Types of inventory — definitions, examples, and how to get started
Inventory management can feel like a daunting task — especially when you’re dealing with multiple categories of inventory. Understanding the types of inventory and how to keep track of them all is key to simplifying your business processes and keeping things running smoothly. In this post, you’ll learn about the four main types of inventory, how to manage your stock better, and additional types of inventory you may need to consider.
This post will cover:
- What is inventory?
- The four types of inventory
- Additional types of inventory
- Managing your own inventory
What is inventory?
Inventory refers to the goods, merchandise, or materials that a business holds for the purpose of resale or production. These can include finished products, raw materials, work-in-progress items, and supplies to keep a business running smoothly.
Let’s say you own a retail store that sells clothing. Your inventory would consist of all the clothing items you have in stock — including shirts, pants, dresses, and accessories. You would need to keep track of the quantity of each item you have on hand, the cost of each item, and the retail price you sell them for. There are several ways you can keep track of that information using spreadsheets or inventory management software.
This information helps you determine when to reorder items, how much to order, and at what price to sell them. If you have too much inventory, you risk using capital and space that could have been used for other purposes. Having too little inventory, on the other hand, could lead to lost sales or dissatisfied customers. Effective inventory management helps find the right balance between these two extremes to ensure your store has enough inventory to meet customer demand without overstocking or understocking.
Inventory management involves ordering, storing, tracking, and selling or using these items in a way that maximizes efficiency and profitability for the business. Having an effective inventory management system is essential for making sure your business has the right amount of inventory on hand to meet customer demand while avoiding overstocking or stock shortages that can lead to financial losses.
The four types of inventory
Now that you have a better understanding of what inventory is and why managing it properly matters, let’s take a closer look at the different categories of inventory. The four primary types of inventory are raw materials, work-in-progress items, finished goods, and supplies. By understanding these four types of inventory, companies can more effectively manage their inventory levels and optimize their operations.
Raw materials are the basic materials that a company uses to produce its products. For example, a furniture manufacturer would have a raw materials inventory of wood, screws, and upholstery fabric.
There are two types of raw materials that businesses may use:
- Direct materials. These are the items used directly in creating finished products. For example, this may be thread used to construct a shirt.
- Indirect materials. These are items that may be used in the production process but don’t make their way into the final product. For example, this could be disposable gloves or tape used in manufacturing a product.
Work-in-progress inventory includes items that are in the process of being manufactured or assembled. This inventory includes raw materials that are in production when the accounting period ends. WIP inventory would include the materials used in manufacturing furniture if it has entered the production process — so it’s no longer in its raw form.
Finished goods inventory includes completed products that are ready for sale or distribution. For example, the finished pieces of furniture — like chairs, desks, and dressers — would be considered finished goods inventory.
Maintenance, repair, and operating (MRO) supplies
Maintenance, repair, and operating inventory includes the materials and supplies needed to keep a business running smoothly. For example, a furniture manufacturer would consider tools, safety equipment, and cleaning supplies as MRO inventory.
Additional types of inventory
We’ve covered the main types of inventory that most businesses recognize and keep track of. But here are a few additional kinds of inventory that could be important to some other businesses:
- Packing material. This category includes materials used for packing and protecting products for shipping or storage. While packing material may be included in MRO inventory, it can sometimes be a separate category.
- Ready for sale. This is any inventory that is in stock and ready to be sold. For example, this could be a shirt hanging on the rack in a retail store that’s ready for a customer to purchase.
- Allocated. Allocated inventory is anything that’s currently in stock but is set aside for an order. This could be an online order that the customer is coming to pick up in store or that needs to be shipped to a customer.
- In-transit. In-transit inventory includes anything that is currently being delivered or moved from one location to another. This could be inventory moving from a warehouse to a retail store or an order that is being shipped from the warehouse to a customer.
- Seasonal. Seasonal inventory is held to meet expected demand. For example, a retailer may order additional goods to meet customer needs on Black Friday.
- Safety. Safety inventory is a backup supply used to cover unexpected demand or supply issues.
Managing your own inventory
Understanding the main types of inventory will help you better manage your stock, mitigate variances, and make sure you always have enough supply to meet demand. The best way to get started categorizing your own inventory is to take one product you sell and start to detail everything that goes into making it from start to finish — as this will allow you to identify any inefficiencies in your inventory management system or production process.
Adobe Commerce offers an inventory management solution that allows you to track all your supplies throughout the production process. Take a product tour to find out how Commerce can help you manage every aspect of your business’s inventory.