Unlike Importers, Distributors and Manufacturers, Contract manufacturers transform their or someone else’s inventory into finished product for specific projects for others. Oftentimes it: is a consultive sale involving adhering to engineering and architectural specs; covers an extended period of time; is dependent on progress payments; involves collaborating with other trades and contractors; has tight time constraints; must meet federal, state, county, municipal, OSHA and product specifications; is vulnerable to lien laws; and can be seasonal in nature.
Ideally the only inventory that would be on hand at any time would be dedicated to jobs in progress. This inventory would be purchased as it was needed and would be completely consumed. In reality this is not how it works.
We know that the following may be found in any contractor’s inventory:
- Stock items that are more economical if purchased in larger quantities.
- Stock items that are often used in more than one project.
- Stock items that are project specific.
- Hardware (nails, screws, hangers etc.) which often times is not accurately tracked.
- Parts and remnants of material left over from previous jobs.
- Replacement parts necessary for warranty and repair work.
- Inventory that is specific to jobs that were cancelled but that could not be returned.
- Capitalized expenses such as permits, overrun charges, fines or fees.
- Items carried as inventory which are actually used in the production phase of the project i.e.. small tools, consumables and/or supplies.
- Salvaged items or exchange items are carried on the perpetual inventory.
- Older items are not written off because “someday” they might be needed.