Inventory is goods or stock a business keeps on hand to meet the demands of customers or to be used in the manufacture of a product. It can be the food on your grocer’s shelf, the replacement parts stocked by a hardware store or the manufacturing components necessary to make a computer. In general, inventory can be divided into four groups: raw material, spare parts, work-in-process and finished goods.
Raw materials inventory consists of items purchased from an outside source. It can be anything from ore and paper to nuts, bolts or seats. Raw materials can even be partially assembled items or an item that the supplier would consider a finished good. What makes these items raw materials to a purchaser is that the buyer had no input into the product’s manufacture.
This type of inventory is used to both support the production process and to support the finished good. It is typically a component of the manufacturing process such as a circuit board for a computer. For instance, a spare part would be used in production if a current component fails a quality control test. Spare parts are also used for repairing a manufacturer’s product that has failed after being purchased by the customer.
As soon as a raw material enters the manufacturing process it enters the work-in-process category. It remains in this category until the finished item comes off the production line and, if part of the production process, goes through inspection and quality control.
An item is considered a finished good when it can be delivered to a customer. It has come off of the production line and is moved from work-in-process to final inventory. It can now be sold to a retailer, a wholesaler or shipped to fulfill a specific customer order.