What Are the 4 Types of Inventory?

If there’s one thing that is true for inventory, it’s that it moves across a lot of channels before it gets to the consumer. To run your business cost-effectively, it’s essential to understand the four different types of commonly used inventory and the stages they move through. But first, let’s define “inventory.”

What is inventory?

Inventory is everything a company utilizes to sell or produce products, from finished goods and parts to raw materials. And depending on what goods or services your business provides, inventory can be anything from bananas to nails to raw silk to priceless works of art.

Usually, inventory is managed via an inventory management system: a sheet of paper or a notebook, a spreadsheet, or inventory management software. By properly managing your inventory, your business will know whether you have enough stock to satisfy customer demand—and exactly when it’s time to place another order. 

Businesses practice tight inventory control because it affects productivity and profitability. And even if a business doesn’t sell or consume every day, just about every company can benefit from managing assets like computers and furniture. 

 

What are the 4 types of inventory?

The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP), Finished Goods, and Maintenance, Repair, and Overhaul (MRO). You can practice better inventory control and smarter inventory management when you know the type of inventory you have. That includes choosing the best inventory management software to keep track of all that inventory.

1. Raw Materials

Materials that are needed to turn your inventory into a finished product are raw materials. These inventory items are bits and pieces of component parts that are currently in stock but have not yet been used in either work-in-process or finished goods inventory. 

There are two types of raw materials: direct materials—which are used directly in finished goods, and indirect materials—which are part of overhead or factory costs. 

Inventory example: For example, direct raw materials might be leather to make belts for your company would fall under this category. Or, if you sell artificial flowers for your interior design business, the cotton used would be considered direct raw materials, too.

Indirect raw materials might be lightbulbs, batteries, or anything else that indirectly contributes to keeping your shop running. 

Related article: What is a Bill of Materials (BOM)?

2. Work-In-Process

Inventory that is being worked on is Work-In-Process (WIP), just like the name sounds. From a cost perspective, WIP includes raw materials (plus, sometimes labor costs) that are still “in production” when the accounting period ends. 

In other words, whatever direct and indirect raw materials your business is using to create finished goods is WIP inventory. 

Inventory example: If you sell medical equipment, the packaging would be considered WIP. That’s because the medicine cannot be sold to the consumer until it is stored in proper packaging. It’s literally a work-in-process. 

Another example would be a custom wedding dress that’s not quite finished when the end of the fiscal year rolls around. That lace, silk, and taffeta are no longer raw materials, but they’re not quite a “finished goods” wedding dress, either.

3. Finished Goods

Maybe the most straightforward of all inventory types is finished goods inventory. That inventory you have listed for sale on your website? Those are finished goods. Any product that is ready to be sold to your customers falls under this category.

Inventory example: Finished goods could be a pre-packaged fruit salad, a monogrammed bathrobe, or a custom-built laptop ready for an employee to use.

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4. Overhaul / MRO

Also known as Maintenance, Repair, and Operating Supplies, MRO inventory is all about the small details. It is inventory that is required to assemble and sell the finished product but is not built into the product itself. 

Depending on the specifics of your business, this inventory might be in storage, at a supplier, or in transit out for delivery. 

Inventory example: For example, gloves to handle the packaging of a product would be considered MRO. Basic office supplies such as pens, highlighters, and paper would also be in this category.

Types of Inventory Management

There are a few different ways to approach inventory management types. The type of inventory control model, the type of timing for practicing inventory, and the type of inventory system you use should all be factors in your overall inventory management strategy.

Let’s start with type of inventory control. What type of inventory control model makes the most sense for your business? Popular inventory control models are Economic Order Quantity (EOQ), Inventory Production Quantity, ABC Analysis, and Just-in-Time inventory. Each of these models takes a different approach in assessing how much inventory you should have in stock. Which one you ultimately decide to use depends on your business. 

You should also consider the type of timing protocol of your inventory practices. Does it make more sense for you to practice perpetual inventory, or take physical inventory on a more periodic basis? The answer will depend on the frequency and amount of inventory that flows through your business.

Regardless of the type of inventory control you practice, you’ll need an inventory system. There are several types of inventory management systems, but inventory software is the clear choice for growing businesses. Sortly is a modern mobile inventory solution that allows you to track inventory, supplies, materials, and assets in one easy app. Other types of inventory systems include Excel spreadsheets and even manual inventory, though these become difficult to update over time and don’t offer the convenience and scale that mobile inventory management does.

 

How Sortly Can Help

Sortly is an inventory management solution that helps you track, manage, and organize your inventory from any device, in any location. We’re an easy-to-use inventory software that’s perfect for large or small businesses. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your business succeed.

With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.

Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on building your business. That’s why over 15,000 businesses globally trust us as their inventory management solution.

Start your two-week free trial of Sortly today.