Inventory flow is the system used by businesses to move consumable products or raw materials within the company. It begins with the purchase of raw materials or consumables from a supplier and is directly related to the company’s accounting procedures. Businesses can use a manual or automated system to reorder inventory.
Inventory flow represents the system that companies use to move consumable products or raw materials within the company. Manufacturers, restaurants, retail stores, distribution centers, and grocery stores are just a few examples of businesses that have inventory flow. These companies often develop a set of procedures to be used consistently when managing inventory. Business owners and operations managers are usually responsible for designing the inventory system. Larger corporate organizations usually have a more intensive inventory management process due to the size and scope of their business operations.
Inventory flow begins with the purchase of raw materials or consumables from a supplier. Manufacturing companies often need raw materials to produce valuable consumer products. Commodities include natural resources such as timber, earth, and minerals. Most manufacturers make consumer products and ship these items to distributors. Distributors receive inventory products and hold them in advance for retail store orders. Most retailers begin the inventory management process by ordering goods from distributors. Accounting plays an important role in the company’s inventory management system.
Inventory flow is directly related to the company’s accounting procedures. Businesses may choose to price their inventory using a first in, first out (FIFO) basis; last in, first out (LIFO); or weighted average method. Companies use the FIFO method when selling the first inventory received in the inventory management system. With this method, businesses receive inventory continuously and add the inventory into a single financial account in the general ledger. The oldest inventory is sold first in the FIFO system. LIFO is the opposite of a FIFO inventory system. Newest inventory is sold first under a LIFO valuation system.
The weighted average method does not require companies to maintain a specific valuation method for the inventory flow system. As companies purchase more raw materials or consumables, the entire cost of inventory is recalculated. The total cost of a single product is divided by the total number of items currently in the inventory system. This creates a new average cost for raw materials or consumables.
As businesses sell through their inventory, the need for more consumer goods and products increases. Businesses can use a manual or automated system to reorder inventory. Manual systems usually require owners or managers to review inventory flow for individual products and place orders from distributors or manufacturers. This process can be lengthy and typically involves the use of several paper books or ledgers. Automated inventory flow systems allow companies to electronically transfer information to distributors and manufacturers requesting additional inventory. Automated systems reduce the lead time needed for companies to replenish current inventory stock. Businesses can also use automated business systems to improve their inventory management process.
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