Inventory processes track the movement of products through a business. There are different types of inventory, and companies must choose a process that suits their products. Periodic and perpetual inventory systems are common, and businesses must consider the amount of work required to manage inventory.
An inventory process represents the specific steps or procedures that a company uses when moving inventor products through its business operations. There are different types of inventory in the business environment. Manufacturing and production companies usually deal with raw materials, work-in-process and finished goods. Warehouses, distributors and retailers primarily deal with final products ready for sale to individuals and businesses. While these two groups represent businesses at different ends of the supply chain, inventory processes can be similar between the two groups.
A broad overview of the inventory process is the system a business uses to track inventory in its ledger. Periodic and perpetual inventory systems are the most common ones found in companies. Periodic inventory systems do not update a company’s general ledger for each specific inventory movement. Companies often start with an opening balance of inventory and update the information quarterly or annually. Some companies may prefer to update their periodic inventory systems on a monthly basis. Perpetual inventory systems update the company’s general ledger after every purchase, sale, or adjustment to the company’s inventory account. Although perpetual inventory systems require more work, they provide a more accurate system for controlling individual inventory processes.
Companies must select each individual inventory process according to the type of items in the company. Companies that produce or sell homogeneous products or items in large batches may prefer a simpler inventory process. Companies often receive, store, label, and sell these products from inventory without inspecting each individual item. Sampling is a common quality inspection process for homogeneous or batch goods. Companies will assess inventory quality by selecting a random sample to inspect inventory.
Composite inventories of individual goods or product lines often require a more detailed inventory process. Companies spend a lot of time managing, labeling and pricing these products as the cost of each product is often different. Business owners and managers often track these items individually to understand which items need to be restocked across the business. Companies with large inventories of individual products often use the perpetual inventory system. This allows them to maintain detailed information in their ledger to accurately represent financial information related to inventory.
Business owners and managers must also consider the amount of work required to manage inventory. Smaller businesses often struggle to maintain the inventory process because they have fewer employees to complete functions and provide the seller with accurate inventory information. Small businesses should also consider outsourcing inventory processes that can complicate their business operations. Business owners can also avoid the specifics of managing individual inventory processes.
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