15 Types of Inventory: Everything you Need to Know in 2023
In this article, we highlight the 15 main types of inventory and how businesses use them to manage stock effectively, with real-world examples. Read on to learn more.
Different Types of Inventory
In business operations, companies typically categorize inventory into five primary types:
1. Raw Materials
The raw materials are the basic components that are transformed into finished goods. They are the essential items required at the start of the production process, without which the final product cannot be made.
Regularly monitoring your raw materials helps in forecasting needs, negotiating bulk purchase deals, and ensuring a continuous production flow without costly interruptions.
Example: For instance, a chocolate factory might have raw cocoa, sugar, and milk as part of its raw material inventory.
2. Work-in-Progress (WIP)
WIP inventory pertains to products that are in the process of being manufactured but are not yet complete. These items have commenced the manufacturing phase but haven't reached the final stage.
WIP inventory provides insights into the efficiency of the production process. By tracking the amount of WIP inventory, businesses can identify bottlenecks or inefficiencies in their manufacturing line.
Example: Consider a car manufacturing plant producing 100 cars, with 30 of them currently in assembly. These 30 cars represent the WIP inventory.
3. Finished Goods
The finished goods are the products that are fully manufactured, ready for sale, and need no further processing. They are the end result of the production process, awaiting distribution to retailers or direct consumers.
This inventory is vital for meeting consumer demands. By analyzing sales trends and seasonal variations, businesses can predict how much finished stock they should have on hand at any given time.
Example:Elegant Footwear might have a stock of 5,000 pairs of shoes ready to be shipped to retailers.
4. MRO (Maintenance, Repair, and Operations) Inventory
MRO inventory refers to the items used in the production process but are not part of the final product. They assist in ensuring the smooth operation and maintenance of the production line, ensuring continuity and efficiency.
The efficient management of MRO inventory ensures that production is never halted due to lack of maintenance materials or tools. This inventory type supports the core production process, even if it's not directly involved in it.
Example: A bakery, Bread & Beyond, might have an MRO inventory that includes oven mitts, baking trays, and cleaning supplies.
5. Safety Stock
The safety stock serves as a buffer against unexpected spikes in demand or disruptions in supply. It's a contingency measure to prevent stockouts and ensure uninterrupted supply to customers.
Example: Natural Beauty Cosmetics might keep an extra 2,000 units of their best-selling lipstick shade as safety stock to ensure they can meet sudden demand surges.
6. Consignment Inventory
Consignment inventory allows businesses to extend their product reach by placing items in retail spaces without committing to a sale. This strategy helps gauge customer interest and market demand, as the products remain the property of the supplier until they're sold.
Example: A local artist places their handmade jewelry in City Boutique without an upfront sale. Only when a customer purchases a piece does the artist receive payment and the boutique takes a commission.
7. Cycle Stock
Cycle stock is the primary inventory that businesses maintain to cater to their day-to-day customer demands. This portion of inventory is frequently replenished and "cycled" through, ensuring that products are always available for regular sales.
Example: A grocery store like Daily Fresh Mart replenishes its stock of fresh fruits every week, ensuring that customers always find fresh produce available.
8. Dead Stock
Dead stock represents items that, unfortunately, have become stagnant in inventory without showing sales movement. Businesses maintain these stocks unintentionally, and they are often remnants of over-anticipation of demand or changes in market trends.
Example:Tech Gears Shop bought an excess of a specific phone model, anticipating high demand. However, after a newer model was released, the older phones became dead stock, lying unsold.
9. Perishable Inventory
Businesses dealing in items with limited shelf lives, such as dairy products or certain medicines, manage perishable inventory. This inventory category requires vigilant turnover management to prevent losses due to spoilage.
Example:Baking Delight prepares fresh pastries every morning and aims to sell them the same day, as they can't be stored for extended periods.
10. In-Transit Inventory
In-transit inventory encompasses those goods that are currently between their point of origin and their intended destination. For businesses, these are products that have been ordered and are en route, highlighting the need for active logistical tracking.
Example:Fashionista Clothing is awaiting a shipment of summer dresses from its overseas manufacturer. Until it reaches the store, the dresses are considered in-transit inventory.
11. Dropshipping Inventory
Dropshipping inventory offers a unique business model where retailers act as sales facilitators. Instead of keeping stock, they rely on third-party suppliers to ship products directly to customers upon purchase, bridging the gap between supplier and end consumer.
Example:Home Decor Hub, for instance, sells unique lamps that are directly shipped by the manufacturer to the customer without the store ever physically stocking them.
12. Seasonal Inventory
Seasonal inventory is curated and maintained by businesses in anticipation of specific times of the year, like holiday seasons or events, when certain products see a surge in demand. This approach ensures that businesses can capitalize on periodic market demands effectively.
Example:Holiday Cheers Store stocks up on Christmas ornaments in November as they anticipate the festive shopping rush that occurs every December.
13. Anticipation Inventory
Anticipation inventory is stock accumulated in preparation for known demand spikes. Businesses use this inventory type to preemptively address expected increases in product demand, whether due to seasonal changes, promotional events, or market forecasts.
Example: Knowing there's a nationwide chocolate festival in July, Sweet Moments Chocolate Factory produces extra batches in June, anticipating a spike in sales.
14. Decoupling Inventory
Decoupling inventory acts as a buffer between different production stages, ensuring that a hiccup or delay in one stage doesn't halt the entire production process. It provides a cushion that enables various production components to operate seamlessly and independently.
Example:Drive Tech Autos stores extra tires and engines, ensuring that a delay in one part's delivery doesn't stop the entire assembly line.
15. Service Parts Inventory
Service parts inventory consists of replacement or spare parts that businesses keep on hand to ensure their products' longevity and functionality. This inventory type is vital for businesses that offer warranties or maintenance services, ensuring they can promptly address any product issues.
Example: Electric Goods Corp. maintains an inventory of replacement motors and belts to promptly service any customer complaints during the warranty period.
Understanding the different types of inventory is crucial for effective inventory management. We hope you now have a better understanding of the different types of inventory and what role they play in business operations.