Inventory can be broadly defined as a detailed list of the objects or products that a business owns. It can also include items that are on order or in transit. Inventory is an important part of every company, as it serves as the foundation for day-to-day operations and future growth. Determining the type of inventory your business should maintain is essential for success.
By understanding the differences between these types of inventory, you can make an informed choice about what is best for your company.
Understanding The Types Of Inventory
Inventory included everything a business uses to sell or manufacture things, from completed products and components to raw materials. You perform inventory management as a business leader to make sure that you have adequate merchandise on hand and to recognize whenever there is a shortfall.
The inventory of a company, which is typically defined as the stage between manufacturing and fulfilling order, is crucial to all of its company activities since it is often the major source of income generating. While inventory can be characterized and categorized in a variety of ways, the main aim of the company has a direct impact on a firm’s order fulfillment capabilities.
Inventory comes with 3 main types of inventory including raw materials, work-in-progress, and finished goods. However, other additional types of inventory also play important roles in the business that you should not overlook. Let’s check out the below!
List Of The 10 Types Of Inventory
A corporation may encounter various distinct sorts of inventory while handling and regulating its inventory. All are essential to comprehend in the quest for efficient inventory management.
Raw materials are any objects utilized in the production of completed products, as well as the various components that are included in them. These items can be manufactured or sourced by the company itself, or they can be acquired from a provider. Raw material inventory is classified into two types, including direct and indirect raw materials.
- Indirect raw materials: These are the raw components utilized during manufacture but not included in the completed product. Consider batteries, cleaning supplies, lubricants, and so forth.
- Direct raw materials: These are the raw components that go into making the product. Consider coffee beans in ground coffee or wax in a candle as examples.
Assessing raw materials inventory not only provides you with an accurate view of your present assets but also allows you to plan ahead of time. You may also use it to determine your raw material turnover rate. This is a ratio that indicates how rapidly raw inventory is utilized and replenished. It measures the accuracy of current sale forecasts and the resulting purchase approaches.
Like raw materials, components are the materials that a corporation utilizes to construct and finish things, besides that they, like screws, stay recognizable after the products have been finished.
Work-in-progress (WIP) inventory.
Work-in-process (WIP) inventory is used by shops that make their own goods. These are incomplete goods or parts that are presently in manufacturing but are not yet available for purchase. Take an example of the furniture company, it can be pieces that have been assembled but have not yet been painted or shipped.
Overhead expenditures and labor connected with production are typically included in work-in-process items. WIP inventory is a firm’s unfinished items that are going to be finished and sold. A WIP is any raw material that has already been processed by human effort but is still not a completed product.
Employing a formula to determine WIP goods yields an estimate. It cannot take into account several factors, including outdated items, waste, scrap, spoilage, and manufacturing slowdowns or stoppages.
Managing WIP is critical for tracking and managing manufacturing capacity and inventory management. Allowing WIP inventory to accumulate over time is not ideal unless it is part of a wider safety inventory or buffer stock plan. It should generally be maintained as simple and consistent.
Since consistent WIP figures are a key business value indication. They have an impact on investments, loan approvals, and future approaches. WIP, unlike raw materials or completed items, is not a liquid. Businesses with huge ongoing projects are holding so much cash locked in stock that relatively few are ready to consider it collateral.
Finished products are completed goods that are ready to be sold. These might have been made by the company or obtained as full, finished goods from a source. Most shops will buy full, finished items from a source or have custom products made for them by a third party. Therefore, finished items are frequently one of the few categories of inventory that must be managed under retail inventory management.
Companies calculate their finished stock by using finished product figures from the end accounting period. Finally, finished items are recorded on the balance sheet as a current assets. This balance sheet is used by management and investors to assess cash flow and stock availability. Both are crucial indicators of a company’s financial health. Calculating the turnover rate is another advantage of having completed product quantities. This metric indicates how rapidly a company’s finished goods are sold and returned during a certain period.
Maintenance, Repair & Operations (MRO) Goods.
MRO which is the abbreviation of Maintenance, Repair, and Operations goods are goods that are utilized in the manufacturing of products but do not directly comprise any part of the completed product. It can include things like tools for manufacture and repair, uniforms and safety equipment, machinery, computer systems, cleaning supplies, batteries, and all products consumed or wasted throughout the manufacturing process.
Small stock items like these may appear insignificant. However, MRO is inventory that must be acquired from a source, housed someplace, and recorded in financial records.
Surprisingly, despite the importance of MRO goods, managing inventory is frequently overlooked since they are not directly related to income. As a result, they are not submitted to the same stringent criteria as other inventory categories. This is mostly due to the slow turnover rate. There is also a tradition of buying MRO supplies on an as-needed approach. Furthermore, firms do not want inventory management activities to distract maintenance staff. However, many teams have concealed covert stockpiles of MRO goods. It is not unusual for a group to seek safety or repair supplies when another group already has a stockpile. However, it should not be dismissed. Those that do not overlook it are doing so in the two following ways.
- Internal management: It is the process through which a manufacturer monitors, replaces, and improves its MRO stock in-house. They do everything on their own.
- Hybrid management: When some MRO items are managed by a third party, this is referred to as hybrid management. This is frequently in the form of a VMI contract and provides numerous same advantages to the producer.
Packing materials are those materials used to package and protect items while they are in storing or shipped to buyers. This is especially crucial for e-commerce sellers. And may include items such as bubble wrap, packing chips, padding, and boxes. When it comes to inventory management, many businesses overlook packing materials. However, these things must be utilized and maintained on a regular basis, thus they must be included in overall inventory reports and accountancy.
Safety Stock and Anticipation Stock
Safety stock is extra inventory stored on hand in the event of unforeseeable supplier disruptions. It prevents running out of stock or bottlenecks in the inventory of raw materials, finished goods, or packing. Stockouts result in a direct loss of sales. They also harm the company’s brand engagement by lowering the quality of the consumer experience.
Unlike safety stock, anticipation stock deals in the foreseeable cases. Extra inventory is maintained on hand on a regular or seasonal basis to allow for known swings in demand. Black Friday is a wonderful illustration of this since many firms calculate excess inventory for holiday shopping.
Extra products or WIP held at every manufacturing line station to avoid shutdowns are referred to as decoupling inventory. While all businesses may maintain safety stock, decoupling inventory is beneficial if various segments of the line operate at different paces and are only applicable to businesses that make things.
It is the inventory that a company needs to keep on hand in order to fulfill regular, predictable demand and supply. This is in contrast to hedging against unforeseeable fluctuations using safety stocks.
Service inventory is a notion in management accounting that relates to how much service a company can deliver in a particular period.
Transit inventory which is usually known as pipeline inventory includes every product in the supply chain that is currently in transit. Consider manufacturing organizations with sophisticated foreign shipments or merchants with several warehouses distributing things. In both circumstances, there are always a significant number of goods that are not in anyone’s physical ownership but are being transferred and must be traced.
Who holds transit inventory varies based on the agreements between sellers and buyers. If legal custody passes to the customer when the merchandise is loaded onto the transport carrier, this is referred to freight-on-board shipment stage.
Inventory optimization is dependent on precise calculations. There is no exception to this kind of inventory. Once your pipeline inventory is appropriately recorded on your balance sheet, it reveals how much money you have locked up in stock. In addition to overhead expenditures such as transportation and storage. It is a particularly significant statistic for organizations in complicated industries.
It is often known as book inventory which is the smallest quantity of stock required by a corporation to perform an operation without waiting. It is largely utilized in manufacturing and the food business. The real versus theoretical formula is used to calculate it.
Excess inventory or obsolete inventory refers to unsold or unused commodities or raw materials that a corporation does not anticipate utilizing or selling but has to pay to store this inventory.
Examples Of Types Of Inventory
Real examples can help these types of inventory become more understandable. The example below shows how various forms of inventories function in retail and manufacturing firms.
For example, fabric, dyes, thread, and print designs are all components of a fashion manufacturing firm.
Assuming luxury gemstone watches are made by a watches company. To make a finished watch suitable for sale, staff put a watch into a velvet box with a preprinted card. The final good’s COGS comprises both its packing and the labor required to create the item.
A laptop is made up of a casing, a printed circuit board, and many other components. WIP refers to the process of combining the components at a dedicated workstation.
From copy papers, printer toner, and folders to gloves, brooms, and glass cleaners are considered the MRO goods of an apartment community.
The zipped bag, for example, containing snacks is the principal packaging material at a food firm. Secondary packaging consists of placing the snack zipped bags in a carton box for transporting and storing. Tertiary packaging is the bubble wrap necessary to carry product boxes on pallets.
A doctor in a remote village stores up on medicines to fulfill patients’ demands if the roadway floods during the rainy season, causing supply trucks to be delayed.
Halloween is coming and in preparation for the Halloween holiday, an event planner purchases inexpensive Halloween decorations like pumpkins, masks, costumes, etc.
Imagine that in a bakery, the decoration makers maintain a supply of sugar flowers on hand to decorate cakes, ensuring that even if the decoration team’s supply of decorating mix is delayed, these bakers may continue to work. Since these flowers are an integral component of the cake’s decoration, the baker would be unable to present a completed cake once they ran out of the flowers.
For example, the fresh replenishment order arrives when a cafe store’s final 200 straws are used. The straws neatly fit into the designated storage place.
Let’s look at the cafe store example, a cafe store poems 12 hours a day, it has 20 tables, and customers typically spend an average of two hours having their drinks. As a result, its service inventory is 240 servings every day. Another example is a hotel with 20 rooms that has a weekly service inventory of 140 one-night bookings.
The theoretical stock in the stock records or systems can sometimes vary from the real inventory whenever a count is performed.
For example, a trendy drawing set is ordered and paid for by an art supply store. The boxes are on their way from the supplier and so in transit.
A skincare firm makes 100,000 unique cleanser packages labeled for the environmental protection campaign, but only sells 50,000 of them before the campaign ends. After that, nobody wants to buy the products, they have to discount or destroy them.
So, as you can see, there are many different types of inventory, each with its own usage and pros and cons. The type of inventory that is best for your company will depend on your specific needs and goals. By taking the time to understand the different options, you can make an informed decision that will help your business succeed.