Different types of inventory are suitable for different business and industry types. Your inventory must neither run low on stocks nor exceed what’s required to fulfill customers’ demands. But if you don’t properly manage your inventory, it can negatively impact your revenue and bottom line. Low or exhausted stock could disappoint your customers, while exceeded stock could result in wastage. Therefore, knowing about inventory and its types is essential to making the right choice based on your business requirements. Let’s discuss what inventory is and the different types of stock.
What is Inventory?
Inventory means a stock of goods. Goods can be items, materials, and merchandise that a company has stored to sell or manufacture new products and sell them to earn profits. The company also manages and updates the goods to meet customer demands. An inventory is an asset, intangible or tangible, having a value for exchange and can be used for generating revenue. In manufacturing, inventory comprises final products manufactured for sale, raw materials for production, and partially finished goods on a factory floor or warehouse. Example: For a cloth manufacturing company, inventory would include clothes ready for sale, raw materials for producing new clothes like cotton, fabrics, leather, needles, threads, etc.; semi-finished cloth stock left for packing or further processing; and clothes kept for quality assurance. In service industries, the inventory is generally intangible since no physical stock is exchanged. The inventory here could be the steps required to generate a sale or the tangible or intangible items to aid in a sale. Example: The airline’s inventory includes the seats that must be filled up. Similarly, a server hosting firm will have virtual servers in its inventory. To fulfill customers’ expectations, a company needs to manage its inventory well. It can be done through a spreadsheet, a notebook, or inventory management software. It will help you track your stock, ensure the required items are available in the stock, and meet customers’ demands so they can place orders whenever they want.
Types of Inventory
Businesses of all types use some kind of inventory in their production and selling process. But inventory can be a complex thing if not appropriately managed. Based on the type of industry or business, inventory can be of different types. And if you want to run a business effectively, you should know inventory types to decide what will suit your business more. Although you’ll find many types of inventory, here are the four main types you should know about.
Raw Materials Inventory
Raw materials are items or goods processed to produce the final product. These items can be the parts of the components present and are not yet used in finished goods or work-in-process inventory. These are combined or modified to create a new product and look unrecognizable after the finished product is formed. A manufacturing company can acquire raw materials using a by-product of a given process or source raw materials from the supplier(s). Raw materials are of two types:
Direct raw materials: These are used directly in a finished productIndirect raw materials: These are a part of factory costs or overhead.
Frequently, manufacturers manage their raw materials, but retail-oriented businesses can choose to work their raw materials either by themselves or participate in the selection and distribution process. Only the manufacturing or service industries utilize the concept of raw materials, but the trading industry does not. Example: Raw materials in the cloth manufacturing industry could be cotton, rubber, needles, threads, silk, and more. These are also the direct raw materials for this type of business, while indirect materials can be lightbulbs, storage space, batteries, machines, etc., that help keep your factory running. Optimizing raw materials inventory is crucial to ensure the customer demands are fulfilled and, simultaneously, avoid losses. Keep exceeding amounts of raw materials than required. You will have to bear high carrying costs, require larger storage space, and face monetary losses when the materials go bad, obsolete, or expire. It is especially evident in the food and beverages industry, pharmaceutical industry, and a few others. Similarly, you don’t want to run short of inventory. Because if you do, you won’t be able to produce the desired volume of products that your customers want to buy. Therefore, ensure you balance both sides by tracking, managing, updating, and restocking inventory according to the market demands.
Work-In-Process Inventory
Work-in-process (WIP) is a type of inventory comprising items in the process of turning into a final product. It’s what you can call semi-finished goods, morphed from raw materials subjected to some processes in their path to becoming a new product. WIP inventory includes items, components, sub-assemblies, and assemblies under process. Based on a cost perspective, it has not only physical materials but also labor costs and overhead charges. WIP inventory can be found on the production floor and is yet to be ready for sale. Until then, it will go under modifications and quality checks. Example: In the computer manufacturing industry, the computers still under some processes to add features or peripherals and seek quality assurance could be WIP inventory. Similarly, in a company that manufactures shampoo, the shampoo, along with the bottles where it’s stored, would still need quality checks. They are also considered WIP inventory. Generally, the lower the WIP inventory locked up, the better it is. It’s because until the inventory is turned into the final good, it’s of no use as you can’t sell them and gain profits. Although, in some cases, such materials can be sold at some price; however, it might not profit the business much. Keeping a large volume of WIP inventory can also be risky in case of a natural disaster destroying the warehouses or a man-made attack compromising data and physical stuff. Many businesses consider WIP inventory not very useful and discard it altogether. Therefore, it’s desirable to minimize work-in-progress inventory volumes. In addition, you can also optimize the time taken to convert the WIP inventory into the final product using more efficient procedures and tools that can boost productivity. This will help you reduce the locked-up value, release it quickly, and achieve better results.
Finished Goods Inventory
These are probably the simplest to understand. Finished goods are the final products ready for sale to the customer. This customer can be a direct consumer or a business buying from you and using it to shape its offerings and then selling to its customers. Finished goods are recognized as completed products in terms of construction, packaging, and quality inspection. They are ready to be sold and marketed in the target marketplace, areas, or stores. This type of inventory could be listed on your eCommerce site, displayed in your store, packaged to be sold to your customer, and so on. You acquire the finished goods after implementing the complete manufacturing process, from using the raw materials and shaping them into the desired product with the help of tools and procedures to assembling the parts, quality assurance, and packaging the product. Finished products are saleable, contributing directly to the company’s revenue. Example: For a car manufacturing company, the finished goods will be the cars or a card loaded on a truck and ready for sale. For a jewelry-making company, the final jewelry pieces kept in the shop and displayed to the customers are finished goods. Similarly, a cloth manufacturing company will have finished goods, such as the completed jeans, tops, gowns, shirts, etc., packed and ready for delivery to a distributor.
MRO Inventory
Maintenance, repair, and operating (MRO) supplies inventory is also known as overhaul inventory. This type of inventory involves items used to assemble a product, excluding parts that end up in a finished product. In terms of cost, maintenance and support expenses are added to this inventory alongside the materials required to modify and strengthen the product and improve its aesthetics. As the name suggests, MRO inventory would include items used in the operations, repair, and maintenance of a given product. These items will be in the inventory even after the final product has been dispatched as the customer could need repair and maintenance services at any time. MRO inventory is crucial in the daily operations of a company. Many businesses consider packaging under this inventory. This way, it could be of two types – primary packing and secondary packing.
Primary packing: It involves the packaging without which a product is not used, such as a can for storing energy drinks, a small tub to store moisturizer, etc.Secondary packaging involves the outer packaging of the goods to prevent damage in transit or handling or make them look aesthetically pleasing. It can be a carton that stores the moisturizer in a tub, a dozen energy drink bottles, etc.
MRO supplies are used during the production, repair, or packaging but never form an integral part of the final product. They are materials supporting the production procedures. Example: MRO inventory is huge. A manufacturing company can include shelves, machines, protective gear like masks and gloves, computers, desks, chairs, office supplies, and many more. In a bike servicing company, MRO inventory will have items that would help them maintain or repair the bike, from towing vehicles to screwdrivers, nuts and bolts, coolants, engine oils, and more.
Other Inventory Types
Other than the above key inventory types, here are some more types:
Service inventory
It’s like MRO inventory but involves human aid in the final good. Since the manufacturing process involves not only materials and machines but also humans to operate the machines and work assembly lines and other processes, it involves significant expenses. Example: Employees like engineers, technicians, machine operators, office staff, contractors, and others.
Buffer inventory/safety stock
In manufacturing and trading, the market frequently fluctuates. This can negatively impact the production process and sales. Buffer inventory can help in such scenarios. It includes items stored in a factory’s warehouse to compensate for unexpected shocks, such as a sudden rise in customer demand, labor strikes, transport delays, etc. Example: A store in a cyclone-prone region can store home supplies in the expected months to address a sudden rise in demand.
Decoupled Inventory
The extra items kept at every production line station can be called decoupled inventory. This helps prevent the work from getting stopped and ensures continuous work with all the things available that are needed for the process. It’s useful for companies manufacturing only goods and if the parts of a line have different working speeds. Example: The store manager of a computer manufacturing company will keep some parts aside in each step of the manufacturing process to ensure nothing can stop production. So, even after a part is missing, the decoupled inventory can be used here.
Cycle Inventory
Cycle inventory includes items ordered regularly in lots so that the storage cost can be minimized and the right volume of inventory is stocked. These materials are a part of some usual process or directly utilized in production. Example: A cloth manufacturing company regularly orders cotton in huge lots. So, if it runs out of cotton, the new refill will arrive and compensate for the needs while acquiring the dedicated space for storage.
Transit Inventory
These are items such as raw materials that a company moves from location to location by railway. These can also be finished goods that a company transports by truck to a store. Example: An eCommerce store orders 100 shirts and pays for them, and they are still in transit to reach the store from the supplier’s location.
Theoretical Inventory
Theoretical inventory or book inventory is the minimum stock an organization requires to complete a given process while eliminating the waiting time. It’s widely used in the food and manufacturing industries. Example: A jewelry-making brand spends 20% on raw materials but finds 23% is the real spend. Here, 3% is the theoretical inventory that was wasted.
Excess inventory
Excess or obsolete inventory is unused or unsold raw materials or goods that a business doesn’t expect to sell or use. However, it still pays for its storage. Example: A company has manufactured 2,000 pairs of shoes for the Black Friday Sale but could only sell 1,800 of them. Black Friday is over, and the craze for this has lowered. So, the brand has to sell them for a discounted price or keep them in the warehouse and still pay for them. Now that you know different inventory types and examples of each, you can pick the best inventory type for your business. So, once you have chosen the most suitable type of inventory for your business, another question arises – how to track and manage the inventory?
How Can Sortly Help?
Sortly will help you track, manage, and update your inventory and assets, no matter your type of inventory. And if you are a small business, it’s one of the best inventory management software in the market. Some of its features include:
End-to-end inventory management irrespective of your business typeTrack items through barcodes or QR and update themSet up alerts automatically to track important dates and stock levels and make the best decisionsYou can manage your inventory wherever and whenever you want using any device, be it a desktop, laptop, tablet, or smartphone.Grant access to different users and securely manage the permission levelsTrack the logs to understand who’s doing what and bypass security risksCreate custom PDF and CSV reports featuring activities and statuses.
Pricing: Sortly has a free version that you can try. It’s best for small startups and individuals. It offers one license, custom field, and 100 entries with email support and the Help Center. Sortly’s paid plans start at $29/month and are best for small businesses. It offers three licenses, ten custom fields, unlimited QR code label generation, and 2000 entries with email support and the Help Center.
Conclusion
Inventory is the asset that includes all the goods and items a company needs to produce the final product. Knowing about different types of inventory will help you understand the differences and pick the most suitable type for your business. Inventory management is a crucial part of your business, whether you have a small-scale business or a big enterprise for manufacturing. Moreover, optimizing your inventory is crucial to ensure you don’t run low on stocks or exceed them. You can use inventory management software to track, manage, update your inventory, and keep increasing revenue.
