In this post, we discuss the one key difference between inventory in service industry and manufacturing, Previously, we discussed how production and consumption is different in service versus manufacturing; we also covered the intangible differences between service and manufacturing. In this post, we’ll discuss the topic of “Inventory” and how that might be understood in a service context and a manufacturing context.
What is Inventory in Manufacturing?
In Manufacturing, Inventory is typically understood as (1) the components used to build the finished product and (2) the finished product themselves. Inventory has the unique property of “cash sitting in product” – in other words, inventory does nothing for the business until it is sold in exchange for a more liquid asset, such as cash. Until then, inventory is a cost.
Series on Difference Between Service Versus Manufacturing
Go here for details on applying Lean for Service Operations. For other posts in this series, please refer to the table below:What is Inventory in Service?
The concept of inventory in a service context is a little difficult to explain and can take on different forms, depending on context. But in general, inventory in a service context, is not to be equated with inventory in a manufacturing context – inventory in service is quite intangible and sometimes it is not a “real good”. Here are some examples,
- Inventory in an emergency room might be the people waiting; in this context, increasing patient flow means that we reduce inventory (people) and, in other words, we serve more patients in a more timely manner. But, who wants to call people “inventory” – it’s not appropriate, but one could misapply the term and reduce people to inventory.
- Inventory in a service context often has the property of intangibility – that is, it’s not often a “real good” that one could point to in a moment of time. For example, seats at a movie theater could be considered “inventory”, but there are other more creative labels for “unused capacity”, such as “occupancy rate”, and others. But, it is basically inventory. Back to the movie theater example, unused seats in a movie theater could be considered inventory for which there is no demand – this means it is “cash left on the table”.
Notice that how we understand the concept of “inventory” determines how we approach it. In the above examples, on the one hand “inventory” should be reduced but, on the other hand, inventory ought to be satisfied or “filled up”.
No Inventory or Buffers
Here are a few examples to illustrate the concept of “intangible” in service versus manufacturing.
Manufacturing Parts
If we manufacture widgets, those parts may go to a retail outlet to be placed in inventory. If the demand suddenly decreases, that inventory is the buffer between production and the demand. The goods will stay in inventory and can be sold later.
Airline Management
Or, if you have too many seats on an airline, or if the airplane is too large for the demand for traveling from point A to Point B, you cannot save those seats for later. When that flight takes off without passengers, those seats are gone.
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James Lawther says
If you swap the word “inventory” for “work in progress” that can help. Work in progress includes forward dated tasks, queues of customers, batch jobs waiting to be batched.
James Lawther says
If you swap the word “inventory” for “work in progress” that can help. Work in progress includes forward dated tasks, queues of customers, batch jobs waiting to be batched….
Chris Western says
I think that we should look at inventory as product that can be supplied without manufacture (finished product) and materials that can be used in manufacture without recieving more (Raw material and WIP), if we take these two definitions, the it become much easier to understand inventory in the service industry;
lets take an example, if we go into a bank, and there is a teller waiting for customers, this is a service that can be supplied without anything else having to happen first, so some of this tellers time is spent just waiting for someone to need the service, this is waste in over inventory. likewise a computer that is in use at only a fraction of its capacity is over inventory, the causes of over inventory in both the manufacturing and service industries are the same, un predictability of the customers purchase pattern, and push rather than pull supply systems.
Lakshmiraj says
Can you please let me know what will Inventory in service industry like Accenture?
Brion Hurley says
Inventory at a consulting company would be:
Does that help?
Nada Hanisa A S says
What would be the inventory for service industry in an educational institution?
Brion Hurley says
The number of classes offered is inventory. There are probably more classes listed than needed, and not enough classes in other areas. The more classes there are listed, the longer it takes students to find the class they need. Books would also be inventory. Can the students order the books just-in-time (JIT), instead of buying them all at once up front, and not using them until the end of the semester (if at all). Inventory would also be the number of students waiting to hear if they were accepted to the school, or those waiting for their student loans to be approved. Does that help? Anyone else have examples of inventory?
Kushagra Bhardwaj says
Can we take Services Accrued over the Payment Cycle of Services offered such as Tuition Provided in Hours Until Tuition Fees are Paid or Due on Accounting Cycle ? Can We Treat the Service offered as WIP during the Accounting Cycle and Take them as Finished Goods on the Day the said Services are due and recognise them as Revenue the day It’s realised as Cash ?!!
Margaret says
What would be the inventory for an accounting firm?
Brion Hurley says
I don’t know much about accounting, but I would guess inventory would be to-do action lists, email inbox not read, backlog of reports needing to be completed, transactions of the business not recorded “in the books” yet, physical paperwork stored in file cabinets, and maybe invoices sent to customers that haven’t been paid yet. Anyone familiar with accounting that can add to this?
Victor says
What would the inventory be for a courier company like DHL?
Brion Hurley says
The actual packages are inventory, so obviously the goal is to get them delivered as fast as possible with little delay. If you look at the time from when the customer packages and labels their item, until it arrives at their customer’s receiving area, all of that would be inventory. It could also be the number of trucks sitting idle that aren’t being used. If you are in the office side of a courier company, it could be the stack of refunds needing to be processed, or emails for quotes that haven’t been completed yet. Hope that helps.
Victor says
What would the inventory be for a courier company like DHL?
Yes it does… Thank you
mubarek says
what would the inventory be for an engineering consultancy office or may be for an interior designing office ?
Brion Hurley says
The work that is waiting to be performed by one of the consultants. Maybe it’s information that is waiting to be sent to a customer (drawing, recommendation, etc). It could be a drawing that is waiting for review and approval. It could be the number of desks in the office that are not being used. It could be office supplies, or it could be software licenses for CAD programs.
For interior design, the backlog of requests would be inventory. If they sell products, those items in the warehouse would be inventory. Anything where money or resources have been applied, but not enough where it can be sold or provided to a customer. Does this help?
Kelsie says
What would inventory in a company that provides security – like offering body guards for private events?
Brion Hurley says
It could be the number of body guards at an event, where you need enough to provide safety, but not too many. Or it could be the number of guards on staff. It could also be the equipment, supplies, weapons, badges, uniforms being stored in a warehouse. It could also be the number of requests for body guards that have not been fulfilled (due to not enough guards). The idea is to have the right number of resources, people, staff (not too many, not too few).
yashmeet says
1. Do service firms have work-in-process (WIP) inventory? Discuss.
Brion Hurley says
Yes, WIP could be customer requests waiting to be answered, unread emails, or applications waiting to be reviewed for approval/denial. Let me know what service firm you are thinking about, and we could give more specifics.
mabelle ortega says
What would be the inventory for Laundromat business?
Brion Hurley says
The washing machines and dryers would be inventory, since you should only have enough to cover customer demand. If they could get faster washers and dryers (like newer versions), you wouldn’t need as many. They could also help customers reduce time to unload the washers and dryers when done (alarms and lights or text alerts).
At a local laundromat in Portland, the washer is 17 minutes only. You get a text alert when it stops, so idle time is less. They need less washers and dryers because of this.
Another inventory would be detergent for purchase. They should have enough to cover purchases of detergent for each day only.