for the planning, control, and optimization of all logistics processes, because supply chain management systems provide information not only about current warehouse inventory but also about other types of inventory.

A company’s inventory is also referred to as its stock of assets. Accordingly, inventory includes not only finished products or raw materials but also, for example, means of transport. Inventory is categorized depending on the type of business:

• Manufacturing companies: raw materials, auxiliary materials, and operating supplies
• Service businesses: operating supplies
• Retail businesses: finished products and merchandise.

Depending on the company, inventory may also consist of all materials in the material flow or combinations thereof.

How is inventory determined?

Inventory can be determined through an effective inventory count . Physical inventory can be determined, for example, by conducting a physical count in the warehouse. However, this is often difficult for logistics inventory, since while materials in the warehouse can be counted without issue, goods that are, for example, in circulation or in transit cannot be easily counted. This is where ERP systems or other inventory management software come into play. They make it possible to continuously record receipts, shipments, and other information, thereby reducing the effort required for the annual physical inventory. Based on this inventory data, an inventory management system can then optimize inventory levels.

What are the different types of inventory?

Inventory management poses major challenges for many companies—especially logistics firms and retailers—not only in terms of financial profitability but also in terms of customer satisfaction. Therefore, proper inventory management is essential, and categorizing inventory types can be helpful in this regard. To analyze inventory, it is divided into different categories. This classification may vary depending on the company and its field of activity. Generally, inventory types can be classified either by function, by product lifecycle, by logistics, or by operational organization. Depending on how the classification categories are defined, there may be overlap between them. An example of this is the minimum inventory level, which can be assigned to both inventory types based on function and those based on operational organization.

Inventory Types by Function

In this case, a distinction is made based on product demand or sales expectations. In manufacturing companies, demand usually refers to internal demand from production, whereas in retail, it refers to customer demand.

Important inventory types include:

• Minimum inventory: Minimum inventory refers to the minimum quantity of a product required to meet the company’s sales forecast. By calculating a higher percentage deviation rate, companies can initiate replenishment measures once a certain sales volume is reached.
• Safety stock: Safety stock is the portion of inventory intended to prevent stockouts. Accordingly, safety stock is used, for example, to cover delivery delays or sales spikes that may be caused by unforeseen events.
• Reorder Point: The reorder point is essentially an indicator that signals when inventory needs to be replenished. It is important that this level be higher than the safety stock.
• Optimal inventory: Optimal inventory is the target level that should be achieved to meet sales expectations and maximize profit. Especially in e-commerce, where inventory costs are typically very high, retailers do not experience financial losses or shortfalls when maintaining optimal inventory levels. This is because the number of products in stock exceeds the minimum inventory level without reaching the maximum inventory level.

Inventory Types Based on Product Lifespan

The categories of this inventory type are based on how long a product can be stored. It is also important to consider how quickly the product must be sold after delivery.

Here, a distinction is first made between perishable and non-perishable inventory. Perishable inventory refers to all products that must be removed from the warehouse quickly due to their shelf life. In most cases, these products also require additional logistical measures such as temperature controls, stacking, or special containers. Non-perishable inventory, on the other hand, includes all products that are less complex to store and for which time has no effect on their shelf life. Managing non-perishable products is significantly easier compared to perishable products.

Another important inventory type based on product shelf life is inventory with an expiration date. This inventory may overlap with perishable inventory. However, the decisive criterion is a specified expiration date after which the products may no longer be sold or processed.

Inventory Types Based on Logistics

Here, the classic logistics inventory terms “stock on hand,” “working inventory,” and “transit inventory” are often used. However, this category refers more to daily operations in the warehouse and related to inventory levels. The most important inventory levels in the warehouse are the minimum inventory (which may also fall under the “Function” category; see above), the physically available inventory, the maximum inventory, the available inventory, and the net inventory.

Challenges of Omnichannel

Online sales have gained new momentum in recent years—amplified by the COVID-19 crisis—particularly in the form of an omnichannel approach. The retail sector has come to realize that it should not rely solely on brick-and-mortar stores as its only sales channel. However, successful omnichannel sales require cross-channel, real-time inventory management to ensure that both deliveries from wholesalers and manufacturers to stores (B2B) and sales from retailers to their customers (B2C) are executed correctly. Same-day deliveries and e-commerce strategies, such as Click & Collect or Click & Reserve, in particular, pose major challenges for retailers. These scenarios place special demands on warehouse and inventory management. Returns present further challenges for inventory levels and inventory management. Inventory also influences the company’s pricing policy and affects customer relationships. In the age of omnichannel retail, store inventory available online is becoming increasingly important to customers. Inventory discrepancies can result in a competitive disadvantage. Real-time inventory management provides a solution to this problem.