5 Types of Inventory You Need to Know
Inventory is the term used to describe the goods that a business owns or sells. Inventory can be classified into different types depending on the stage of production or the purpose of holding it. Knowing the types of inventory can help you manage your inventory more efficiently and optimize your cash flow. Here are five common types of inventory that you should be familiar with.
Key Takeaways
Inventory is the term used to describe the goods that a business owns or sells.
There are five common types of inventory: raw materials, work-in-progress, finished goods, merchandise, and MRO.
Inventory management is the process of planning, organizing, and controlling the inventory of a business.
Inventory management helps a business optimize its cash flow, reduce its storage costs, avoid stockouts or excess inventory, improve its customer service, and increase its profitability.
1. Raw Materials
Raw materials are the basic materials that are used to produce finished goods. They are the inputs that are transformed through various processes into outputs. For example, wood, metal, fabric, and paint are raw materials for furniture making. Raw materials are usually purchased from suppliers and stored in warehouses until they are needed for production. Raw materials inventory is the stock of raw materials that a business has on hand at any given time.
2. Work-in-Progress (WIP)
Work-in-progress (WIP) is the inventory of goods that are partially completed but not yet ready for sale. WIP represents the value of the labor, materials, and overheads that have been invested in the production process so far. For example, a car that has been assembled but not painted or tested is WIP inventory for an automobile manufacturer. WIP inventory is usually stored in the production facility until it is finished and moved to the finished goods inventory.
3. Finished Goods
Finished goods are the inventory of goods that have completed the production process and are ready for sale to customers. They are the final outputs of the production process that meet the quality standards and specifications of the business. For example, a sofa that has been upholstered, polished, and packaged is a finished good for a furniture maker. Finished goods inventory is the stock of finished goods that a business has on hand at any given time.
4. Merchandise
Merchandise is the inventory of goods that a business purchases from other businesses for resale to customers. Merchandise is also known as trading inventory or retail inventory. For example, a clothing store that buys clothes from wholesalers and sells them to customers is a merchandiser. Merchandise inventory is the stock of merchandise that a business has on hand at any given time.
5. Maintenance, Repair, and Operating Supplies (MRO)
Maintenance, repair, and operating supplies (MRO) are the inventory of goods that a business uses to support its operations but does not sell to customers. MRO includes items such as tools, equipment, spare parts, cleaning supplies, office supplies, and consumables. For example, a restaurant that uses knives, pots, pans, napkins, and salt is an MRO user. MRO inventory is the stock of MRO items that a business has on hand at any given time.
Tips
- Use an inventory management system or software to track your inventory levels, movements, and costs.
- Conduct regular physical counts or audits to verify your inventory records and identify any discrepancies or errors.
- Implement an inventory control method such as FIFO (first-in, first-out), LIFO (last-in, first-out), or weighted average to value your inventory and calculate your cost of goods sold.
- Apply an inventory optimization technique such as ABC analysis, EOQ (economic order quantity), or JIT (just-in-time) to determine how much and when to order or produce inventory.
- Categorize your inventory into different types and assign different priorities, policies, and procedures for each type.
Types of Inventory and Global Demand
Inventory is the term used to describe the goods that a company either uses in production or sells to customers. Inventory is a major asset on the balance sheet for most companies, and it serves as a primary source of revenue generation. However, inventory also involves costs and risks, such as storage, obsolescence, spoilage, theft, and depreciation. Therefore, inventory management is crucial for optimizing the balance between supply and demand.
There are different types of inventory, depending on the stage of production or the purpose of use. In this report, we will discuss four main types of inventory: raw materials, work-in-progress, finished goods, and maintenance, repair, and operating supplies. We will also analyze the global demand trends for each type of inventory in the context of the current economic and environmental challenges.
Raw Materials
Raw materials are the basic inputs that are used to produce finished goods. Examples of raw materials include metals, wood, chemicals, fabrics, grains, etc. Raw materials are usually purchased from suppliers and stored in warehouses until they are needed for production.
The global demand for raw materials depends on various factors, such as the level of industrial activity, consumer preferences, technological innovations, trade policies, environmental regulations, and geopolitical events. According to the World Bank, the demand for raw materials has been recovering from the sharp decline caused by the COVID-19 pandemic in 2020. However, the recovery has been uneven across different commodities and regions. For instance, the demand for metals has been boosted by the green transition and infrastructure spending in some countries, while the demand for agricultural products has been affected by weather shocks and supply disruptions.
Work-in-Progress
Work-in-progress (WIP) is the term used to describe the inventory that is in the process of being transformed from raw materials to finished goods. Examples of WIP include partially assembled products, semi-finished goods, or goods that are waiting for quality inspection or packaging. WIP is usually stored in factories or workshops until it is completed.
The global demand for WIP is closely related to the demand for finished goods, as well as the efficiency and capacity of production processes. The COVID-19 pandemic has disrupted the global supply chains and caused significant delays and shortages of WIP in some industries, such as automotive, electronics, and pharmaceuticals. On the other hand, some industries have increased their WIP levels to cope with the uncertainty and volatility of demand, such as e-commerce, health care, and food delivery.
Finished Goods
Finished goods are the term used to describe the inventory that has completed all stages of production and is ready for sale to customers. Examples of finished goods include cars, computers, clothes, books, etc. Finished goods are usually stored in warehouses or distribution centers until they are delivered to retailers or end-users.
The global demand for finished goods depends on the level of consumer spending, income distribution, population growth, demographic changes, lifestyle trends, product innovation, marketing strategies, and competitive forces. The COVID-19 pandemic has had a mixed impact on the demand for finished goods across different sectors and regions. For example, the demand for durable goods such as furniture, appliances, and home improvement products has increased due to the shift to remote work and online education, while the demand for non-durable goods such as clothing, footwear
Frequently Asked Questions
Q: What is the difference between raw materials and finished goods?
A: Raw materials are the inputs that are used to produce finished goods, while finished goods are the outputs that are ready for sale to customers.
Q: What is the difference between work-in-progress and merchandise?
A: Work-in-progress is the inventory of goods that are partially completed but not yet ready for sale, while merchandise is the inventory of goods that are purchased from other businesses for resale.
Q: What is the difference between finished goods and merchandise?
A: Finished goods are the inventory of goods that are produced by the business itself, while merchandise is the inventory of goods that are sourced from other businesses.
Q: How do you calculate inventory turnover?
A: Inventory turnover is a ratio that measures how many times a business sells its average inventory in a given period. It is calculated by dividing the cost of goods sold by the average inventory.
Q: Why is inventory management important?
A: Inventory management is important because it helps a business optimize its cash flow, reduce its storage costs, avoid stockouts or excess inventory, improve its customer service, and increase its profitability.
References:
http://publications.cta.int/media/publications/downloads/1749_PDF.pdf
https://www.tradegecko.com/blog/skus-and-upcs-do-your-products-have-an-identity
https://www.investopedia.com/terms/i/inventory.asp
https://business.adobe.com/blog/basics/4-types-of-inventory
https://www.wallstreetmojo.com/types-of-inventory/
https://www.sortly.com/blog/what-are-the-4-types-of-inventory/
Essential Topics You Should Be Familiar With:
