Understanding On-Hand Inventory: Examples and Real-World Applications
Understanding inventory management is crucial for any business that engages in goods procurement and sales. A key aspect of inventory management is recognizing what constitutes on-hand inventory. This article explores the concept of on-hand inventory and provides examples to help clarify the terms and real-world applications.
What is On-Hand Inventory?
On-hand inventory is stock that an organization has both legal title to and physical possession of. This includes goods stored in warehouses, retail shelves, or any other location where the company holds the inventory. Essentially, these are items that are ready for immediate sale or use within the business.
Examples of On-Hand Inventory
Goods in Stock: These are items that are physically present in the business premises. For instance, in a car repair store, all tires and repair parts that the company owns and keeps in the warehouse or on the store floor are considered on-hand inventory. Retail Shelves: Products sold in retail stores are also on-hand inventory. For example, the cups in a coffee shop that are ready for customer use are part of the on-hand inventory.A Real-World Scenario: A Firestone Store's Inventory Management
Let’s delve into a practical example of on-hand inventory management using the experience of a Firestone car repair store from the early era before the advent of computerized inventory systems.
Before the integration of computers, a Firestone store relied on a manual ledger system to manage its inventory. Each tire size had a corresponding 5x7 card in the ledger.
For instance, a customer may come in seeking 750 x 16.5 tires, which are needed for a trailer. The store would first check the ledger card to ensure it had the required tires. If the customer wanted tires for a tractor as well, that could potentially mean a sale of 18 or 14 tires. Once a sale was made, the company would update the ledger by reducing the inventory accordingly.
This manual system was effective but required regular stock counts to maintain accuracy. Every month, a comprehensive inventory count would be conducted to ensure the ledger reflected the actual stock on hand. These manual processes were critical for maintaining an accurate on-hand inventory level, which directly impacts the store’s success.
On-Hand Inventory vs. Other Types of Inventory
FOB Shipping Point Inventory: These are goods that the business has purchased but are not yet physically in its possession. For example, if a business purchases tires FOB (Free On Board) shipping point, the tires are legally owned by the business but are not yet at the store’s location. These items are not considered on-hand inventory until they arrive. Consignment Inventory: This type of inventory represents goods that a business owns but has entrusted to another party for storage and sale. For example, goods consigned to a trade show display. The items are on-hand inventory for the consignor but not for the consignee who is merely displaying them.Importance of Accurate On-Hand Inventory Management
Accurate inventory management is essential for several reasons. First, it helps in making informed business decisions. For example, tire sales often influence the overall profitability of a car repair business. By maintaining accurate records, a business can identify best-selling products, monitor trends, and optimize stock levels.
Second, accurate on-hand inventory supports efficient operations and customer service. If a customer walks into a store expecting to find a specific product, it is crucial to have that product in stock. If the inventory is consistently accurate, customer satisfaction is likely to increase.
Lastly, accurate inventory management can help in reducing holding costs. By knowing the exact amount of inventory on hand, a business can avoid overstocking, which can lead to increased storage costs and the risk of products becoming obsolete.
Conclusion
Understanding the concept of on-hand inventory is vital for any business involved in goods procurement and sales. Whether it is through a manual ledger system or modern inventory management software, accurate tracking of on-hand inventory is crucial for maintaining effective stock levels, enhancing customer satisfaction, and ensuring the overall success of the business.