To run your business cost-effectively, it’s essential to understand the four different types of commonly used inventory: raw materials, work-in-process, finished goods, and MRO inventory. But before we dive into these four types of inventory, let’s first define “inventory.”
What is inventory?
Usually, inventory is managed via an inventory management system: a sheet of paper or a notebook, a spreadsheet, or inventory management software. The more inventory you have on hand, and the more different types of inventory you have on hand, the more likely your business is to benefit from inventory management software with automation features.
What are the 4 types of inventory?
1. Raw Materials Inventory
Materials that are needed to turn your inventory into a finished product are called raw materials. These inventory items are component parts that are currently in stock but have not yet been used in either work-in-process or finished goods inventory.
For example, in the construction industry, raw materials could include inventory like lumber, steel, and copper that are used to complete projects. Or raw materials could be used to create a finished product; for instance, cotton that’s used to create a t-shirt sold in a store.
Despite their ‘unfinished’ status, raw materials can still be of significant value and are essential to operations—so tracking them is crucial. Many industries rely heavily on raw materials inventory to sustain their production and service delivery.
Related: How to Store Raw Materials
2. Work-In-Process Inventory
Inventory that is currently being manufactured is referred to as work-in-process inventory (WIP). From a cost perspective, WIP includes all those once-raw materials that are still in production when the accounting period ends. In the simplest of terms, any raw materials your business is currently using to create finished goods are considered WIP inventory.
WIP inventory is especially common in manufacturing and food and beverage businesses. For example, WIP inventory could include cars still on an assembly line and coffee beans that haven’t been roasted yet.
Another example would be a custom wedding dress that’s not quite finished when the end of the fiscal year arrives. The lace, silk, and taffeta used are no longer raw materials, but there is not a finished wedding dress ready to sell, either.
This easy, comprehensive guide will help you:
Free Ebook: Getting Started With Inventory Tracking
3. Finished Goods Inventory
The most straightforward of all inventory types is finished goods inventory. Any product that is ready to be sold to customers—or utilized by customers—is considered finished goods inventory.
For example, finished goods could be a handcrafted leather wallet ready for online sale, a set of artisan-made candles packaged for retail, or a batch of custom-printed t-shirts ready to ship.
In the medical industry, most supplies and materials that are ready to use or consume are considered finished goods, even though they are not “for sale.” However, production on these items must be fully complete. So, if a vaccine needs to be mixed with a solvent to be offered to a patient, it cannot be categorized as a finished good until it is truly ready to be used.
It’s important to note that what category an item falls under depends completely on how it’s being used by a particular business. For instance, a manufacturer might consider steel or lumber to be a finished good, but for a construction company, these products are categorized as raw materials.
4. Overhaul / MRO Inventory
Also known as maintenance, repair, and operating supplies, MRO inventory stands for maintenance, repair, and operations inventory. This type of inventory is utilized by a business to conduct preventive and corrective maintenance on an asset or to keep day-to-day business activities running efficiently.
For example, in manufacturing, hard hats and goggles used during the production process would be considered MRO inventory. In construction, repair parts for heavy machinery and even industrial lubricants are considered MRO inventory because they maintain project schedules and prevent downtime.
MRO inventory also includes the consumable supplies that enable a business to provide its goods or services. For instance, most offices require staying stocked with pens, paper, ink cartridges, cleaning supplies, and so on, regardless of the type of service they provide.
Types of Inventory Management
There are a few different ways to approach inventory management. How you track inventory and the type of inventory system you use will factor heavily into your overall inventory management strategy.
First, consider your inventory control model. 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 how frequently you’ll count inventory or whether you’ll track all updates in real time. 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 amount of inventory that flows through your business and whether you’re using inventory software with barcode and QR code capabilities.
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 sheets, though these become difficult to update over time and don’t offer the convenience and scale that mobile inventory management does.
About Sortly
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 all four types of inventory, from raw materials to finished goods. Sortly 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.
