Types of Inventory and Quality Standards
There are a few different roles that inventory can play in production.
- First, it can act as a buffer between production and demand, ensuring that production can continue even when demand fluctuates.
- Second, it can be used to level production, and even out spikes and troughs in demand.
- Third, it can be used to provide flexibility in the production process, allowing for different levels of customization and variation.
- Finally, it can be used as a quality control measure, ensuring that only finished goods that meet quality standards are sent out to customers.
There are the following types of inventory:
1. Raw Inventory
It includes all such items which are supplied by some other firm in the form of raw material, for the concern to which these are supplied. These raw materials are used in the finished product in some form or other.2. Process Inventory
These are used in process of manufacture and as such these are neither raw material nor finished goods.3. Finished Inventory
These are finished goods and ready to be taken in store and stock for sale purposes.There are six important standards used as a tool to control inventory:
1. Standard order
It means quantity to be purchased at any time. It is the difference between maximum and minimum quantity.2. Lead or procurement time
It is a time that is calculated by a firm on the basis of past experience. It is the time that lapses between preparing invoices for the placement of orders and the time taken for the supply of materials.3. Maximum store
It is the upper limit of the inventory and is the largest quantity that should be kept in stores taking the interests of the company into consideration.
4. Minimum stores
It indicates a lower limit of the inventory, and the safety margin can be used in case of emergency. This quantity also includes abnormal requirements of the firm.
5. Stock holding
It means holding of stock so that inventory does not go out of stock. It also means a buffer stock that can be utilized when material falls even below the minimum level. It takes care of the shortage of inventory in the market and helps in reducing the variety of items to be handled. It also helps in deciding quick materials at the time of need and necessity.
6. Ordering point
It means a point that indicates the time to initiate a purchase order. It is the quantity of material required between the exhaustion of available stocks and the supply during the interval between placement of an order and delivery of materials.
