Inventory versus Non-Inventory versus Stock versus Non-Stock versus Special Order versus Order as Needed
These inventory terms all seem relatively self-explanatory, and within a particular organization, everyone feels like they are using them correctly. But I can tell you that as an outsider (consultant), I spend a fair amount of time trying to figure out what people mean when they use these terms. It’s important for me to understand what someone means when they use these terms because it affects the processes that use them.
First off, let’s define an Inventory Item. This is an important one due to how an inventory item interacts with your software. An inventory item has a record in your system’s Item Master and tracks inventory quantities associated with receiving, storing, consuming, and shipping the item. Therefore, after you receive a PO for an inventory item, you can inquire in your inventory system and see that you now have a quantity on hand for that item.
Special note on “inventoried items”. If someone is referring to an item as an “inventoried” item, they probably mean they normally stock the item.
Now let’s move on to a Non-Inventory Item. Since an inventory item has an item master record and tracks quantities, you would be right to assume a Non-inventory item does neither of these. Therefore, a non-inventory item on a Purchase Order or Sales Order has very little system functionality behind it. You can still see that you received it or shipped it, but that is just due to the transaction information on the Purchase Order or Sales Order; there are no quantities in your “Inventory System” to provide further information on this inventory or the related transactions. Usually, the best you can expect is a reference on the purchase order of a non-inventory item to the associated sales order of that item.
NOTE; Not all systems treat non-inventory the same. For example, Quickbooks actually has an "Item Type" to set up for non-inventory items. It still does not track quantities, but it does track information (vendor, cost, etc) related to the item in the software product. In most larger systems non-inventory is a "line type" on purchase and sales orders. When you set the line type as non-inventory, you can pretty much enter anything on that line.
Stock Items are those items that you keep inventory on hand as a regular part of business. Basically, when you run low, you order more so that, in theory, you always have some inventory available. Stock Items would almost always be Inventory Items because you would want to track the inventory of these items.
Non-Stock Items are items that you don’t keep quantities on hand as a regular part of business. A non-stock item would probably be an inventory item if you ordered or produced them regularly, even though you don’t keep inventory as a normal part of business.
This brings us to Special-Order Items and Order-as-Needed Items. These are both arguably the same thing and would both be considered non-stock items because you don’t keep inventory on hand as a regular part of business. These could be Inventory or non-inventory items, though these terms would most likely be used as categories that describe order policies of inventory items since non-inventory items would not have a means to categorize them.
Why should you care?
When setting up and maintaining your inventory system, this decision is an important one. Setting up an item as an inventory item requires more setup work, but gives you much greater functionality to track and manage the item. If you want to be able to track inventory quantities or track where an item is stored (warehouse locations), where you purchase an item from, what the lead time is, and what it costs, what you sell it for, you probably need to set it up as an inventory item. Information available for a non-inventory item is likely limited to what you can include on the sales order to sell it, or the purchase order to purchase it. Ideally, everything would be set up as inventory items, this would include non-stock and special-order items. This would provide more useable historical data for doing analysis. For example, you may want to occasionally run reports on special-order items to see how often they were sold. If they sell frequently enough, you may want to change them to stock items. Conversely, if a stock item is not selling, you may want to change it to non-stock. I’m not saying you can’t do this if you set it up as non-inventory, but it will be more challenging. Other characteristics you can track with inventory items include weight, cube, cross-references, special handling instructions, etc.
Problems with non-inventory items.
Key problems with these are the lack of system functionality you have to track them. Usually, when a non-inventory item is received, it has to be placed somewhere so you can find it when you need to ship it. Since the system can’t track a bin location for a non-inventory item, this is entirely a manual process. Usually, there is just a physical rack somewhere where all non-inventory goes. Sometimes you can associate the sales order with the purchase order of a non-inventory item. If so, you can produce a label with the sales-order number and place that on the non-inventory item. Also, by associating the sales order with the purchase order, you may be able to automatically release the sales order when the non-inventory item comes in, otherwise, you won’t have any signal that you now have the item for the sales order and are stuck with another manual process to manage this.
In summary, when someone starts talking about inventory items and non-inventory items, you probably need to ask a few questions to make sure you know what they are talking about. In addition, if you regularly have to deal with non-stock items, you need to see what functionality your system has to manage them (associate a non-inventory purchase order with a sales order). If you have non-stock items that are likely to be ordered multiple times, you are probably just better off setting them up as inventory items that are not stocked.
See article on Dropshipping for another inventory classification.
More Articles by Dave Piasecki.
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Dave Piasecki, is owner/operator of Inventory Operations Consulting LLC, a consulting firm providing services related to inventory management, material handling, and warehouse operations. He has over 25 years experience in operations management and can be reached through his website (https://www.inventoryops.com), where he maintains additional relevant information.