Basic Types of Inventory
For retailers, warehouse distributors and wholesalers it’s important to understand the types of inventory used in the supply chain. Below are four primary inventory types you should know, plus other types of inventory that are important to business operations.
What are the 4 basic types of inventory?
Inventory can be classified into four main types:
- Raw materials are ingredients or components used to manufacture a finished product. A brewer, for example, will use grain, yeast and hops as ingredients in the fermentation process to produce a volume of beer.
- Work in progress (WIP) represents inventory in production and not yet ready for sale, for example, beer still in the process of fermenting.
- Finished goods are products in your inventory that are ready to be sold to your customers. This inventory type is common to all companies that sell products.
- Maintenance, repair and operating supplies (MRO goods) are used to support production processes and infrastructure. Such goods are usually consumed during production but are not part of the finished product. Examples include lubricants, coolants, janitorial supplies, uniforms, gloves, packing materials, tools and office supplies, including computers.
Are there other types of inventory?
Yes. Inventory can be further classified by the purpose it serves.
- Buffer inventory, or buffer stock, is the amount of stock you hold as a precaution against stock-outs and is also sometimes called safety stock. Buffer stock has two benefits, nonstop production and increased customer satisfaction. While these benefits come with increased carrying costs, being able to deliver finished goods at a moment’s notice may be worth it.
- Transit inventory refers to raw materials, WIP, finished goods and MRO being moved from from location to other for any purpose. Long distances can mean that inventory is in transit for anywhere from days to months. Also known as goods in transit.
- Anticipation inventory or anticipatory stock is raw materials or finished goods kept in anticipation of demand based on past or seasonal trends or current events that are expected to drive price hikes. Traders are most likely to use this strategy.
- Decoupling inventory is an inventory of parts between machines (i.e., one machine feeds parts to the next machine), allowing sequential, dependent processes that typically run at different speeds to stay in sync, as machinery is generally always running, other than when it’s being serviced. Decoupling inventory serves to regulate production flow.
- Cycle inventory is inventory a seller cycles through to fulfill regular sales orders and results from ordering in batches or lot sizes to optimize carrying costs versus machinery setup costs, rather than ordering material only as needed. Part of on-hand inventory, or stock on hand, which includes all items the seller has in its possession, cycle stock equals total stock on hand minus safety stock.