Every e-commerce operation is heavily reliant on supplies and inventory, but each serves a distinct purpose.
While the two are easily confused, distinguishing between them allows small businesses to keep proper records for bookkeeping and inventory tracking — two functions that are critical in larger supply chain operations like inventory management, demand planning, and inventory forecasting.
Businesses can lay the groundwork for smoother, more efficient business operations by meticulously recording, tracking, and managing both supply and inventory.
In this post, we’ll go over the distinctions between supply and inventory, as well as how to manage and account for both.
What’s the distinction between supplies and inventory?
The items you use to run your daily operations are referred to as supplies. They are not necessarily a component of the finished products sold to customers, but they are critical to the operation of your business.
Inventory, on the other hand, refers to the raw materials that will be transformed into finished goods, as well as the finished goods that will be sold to the end customer.
What exactly are supplies?
Supplies are items that you use to support your day-to-day operations. The supplies you require will differ depending on the type of business you run, but they will almost always include common office supplies such as paper, stationery, toner, boxes, shipping labels and barcodes, bubble wrap, packing paper, packaging tape.
Price tags, for example, would be considered supplies in a clothing reseller (because they are required for business operations but are only used once), whereas a washing machine used to prepare many clothing pieces for resale would be considered equipment.
What exactly is inventory?
Inventory is anything you buy or make to sell to your customers. Aside from finished goods that are ready to sell, inventory may also include production inventory that is eventually incorporated into finished products, items that are still being manufactured (or work-in-progress inventory), and finished goods.
For example, if you make and sell soap, finished soaps stored in your warehouse can be considered inventory.
Furthermore, the raw materials used to make the soaps, such as oil, colorants, lye, fragrance, and distilled water, can be considered inventory because they are used in the final product.
Even as these raw materials are transformed into finished products, the soaps remain work-in-progress inventory as they sit in the mold awaiting curing and cutting.
The bubble wraps, tapes, and boxes you use to ship the soaps to your customers, on the other hand, are considered supplies. This is because they are not a component of the finished product and do not serve as raw materials in the production of the soaps.
Similarly, anything used to clean and prepare finished goods for packaging is considered a supply because it is not a part of the final product and is “consumed” during the manufacturing process.
As long as your finished goods remain unsold, they are considered inventory. Even if you still have them in your warehouse, they are no longer “inventory” once customers have purchased and paid for them.
Difference of Managing Inventory and Supplies
It’s critical for businesses to distinguish between inventory and supplies, and it’s also critical to managing inventory and supplies differently. Here’s a breakdown of the differences between inventory management and supply management.
- Inventory Management
Inventory management entails keeping track of a company’s stocked products and ensuring proper inventory records and accurate inventory lists are kept.
Although inventory management activities can be performed wherever your inventory is stored, most businesses prefer to store and manage inventory in a large warehouse space with dedicated shelves and aisles.
Inventory management is a multifaceted endeavor that consists of several distinct processes. Among these processes are:
- Receiving stock in a warehouse
- Its organization and storage (while maximizing space)
- Inventory control measures such as periodic inventory audits
- Tracking inventory levels and turnovers
- Control on inventory
- Demand prediction
- Determining to reorder points and optimal reorder quantities
- Restocking inventory as needed
Good inventory management ensures that you maintain optimal inventory levels and that inventory moves as smoothly as possible through the supply chain. This helps to streamline warehouse and fulfillment operations, making your business run more smoothly.
- Supply Management
The process of managing supplies and other items that are not tracked as inventory is known as supply management. While supply management can be complex in and of itself, it typically deals with smaller quantities of material than inventory management and has no direct impact on customers.
Typically, you’ll have a dedicated storage room, closet, or warehouse space to keep your supplies in. Most businesses use cabinets, shelves, and boxes with appropriate labels to organize supplies within these rooms or closets.
You still need to keep track of how you’re using your supplies, how much you have left, and when you should replenish supply levels, just like you do with inventory.
How to Keep a Supply Inventory
For two reasons, it is critical to keep a supply inventory — that is, to track and record what supplies were purchased and when.
For starters, it gives you constant visibility into supply levels, which helps ensure that you don’t run out of critical supplies at critical times.
Second, keeping a supply inventory allows your company to properly represent spending on its balance sheet, and recording supply purchases as they occur simplifies end-of-year accounting.
To keep a supply inventory, start by making an inventory log those records all of the supplies you have on hand. You can then categorize all of the available supplies by type and location. For example, you might want to keep packing supplies in one group and printing supplies in another.
Next, keep track of how many units you currently have on hand. Based on this data, you can make appropriate plans for reordering supplies at the appropriate time to avoid being out of stock.
Remember to account for the minimum order quantity and transit time (so you can plan your procurement logistics accordingly), and keep some buffer inventory on hand at all times.
Difference of Accounting for Supplies and Inventory
Supplies are typically treated as incurred expenses associated with running your business in an accrual-based accounting system. Unused supplies are initially recorded as assets in supply accounting but are then deducted as an expense when they are used.
Inventory accounting, on the other hand, treats inventory as an asset and records how the value of your total inventory changes over time. The weighted average, specific identification, LIFO (last in, first out), and FIFO are all methods for calculating inventory value (first in, first out).
Whatever method you use, it is critical to accurately account for all inventory, including finished goods inventory, goods in transit inventory, pipeline inventory, and work-in-process inventory.
You can accurately calculate your profit margins and cost of goods sold at the end of an accounting period if you include all inventory in your calculations.