Types of Inventory
There are several different types of inventory a company might come across while handling and controlling its stock. All are critical to understand in the pursuit of effective inventory management.
This chapter covers all these different types, so your business is best equipped to manage, plan and budget for stock going forward.
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Basic types of inventory
There are five fundamental types of inventory when it comes to the products a business might sell.
- Raw materials.
- Work-in-progress (WIP) inventory.
- Finished goods.
- Maintenance, repair & operations (MRO) goods.
- Packing materials.
It’s also useful to break ‘finished goods’ into a further five sub-categories, which we discuss later. This gives 10 overall types of inventory retailers should be aware of.
Let’s explore each type further below:
1) Raw materials
Raw materials are any items used to manufacture finished products, or the individual components that go into them. These can be produced or sourced by a business itself or purchased from a supplier.
A business that makes its own bespoke furniture may purchase materials from a supplier. While a small business supplying specialty herbs may actually grow these itself.
Either way, raw materials are still considered a type of inventory. And so must be managed, stored and accounted for accordingly.
2) Work-in-progress (WIP) inventory
Work-in-progress (WIP) inventory again refers to retailers that manufacture their own products. These are unfinished items or components currently in-production, but not yet ready for sale.
For our furniture business, this may be products that have been put together without yet being painted or packaged.
3) Finished goods
Finished goods are products that are complete and ready for sale. These may have been manufactured by the business itself, or purchased as a whole, finished product from a supplier.
Most retailers will either purchase whole, finished products from a supplier, or have custom products manufactured for them by a third-party. Finished goods are therefore often (but not always) one of the only types of inventory needing to be handled within retail inventory management.
4) Maintenance, repair & operations (MRO) goods
MRO goods are items used within the manufacture of products, but without directly making up any part of a finished product.
This can include items such as:
- Production & repair tools.
- Uniforms & safety equipment.
- Cleaning supplies.
- Computer systems.
And all items that are consumed or discarded during the production process.
Small types of inventory like this may seem menial. But MRO is inventory that still needs to be purchased from a supplier, stored somewhere and accounted for in financial records.
5) Packing materials
Packing materials are anything you use for packing and protecting goods – either while in storage, or during shipping to customers.
This is therefore particularly important for online retailers. And may include things like:
- Bubble wrap.
- Packing chips.
- A variety of boxes.
Many retailers don’t think about packing materials when managing their inventory. But stocks of these items need to be used and maintained regularly – and it’s therefore important to include them in overall inventory reporting and accounting.
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Finished good types of inventory
Within a retail context, it’s also useful to further subdivide finished goods into a few other types of inventory. This gives a business much greater inventory visibility, allowing for improved allocation and management.
|1. Ready for sale||Also known as ‘available inventory,’ this is stock that has been manufactured/purchased and put away in the warehouse ready for sale. It could be picked, packed and shipped without complication at any desired moment.|
|2. Allocated||This is inventory that has been bought by a customer and allocated to a sales order. It is therefore not eligible for sale again, and must be removed from the available inventory figure.|
|3. In-transit||This is unsold inventory that is currently on the move – e.g. a purchase order delivery in transit, or stock being moved to another warehouse.|
|4. Seasonal||Also known as ‘anticipation stock,’ this is inventory that has been manufactured or purchased to specifically cover a forecasted upturn in demand.For example, to cover Black Friday sales, or your peak season.|
|5. Safety||This acts as a buffer cushion of stock to cover you in the event of any unforeseen upturns in demand, or problems with supply.|
Knowing (and using) these different types of inventory is critical to good inventory management. In the next chapter, we’ll go into the art and science of inventory forecasting.