Types of Inventory

What Are the Types of Inventory?

By Team TranZact | Published on Feb 16, 2023

Understanding different types of inventory is essential for effectively managing a company's resources, minimizing waste, reducing carrying costs, and increasing customer satisfaction. An effective inventory management system that handles diverse types of inventory can help a company better track inventory levels, forecast future demand, and make informed decisions on purchasing and production.

By taking the time to understand different types of inventory and implementing an effective inventory management system, your business can improve its operations, increase profitability, and achieve long-term success. Let’s dive into this topic further:

TranZact - Best Inventory Management Software

What Is Inventory?

Inventory is a term used to describe the items that a company holds for sale, manufacturing, or any other purpose. In addition to stocking up the inventory, it is important to focus on inventory management, which eventually helps streamline the supply chain.

Inventory refers to the stock of raw materials, semi-finished goods, or finished products that a company retains to meet customer demands. Management of inventory is a crucial part of any business as it helps companies keep track of the items they have in stock, avoid stock shortages, and manage their flow of goods.

Types of Inventory

There are several types of inventory in manufacturing, each serving a unique purpose within a business. The common types of inventory are as follows:

Raw Materials Inventory

Raw materials inventory is the collection of raw materials and components that a company holds for production. This type of inventory is used in the early stages of production and is the starting point for creating finished goods. Raw materials inventory includes everything from raw materials like wood or metal to parts and components like screws or circuits.

Work-in-Progress Inventory

Work-in-progress (WIP) inventory refers to the unfinished products that are in the process of being manufactured. Work-in-progress inventory, also known as ‘in-process inventory’, provides an accurate picture of the ongoing production process. It is important to manage WIP inventory effectively to avoid production bottlenecks and ensure a smooth production process flow. It includes semi-finished goods, components, assemblies, and others.

MRO inventory

MRO or maintenance, repair, and operations inventory, refers to the collection of items used to maintain and repair a company's production equipment and facilities. This inventory can include everything from replacement parts and tools to cleaning supplies and safety equipment.

MRO inventory is an important component of a business, as it helps companies keep their production equipment and facilities running smoothly and efficiently. It may include oil, lubricants, tools, screws, nuts, and bolts.

Safety Stock Inventory

This refers to a company's extra inventory to ensure it can meet customer demand during periods of high demand or unexpected events. This type of inventory is important for companies operating in industries with fluctuating demand or relying on just-in-time (JIT) inventory management systems.

Safety stock inventory is typically stored in a warehouse or distribution center, and inventory management systems and software closely monitor it. For example, if you sell 50 products every day, and you want to keep a buffer stock for 4 days, then the safety stock units calculation would be 50 X 4= 200 units.

Obsolete Inventory

Obsolete inventory refers to items that are no longer in demand or have been discontinued. This type of inventory can become a problem for businesses if it is not managed effectively, as it ties up valuable storage space and financial resources.

In some cases, obsolete inventory can become a liability if it cannot be sold or disposed of properly. To manage obsolete inventory effectively, businesses should have a plan for its disposal. Some options to do so are selling it as scrap, returning it to suppliers, or donating it to charity.

Cycle Count Inventory

This is a type of inventory or control method where businesses periodically count a portion of their inventory to ensure that their records are accurate. This type of inventory helps businesses identify and resolve discrepancies in their inventory records.

It can help prevent stock shortages and overstocking. Cycle count inventory is typically performed by rotating different sections of the inventory counted each time.

Pipeline Stock

It consists of goods that have not yet been sold but are not under the jurisdiction of the company. It is also termed as ‘in transit’ since this inventory is in the transportation network.

Anticipation Inventory

This type of inventory is kept on hand to meet upcoming demand. Sometimes the company may hold volumes of inventory because they anticipate an event that might take place. For example, stocking up on a certain item due to a price hike or transportation strike.

Finished Goods Types of Inventory

Finished goods inventory refers to the products that have been completely manufactured and are ready for sale. This type of inventory is the result of the production process and is often the most valuable type of inventory for a company, as it has gone through all the cycles of production to reach its final stage.

Effective management of finished goods inventory is crucial for ensuring that the right products are available for sale at the right time. It also helps to minimize the risk of obsolescence and ensures that the company can meet customer demand on a timely basis. Finished goods inventory can be further divided into two subcategories:

Consumer Goods Inventory

Consumer goods, in general, refer to the products that are sold in a direct way to consumers. This inventory includes items, such as clothing, electronics, and household goods. Retailers and wholesalers typically manage consumer goods inventory.

Industrial Goods Inventory

The term ‘industrial goods inventory’ refers to the materials and supplies used by other companies to manufacture their products. This inventory includes items, such as raw materials, machinery, and equipment. Manufacturers and suppliers typically manage industrial goods inventory.

Adopt a Software to Manage All Types of Inventory in Your Business

It is vital for companies to effectively manage different types of inventory as it plays a crucial role in ensuring business success. Proper inventory management ensures that the right amount of inventory is always available to meet customer demand and improve customer satisfaction.

A well-managed inventory system with TranZact, which is an advanced cloud-based software, can positively impact the bottom line of your manufacturing business by increasing efficiency, minimizing costs, and providing enhanced business value.

FAQs on Types of Inventory

1. What is inventory management?

Inventory management is the process that encompasses supervision and monitoring of the flow of goods into and out of a company's inventory. It involves monitoring inventory levels, ordering new inventory when needed, and tracking the movement of goods through the supply chain.

2. What is an inventory control system?

An inventory control system is software that helps companies maintain effective supervision over their inventory. It provides real-time information about inventory levels and helps companies decide when to order new inventory.

3. What is ABC inventory analysis?

ABC inventory analysis is a method used by companies to categorize their inventory into three categories based on the value of each item. Category A items are the most valuable, category B items are less valuable, and category C items are the least valuable. Companies use this information to prioritize their inventory management efforts and allocate resources appropriately.

4. What is the role of inventory management systems in inventory control?

Inventory management systems play a crucial role in inventory control by providing real-time visibility into inventory levels, demand patterns, and supplier information. These systems can automate inventory management from tracking and monitoring to ordering and replenishing. They can help organizations improve their inventory accuracy, reduce waste, and minimize the risk of stockouts.

5. What are the benefits of using inventory management software for inventory control?

Inventory management software offers numerous benefits for inventory control including increased efficiency and accuracy, improved visibility into inventory levels, reduced stockout risk, and more streamlined processes. With inventory management software, organizations can automate key inventory management tasks, such as order tracking and monitoring, inventory analysis, and stock replenishment. This ultimately helps businesses to improve their overall inventory management performance.

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TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.