Some businesses make things, some sell things, and some do both. Each of those"things" becomes an inventory item for a company, and all of them togetherconstitute a company's inventory — usually physical assets from which thebusiness generates revenue. Like all valuable business assets, inventory must be tracked andproactively managed for a business to be successful. So "inventory item" has adual meaning: It can mean the asset itself or the asset's entry in an inventorymanagement system. Inventory items are the basic building blocks of every inventorymanagement system, whether it's a paper-and-pencil system or a sophisticated enterpriseresource planning (ERP) system.
What Is an Inventory Item?
In simple terms, an inventory item represents the goods a company has for sale or thematerials needed to create those goods. An item's stage of production will determinewhich inventory category it is counted in: raw materials, works-in-progress or finishedgoods — this is sellable inventory that this article will refer to. Inventory can alsobe maintenance, repair, andoperation (MRO) inventory, non-sellable inventory needed for manufacturing thatisn't a part of finished goods.
Inventory items usually are physical assets companies can measure and count. For example, abakery would list all the ingredients needed to prepare its treats — like flour,sugar, yeast, salt and milk — as inventory items. Baking pans and ovens are notinventory; they're capital equipment. Certain industries may consider intangible itemsas part of their inventory. In travel and hospitality, for example, hotels consideravailable room nights as inventory, and airlines' inventory include seats on flights.
In an inventory managementsystem, inventory items are database entries that contain all the data fields neededto fully describe the item, along with many potential related fields. For example, inaddition to information about the cost to manufacture an item and what countries theitem's components were sourced from (which is important for compliance withinternational trade regulations and for calculating tariffs), the entry of an item meant forretail sale would also include a stocking unit (SKU) number andanother for shipping parameters.
Types of Sellable Inventory Items
- Raw materials or components are the ingredients needed to manufacturegoods for a company to sell, and they typically can't be recognized oncethey're turned into finished goods. To carry forward the bakery example, before allof its delicious-looking treats appear on the shelf, they have to be"manufactured." So, the eggs, sugar, flour, milk, sprinkles and chocolate arethe raw materials. Not all industries need or use raw materials; they're mostlyinventory for the manufacturing industry. Components are like raw materials, except theycan still be recognized once part of a finished good — things like bolts, screws,handles, etc.
- Work-in-progress refers to items that are at some stage in themanufacturing and packaging process but not yet set for distribution or sale. It caninclude items awaiting packaging or quality control checks as well as packaged items. Atthe bakery, work-in-progress items could include trays of cookies waiting to be boxed,loaves of bread on cooling racks or cakes out of the oven but not yet frosted.
- Finished goods are those that have passed through all the productionpoints and are ready to hit the marketplace for sale. Essentially, finished goods arethe merchandise you might see on store shelves. The bakery's finished goods are theboxes of cookies, the sliced and bagged loaves of bread and the fully decorated cake.
Some businesses, however, have more complex operations than a bakery. These businesses maymaintain other types of inventory items, such as:
- MRO inventory. Maintenance, repair and operating supplies are integralin daily operations, particularly in manufacturing industries. These items keep themachines and other production-line equipment functioning. Examples of MRO inventoryinclude screws, nuts and bolts, machine lubricants, coolants and uniforms.
- Buffer inventory. Also referred to as "safety stock," theseitems are kept in storage to prevent out-of-stock situations when market movementscan't always be forecasted. Think of a supermarket ahead of a big storm. If it hasenough buffer inventory, then everyone can buy milk, bread and paper towels. If not,some people will be disappointed.
- Cycle inventory. These items are ordered in large amounts on a regularbasis. Using the baked goods company example, ingredients such as flour, milk, eggs andcupcake wrappers could be considered cycle inventory.
- Decoupling inventory. Much manufacturing work gets done by multiplemachines, with Machine A feeding into Machine B into Machine C. If using decouplinginventory, a manufacturer may put some work-in-progress items from Machine Baside, just in case that machine were to break down or otherwise not produce its typicalamount. That way, the company can use the stored work-in-progress inventory made earlierby Machine B to feed Machine C in the event of an unanticipated low-stock situation.
- Transit inventory. Items being moved from one place to another arecalled transit inventory. They could include any of the three basic categories ofinventory items.
- Service inventory. How much service a business can offer in a certaintime frame is referred to as service inventory. For example, a boutique hotel with 44rooms has a service inventory of 308 one-night stays per week.
- Excess inventory. This is unsold or unused raw materials. A companymust account for any expenses tied to storing this stock that it may not use or sell.
How to Describe Inventory Items
Keeping stock of the stock requires an effective and efficientinventory list, typicallygenerated by the descriptions entered on each inventory item. Inputting those descriptionsin a smart way helps streamline subsequent management decision-making.
- Begin with a noun. Adjectives are important — but never as thefirst words of an inventory item description. Why? Because a store or warehouse mighthave 500 "large" items or 500 "green" items, so if those are thefirst two words in an item's description, a business manager could waste timescrolling up and down a long list looking for that "large green salad dish."Descriptions should begin with a generic name of the item, like "Dish,"followed by descriptive adjectives, like "porcelain, green, large." Anotherexample: "Wheel, Mustang, magnesium, 15 X 7, 1965-1973."
- Avoid information overload. Use only the descriptors necessary todefine the item uniquely on the list. Stick to things such as type of item, color andsize. Other item codes, such as country of origin or expiration dates, don't needto be in the inventory item description. Different inventory item fields exist toinclude these types of details.
- Be functional, not conversational. The most important rule of thumb fordescribing inventory items is not to describe them the way you would speak about orrefer to them in conversation. Instead, write functional descriptions about items tooptimize their later use by the business's managers and other professionals.Remember, it's about effective use of the inventory list.
- Align with the business. Inventory lists should uncomplicate businesslife, making it more efficient. It's important to think through the optimal way inwhich inventory item reports could be used by the business and then include in thedescription all the data fields necessary to streamline those processes. Besides aunique name and description, an inventory for a chain of retail stores, for example,should include a SKU number, single-unit price, volume-discounted prices (if any),quantity in local stock, other stores/warehouses, reorder point and estimated reorderdelivery times — all information that a retailer on the sales floor may need at amoment's notice.
Manage Inventory Items With Software
Managing inventory properly is integral to the success of a product-oriented business. At anypoint in time, businesses must determine exactly what they have in stock, where it islocated, when to order more and how to balance supply and demand based on seasonality andforecasting. Good inventory management software helps companies accomplish these goals.Businesses that deploy NetSuiteInventory Management, for example, can view their inventory in real time across alllocations and sales channels. Demand-based planning leverages the business's historicaldata to help optimize inventory levels throughout the year, reduce costs from overbuying andminimize out-of-stock moments. NetSuite's tools can automate inventory tracking,dynamically manage reordering, trace an item after ordering and generate tasks and alertsfor designated business team members.
Conclusion
The more inventory a modern business has, the more important it becomes to manage thatinventory well. Strong inventory practices begin with inventory item descriptions —the foundation on which the entire inventory management system depends. Best practices forindividual inventory item descriptions make for a more effective inventory list foremployees and a more effective inventory management system overall. Managing inventoryproperly from the ground up helps the process run smoother.
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Inventory Item FAQs
What is an example of inventory?
Inventory is the items/merchandise a company has to sell, as well as the materials needed tocreate those products. The three main categories of inventory are raw materials,work-in-progress and finished goods. An example of raw materials inventory would be themagnesium in an alloy wheel. An unpolished wheel would be placed in work-in-progressinventory, and the polished wheel is placed in finished goods inventory.
How do you list items in inventory?
When creating inventory items, keep their descriptions unique and simple. Always start withwhat it is first (the noun), followed by what it looks like (the adjectives). This way, itmakes locating items on the list quicker and easier. Avoid cramming too much informationinto the item description itself; let the other data fields provide needed additionalinformation.
What is considered a non-inventory item?
Non-inventory items may be physical products a company purchases and then quickly resells tocustomers or intangible items for sale like a conference fee. What non-inventory items allhave in common is that the business does not track them, for a variety of different reasons.They can include items bought for company use, like office supplies, or goods bought for aspecific project and then quickly invoiced or sold to the customer. A custom-made sink for akitchen installation is an example of an item purchased by a company and resold to thecustomer.
What is an inventory list?
An inventory list is a complete and itemized record of everything a company has in stock, beit for sale, for use or both. It can include raw materials, work-in-progress items andfinished goods. Such a list helps to understand item availability and what the business isselling and has available to sell.
