Inventory can account for a huge part of a company’s assets. Understanding inventory will help small business owners manage inventory more efficiently and get the best return on investment. So let’s learn more about 10 types of inventory with us in this post.
What is Inventory?
Inventory is the goods and materials that a business holds for utilization, sale, or manufacturing products. Inventory management is the process of stocking, storing, tracking, and selling inventory.
Inventory management allows owners to stock the right amount of inventory and restock when there’s a shortage. Managing inventory effectively can reduce expenses and increase profits for your company.
10 Types of Inventory Business Owners Should Know
1. Raw Materials
Materials that are used to turn your inventory into a finished product are called raw materials. For example, fabrics to make T-shirts or trousers for a clothing manufacturing company are raw materials.
To track the supply of raw materials, you need to have a system in place. Or else, you can’t make a forecast of what you’ll produce in the near future.
Work-in-process inventory is goods or products that are unfinished and currently in the production phase. These goods are not yet ready for sale.
3. Finished Goods
Finished goods are goods ready to be marketed and sold to your customers. For example, if you produce processed burgers for customers, the packaged meat patties and buns are finished goods inventory.
MRO stands for maintenance, repair, and operating supplies. MROs, or overhaul inventory, are used for the manufacture, maintenance, and repair of goods. Production tools, batteries, computer systems, safety equipment, and so on, are all MRO goods.
For example, if you own a car factory, MROs are bearings, lubricants, bolts, nuts, etc.
5. Packing Materials
Packing materials are inventory used to protect, pack and ship your goods. Some examples include bubble wrap, pallets, labels, etc.
When it comes to packaging, you might’ve heard of primary and secondary packaging. Primary packing is a crucial step, without it, the goods cannot be used. Secondary packing is the packaging used to facilitate the transportation of goods. For example, if your business manufactures beverages, the bottle is the primary packing, while the box that holds four bottles altogether for delivery is the secondary packing.
6. Goods in Transit
Goods in transit are the type of inventory that has left the dock of the seller, but not yet received by the customer. Because of the distance or shipping time, the customers have to wait weeks or months until the goods in transit are successfully delivered.
7. Cycle Stock
Cycle stock is inventory scheduled to be used over a certain period of time. This period is usually defined as the time between orders or the time between production cycles.
The forecast is the most accurate way to calculate cycle stock levels. In the absence of a prediction, historical data can be used as a proxy, with seasonality, product life cycle variables, and emerging patterns all taken into account.
8. Buffer Stock
Buffer stock, also known as safety stock, can be understood as products that are not part of the original consumption plan, but are reserved for use in case of emergency. Buffer stock is often used when market demand exceeds product consumption and the initial forecast, or if production volume is lower than planned.
Depending on the risks and the company’s inventory policies, buffer stock can be a “lifesaver” to keep the business going. With buffer stock, you can avoid backorders, stockouts, making the customer wait for a long time, or losing your customers.
9. Smoothing Inventory
To “smooth” out during the peak season and satisfy the demand of customers, smoothing inventory is purchased by most businesses. They’re products that manufacturers buy or store in excess of current needs.
Based on historical data, a business can predict the future trend of the market and make certain decisions. Some businesses invest in stockpiling of smoothing inventory while expecting an increase in price or a spike in demand. Storing smoothing inventory also helps businesses to keep their employees occupied during slow months, minimizing labor cost, and preventing layoffs.
10. Decoupling Stock
In manufacturing operations, the factory and the machinery must be active at all times. However, every machine produces at a different pace. In the production chain, one or two pieces of equipment can run many times faster than others.
Machines sometimes need to be shut down for repairs or maintenance. That’s when decoupling inventory is used to keep the plant running as expected.
Parts, materials, and finished goods that are waiting to be used by the next machine in the chain are referred to as decoupling inventory. It decreases the business’ dependence on the sequential nature of the production line and keeps everything running smoothly.
Inventory is a crucial asset for every business, so it’s important for owners to understand what it means. Understanding the various types of inventory will help you create a better plan for evaluating and utilizing them effectively.