What is Inventory?

The term”inventory” is used to describe the raw materials that are used for production and also the products made that are offered to purchase. The Inventory of a company is one of the biggest assets since the sale of Inventory is among the main sources of revenue and consequent dividends for shareholders of the company. There are three kinds of Inventory: raw materials, work in progress, and finished items. It is classified as an asset in the current position on a company’s balance sheet.

Key Takeaways

  • Inventory refers to the raw materials utilized to make items as well as items that are to purchase.
  • This is classified under current asset in the balance sheet of a business.
  • The three kinds of Inventory comprise the raw materials, work-in-progress, and final goods.
  • Inventory is valued at three different methods, which include the first-in-first-out method, the last-in-first-out method, and the weighted-average method.
  • Inventory management helps businesses reduce inventory costs as they produce or acquire items on a need-to-have basis.

understanding Inventory

Inventory is an essential asset for any business. It’s the variety of items that are used in the production process or products that a business holds throughout its daily business. There are three main types of Inventory: raw materials (any materials utilized to create finished products) and work-in-progress (WIP) and the finished goods, or items that are ready to sell.

As previously mentioned, the inventory category is an asset in the current position on the balance sheet of a business and serves as a buffer between order fulfillment and manufacturing. If an inventory item is sold, its cost of carrying is transferred to the cost of goods sold (COGS) category of the income statement.

Inventory is evaluated in three different methods. The three methods include:

13 Inventory Types

Raw MaterialsRaw material is used by companies to produce and complete products. Once the product is finished, the raw materials generally are not recognizable from their original forms like the oil used to make shampoo.


Components are comparable to raw materials in the sense that they are the raw materials that are used by companies to make and complete products, with the exception that they are recognizable after the product is finished like a screw.

WIP (Work In Progress (WIP):

WIP inventory refers to products in the process of production. It also includes raw materials , components such as overhead, labor, and even packaging materials.

Final Goods:

The finished goods are those that are ready for sale.

Maintenance Repair and Operations (MRO) Goods:

MRO refers to Inventory — usually in the form of items that support creating a product or the management of a company.

Materials for Packaging and Packing:

There are three kinds of packaging materials. Primary packaging protects the product and allows it to be used. Secondary packaging is the wrapping of the final product and may contain labels or SKU information. Tertiary packaging is bulk packaging used for transportation.

Security The Stock Market and the Anticipation Stock

Safety stock is an additional inventory that a company purchases and stores in order to deal with unplanned situations. The safety stock comes with carrying costs; however, it helps improve customer satisfaction. Like anticipation stock, it consists of finished or raw products purchased by a company in response to the trends in production and sales. If the cost of a raw product is increasing or peak sales are close, the business could buy safety stock.

Decoupling Inventory:

Inventory decoupling is the name used to describe additional WIP or items that are stored at each line station in order to prevent the interruption of work. While all businesses may have safety stocks but decoupling Inventory is beneficial when lines operate at different speeds. It only applies to businesses that manufacture products.

Cycle Inventory:

Companies purchase Inventory for cycle cycles in lots in order to obtain the correct amount of Inventory with the least storage cost. Find out more about the cycle inventories in “Essential Guide to Inventory Planning.”

Service Inventory:

Service inventory is an accounting term that describes the amount of service a company can offer in a particular time. A hotel that has 10 rooms, for instance, has a inventory of services of 70 single-night stays within one week.

Transit Inventory:

Also known as pipeline inventory, the Inventory of transit is being moved between the manufacturer’s distribution centers and warehouses. Transit inventory could take weeks to travel between warehouses and distribution centers.

Theoretical Inventory

Also known as book inventory theoretic Inventory is the lowest amount of stock that a company must have to complete a procedure without waiting. Theoretical Inventory is typically used in the food and production industry. It’s calculated using the actual and theoretical formula.

Excess Inventory

Also called obsolete Inventory, excess Inventory includes un-sold or inactive raw materials or goods that companies don’t intend to sell or use however must nevertheless have to pay for storage.

Examples of Inventory

Examples from real-life situations can assist in making inventory models easier comprehend. The following examples illustrate how different kinds of inventory function in both manufacturing and retail industries.

Raw Materials/Components:

A company that manufactures T-shirts uses components such as dyes, threads, fabrics and designs for printing.

End-to-end Goods:

A jewelry maker makes charm necklaces. The employees attach a necklace to a card, and then insert it into envelopes of cellophane to make a final product that is ready to sell. Cost of Goods Sold (COGS) for the final item includes packaging as well as the work required in the making of the product.

In Progress: In Progress:

A cell phone is comprised of a casing, a printed circuit board and other components. In the course of making these components on a specific workstation is called WIP.

RRO Products:

Operating, maintenance and repair items for condominiums include folders, copy paper and printer toners and gloves, glass cleaner and brooms for cleaning the property.

Packaging Materials:

In a seed business, the principal packing material is a sealed bag which contains flax seeds. Incorporating seeds from flax inside an appropriate container for transportation or storage will be the second packing. Third packaging is shrink wrap needed for shipping pallets of cases.

Security Stock

A veterinarian in a remote community stockpiles disinfectants as well as cat and dog treats in order to satisfy customer needs in the event that the road floods in the spring freeze and delay delivery trucks.

Anticipated/Smoothing Inventory:

An event planner purchases discount spools of ribbon as well as tablecloths that are floral in anticipation of the wedding season in June.

The Decoupled Inventory

When a bakery is in operation, decorators will have a stock of sugar roses to decorate wedding cakes. So even if the team’s frosting mix is running out the decorators are able to continue working. Because the flowers are a part of the cake’s design in the event that the baker was out of the mix and couldn’t make it to the final cake.1

Cycle Inventory:

In restaurants, when they use their last 500 napkins made of paper The new refill order comes in. The napkins are easily tucked away in the designated storage space.

Service Inventory:

The cafe is open all hours of the day, with 10 tables where guests spend an average of 1 hour eating their meals. The Inventory of its service, therefore it serves 120 meals every day.

Theoretical Inventory Cost

A restaurant is aiming to spend 30 percent of its budget for food, but the actual cost is 34 percent. “Theoretical Inventory” is “theoretical inventory” is the 4percent of food that was wasted or lost.

Book Inventory:

The stock inventory theoretically stored in the inventory record system that may be different with the Inventory you actually have, when you do an inventory.

Transit Inventory:

An art shop buys and purchases 40 tins of a well-known pencil set. Tins are on their way from the vendor and, consequently, are being transported.

Excess Inventory

A shampoo manufacturer makes 50 000 special shampoo bottles that are branded to coincide with the summer Olympics. However, the company only sells 45,000 when the Olympics have ended, and no one is willing to purchase them, which is why they’re required to sell them off or dispose of them.

What is Manufacturing Inventory?

In the manufacturing process, Inventory is comprised of items in stock as well as raw materials and components that make up the products. Manufacturing companies closely monitor the levels of Inventory to ensure there’s not a shortage that would stop production.

Accounting breaks down manufacturing stock in raw material, work-in-progress, and finished items because each kind of Inventory has a distinct cost. Raw materials generally cost less per unit than the finished products.

What does Inventory mean for the Service Industry?

Every business has an inventory to support its business. For service businesses, this Inventory is considered to be intangible. The Inventory of a law firm is, for instance, comprised of its files. The paper used can be printed legal papers is the company’s MRO.

The importance of inventory control

Control of Inventory allows companies to purchase the correct amount of Inventory at the appropriate moment. Also called stock control, this method helps to optimize the amount of Inventory, decreases storage costs , and helps prevent stockouts.

Best Practices for Inventory

The old saying “if you can’t measure it, you can’t manage it” is applicable to the management of Inventory as well as best practice. The first and most effective practice is to keep the track of your Inventory Other best practices include:

Safety Stock for Carry:

Also called buffer stock, buffer stock helps businesses from running out of products or items that are in high demand. When companies exhaust their calculated stocks, the safety stock acts as a backup in the event that the demand rise in a sudden manner.

You can invest in a Cloud-based Inventory Management Software:

Cloud-based inventory management systems allow businesses know at a moment’s notice the exact location of every SKU and product are in the world. This information helps organizations to stay up-to-date, responsive and flexible.

What are the major distinctions between the Inventory and Warehouse

Complexity /Features

One of the major difference between warehouse management is the level of complex nature of each inventory management system. Inventory management systems are more straightforward, as an inventory management system could provide an estimate of the total Inventory you’ve got for the storage area you have chosen. The warehouse management system, however, other hand, provide an organization to manage the entire storage system inside a structure such as one that is a warehouse. Therefore, if a facility contains multiple storage bins of the same item Warehouse management systems will assist in managing each of them, while an inventory management system can simply tell you the number of a particular item you own.

Control and Storage

The distinction in the simplicity and complexity extends to the storage and control of Inventory, too. With the case of an inventory control system, you will just be aware that you have the exact product in stock and the amount is in stock. The administration of the Inventory in the warehouse is dependent on the implementation of warehouse management. This allows you to locate specific areas for the Inventory to be placed or even retrieve it in the future. In essence warehouse management will provide you with the details of the control of Inventory, while inventory management provides you with the amount.


Another major difference between warehouse management and Inventory is the degree to which one can be integrated in the overall operations of a company’s management of its Inventory and supplies. SAP states the management of Inventory is usually the initial step in other processes when it comes to warehouse management. However, the warehouse management process is linked to other aspects of the management of a company including sales, production supply, distribution, as well as quality control. Also warehouse management is essential to the daily operations of other departments, while inventory management isn’t.

Software Solutions

In the case of software for managing Inventory versus Warehouse management programs, software for warehouse management generally gives a company the chance to analyze and adjust their Inventory as well as storage when required, while inventory management software doesn’t allow this. The various communication tools used in warehouse management usually allow you to analyze and make necessary changes and result in a more efficient and efficient process.

Software Solutions Key Differences

In simple terms, the primary distinction between the Warehouse management system (WMS) as well as an inventory management system (IMS) is that one is able to track the number of products, or SKUs. The other is monitoring units of space, which includes bins and compartments.

Software for managing Inventory

The inventory management program is a system that uses computers that tracks the levels of Inventory, orders deliveries, and sales. It is also used in the manufacturing sector to produce documents such as a work order and bill of materials as well as other documents related to production. This software is suitable for businesses searching for an inventory program that is simpler and focused on the management of the actual product.

Software for managing Inventory is great for small and mid-sized businesses that do not own many items. Even though the software’s capabilities are limited to inventory management, it is the main advantage. If your company has no need for the extravagant gadgets that come with more complicated administration system, this inventory management software is the best choice.

Warehouse management software for warehouse management

The software for warehouse management, similar to Inventory management software can be used for monitoring the quantities of goods including cycle counting, packaging, picking, and managing multiple sites. But warehouse management software offers more information and capabilities related to the shipping of products channels, shipping channel listings, and other functions. In reality, warehouse management software includes many functions that it’s impossible to explain the entire array in one article.