Inventory Classification

Analysis of the entire supply chain will indicate the various types of inventory. Inventory can be classified by flow of material and by functions.

By Flow of materials
- Raw materials. These are purchased items received which have not entered the production process. They include purchased materials,
component parts and subassemblies;
- Work-in-process (WIP). Raw materials that have entered the manufacturing process and are being worked on or waiting to be work on;
- Finished goods. The finished products of the production process that are ready to be sold as completed items. they may be held at a factory or central warehouse or at various points in the distribution system;
- Distribution inventories. Finished goods located in the distribution system;
- Maintenance, repair and operational supplies (MROs). Items used in production that do not become part of product.

By Functions
Transit / Pipeline
Sometimes called transportation stock, pipeline inventories represent material that is in transit, such as from a plant to a distribution center or a customer. Pipeline stocks are most prevalent with distribution inventories of finished goods. Pipeline stocks also exist
for raw materials, but keep in mind that the raw materials for one organization represent the finished products of the company producing them and, therefore, are a form of distribution inventory to the producer. Transit inventory does not depend on the shipment size but on the transit time and the annual demand.

The average amount of inventory in transit is:

I is the average annual inventory in transit, t is transit time in days and A is annual demand. Notice that the transit inventory does not depend upon the shipment size. The only way to reduce the inventory in transit, and its cost, is to reduce the
transit time.

Note that the term transportation inventory refers to inventory that is in transit. The term pipeline inventory includes transportation inventory and other inventory needed to fill a distribution system, including intermediate points.  Not all safety stocks are part of pipeline inventory.

Cycle / Lot Size
Cycle stock gets its name from the cyclic reordering practice associated with most goods. It is sometimes referred to as lot-size stock and results from ordering on quantities that are in excess of current needs. This stock gets depleted gradually upon serving customer orders and replenished cyclically when supplier orders are received. Cycle stock applies equally to finished goods, work-in-process, raw materials, and MRO inventories. Cycle stock is used to take advantage of quantity discounts, reduce shipping, clerical and setup costs and where supply rate is lower than the demand rate.

The term anticipation stock is usually applied to inventory buildups that are produced and accumulated based on some strategy as preparing for peak season, planned sales promotional campaign, or to help level the production rate to reduce the production rate changeover costs. Seasonal product buildup is one of the best examples of anticipation stock. Inventory buildup due to a planned shutdown of a manufacturing plant for changeover or vacation is another example.

Safety Stocks
Safety stock, also referred to as buffer stock, is used to protect against the possibility of stock-outs when demand or supplies are subject to uncertainty or fluctuation. It constitutes extra inventory held just in case anticipated demands exceed those that were
forecast or in case a replenishment order is tardy or in a quantity less than requested.

Hedging Stocks
Hedging stock is very similar, conceptually, to anticipation stock. The term is borrowed from financial markets to denote the higher degree of risk involved. Some even call it gambling stock. Hedging stock is a form of inventory buildup that is done in anticipation of some event that may not actually come about, which differentiates it from anticipation stock. Justification for hedging stocks may be based on such things as impending labor strikes in a supplier industry, predicted sharp price increases for a raw material, unsettled governments of countries where foreign suppliers are located, or items that have very long, or variable, lead times.

Decoupling Supply and Demand
The term, decoupling stock, is sometimes used instead of safety stock to represent a separation, or buffer, of product demand from product supply. Most often, however, it is used to denote work-in-process inventories that act as buffers between successive work
operations in a factory, especially in job-shop production. As factory work orders pass from work center to work center, queues of orders are often planned for each work center to absorb variations in work load due to mix of parts or products being worked on. These
queues of work separate the operations so that each work center can produce somewhat independently from other work centers. The objective is to prevent idle time in the factory.