Get ahead with deals in the pipeline for inventory

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So let's talk about inventory. What is inventory? Inventory is simply a list of items that a company owns and that can be finished goods, raw material or products that they will sell to the consumer or another business. So there are a few different types of inventory that I want you to know about rather types more of how inventory categorization changes over time. So, for example, a company starts by ordering raw material from their supplier, the inventory that will be put into production. So you order the raw material first and then once the supplier ships that raw material, it actually becomes a transportation pipeline, an inventory. And any time inventory is moved, it is considered transportation pipeline inventory. So your company receives the raw material and you take the raw material and you put it in production to build your product. That raw material now becomes work in process inventory. So now that they're in production, they're work in process inventory, but eventually your company finishes the production and creates the next type of inventory, A Finished good. Now these are the products that we buy out of the stores. It becomes the finished goods once is completely done with production. So once the, let's say, computer has been fully assembled and ready to ship, it is considered a finished good. Those are the general types of inventories. There are a few more I want to talk about. We have replacement parts, inventory. So as you know, when it comes to production, there's a lot of machinery and tools being used. Machines break, right? So companies keep replacement parts inventory again to replace machinery as it wears out. Any other type of inventory is simply supplies. And these are just parts and materials that are used in the production process, but not usually part of the component that could be nails lubricate. It's things of that nature that are vital to production but are not considered part of the finished product because typically you don't see these components when you buy the finished product, but it's necessary for production. In the last type of inventory I want to talk about is what we call safety stock. So what is safety stock? It's a buffer. That's all it is. Is additional inventory purchased or produced by the company just in case they run out. Now, there are instances where you will have a company comes in out of the blue and purchase of a ton of your inventory or as much as they can possibly buy. Now usually they're going to take that and sell it to a customer. They receive an order, but they purchase from you, so they buy as much as they can from you because obviously they've received a big order. Right now you have a stock out or what we call a stock out and that is when your inventory is completely out or depleted. So companies want to avoid a stock out. Why? Because if you don't have the inventory, your customer will purchase from a competitor in most cases. So companies like to make sure they have inventory on hand at all times. So it begs the question, why don't companies just produce or order enough inventory where they never run out? Good question. Reason being and here's a key takeaway inventory is cash, right? Inventory, again, is a list of products that a company owns. Or again, these could be raw material, but there is a cost and a quantity associated with inventory. May take a look in your pantry or your closet. That's inventory, the clothing or the food item that canned goods. All of that is inventory. If you took a count and a quantity, you can then determine valuation or the value of that inventory so that you can sell it. So companies do the same thing. Companies like Walmart has billions of dollars in inventory sitting on store shelves. So when it comes to tax time, they have to have an accurate depiction of how much cash they have simply in inventory. And that is where your inventory systems, which I discussed in another video, come into play and being able to track accurately how much inventory you have and the value of that inventory. So one company don't want their cash tied up on the shelf because they can use that money, especially when you're talking about a large company. If I can take $1 billion in inventory off of the shelf and put that $1 billion into, you could put that in a savings account alone. That much money. Right. And it will accumulate interest in the company makes money from their money instead of having it sitting on the shelf. So that's the first thing we don't want all of our inventory or cash on the shelves if we can take that money and invest it elsewhere. Second, another concept is capacity, what we call capacity planning, right? Do we have the space for all of that inventory? Right. If we have the space, great. If we don't, then we can only purchase so much. Remember, huge company specialty retail companies have a ton of inventory and they have to store inventory somewhere, which is usually in a warehouse or additional storage off site. But yet that comes with a cost as well. So the company not only has to be able to afford to be able to either produce or purchase additional inventory, they got to have the space for it, right capacity planning. Same thing with with you, your refrigerator or deep freezer only has so much capacity, right? You may be able to afford to buy more meat when you go to the store or food when you go to the store. But you only buy so much based on your capacity to store that food. And that brings up the next point. Perishables. When we think about inventory, we have to consider one the shelf life. When we think about the restaurant industry, they can't purchase a ton of inventory, right, Because eventually those items will expire. They will expire. And with things like technology and fashion, there's depreciation that comes into play where the value of a particular product changes over time. If you sold laptops and you purchased a ton, you may find yourself stuck with a ton of old laptops. This is why large companies that produce computers will discount some of their old computers to to sell them because again, it's no benefit to them to have that old model sitting on a shelf, even though it's brand new, it lost value. So they try to give as much as they can out of that product so that they can make some money from it in some type of way. So that's why the main reasons why companies just don't buy a ton of inventory, they consider a number of factors, not those that I just mentioned, but also demand what is how often are customers requesting the product, the seasonality of demand, which are also discussed in another video. But companies do want to avoid a stock out because again, you will go to a competitor. And you know, speaking of stock outs, I have to say, and for the sake of this video, we're going to call this place Top Ise Top Ise Chicken. Okay, I went to Top Ise Chicken and top Ise told me that they didn't have any chicken. How does the ticket plate work out of chicken? Stock out right. So I went and got food from somewhere else, right? I went to another chicken place because I want it chicken, but again top ise can't just buy a ton of chicken because of the shelf life of the product. And that's where the different inventory models in how we purchase inventory come into play. So key takeaways. Remember, inventory is just a list of items that a company owns that they were either sell or use in production. There are a few different types of emails, a few different types of emails, a few different types of inventory that you want to be aware of. Raw material, work in process, finished goods, replacement parts, inventory supplies, transportation, pipeline inventory and safety stock. And remember, inventory is cash. You don't buy a ton of inventory unnecessarily because you don't want your cash tied up in your products or on your store shelves. And that's the main reason why companies make sure that they use different models and different inventory systems to have accurate inventory at all times.