There are several different types of inventory a company may come across when handling and controlling its stock. All of them are essential to understand on the path toward effective inventory management.
This post covers each of these types, so your business is better equipped to manage, plan and budget for stock going forward.
Basic types of inventory
There are five fundamental types of inventory when it comes to the products a company might sell.
These are:
- Raw materials.
- Work-in-progress (WIP) inventory.
- Finished goods.
- Maintenance, repair and operations (MRO) goods.
- Packaging materials.
It’s also useful to break “finished goods” down into another five subcategories, which we’ll look at further down. That gives you 10 broad types of inventory retailers should be aware of.
Let’s explore each type below:
- Raw materials
Raw materials are any items used to make finished products, or the individual components that go into them. These can be produced or sourced by a company itself, or bought from a supplier.
For example:
A company that makes its own custom furniture might buy materials from a supplier, while a small business supplying specialty herbs may actually grow them itself.
Either way, raw materials are still considered a type of inventory. And so they should be managed, stored and accounted for accordingly.
- Work-in-progress (WIP) inventory
Work-in-progress (WIP) inventory again refers to retailers who manufacture their own products. These are unfinished items or components currently in production, but not yet ready for sale.
For our furniture business, these might be products that have been assembled but not yet painted or packed.
- Finished goods
Finished goods are complete products, ready for sale. These may have been manufactured by the company itself, or bought outright as a finished product from a supplier.
Most retailers will buy complete, finished products from a supplier, or commission a third party to manufacture custom products for them. As a result, finished goods are often (but not always) one of the only types of inventory that need handling within retail inventory management.
- Maintenance, repair and operations (MRO) goods
MRO goods are items used in the manufacturing of products, but which don’t directly form any part of a finished product.
This can include items such as:
- Production and repair tools.
- Uniforms and safety equipment.
- Cleaning supplies.
- Machinery.
- Batteries.
- Computer systems.
And all the items that are consumed or discarded during the production process.
Small types of inventory like this may seem trivial. But MRO is inventory that still has to be bought from a supplier, stored somewhere and accounted for in the financial records.
- Packaging materials
Packaging materials are everything used to package and protect products, whether during storage or during shipping to customers.
As such, this is particularly important for online retailers. And it can include things like:
- Bubble wrap.
- Filler.
- Packing slips.
- A range of boxes.
Many retailers don’t think about packaging materials when managing their inventory. But stocks of these items need to be used and replenished regularly, so it’s important to include them in overall inventory accounting and reporting.
Finished-goods inventory types
Within a retail context, it’s also useful to further subdivide finished goods into a few other inventory types. This gives the business far greater inventory visibility, allowing for better allocation and management.
- Ready for sale – Also known as “available inventory,” this is stock that has been manufactured/purchased and stored in the warehouse, ready for sale. It can be picked, packed and shipped without complications at any desired moment.
- Allocated – This is inventory that has been purchased by a customer and assigned to a sales order. As such, it is no longer eligible for sale and must be removed from the available inventory figure.
- In transit – This is unsold inventory currently on the move, for example the delivery of a purchase order in transit or the transfer of stock to another warehouse.
- Seasonal – Also known as “anticipation stock,” this is inventory that was manufactured or purchased specifically to cover a forecast increase in demand. For example, to cover Black Friday sales or your peak season.
- Safety – Acts as a buffer of stock to cover you in the event of unforeseen surges in demand or supply problems.
Knowing (and using) these different types of inventory is essential to good inventory management.
In the next chapter, we’ll get into the art and science of inventory forecasting. You may also be interested in reading about inventory tracking, stock control and inventory best practices.