Chapter 4 Inventory

4.4 Types of Inventory

Inventories can be categorized into thefollowing types, signifying the reasons for which they are accumulated:

(1) Cycle stock

Cycle stock is inventory that results fromthe replenishment process and is required in order to meet demand underconditions of certainty ¾that is, when the firm can predict demand andreplenishment times (lead times) perfectly. For example, if the rate of salesfor a product is a constant 20 units per day and the lead time is always 10days, no inventory beyond the cycle stock would be required.

(2)In-transit inventories

In-transitinventories are items that are in route from one location to another. They maybe considered part of cycle stock even though they are not available for saleand/or shipment until after they arrive at the destination. For the calculationof inventory carrying costs, in-transit inventories should be considered asinventory at the place of shipment origin since the items are not available foruse/sale and/or subsequent reshipment.

(3) Safety or buffer stock

Safetyor buffer stock is held in excess of cycle stock because of uncertainty indemand or lead time. The notion is that a portion of average inventory shouldbe devoted to cover short-range variations in demand and lead time. Averageinventory at a stock-keeping location that experiences demand and/or lead timevariability, is equal to half the order quantity plus the safety stock. In mostbusiness situations management must be able to deal with variability in demandand lead time.

(4) Speculativestock

Speculativestock is inventory held for reasons other than satisfying current demand. Forexample, materials may be purchased in volumes larger than necessary in orderto receive quantity discounts, because of a forecasted price increase ormaterials shortage, or to protect against the possibility of a strike.Production economics may also lead to the manufacture of products at timesother than when they are demanded. Finally, goods may be produced seasonallyfor consumption throughout the year, or at a constant level in anticipation ofseasonal demand in order to maintain a stable workload and labor force.

(5)Seasonal stock

Seasonalstock is a form of speculative stock that involves the accumulation ofinventory before a season begins in order to maintain a stable labor force andstable production runs.

(6)Dead stock

Deadstock is the set of items for which no demand has been registered for somespecified period of time. Such stock might be obsolete on a total company basisor just at one stock-keeping location. If it is the latter, the items may betransshipped to another location to avoid the obsolescence penalty or markeddown and sold at its current location.