The types of inventory waste found in a business are not solely limited to damaged or outdated stock. Waste can be encountered in any activity that uses resources without adding any value for the end user. Instead, it increases cost, either to the manufacturer or to the consumer. Waste is a key area where businesses should focus their efforts in reducing costs for greater profitability.
1. Raw materials
Raw materials are arguably the largest area of all the types of inventory waste in most manufacturing businesses. Many will hold high levels of inventory stock to protect against fluctuations in consumer demand, supplier issues or to alleviate costs to expedite due to shortfalls.
Economies of scale can be achieved through bulk purchases and larger order quantities, with the added potential to reduce freight and transport costs. However, holding an excess of inventory stock leads to extra storage expenses, additional material handling costs and takes up valuable space in the warehouse.
Work-in-progress (WIP) inventory is classified as an unfinished product that requires further work, processing or assembly. Just like other types of inventory waste, WIP inventory ties up cash that could be generating higher returns elsewhere.
Production planning strives for a constant capacity and cost-effective use of plant and machinery, which means that sub-assembly components may be produced year-round and stored as WIP inventory. Waiting to be processed into finished goods to meet seasonal consumer demand. In large manufacturing plants, even small amounts of WIP can add up to significant amounts of capital tied up in this type of inventory.
3. Finished goods
Finished goods inventory is generally the most expensive because it incurs a gamut of costs from the initial purchase price, costs of procurement and inspection to all additional expenses directly associated with the maintenance, storage and preparation of inventory for sale.
Carrying inventory brings with it the risk of waste through surplus, slow moving or obsolete stock. As well as handling costs, opportunity costs and waste from lost, stolen or damaged stock.
4. Maintenance, repair and operations
Maintenance, repair and operations (MRO) inventory are those items consumed in the production process that don’t become part of the final product. This can include repair components, spare parts, lubricants, tooling and accessories.
The cost of MRO inventory can be quite substantial, yet MRO inventory often lacks the control afforded to raw materials, WIP and finished goods. It is rarely measured in terms of on-hand availability, is generally not centrally located and often results in the types of inventory waste where stock is misplaced or becomes obsolete before it is needed.
5. Office supplies
Often overlooked as inventory stock, office supplies like any production inventory, tie up cash-flow and take up space. Although the costs of this type of inventory will be significantly lower than production inventory, it should be monitored in a similar manner.
If you don’t have a central area responsible for ordering and maintaining this type of inventory, costs can very quickly add up. Not only will large quantities of similar supplies end up in different locations, office supply inventory has a high risk of waste via pilferage. The less you carry of this type of inventory, the easier it is to control and reduce this type of waste.
The various types of inventory waste can have a significant impact on the profits and growth of your business if not correctly identified and managed. Understand the common causes that lead to inventory associated waste and keep track of all types of inventory stock to alleviate potential financial loss or unnecessary cost to your business.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.