12 Types of Inventory: Complete Information
Inventory is the store or stock of goods. The goods are retained at hand or nearby to allow the business to meet the demand fulfilling its reason to exist.
And in this post, you’re going to know the type of inventory exists.
Let’s get started.
Four Types of Inventory
There are four types of inventory: work-in-progress, finished goods, raw material, and MRO goods.
The raw material is a type of inventory used by the manufacturer in the conversion process to generate subassemblies, components, or final groups. The inventory items could be extracted materials or commodities that have been extracted or produced by the company or its subsidiary. As well, they could be elements or objects purchased from outside the firm.
According to the supplier, the item could be partially assembled or finished good, but the purchasing firm classifies it as a raw material. Raw materials generally include commodities like grain, ore, minerals, chemicals, petroleum, paper, steel, wood, paint, and food items. Other items like key stock, bolts, nuts, ball bearings, wheels, seats, engines, and casters are raw materials if bought from outside.
In a manufacturing resource planning (MRP) or materials requirement planning (MRP), the bill-of-materials file system uses a product structure tree tool for clarifying the relationship in inventory items providing an exploding or filling out basis, master production schedule.
Raw materials are used to manufacture components which are then incorporated in the final product or the part of the subassembly. Subassemblies assemble or manufacture the end product. A component is a part that goes to make another part. The part made is the parent. An item without a component is a purchased item or raw material.
Work-in-progress (WIP) consists of all materials, assemblies, subassemblies, and parts or components waiting to be processed or are being progressed within the system. It includes the raw material for initial processing to the completely processed material due to final inspection and acceptance waiting for inclusion in the finished goods. An item with a parent isn’t raw material but work-in-process. Controlling WIP helps to:
- Maintain uniform production
- Offers flexibility to plan every production
- Checks wastage
- Reduces handling cost of material
Finished goods are completed parts ready for customer order. Finished goods inventory is that stock of completed products. They have inspected goods that meet final inspection requirements and are transferred from work-in-process to finished goods inventory.
The completed goods may now be sent to distribution centers, directly sold to the final user, wholesalers, retailers, or held awaiting a shopper’s order. An item without a parent at this point is a finished good. The finished goods inventory helps in the following:
- Having an inventory is more economical than always placing orders.
- Producing instantly when demanded is hard.
- Helps to schedule production efficiently.
- Products are kept in displays for the customer.
Within the retail context, finished goods can be subdivided into different inventory classes to allow efficient allocation and management. They include:
Ready for sale: also referred to as available inventory, it’s purchased or manufactured and kept aside in a warehouse ready for sale. Any moment it can be packed, picked, and shipped.
Allocated: Its inventory is already bought by a customer and has been allocated to a sales order. It’s not eligible for resale and should be removed from the available inventory figure.
MRO Goods Inventory
MRO goods or repair, maintenance, and operating supplies are used to maintain and support the production infrastructure and process. These goods are consumed due to the production process, though not directly with the finished product.
MRO goods include coolants, oils, lubricants, gloves, uniforms, packing material, janitorial supplies, bolts, nuts, shim stock, tools, key stock, and screws. Others include office supplies like pencils, pens, toner, copier paper, and staples, all fall under MRO goods inventory types.
Classification of Types of Inventories
Depending on the firm’s operations, industry, and inventory types managed by the business, inventory is further classified in various ways. Firms purchasing finished goods for sale to customers at a markup hold only one type of inventory called merchandising inventory.
Some companies like manufacturers have to manage several inventories in separate classifications for efficient inventory tracking.
The different types of inventory are classified into two inventory categories: direct inventories and indirect categories.
- Direct Inventories
These are items directly used to manufacture or produce and form part of services or goods provided or produced. Types of direct inventory include production inventory, work-in-progress inventory, MRO, finished goods, and miscellaneous inventories.
- Indirect Inventories
Indirect inventories include items required to manufacture services and goods and aren’t part of the completed goods. They include buffer, transportation, decoupling, lot-size, anticipation, and seasonal inventories.
The types of inventory classification based on the purpose they serve include:
In certain instances, inventory acts as a measure against demand and supply uncertainties and unforeseeable events like low quality or poor delivery reliability of the supplier’s products. Such inventory precautions are commonly called safety stock or buffer inventory. It is the amount of stock on hand over and above the currently required to meet demand.
The higher the safety stock, the better the company’s customer service. Buffer inventory checks on stock-outs. The firm won’t have to backorder an item where the customer waits until the next cycle or even lose the customer to a competitor.
Transit or pipeline inventory results from transporting material or items from one point to the other. There is transportation time taken to get to the other location. Merchandised shipped through rail or truck could at times take weeks or days to move from regional warehouse to retail facility.
Large companies like automobile manufacturers engage freight consolidators to consolidate their transit inventories from different locations to one shipping area, thereby enjoying economies of scale.
The more the stock a business holds as decoupling inventory in the various distribution or manufacturing system stages, the less coordination is required to retain the system operating smoothly. An equilibrium is reached that allows the plant to run without holding absurd inventory. The efficiency cost is compared with carrying excess inventory cost to strike an optimum balance between coordination in the system and inventory level.
At times, companies purchase an excess inventory of the current requirement to anticipate a likely future event. Such events include impending labor strike, seasonal demand increase, and price increase. Retailers often use this tactic.
Manufacturers build up inventory when demand is low in anticipation of increased demand. The company, therefore, avoids lay-off costs, excessive overtime, and all extra costs associated with the need to hire more labor to meet the demand. All valleys and peaks in demand undergo a smoothing process maintaining constant output and a stable workforce level.
Economic order quantity (EOQ) balances carrying costs or inventory holding with setting up machinery or order costs. If large amounts are produced or ordered, there is an increase in inventory holding costs while setup or ordering costs reduce.
If lot sizes reduce, inventory carrying or holding costs reduce, while setup/ordering costs increase as more setups or orders are needed to fulfill demand.
When the two costs equalize, setup/ordering costs and carrying/holding costs, total cost (the two costs sum) is reduced. Lot-size or cycle inventories result from that process. The excess material ordered is held in inventory in an attempt to achieve a minimization point. Ordering in batches instead of ordering strictly the material required results to cycle inventory.
Theoretical inventory is the average inventory in a given throughput, assuming no WIP item waits in a buffer. It could be an ideal situation if inflow, outflow, and processing rates are the same at any given point in time.
Unless you have a single process system, there is always inventory in the system. Theoretical inventory is the assertion of this inventory. It is the minimum inventory required for goods to run through without waiting in the system. It’s that minimum inventory needed to maintain a process.
Types of Inventory Control Systems
Inventory consists of a significant investment of the business’s cash. A suitable type of inventory management is put in place because of the inventory’s investment and value. The company needs to track the inventory movement as close as possible.
The inventory control system is a technology-based solution integrating all aspects of a business’s inventory tasks: purchasing, shipping, warehouse storage, receiving, turnover, reordering, and tracking. A suitable type of inventory control system takes a holistic inventory approach empowering a business to utilize slim practices that optimize efficiency and productivity in the supply chain, holding the correct inventory at the right place to improve customer expectations.
There are three types of inventory control systems: manual, periodic, and perpetual inventory systems. These systems are two main categories of inventory management systems, namely radio frequency identification (RFID) systems and barcode systems for the inventory control process’s overall support.
There should be a central database for every inventory to analyze data, forecast the demand, and generate a report. Good types of inventory systems incorporate documenting, reporting types of inventories, and labeling processes. An inventory tracking solution paired with an inventory management app or inventory control app can manage and control inventory effectively.
Firms use one of the three types of inventory systems as outlined below.
Manual Inventory System
In the past, all businesses tracked inventory manually by counting the items in stock. Small businesses that carry inventory levels today could still use the manual system. A worker goes through a checklist, counts every item, writes the results, and then enters those quantities in a spreadsheet. The information is later used for reordering materials as required.
Periodic Inventory System
The periodic inventory system is seen as the bridge between perpetual and manual systems. Inventory is tracked periodically and manually.
The barcoding system has been a great deal.
Businesses tag inventory items with barcodes. Periodically, the barcodes are scanned to track the firm’s arrival, its usage and travel in the firm, and final destination either as a complete product or consumed.
A tracking computerized system finally provides routine access to the locations of all quantities of items and initiates re-stocking orders.
Perpetual Inventory System
A sophisticated system will deliver real-time data. Immediately inventory enters the business and is moved, used, thrown out, or sold, the central system updates abruptly.
Radio Frequency identification tags (RFID) are responsible for the perpetual system. Active RFID tags continuously communicate with real-time information providing data, while passive RFID tags using electromagnetic energy from readers transmit data. RFID tags data is sent to CMMS, providing management with transparency of inventory levels for smarter business decisions.
Merits of Perpetual Inventory System
- Quick valuation of closing stock – due to continuous stock verification, the closing stock value is recorded any time of the year. It greatly facilitates interim profit and loss A/C and balance sheet preparation and at the close of a financial period.
- Lesser investment in materials – the control system allows a regular check on issues and receipt of material process. Material investment is therefore optimized.
- Helps formulate valid purchase policies – a storekeeper quickly knows when more material is needed by every factory department since the different levels of every type of material are indicated.
- Immediate detection of leakages and theft – a well-planned control system manages material movement, and immediately there is theft or leakage or other discrepancies, it’s detected without delay.
- Working capital adequacy – the system controls issue and storage of materials. It ensures working capital is adequately supplied and not held up.
- There is a continuous check on the efficiency of working and operating stores.
The A.B.C. Method of Controlling Stock
It’s stock control according to the value approach. The method is essential in preserving expensive inventory items.
For reasonable control of costly material, A.B.C (Always Better Control) method is a great choice. In this method, the material is grouped into three categories according to their value.
Group A constitutes costly items. They could be few, but their value is over 50% of the total value of inventory.
Group B follows in value, while group C is for those items with less than 20% of the total store value. It’s the residuary category, and routine care is necessary.