What Is Inventory and How Do We Manage It?
By: PJB
Date: December 26, 2025
Fundamentally, inventory is the items of materials and supplies which are used by a business to sell and/or provide products for sale to customers of the business. There are different types of inventory items which must be considered as well as the different ways in which we account for inventory four purposes of managing our businesses.
Generally, inventory items may be classified or characterized as raw materials, supplies (M&S), work in process (WIP) and finished goods (FG). These characterizations and designations are determined based upon the nature of the business. For example, Raw Materials Inventory would likely be a type of inventory designation utilized by a manufacturing company that converts raw materials, such as wood, into finished furniture (FG). Raw materials usually consists of materials that have not yet been altered or used in production by a manufacturing firm to create its FG products.
While Materials and Supplies are also used by manufacturing concerns, this designation of inventory is also used by service type companies such as pest management firms. The M&S items are utilized in the service performance process and these services are the product which such companies sell to their customers.
Work in Process (WIP) is another inventory designation utilized by manufacturing firms and may be used by other businesses where applicable. WIP would be a piece of furniture which is not yet finished but retains the value of the raw materials plus the work conducted thus far until finished.
Finished Goods(FG) is an inventory designation which is best suited to those companies that sell such goods to their customers. A finished piece of furniture which is ready for sale to customers is an example of finished goods. Generally speaking, a service type company would not have FG inventory.
Why Must We Manage Inventory?
There are various important reasons that we must manage our inventory which include but are not limited to: the time value of money, obsolescence, market demand, production capacity, scheduled work and others.
We must be considerate that the value of the inventory represents dollars which are limited in value to that of the utility of the inventory item. Therefore, we know that inventory may have a beneficial or detrimental affect upon our business such that we also need to consider our cashflow and other financial needs of the business. For example, a service type company earns revenue based upon services completed or services delivered. Since these services may be performed at the customer’s location, the service company also must have adequate cash on hand and/or credit to purchase fuel for service vehicles, service related M&S and other important factors.
We might now understand how this service company may be adversely affected should this company have too much inventory on hand and/or an insufficient quantity of inventory on hand.
The benefits of proper inventory management assist the company to perform in a cost effective and profitable fashion. In fact, proper inventory management serves to optimize the financial performance of the business.
Inventory Management Methodologies
There are well known inventory management methodologies which are implemented by today’s businesses. The goal of inventory management is to
Effectively and efficiently manage inventories to avoid both overages and shortages of inventory items.
The four inventory management methods commonly utilized today include a) just-in-time management (JIT), b) materials requirement planning (MRP), c) economic order quantity (EOQ) and d) days sales of inventory (DSI).
For pest management service companies DSI may be a wise choice. Under DSI the company and inventory manager have already calculated the quantity of inventory items needed to operate the business each day such that this quantity of inventory is maintained for such use.
Another factor to consider may be safety stock. When viewed in this fashion safety stock would be a designated quantity of inventory to have on hand and available for use in addition to the DSI inventory level. The purpose of safety stock is to avoid being short of inventory items such that service delivery is not hampered.
Inventory Management Systems
Basically, inventory is the counting of the inventory items such that we know what we have on hand for each item. Inventory involves a number of steps including, but not limited to: 1) Deciding upon an inventory management software or system, 2) Identification of all inventory locations, 3) Identification and listing of each unique inventory item, 4) Categorization of each inventory items, 5) A written description of each inventory items, 6) The creation of barcodes or QR codes for each inventory item should the business choose to utilize technology for such purposes, 7) Application of the barcodes or QR codes for inventory scanning as needed during inventory management.
More to follow in “Part 2” . . . please note that this article is a WIP. Let me know if any questions.