Classification of Inventory

Inventory may be classified in different categories based on various aspects like manufacturing, control and service.

BASED ON MANUFACTURING:

Based on manufacturing aspect, inventory can be either of the following:

a) Production Inventory

Raw materials, components, and sub-assemblies purchased from outside production inventory get into the finished product.

b) Work-in-Process Inventory

All things in semi-finished form or products at various stages of manufacture fall under this category.

c) Finished Goods Inventory

This comprises products that are ready to be shipped to customers or distributors.

d) MRO Inventory

Maintenance, repairs, and operational supplies such as spare parts and consumable stores that do not end up in the finished product but are consumed throughout the manufacturing process.

e) Miscellaneous Inventory

Other items not specified above, such as scrap, obsolete, and unsaleable products from primary production, and office stationery, other items from factory and sales department etc.

SERVICE BASED INVENTORY:

This consists of four classes:

a) Quantity or Lot size

This entails buying in bulk. This is done to

i) achieve volume discounts.

ii) save money on transportation and purchases

iii) cut down on shipping and receiving costs

Buying cotton every day rather than in bulk during the cotton season would be uneconomical for a textile company.

b) Anticipation Stocks

These are preserved in order to accommodate predictable changes in demand or raw material availability. This includes the purchasing of potatoes during the potato season for the sale of root preservation goods throughout the year.

c) Stocks that fluctuate

These are carried to ensure that consumers or customers have ready access to supply in the event of unpredictably fluctuating demand.

d) Risk Stocks

These are the components required to ensure that no complete manufacturing breakdown occurs. These are things that have a considerable lead time for delivery but are necessary for production.

ABC CLASSIFICATION:

Making an ABC categorization is a smart place to start when reviewing an inventory control system. ABC analysis suggests that if we start with ABC of inventory, the 'Control' will be "Always Better." As shown in the figures, this idea separates inventories into three groups based on the percentage of total value and the percentage of total number of goods.

As shown in figures above:

A-items group constitutes 10% of the total number of items and 70%, of the total money value for all the items.

B-items group constitutes 20% of the total number of items and 20% of the total money value for all the items.

C-items group is just opposite of A-items group. It constitutes 70% of the total number of items and 10% of the total value.

This classification gives explicit instructions for assigning control priorities to the items. In every aspect of control, such as tight control, solid operational theory, and attention to security, a class item must come first.

ABC + VED Classification:

The combination of ABC categorization and VED classification (Vital, Essential, and Desirable) improves inventory control efficiency. It's worth noting that ABC categorization is based on proportionate value reasoning, whereas VED classification is based on judgement, experience, and other factors. As seen in Figure, the total number of categories increases to nine.