Understanding the Four Types of Inventory

Key Takeaways:

• Knowing the four types of inventory is critical: raw materials, WIP inventory, finished, goods, and safety stock.
• Monitoring all types of material across the supply chain can heighten visibility and eliminate costly mistakes.
• Mobile inventory technologies can help you better understand and track inventory movements, maintain optimal stock levels, and reduce overstocking.

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In today’s fast-paced supply chain, it’s crucial for companies to efficiently manage their inventory. Although many types of inventory exist, in this article, we will look at the four main types: raw materials, work-in-progress inventory, finished goods, and safety stock.

Knowing the four types of inventory is important, yes, but so is understanding why it’s important to track each inventory type, especially for manufacturers.

In 2022 alone, the worldwide cost of inventory distortion was estimated at $1.9 trillion. When inventory across the supply chain is not visible and streamlined, manufacturers stand to lose time and money. Using technologies like mobile inventory is one way to enhance oversight and efficiency in stock management.

1. Raw Materials Inventory

Company warehouses don’t just house finished products. Some manufacturers use distribution centers to store raw materials like produce or flour for their production lines.

Raw material inventory acquisition and storage is an essential component of any inventory strategy. For instance, acquiring crops, which respond based on weather conditions, can lead to cost increases, supply chain adjustments, and even delayed shipping.

It’s important for warehouses to monitor raw materials. Shortages or stockouts can lead to stoppages on the production line, impacting delivery schedules, customer service, and revenue.

Having reliable information about stock levels and consumption is a baseline requirement to prevent interruptions on the shop floor.

Inventory management software solves these challenges. For larger companies that use an ERP system, mobile inventory solutions with built-in barcode scanning can ensure extremely high levels of accuracy, speed, and efficiency in these areas.

2. Work-in-Progress Inventory

WIP inventory refers to a company’s partially or semi-finished goods in the process of being made. Often, WIP materials go through a process of preparation, mixing, and finishing, or equivocal stages.

While work-in-progress inventory may be widely used, keeping track of it is difficult. Think of an ice cream manufacturer that transforms raw ingredients like sugar, milk, and chocolate chips into finished goods—ice cream.

How do you track the consumed materials once they are mixed into WIP inventory?

While inventory control systems provide some oversight, tracking material movements through the phases of production necessitates automated data collection for visibility.

For example, employees using mobile barcoding devices are able to quickly update inventory progress at any point in the product lifecycle. These checkpoints help automate track-and-trace for raw components, WIP materials, and even completed products.

This is especially relevant for process manufacturers, where intermediary materials are essential to the creation of a finished product.

3. Finished Goods Inventory

Once a completed product has been made, it becomes a finished good. These products are ready for sale.

For example, the ice cream you buy in the store is considered finished goods. It started as raw materials, the recipe mixed and made as various types of WIP inventory, then was finished, packed, picked, and shipped.

Finished goods must be closely tracked to ensure final delivery to customers. Technology helps keep tabs on stock so it doesn’t get lost or expire. Mobile solutions enhance inventory management in this area, enabling efficient pick, pack, and ship operations.

While finished goods seems self-explanatory, there are several types that warrant further explanation:

In-Transit Inventory

Finished goods that are being transported from one location to another in the supply chain are referred to as in-transit inventory. These items have been produced but are not currently sitting in a warehouse because they are “in transit” on a transportation vehicle.

Since in-transit goods are at higher risk of getting lost, misplaced, or misdelivered, it’s important to not lose sight of them as they travel to their endpoint. Many field mobility solutions exist capable of closing that oversight gap.

Cycle Inventory

Inventory that moves quickly through the supply chain is called cycle stock. These are products that arrive from a supplier or manufacturing process and are almost immediately pushed out to customers.

Warehouse operations must be flexible and agile to keep up with the speed of high inventory turnover. Reliable, up-to-the-second data is a must.

Cycle stock indicates high demand. A quick supply chain can be tough to monitor, though, and customer needs and expectations can always change. In fact, 78% of respondents to the Digital Inventory Report noted fluctuating demand as a critical challenge impacting their operations.

Slow-Moving Inventory

Slow-moving items are the opposite of cycle inventory. These goods do not move quickly, as the name implies. When items stop moving at all, they become dead stock inventory. Deadstock refers to unsold products that are no longer in demand and are unlikely to be sold in the future.

Similar to dead inventory, stock that is no longer viable as raw materials or sellable as finished goods become obsolete inventory.

Often, electronics manufacturers end up with chips or electrical parts that have reached obsolescence if they can’t effectively track or sell components. Food manufacturers must be vigilant about expiration dates on food ingredients and products. Expired food can’t be sold or scrapped and reused.

Slow-moving, dead, and obsolete stock can be the result of poor or changing market demand, overproduction, or inadequate inventory tracking software. Regardless, sluggish SKUs tie up valuable resources, draining the company’s bottom line.

4. Safety Stock Inventory

Safety stock inventory represents deliberate overstocking of materials to cover unpredictable market fluctuations.

Safety inventory may be created in times of low demand so manufacturers can continue production schedules without stoppages due to stockouts.

Reserve stock can also be anticipatory. Companies create large inventories for times of projected high sales. If a manufacturer expects a rise in the price of supplies or a future inability to obtain materials, they may want to produce as many goods as possible while conditions are thriving.

The reality is, safety or anticipatory inventory is often “just-in-case” inventory, collected out of fear of future shortages or market turns. What happens, however, is that safety stock sits on warehouse shelves much longer than other classifications, ultimately depreciating or going unused entirely.

Again, technologies like mobile software and automation are instrumental in preventing undue stock hoarding. As a result, businesses can reduce overhead and carrying costs, increase monitoring, and make better strategic decisions.

How to Track All Inventory Types

No matter what type of inventory a company uses, an inventory management system is needed to run efficiently. In the face of constant supply chain and cost pressures, a robust solution capable of ensuring real-time visibility, oversight, and control is ideal.

But with so many types of inventory—raw materials, WIP inventory, finished goods, and safety stock—each with its own needs, how can they all be tracked?

Many companies are finding that the right mobile inventory solution can not only solve these challenges but provide numerous benefits in cost-savings and performance, streamlining operations for future growth.