We’ll also provide basic definitions of the different types of inventory.
The most basic definition of inventory is the materials or “things” your business owns. These can be tangible (products and raw materials) or intangible (e.g., software). In most cases, when we refer to inventory, we simply mean all the materials the business has kept in stock—to sell. But, in some cases, it can be inventory that’s not intended for sale, such as fixtures and fittings. These kind of items are generally counted for financial and/or insurance purposes and are known as maintenance, repair, and operating supplies, or MRO goods (definition below).
Inventory can be listed as either an asset or a liability. If a business has lots of inventory, it can convert that inventory into revenue by selling it. Conversely, having too much Inventory can also end up costing the business if that inventory doesn’t get sold.
Inventory can be classified into four main types:
Yes. Inventory can be further classified by the purpose it serves.
When we refer to inventory management, we mean the theories, processes and tools involved in controlling inventory at each stage, from sourcing to storing to selling. The core purpose of inventory management is to make sure that you have the right amount of stock on hand at the right time—at the right cost and price. What is an inventory management system? An inventory management system describes the processes and tools used, physical and/or digital, to track, record and analyze inventory movements and sales performance across the supply chain. Cin7 is an example of a cloud-based inventory management system that uses an integrated software platform to efficiently perform all of these tasks.
Because to run a successful product-focused business, you need to have enough inventory to sell, to satisfy customers and meet market demand. Systematic and transparent inventory management is therefore critical to a business’s bottom line. For instance, it costs money to store inventory, so inventory managers or other stakeholders try to determine the minimum amount of space required to store the maximum amount of inventory.
There are many metrics used to determine whether or not the business is doing a good job of managing inventory. One of these metrics is inventory turnover ratio. Generally, the higher the ratio, the better it is for the company, because it means that inventory isn’t sitting idle on warehouse shelves, where it doesn’t make money and in fact costs money. Rather, it is being used in production or sold in stores.
For more information, including basic inventory formulas, metrics and accounting methods, see our resources page What is inventory management?
From a product perspective, inventory management’s importance lies in understanding what stock you have on hand, where it is in your warehouse(s), and how it’s coming in and out of your supply chain.
Clear, real-time inventory visibility helps you:
From an organizational perspective, inventory management provides insights into your financial standing, customer behavior, sales trends, product development and potential business opportunities.
Product companies have to innovate quickly in the coronavirus era. With increases in online shopping and demand for click-and-collect, retailers and wholesalers are doing everything from shifting their sales-channel focus to fundamentally changing how they do business.
Sooner or later, product companies will be required to audit their inventory. Learn the basics with Cin7’s introduction to auditing for inventory.
Lost, obsolete or overstocked inventory drives up costs and destroys margins. Without inventory visibility, you won’t know your business is suffering until it’s too late.