Businesses need various factors to work well, and one of the most crucial is keeping customers happy.
After all, without customers, there’s no business!
But how do companies attract and retain customers?
By managing their available goods through different types of inventory.
Inventory is at the core of every retail brand. It includes three crucial parts: raw materials, work-in-progress, and finished products that boost sales and generate income. Yet, mastering warehouse and inventory management is challenging.
Effectively managing the wide range of inventory types requires a strategic approach for each. In this blog post, we explore different inventory categories and reveal effective techniques for managing each one.
Let’s get started!
Inventory: What is it?
An organization’s inventory, often seen as the bridge between production and order completion, plays a crucial role in all its business activities, often serving as a key revenue generator. While inventory can be categorized and defined in various ways, it’s the management of it that significantly impacts an organization’s ability to fulfill orders efficiently.
Inventory refers to the supply of goods or products that a business holds. These items are kept by the business to meet customer demand and achieve its goals. If the inventory isn’t managed correctly, the business may not have an accurate count of its products or services available, leading to potential unpreparedness or inability to fulfill orders.
Imagine you’re running a retail shop, and a customer walks in searching for new jeans. If you’re out of stock because you haven’t replenished them since the day before, that customer might choose to shop elsewhere. It’s understandable.
What Are The Types Of Inventory?
Inventory can be sorted in various ways depending on how you look at it. This means that some items might fit into more than one category.
Here’s a brief overview of the most common types of inventory you’ll come across in a product-based business.
1. Raw Materials
Raw materials are the materials a company uses to make and complete products. Once the product is complete, you usually can’t tell what the raw materials were at first. Raw materials inventory is crucial for online businesses that make their own products.
For example:
The wood you buy from the supplier to create furniture is your raw material if you sell wooden furniture.
2. Work-in-progress (WIP)
Work-in-progress or work-in-process inventory refers to the inventory that is currently being worked on during the production process. This inventory comprises products that have been partly manufactured but are not yet completed for sale.
Work-in-progress inventory is crucial for online businesses that produce their own goods, as it enables them to monitor the advancement of their production process.
For example:
In a furniture business, all the unfinished parts before the assembly of the final product are considered work-in-progress inventory.
3. Finished Goods
Finished goods inventory consists of products that are prepared for sale to customers.
This inventory encompasses items that have been completely manufactured, packaged, and are all set for shipment. Among the different types of inventory, finished goods inventory holds the utmost significance for e-commerce businesses because it directly contributes to revenue generation.
For example:
For a bread-making company, the packaged bread that’s ready to be sold represents their finished product. Similarly, in the furniture business, the table that has been assembled, painted, and prepared for sale serves as the finished product.
4. MRO Inventory ( Maintenance, Repair, and Operating Supplies)
Maintenance, repair, and operating inventory encompasses the materials and supplies necessary to maintain the smooth operation of a business.
For example:
A furniture manufacturer would regard tools, safety gear, and cleaning supplies as part of their MRO inventory.
5. Packing and Packaging Materials
Packing materials come in three varieties.
- Primary Packing
- Secondary Packing
- Tertiary Packing
Primary packing shields the product and ensures its usability. Secondary packing involves enclosing the finished product and may include labels or SKU details. Tertiary packing involves bulk packaging designed for transportation purposes.
For example:
In a seed company, the primary packing material is the sealed bag containing items such as flax seeds. Placing these bags into a box for transportation and storage constitutes secondary packing. Tertiary packing involves using shrink wrap to package pallets of product cases for shipping.
6. Safety Stock and Anticipation Stock
Safety stock is like a backup stash of products a company keeps just in case something unexpected happens, like a sudden increase in demand or a delay in deliveries. While it costs money to store this extra inventory, it’s worth it because it ensures that customers are happy and orders can still be fulfilled despite surprises.
Anticipation stock, on the other hand, is like stocking up on materials or products ahead of time based on what’s expected to happen with sales and production. For example, if the price of key material is going up or if there’s a busy season coming up, a company might buy extra stock in advance to avoid running out later.
For example:
In a remote area, a vet prepares by storing disinfectant and treats for dogs and cats, ensuring they have enough supplies in case the highway gets flooded during the spring thaw, causing delays in delivery trucks.
An event organizer takes advantage of discounts to purchase spools of ribbon and floral tablecloths ahead of the June wedding season, anticipating the increased demand during that time.
7. Decoupling Inventory
Decoupling inventory is like having extra materials or work-in-progress items stored at different points along a production line to avoid any disruptions in work.
While safety stock is something all companies might have, decoupling inventory is specifically important for manufacturers, especially if different parts of the production line operate at varying speeds.
For example:
In a bakery, the decorators have a supply of sugar roses on hand to decorate wedding cakes. This ensures that even if the delivery of frosting mix for the decoration team is delayed, the decorators can continue their work.
8. Service Inventory
Service inventory is a term used in accounting that means how much work a company can do during a certain time.
For example:
A cafe operates for 12 hours daily, offering 10 tables where customers usually spend an hour enjoying their meal. Consequently, its service inventory amounts to 120 meals per day.
9. Transit Inventory
Transit inventory, sometimes called pipeline inventory, refers to stock that is currently in motion between different places like the manufacturer, warehouses, and distribution centers.
For example:
If an art store orders and pays for 40 tins of a popular pencil set, and those tins are currently on their way from the supplier to the store, they are considered to be in transit.
10. Excess Inventory
Also referred to as obsolete inventory, excess inventory represents products or raw materials that a company hasn’t been able to sell or use and doesn’t anticipate doing so in the future. However, the company still incurs costs to store these items.
For example:
Consider a shampoo company that manufactures 50,000 shampoo bottles branded for the summer Olympics. Despite producing this quantity, only 45,000 are sold, and now that the Olympics are over, there’s no demand for the remaining inventory. As a result, the company is left with excess inventory that it either needs to discount heavily or dispose of.
Now that we know the types of inventory in supply chain management, let’s discover a few tips to manage your inventory.
4 Tips To Manage Your Inventory Better
There is a popular saying in business-
“If you cannot measure it, you cannot manage it”
This applies particularly to the different methods of inventory management. Here’s how you can manage your inventory:
- Maintain Safety Stock
Also known as buffer stock, these are extra products kept on hand to prevent companies from running out of materials or popular items. When companies use up their planned inventory, safety stock acts as a backup in case demand suddenly increases.
- Adopt a Cloud-based Inventory Management System
Cloud-based inventory management programs provide real-time information about the location of every product and SKU worldwide. This data helps companies stay updated, responsive, and adaptable.
- Implement a Cycle Counting Program
Cycle counting goes beyond the warehouse, ensuring accurate stock levels and keeping customers satisfied while saving businesses time and money.
- Utilize Batch/Lot Tracking
Keep detailed records for each batch or lot of a product. This tracking method is essential for companies with perishable goods, providing information like expiration dates. Even for non-perishable items, batch/lot tracking helps understand product costs and shelf life.
FAQs: Understanding and Managing Different Inventory Types
What does inventory encompass?
Inventory consists of both the raw materials needed for manufacturing goods and the finished products available for sale.
What is the importance of inventory control in a business?
By implementing inventory control, companies can maximize their profits. It allows them to minimize the money tied up in stock, helping them manage their assets, accounts, and financial records better. This is crucial because it prevents unnecessary expenses caused by buying too much inventory or purchasing items that aren’t needed, instead focusing on what’s essential.
What are some other inventory control methods available?
There are several popular inventory control techniques for businesses to consider, such as ABC analysis, Just In Time (JIT), the Fast, Slow, and Non-Moving (FSN) approach, and the Economic Order Quantity (EOQ).
Conclusion
Knowing the different types of inventory is key to running your business smoothly, keeping track of your stock, and ensuring you have enough to meet customer needs. A good way to begin organizing your inventory is by picking one product you sell and listing out all the things needed to make it, step by step. This helps you spot any issues in how you manage your stock or produce your goods, so you can fix them and improve your processes.
If you need help with managing your inventory, don’t hesitate to reach out to us. Let’s talk about how we can help your company grow.
