This article will define inventory, explore the different types of inventory, and cover some key inventory best practices.
Inventory Definition
Inventory refers to the goods, materials, and assets that a business carries for day-to-day operations. Inventory may be held for production, sale, or resale purposes. Often, different types of inventory serve different business purposes.
While specific inventories vary from business to business and industry to industry, inventory generally includes raw materials, finished goods, work-in-progress goods, and maintenance, repair, and operations (MRO) goods.
When managed properly, inventory ensures a business can meet the demands of its customers without unnecessary holding costs. Typically, companies adopt an inventory management system that simplifies the process. The systems can be manually updated on paper or a spreadsheet, or automatically via inventory software.
Key types of inventory
While there are many categories and classifications of inventory, experts agree there are four main types of inventory.
Raw materials
Raw materials inventory refers to the basic materials utilized during production and manufacturing. In the construction industry, raw materials included lumber, stone, and steel. In the automotive industry, raw materials may consist of inventory such as steel, plastic, and rubber.
In certain industries—such as construction—raw materials can be particularly vulnerable to damage, theft, or degradation. Stakeholders should carefully review storage and safety best practices for these materials.
Work-in-progress items
Work-in-progress inventory, also known as WIP or work-in-process inventory, refers to partially-finished goods currently in production. This distinction is important for businesses that transform raw materials inventory to finished goods inventory that is later sold, resold, or otherwise utilized by the business. For example, an electronics manufacturer would classify half-built laptops as work-in-progress inventory.
Finished goods
Finish goods are items that are ready for immediate sale. The seller may have manufactured these items in-house or purchased them from a wholesaler as already-finished goods. Either way, the classification for these items is the same.
Examples of finished goods Include furniture, clothing, and automobiles.
MRO inventory
Maintenance, repair, and operation inventory refers to the necessary items a business keeps on hand so that production and the equipment that enables production continue to run smoothly. This type of inventory includes spare parts, tools, cleaning supplies, and even items like lightbulbs.
A factory may keep items like lubricant, protective goggles, and gloves as part of its MRO inventory.
The importance of inventory control
It’s challenging to discuss inventory without touching on inventory control. When properly implemented, inventory control ensures a business has everything it needs to meet customer demand while minimizing disruptive stockouts and costly overstocking.
Key reasons to prioritize inventory control include:
- Promptly fulfilling customers’ orders, which leads to improved satisfaction and loyalty.
- Reducing cash burn, since businesses can decrease the upfront and carrying costs of holding excessive inventory.
- Minimizing the risk of stockouts, which lead to delays and distractions that may cause a ripple effect for the business and its reputation.
- Minimizing obsolescence, which occurs when outdated, unwanted inventory accumulates.
Essential inventory best practices
While there are many ways to improve a company’s inventory management strategy, the following practices are considered some of the most important.
Demand forecasting
In order to correctly anticipate how much inventory a business needs, a company must combine historical data with informed predictions about the future. Inventory management software automates the bulk of inventory recordkeeping, streamlining the demand forecasting process.
ABC analysis
ABC analysis is a commonly-practiced inventory management strategy that helps businesses determine which inventory requires the most attention and the most stringent inventory control.
- Category A → Tightest inventory control (10% of inventory; 70% of value)
- Category B → Moderate inventory control (20% of inventory; 20% of value)
- Category A → Loosest inventory control (70% of inventory; 10% of value)
Just-in-time inventory
Just-in-time inventory is a common inventory control strategy where businesses order goods only as needed. If there is no production required or sale scheduled, the inventory is not delivered. This reduces carrying costs and the risk of shrinkage and obsolescence, but it’s only suitable for select businesses.
It’s commonly utilized by manufacturers that have aligned their production schedules with their suppliers’ deliveries.
Optimized vendor management
Whether a business relies on vendors to provide raw materials, finished goods, or another type of inventory, properly maintaining supplier relationships is essential. Stakeholders should make time at least annually to review supplier performances, ensure lead times and minimum order quantities still serve the business, and consider renegotiating pricing and terms.
Businesses can also talk to suppliers about market trends, anticipated shortages and price increases, and supply chain challenges.
Inventory audits
Even businesses that have implemented highly efficient inventory management systems benefit from the periodic auditing of stock rooms and inventory storage spaces. These audits can identify discrepancies, reveal vulnerabilities in a company’s inventory storage or security systems, and help reduce the risk of shrinkage and obsolescence.
Such audits can be expedited by leveraging technology such as QR codes.
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Understanding inventory turnover
Inventory turnover measures how many times a company’s inventory is sold and replaced over a given period. Also known as inventory turnover ratio or rate, the metric is a key indicator of a business’s inventory management strategy. A high turnover ratio suggests efficient inventory management and quick, healthy sales.
Related: How to Calculate Inventory Turnover Rate
The importance of inventory analysis
Inventory analysis is the practice of inspecting inventory data to better understand inventory trends, past performance, and future opportunities for optimization. When conducted properly, analyzing inventory also:
- Identifies slow-to-sell or obsolete stock.
- Determines the impact of inventory purchases on a business is cash flow.
- Reveals new ways to improve future inventory control practices.
While every business should perform a formal inventory analysis when planning for the year ahead, such analyses can also be performed on the spot. Either way, the process is simplified when inventory records are maintained perpetually with inventory software.
Sortly inventory management software lets you organize, track, and manage your inventory—from any device, in any location. Our easy-to-use mobile app lets you and your team update inventory on the job, scan barcodes from your smartphone, set low stock alerts to remind you to re-order, and more. That means you can work more efficiently, plan for jobs better, and serve your customers to their highest satisfaction.
If your business would benefit from improved inventory management, try Sortly free for 14 days.
