Types of Inventory / Stock

5 Basic types of inventories are raw materials, work-in-progress, finished goods, packing material, and MRO supplies. Inventories are also classified as merchandise and manufacturing inventory. Other such classifications on various bases are goods in transit, buffer stock, anticipatory stock, decoupling inventory, and cycle inventory. We will understand different types of inventory in detail in the further article.

Types of Inventory

There are three types of businesses: trading or merchandising, manufacturing, and service. Out of these, services are not inventorial. Here, the first inventory classification is based on the nature of the business – Merchandise and Manufacturing Inventory.

Merchandise Inventory

It is the inventory of trading goods held by the trader.

Read Merchandise Inventory for a detailed explanation.

Manufacturing Inventory

Types of Inventory

It is the inventory for the manufacturing and selling of goods. Based on the value addition or stage of completion, the manufacturing inventories are further classified into 3 types of inventory – Raw Material, Work-In-Progress, and Finished Goods. Another type is MRO inventories which are to support the whole manufacturing and administrating operation.

Keep reading Manufacturing Inventory

Raw Materials

These are the materials or goods purchased by the manufacturer. Then the application of the manufacturing process to the raw material to produce desired finished goods takes place. For example, the use of scrap aluminum for creating aluminum ingots. Use flour for making bread. Finished goods for someone can be raw materials for someone—for example, using aluminum ingots as raw material for the manufacturer of utensils.

The business importance of raw material as an inventory is mainly to protect against any interruption in production planning. Other reasons can be availing price discounts on bulk purchases, guarding against market shortage situations, etc.

Work-In-Progress (WIP)

These are the partly processed raw materials lying on the production floor. They may or may not be saleable. It is also known as semi-finished goods. It is unavoidable inventory that almost any manufacturing business creates.

This inventory level should be as low as possible since a lot of money is blocked over here, which otherwise can be used to achieve better returns. Speeding up the manufacturing process, proper production planning, customer and supplier system integration, etc., can diminish work progress levels. Lean management considers it as waste.

Get a detailed overview of Work in Progress.

Finished Goods

These are the final products after the manufacturing process on raw materials. They are sold in the market.

There are two kinds of manufacturing industries—one, where the product is first manufactured and then sold. Second, where receives an order first, and then manufacture it as per specifications. It is inevitable to keep finished goods inventory in the first one, whereas it is avoidable in the second one.

Packing Material

The inventory use for the packing of goods is the Packing Material. It can be primary packing or secondary packing. Primary packing is the packing without which the goods are not usable. Secondary packing is the packing done for convenient transportation of goods.

MRO Goods

MRO stands for maintenance, repair, and operating supplies. They are also called consumables in various parts of the world. They are like a support function. Maintenance and repair goods like bearings, lubricating oil, bolt, nuts, etc., are used in the machinery used for production. Operating supplies mean the stationery etc., used for operating the business. Here is our detailed post on MRO Inventory.

See MRO Inventory for a detailed post on it.

Other Types of Inventories are classified on various basis are as follows:

Materially, there are 4 types of inventories only, as explained above. Following types of inventories are either the reasons to hold those 4 basic inventories or business requirements for the same. Some of them are suitable strategies for certain businesses.

Goods in Transit

Under normal conditions, a business transports raw materials, WIP, finished goods, etc., from one site to another for sales, purchase, further processing, etc. Due to long distances, the inventory stays on the way for days, weeks, and even months, depending on the distance. Also, call it Inventory / Goods in Transit. Goods in transit may consist of any type of basic inventory.

Buffer Inventory

Buffer inventory is the inventory that one (mostly government) keeps or purchases to meet future uncertainties. Also known as safety stock, it is the amount of inventory besides the current inventory requirement. The benefit is smooth business flow and customer satisfaction, and the disadvantage is the carrying cost of inventory. They keep raw materials as buffer stock for achieving nonstop production and finished goods for delivering any size or order by the customer.

Anticipatory Stock

Based on past experiences, a business person can foresee the future trends of the market and make certain decisions based on that. Expecting a price rise, a spurt in demand, etc., some person in business invests money in stocking those goods. Such kind of inventory is known as anticipatory inventory. It is normally the raw materials or finished goods, and traders execute this strategy.

Decoupling Inventory

In a manufacturing concern, plants and machinery should always keep running. The act of stopping machinery costs the entrepreneur additional setup costs, repairs, idle time depreciation, damages, trial runs, etc. The reason for the halt is not always the demand for the product. It may be because of the availability of input. In a production line, one machine/process uses the output of other machines/processes. The speed of different machines may not always integrate. For that reason, the stock of input for all the machines should be sufficient to keep the factory running. Such WIP inventory is called decoupling inventory.

Cycle Inventory

Cycle inventory is a type of inventory that accumulates due to ordering in lots/sizes to avoid carrying the cost of inventory. In other words, it is the inventory to balance the carrying cost and holding cost for optimizing the inventory ordering cost as suggested by Economic Order Quantity (EOQ).

Quiz on Types of Inventory/Stock.

This quiz will help you to take a quick test of what you have read here.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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