14 Types of Inventory (Plus Effective Management Tips)

Updated 5 March 2023

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Inventory is a part of every business, whether it performs a service, distributes items to others or manufactures a product. While inventory is a relatively broad term, it encompasses items ranging from raw materials in transit to finished goods. If your job duties include inventory management, knowing more about inventory types can help you streamline a company's production and sales processes. In this article, we define the term inventory, explore 14 types of inventory and also provide expert tips for managing various materials in an organisation.

What Is Inventory?

Inventory is the total goods and materials that a company uses for production or sales. It may comprise the raw materials across various manufacturing plants, partially assembled goods and items ready for consumers to purchase. Businesses often prioritise inventory management, as it allows them to buy enough goods to fulfil customer orders while having cash available for other operational expenses. Effective inventory management also helps companies reduce waste and optimise the space in their storage facilities.

14 Types Of Inventory

Here are 14 types of inventory and some examples of each type:

1. Raw materials

Raw materials are any goods that a company uses to create its final products. Companies often purchase these natural resources or pre-manufactured items from third-party vendors, though they may source their own if they want to keep costs down or have more control over the quality. Sometimes, raw materials are unrecognisable in the final product. For instance, you likely cannot detect the raw material glycol once a manufacturer incorporates it into lotion. A more apparent example of this raw material is the paint for a nightstand.

2. Packing materials

Packing materials are items that a company uses for package or to ship its materials. Some businesses segregate packing materials based on their use. For instance, the primary packing material for a cookie manufacturer might be the plastic sleeves that contain the cookies. The larger cardboard boxes that contain the sleeves and feature barcodes might be the secondary packing materials. The tertiary packing materials can be the shrink wraps and pallets that keep the cardboard boxes dry in transit.

3. Transit inventory

Transit inventory comprises goods that are in between the supplier and the manufacturer. The company has usually paid for its transit inventory and waits on the supplier to deliver it to its production facilities. Transit inventory is important to account for, as it requires the company to allocate cash before the inventory is accessible.

4. Smoothing inventory

Smoothing inventory refers to when a company purchases extra goods in anticipation of a future requirement. This proactive approach involves making accurate predictions about demand and ensuring the company has enough to satisfy customers. Managing smoothing inventory may even provide a competitive advantage over other companies that do not implement similar strategies. For instance, a grocery store might order more flowers than it normally does the week leading up to Mother's Day.

5. Excess inventory

Excess inventory refers to any unused goods or raw materials. Unlike smoothing inventory, excess inventory usually occurs unintentionally. A company may have ordered too much of a product or external factors may lead to reduced demand. Regardless, excess inventory can transition to dead inventory if the company cannot recycle it for another campaign. An example of excess inventory is a candle company having extra wicks after a limited release campaign. Here, the company may likely recycle the wicks and use them in other products.

6. Safety stock

Safety stock is inventory that a company purchases to protect itself in the event of a sudden increase in demand. It differs from smoothing inventory in the way it helps the company prepare for more general world events or natural phenomena. For instance, consider a manufacturer with a remote plant. If it is challenging for the manufacturer to receive a certain raw material during the winter months, it might store large quantities at the plant to prepare them later.

This way, the manufacturer can continue producing its expected output regardless of any transit issues that may occur in the near future.

7. MRO inventory

MRO inventory or maintenance, repair, and operating inventory, consists of supplies that help an organisation facilitate its daily operations. These supplies often include office supplies like paper, toner and computers. Companies also label brooms, gloves and chemicals as MRO, as these supplies allow them to maintain clean facilities, which is important for a productive work environment.

8. Service inventory

Businesses that primarily provide services instead of goods may rely on measuring their service inventories. This number indicates how many potential services a business can provide. For instance, if a nail salon has five technicians that can each manage eight appointments per day, the day's service inventory is 40 appointments.

9. Decoupled inventory

Decoupled inventory includes extra materials at different production stages to ensure employees always have tasks to perform. This type of inventory is essential for facilitating productivity, in case of unexpected delays. For instance, consider a three-stage manufacturing process where each stage depends on the last. If a crucial piece of equipment breaks during stage two, stage three employees can rely on the decoupled inventory to continue operations effectively.

10. Cycle inventory

Cycle inventory consists of the materials a company regularly uses to fulfil orders. It is important for businesses to manage their cycle inventories so that they have enough goods to meet demand. Though companies usually replenish their cycle inventories quickly, they use the first-in, first-out system to ensure they use the most perishable products first.

11. Book inventory

Book inventory, or theoretical inventory, is the recorded amount of materials that a company owns. The actual amount may differ from the book inventory because of errors. For instance, the book inventory might show a company has 1,000 computers when it only has 998. The discrepancy can be because of a point of sales system failure during a power outage when the company sold two computers.

12. Work-in-progress inventory

Work-in-progress inventory, also known as in-process inventory, refers to any goods that are partially completed. It accounts for goods at various stages in the production process to help organisations understand the cost of raw materials, labour and overhead costs of each stage. Frozen cakes are an example of a work-in-progress inventory, as they require going through the frosting process of the production line before becoming finished goods.

13. Finished goods

Finished goods are items that are ready for customers to purchase. They have undergone all parts of the manufacturing process and are ready for distribution and sale. Most companies classify finished goods as those that are not in stores yet, meaning this part of the inventory takes up space in warehouses. A finished goods category for inventory is useful for many companies, but businesses that do not process their own goods may omit this classification.

For instance, a car manufacturer is likely to categorise vehicles as finished goods, but a car dealer may not, as it only receives assembled vehicles for sale.

14. Dead stock

Dead stock is any inventory that a business cannot use or sell. One of the most common causes of dead stock is time, as a company cannot sell expired food or effectively use outdated technology. Organisations may try to prevent dead stock by implementing sales strategies before a product expires. If a company finds it difficult to sell these products, it might sell them at a discounted rate or bundle them with successful products to clear the dead stock.

Tips For Inventory Management

Here are some tips you can follow to manage the various types of inventory of a company:

Use an inventory management system - Inventory management systems help organisations keep more accurate records and fulfil orders to meet demands successfully. A system that is specific to the industry can ensure efficient tracking and easier inventory management.
Develop an organisation-specific categorisation method - While it is useful to categorise inventory based on their types, some organisations also create their own categorisation methods. For instance, a company might organise its materials by how frequently it uses them or how expensive they are.
Re-evaluate inventory requirements periodically - As an organisation expands its operations, its inventory requirements are likely to grow. Re-evaluating storage methods and ordering processes at regular intervals can improve efficiency while reducing costs.