Inventory

Material that (and information that) resides within a value stream between processing steps. 

Physical inventories are usually classified by their position in the value stream and by their purpose. Raw materials, work in progress and finished goods (also called finished goods) are terms used to indicate the position of inventory within the production process. Buffer stocks, safety stocks and supply stocks are terms used to describe the purpose of inventory. Since inventory always has both a position and a purpose (and some inventories have more than one purpose), items can be both finished goods and buffer stocks, for example. Similarly, the same items can be raw materials as well as safety stocks. Some items can even be finished goods, buffer stocks and security stocks at the same time (especially if the value stream between raw materials and finished goods is short). 

The size of buffer and safety stocks will depend on the variability in demand (which determines the need for buffer stock) downstream in the value stream and on the capability of the process (which determines the need for safety stock) upstream in the value stream. According to good Lean practice, one sets the stock for a process and continuously reduces that stock whenever possible, but only after reducing downstream variability and increasing upstream capability. If one reduces inventory without addressing variability or capability, one will only disappoint the customer because the process will then fail to deliver the required products on time. 

To avoid confusion, it is important to carefully define each type of stock. Below are the six types of stock:

Buffer stock

Goods held, usually on the downstream side of a facility or process, to prevent running dry in the event of an abrupt increase in short-term demand exceeding production capacity. 

The terms buffer stock and safety stock are often used interchangeably, leading to confusion. There is an important difference between the two, which can be summarized as follows: buffer stock protects your customer from you (the producer) in the event of an abrupt change in demand; safety stock protects you from incompetence of your upstream processes and of your suppliers. 

End products 

Items that a manufacturing facility has completed and are awaiting delivery. 

Raw materials 

Goods in a production facility that have not yet been processed. 

Safety stock 

Goods held at any point (raw materials, work in progress or finished goods) to prevent downstream customers from running dry due to upstream process capability problems. Also called emergency stock.

Supply stock 

Goods in conveyors on the downstream side of a plant destined for the next delivery. (Their size and frequency usually correspond to that of delivery batches.) Also called cycle stock. 

Work in progress (OHW). 

Items between machining steps within a manufacturing facility. In Lean systems, standardized work-in-progress represents the minimum number of parts (including units in machines) needed to keep a cell or process running smoothly.