15 Types of Inventory With Tips for Management
By Indeed Editorial Team
Updated March 30, 2022
Published August 4, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Inventory is a part of every business, whether it performs a service, distributes items to others or manufactures a product. Businesses order stock, organize warehouses and even decide what products to offer based on their understanding of their own inventory. If you're responsible for evaluating what your organization needs, it might be helpful for you to learn about the different types of inventory. In this article, we explore 15 types of inventory and discuss some tips for managing your inventory.
What is inventory?
Inventory describes the items that an organization owns, from raw materials to finished items waiting for purchase. Inventory can also be a verb that describes the act of counting or managing inventory for a company. Managing inventory carefully can help a business understand its resources, save money, store items more efficiently and keep the appropriate amount of products in stock to meet needs. Because inventory is so important, many organizations have specific personnel and systems dedicated to tracking inventory.
15 types of inventory
Companies may have different types of inventory depending on their industries and business models. Some items may fall into more than one category, like finished goods that are being held as safety stock or excess inventory. Here are 15 types of inventory with examples to help you understand each one:
1. Finished goods
Finished goods are items that are completed and packaged for sale. Manufacturing companies commonly have finished goods in their inventory that have not yet shipped. For distributor or service companies, categorizing something as a finished good may not be as useful since these companies usually don't process or build their own goods. For example, a car company may categorize vehicles as finished goods, while a car dealer may not since all the cars are complete before they arrive.
2. Work-in-progress inventory
Work-in-progress inventory includes items that are partially assembled. For example, a company that makes pillows may have some completed pillowcases as work-in-progress inventory that have not yet been stuffed and packaged. To understand the value of materials and labor invested into work-in-progress inventory, you might calculate equivalent units of production.
3. Raw materials
Raw materials are any items that are processed to become part of the finished product. This may include pre-manufactured items or natural resources purchased from a different vendor. For example, a furniture company's raw material inventory may include wood, hardware, paints and finishes.
4. Safety stock
Safety stock, also known as buffer stock, is inventory kept to meet company needs in case demand suddenly increases or a natural or human force interrupts the supply. When calculating safety stock, it's important to consider the industry and the needs.
A more remote area may require more safety stock during seasons where weather can make travel difficult, but keeping a lot of consumable safety stock may mean throwing out items that expire before they sell. For example, a remote mountain grocery store may keep large amounts of unperishable foods as safety stock in the winter but not keep very much fresh produce.
5. Packing materials
Packing materials include any items that are used to package or ship items. Sometimes it's useful to categorize packing materials depending on their use. For example, a primary packing material for a tea company may be the paper tea bags that hold the leaves, while the secondary packing materials are the larger cardboard boxes displayed in stores with barcodes. The tertiary packing materials would be the pallets and shrink wrap used to keep the cardboard boxes safe and dry during transportation.
6. MRO supplies
Supplies for maintenance, repair and operating, known as MRO supplies, are considered inventory at some organizations, while at others, supplies and inventory are separate categories. MRO supplies typically include office and cleaning supplies, but they may also include maintenance equipment. Some specific examples of these supplies include paper, toner, brooms, gloves and computers.
7. Smoothing inventory
Smoothing inventory is inventory purchased in anticipation of a future need, and it can help avoid shortages or delivery delays during busy seasons. Both manufacturing and service companies may purchase smoothing inventory. For example, a barbeque restaurant may prepare extra meat before a holiday weekend, or a popsicle manufacturer may increase orders before summer.
8. Decoupled inventory
Decoupled inventory is extra inventory for different stages of the manufacturing process kept so that all assembly employees have potential work to do. It's used as a backup method to prevent delays during manufacturing, since it may allow employees at a later stage to continue working, even if an earlier stage has a problem. For example, a shoe company may keep an excess of pairs of shoes in each stage of production, so that if there's a delay in leather delivery, employees still have work to do until the new delivery arrives.
9. Transit inventory
Transit inventory is simply any inventory that's in transit. Inventory often becomes transit inventory when it's paid for, but before the supplier delivers it. For example, a bakery may have a standing order for a staple ingredient like flour each month, and the flour is transit inventory from the time payment processes until the flour arrives at the bakery.
10. Excess inventory
Excess inventory can be any goods or raw materials that are unused. If excess material is unusable in another product or campaign, it may become dead inventory or obsolete inventory. For example, a cosmetics company may have leftover palette packaging for a limited release. If they don't use it again, this excess packaging may be dead or obsolete inventory. They might put a new label on that packaging and release a new product with it to reuse it.
11. Book inventory
Book inventory, also called theoretical inventory, is the recorded amount of inventory that the company has. The actual inventory may differ from the book inventory because of errors in counting or mistakes recording sales. For example, an electronics store may have a book inventory of 1,000 televisions but an actual inventory of 998 due to a point of sales system outage when they sold two televisions.
Related: How To Calculate Cost of Inventory
12. Service inventory
Service inventory relates a business's physical capabilities to its potential services, and it can be an inventory substitution for service businesses. Usually, the service inventory is the number of potential services a business can provide. For example, a bike shop with a part-time mechanic may be able to service 15 bikes a week, so they would have a service inventory of 15 maintenance appointments.
13. Cycle inventory
Cycle inventory is the inventory that a business regularly uses and replaces. Knowing the size of a company's cycle inventory can be helpful when planning space usage, since a business needs adequate space to store and access its cycle inventory regularly. A hair salon that's looking to relocate, for example, might look for storefronts with big enough closets to store all hair dye and styling products they use.
14. Theoretical inventory
Theoretical inventory is the minimum amount of inventory a company needs to perform its business. It's a potential inventory amount rather than a literal count of inventory, like most of the other types. For example, a restaurant's theoretical inventory of salad lettuce may be 100 bags a week, but they may order more to have a safety stock or in case some if the lettuce isn't up to their standards.
15. Dead stock
Dead stock is inventory a company can't use or sell to a customer. The most common cause of dead stock is outdated inventory, like expired food, older models of technology or products released for a specific theme. Companies may try to prevent or get rid of dead stock by discounting it before it expires or by bundling it with another product that sells well. For example, if a new organic food store discovered that it ordered too much bread in its first week of business, they might have to throw out expired loaves of dead stock.
Tips for managing inventory
Here are some tips for managing inventory:
Use an inventory management system
An inventory management system can help your business keep your inventory organized, which can help you fill orders more quickly. This can lead to more satisfied customers and less lost or dead stock. Many inventory management systems are online or cloud-based, so employees can access them remotely or in different places on a warehouse floor.
Implement cycle counting
Cycle counting is an alternative to performing a full physical annual inventory of all materials. There are different cycle counting methods, but it generally involves counting a certain area or item at a time. It can be more efficient than an annual inventory since it doesn't require the company to shut down completely.
Reevaluate your inventory needs
As your business grows, you may find that you need different inventory as products change in popularity. Reevaluating your inventory needs regularly can help ensure you have enough safety stock. Understanding how much inventory you have can also allow you to make sure all company areas are clean, organized and accessible, which improves employee morale and speed.
Store inventory according to type
Besides the types of inventory listed here, you might categorize your inventory by how frequently you use it, how valuable the items are or when during the manufacturing process you need each item. Thinking about these types of inventory can help you organize your warehouse or store better. Your layout may enable you to make cycle inventory more accessible, keep dead stock out of the way and see at a glance whether your theoretical inventory matches actual inventory.
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