The inventory turnover ratio (ITR) is a barometer of performance of materials management function. In the generally understood term, inventory means a physical stock of goods kept in store to meet the anticipated demand.
The inventory includes a vast spectrum of materials that is being transferred, stored, consumed, produced, packaged, or sold in one way or another during a firm`s normal course of business.
Inventory has a financial value, which for accounting purposes is considered a floating asset. However, it may be very difficult to convert physical inventory into liquid assets, hence the inventory is very risky investment.
It is necessary to have physical stock in the system to take care of the anticipated demand because non-availability of materials when needed will lead to delays in production or projects or services delivered.
Holding the inventories is connected with significant costs. Despite the all efforts and technological innovations, inventories are often still the asset with lowest return in the company.
Given the relative magnitude of inventory, one important factor in measuring income is the value of ending inventory. The higher the value of ending inventory (reported in the balance sheet), the lower the value of COGS (Cost of goods sold) and, therefore, the higher the net income (income statement).
Types of Inventories:
*Raw materials inventory as input to manufacturing system.
*Bought-out-parts (BOP) inventory which directly go to the assembly of product as it is.
*Work-in-progress (WIP) or work-in-process inventory or pipeline inventory.
*Finished goods inventory for supporting the distribution to the customers.
*Maintenance, repair, and operating (MRO) supplies. These include spare parts, indirect materials, and all other sundry items required for production/service systems.
Financial Objectives:
*To minimize the capital investment in the inventory.
*To minimize inventory costs.
*Economy in purchase.
The meaning of inventory
