Types of Inventory
There are different types of inventory, some varying by industry, but all representing products at different stages. An inventory item can begin as a raw material and be transformed into different types of inventory as it moves along in production workflows. Most manufacturers work with raw materials, work in progress, finished goods and maintenance, operation, and repair (MRO) goods, often noted as assets in your inventory database. Inventory types at any stage should be tracked by quantity and cost to reflect accurate amounts on the general ledger.
How Many Different Types of Inventory Are There?
While all different types of inventory fall under the above mentioned types, they can be further categorized:
- Raw Materials – Raw Materials are the ingredients or chemicals used to manufacture finished goods. They are usually transformed during the production process to appear and/or behave differently than the original item.
- Work in Progress – When raw materials are combined or altered by different manufacturing processes, they exist in different stages as work in progress. Tracking work in progress logs the workflow steps, costs, overhead and assets used up to the point of reference.
- Finished Goods – Finished goods are items suitable for sale to the consumer.
- MRO – items and supplies used to manufacture products are considered MRO inventory.
- Components – Similar to raw materials, components are the original items used to manufacture but they maintain their existing state. For instance, parts used to manufacture computers, machines and vehicles still exist as the original parts (parts inventory system). If a bicycle is disassembled, you will still have the original screw, unchanged by production.
- Packing/Packaging Materials – These materials include containers for the finished product such as bottles, cans, plastic, etc.; materials used to pack the finished products like sheets of cardboard, bubble wrap, foam, etc.; labels and packaging used to ship the item; and, finally, packaging for bulk shipping.
- Safety Stock – Additional inventory kept on hand in case of an increase in demand is safety stock. To determine how much to have, the company uses a formula that considers lead time and the quantity of the regular order.
- Decoupling Inventory – When extra inventory is kept at a workstation to prevent production holdups, those items are referred to as decoupling inventory.
- Cycle Inventory – Each time an order is placed from a supplier, the quantity ordered is the cycle of inventory that is processed at one time.
- Service Inventory – Service inventory does not involve manufacturing, rather it is a service provided such as a hotel room, consulting, advertising, medical care, etc. and inventory is counted according to how many units of service can be provided in each time frame.
- Pipeline Inventory – Inventory that is in transit between the manufacturer and distributor, manufacturer and warehouse, or one warehouse to another is pipeline inventory.
- Theoretical Inventory – The amount of inventory that is available immediately is theoretical.
- Excess Inventory – Inventory that cannot be sold is excess inventory. It still accumulates storage costs while it sits around in the business’ facility.
The Pluses and Minuses of Carrying Different Types of Inventory
While consumers can be demanding and offering a wide selection of choices can be advantageous for pleasing a broader audience, there are some considerations to weigh before investing heavily in significantly diversified inventory.
Advantages:
- Reduced Risk: A diversified inventory can help reduce risk by spreading the company’s investments across different products. This means that if one product doesn’t sell well, the business will still have other products to fall back on.
- Increased Sales: Offering a wider range of products can attract a larger customer base, leading to increased sales. Diversifying inventory can also help a business cater to different customer needs and preferences.
- Competitive Edge: A diversified inventory can give a business a competitive edge over its competitors by providing a unique product mix.
Disadvantages:
- Increased Costs: Diversifying inventory can lead to increased costs associated with purchasing, storing, and managing a larger number of products.
- Inventory Management: Managing a larger inventory can be challenging, especially for small businesses that may not have the resources to handle the logistics of a diversified inventory.
- Complexity: Diversifying inventory can make a business more complex, as it requires more resources to manage a wider range of products, leading to potential confusion and complexity in the supply chain.
Types of Inventory Management Systems
There are two different types of inventory management systems used by most businesses: perpetual and periodic. (You can find more details about inventory management types here). In a perpetual system, the inventory count is updated in real-time when items are received and logged into stock with either a barcode system or a RFID system and when the item is sold. In a periodic system, a physical inventory count.
Keeping track of all the different types of inventory, their costs, overhead, etc. is a big task if done on spreadsheets. The best way to handle any type is with a software system that integrates all the different areas of the business together so everyone can work with the same set of data to make more informed decisions. That’s precisely what SOS Inventory was designed for and with functionalities offered by enterprise level software yet at an affordable price tag for small businesses. Different types of inventory systems may include some or all of your functionality needs with most software costing more than your business can afford. Take control over your inventory and realize the savings and transparency that the best type of inventory software, SOS Inventory, can bring to your business. All the features you need from various types of inventory systems can be realized from a single, affordable solution.
