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 details in the further article.

Types of Inventory

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

Merchandise Inventory

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

Manufacturing Inventory

Types of Inventory

It is the inventory for 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.

Raw Materials

These are the materials or goods purchased by the manufacturer. The manufacturing process is applied to the raw material to produce desired finished goods. For example, aluminum scrap is used to produce aluminum ingots. Flour is used to produce bread. Finished goods for someone can be raw material for someone. For example, the aluminum ingot can be used as raw material by utensils manufacturer.

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

Work-In-Progress (WIP)

These are the partly processed raw materials lying on the production floor. They may or may not be saleable. These are also called semi-finished goods. It is unavoidable inventory which will be created in almost any manufacturing business.

This level of this inventory should be kept 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 the levels of work in progress. Lean management considers it as waste.

Finished Goods

These are the final products after 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 the order is received first and then it is manufactured as per specifications. In the first one, it is inevitable to keep finished goods inventory whereas it can be avoided in the second one.

Packing Material

Packing material is the inventory used for packing of goods. It can be primary packing and 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 as consumables in various parts of the world. They are like a support function. Maintenance and repairs 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.

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 inventory or business requirement 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 other for various purpose like sales, purchase, further processing etc. Due to long distances, the inventory stays on the way for days, weeks and even months depending on distances. These are called Inventory / Goods in Transit. Goods in transit may consist of any type of basic inventories.

Buffer Inventory

Buffer inventory is the inventory kept or purchased for the purpose of meeting 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 disadvantage is the carrying cost of inventory. Raw material as buffer stock is kept for achieving nonstop production and finished goods for delivering any size, any type of order by the customer.

Anticipatory Stock

Based on the past experiences, a businessman is able to foresee the future trends of the market and takes certain decisions based on that. Expecting a price rise, a spurt in demand etc some businessman invests money in stocking those goods. Such kind of inventory is known as anticipatory stock. It is normally the raw materials or finished goods and this strategy is executed by traders.

Decoupling Inventory

In manufacturing concern, plant and machinery should always keep running. The act of stopping machinery, costs to the entrepreneur in terms of additional set up costs, repairs, idle time depreciation, damages, trial runs etc. The reason for halt is not always the demand of the product. It may be because of the availability of input. In a production line, one machine/process uses the output of other machines/process. The speed of different machines may not always integrate with each other. 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

It is a type of inventory accumulated 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).

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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