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Unit 11: Physical Distribution and Inventory Management

7. Order-Entry Lead Time measures the time taken to take customer order. Notes
8. Days of inventory = days per year* inventory turnover rate
9. The lower the inventory turns, the better the firm uses its inventory assets. Another
common measure is days of supply.
10. Transit-time is defined as time period from initiating of an activity to its completion.

11.5 Types of Inventory

Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near
a business’s location so that the firm may meet demand and fulfil its reason for existence. If the
firm is a retail establishment, a customer may look elsewhere to have his or her needs satisfied
if the firm does not have the required item in stock when the customer arrives. If the firm is a
manufacturer, it must maintain some inventory of raw materials and work-in-process in order
to keep the factory running. In addition, it must maintain some supply of finished goods in
order to meet demand.
Generally, inventory types can be grouped into four classifications: raw material, work-in-
process, finished goods, and MRO goods.

Raw Materials

Raw materials are inventory items that are used in the manufacturer’s conversion process to
produce components, subassemblies, or finished products. These inventory items may be
commodities or extracted materials that the firm or its subsidiary has produced or extracted.
They also may be objects or elements that the firm has purchased from outside the organization.
Even if the item is partially assembled or is considered a finished good to the supplier, the
purchaser may classify it as a raw material if his or her firm had no input into its production.

Work-in-process

Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and
subassemblies that are being processed or are waiting to be processed within the system. This
generally includes all material—from raw material that has been released for initial processing
up to material that has been completely processed and is awaiting final inspection and acceptance
before inclusion in finished goods.
Finished Goods

A finished good is a completed part that is ready for a customer order. Therefore, finished goods
inventory is the stock of completed products. These goods have been inspected and have passed
final inspection requirements so that they can be transferred out of work-in-process and into
finished goods inventory. From this point, finished goods can be sold directly to their final user,
sold to retailers, sold to wholesalers, sent to distribution centers, or held in anticipation of a
customer order.

Any item that does not have a parent can be classified as a finished good. By looking at the
rolling cart product structure tree example one can determine that the finished good in this case
is a cart.
Inventories can be further classified according to the purpose they serve. These types include
transit inventory, buffer inventory, anticipation inventory, decoupling inventory, cycle

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