What Is Inventory? Definition, Types, and Examples

Bookkeeping

For small businesses, a simple system may suffice, while larger enterprises may require more complex solutions. It’s crucial to understand your business needs to select the most suitable inventory management system. Whether you’re managing a small storefront or a large warehouse, understanding the fundamentals of inventory management is the first step towards efficiency. Inventory valuation methods like LIFO vs FIFO and WAVCO play a crucial role in how companies report their assets and costs. These techniques affect the calculation of the cost of goods sold and, consequently, a company’s overall financial health. Understanding these differences is essential for accurate financial reporting and strategic decision-making.

Inventory includes raw materials, components, work-in-progress (WIP) items, finished goods, and even operational supplies like maintenance tools. Effective inventory management requires tracking these assets, optimizing stock levels, and ensuring the right inventory is available at the right time and place. By linking inventory management systems to POS systems, businesses can automate reordering and maintain optimal stock levels.

Argos Software Inventory Management

Interlake Mecalux’s Easy WMS, for instance, assigns locations intelligently, sequences tasks, and automates information flows. Additionally, it integrates with the leading ERP systems on the market and various automated and robotic intralogistics solutions. Maintaining appropriate safety stock levels acts as a buffer against unexpected fluctuations in demand, supply chain disruptions, or delays in production.

Work-in-progress inventory is the partially finished goods waiting for completion and resale. A half-assembled airliner or a partially completed yacht is considered to be a work-in-process inventory. As noted above, inventory is classified as a current asset on a company’s balance sheet, and it serves as a inventory cycle for manufacturers retailers and distributors buffer between manufacturing and order fulfillment.

Decoupling Stock

Understanding these differences is essential for accurate financial reporting and strategic decision-making.
Transit inventory includes goods currently moving within the supply chain, such as shipments from suppliers to warehouses or warehouses to customers.
Understanding different inventory types is essential for effective business management, as each category serves a specific purpose and presents unique challenges.
For instance, a manufacturing plant might use MRO supplies to maintain machinery, repair equipment, or keep the factory clean and functional.
When you carefully track inventory levels, estimating how much to spend on raw materials or how many employees a production goal requires is easier.
Inventory turnover, an important indicator in inventory management, is derived by dividing the cost of goods sold (COGS) by the average value of inventory.
Whether you’re managing a small storefront or a large warehouse, understanding the fundamentals of inventory management is the first step towards efficiency.

Any product that is ready to be sold to customers—or utilized by customers—is considered finished goods inventory. This inventory type includes any materials your business uses to pack the products you sell. If you make toothpaste, the tube you put the toothpaste in could be classified as packing materials. Any boxes or packaging you use to ship or store your products are packing materials as well. Just in Time (JIT) inventory is not an inventory type but a methodology in which length of time to file taxes online materials are only purchased and received when necessary to manufacture a finished product—not before.

It includes inventory that is being transported from one location to another and is not yet available for sale or use.
This ensures that businesses can manage inventory across multiple selling channels seamlessly.
Classification also aids in smooth accounts payable and accounts receivable operations and a general ledger that balances out.
They are the essential components that undergo transformation through various production processes to create the products that customers purchase.
At its core, inventory is a major asset, a current asset on a company’s balance sheet, pivotal for day-to-day operations, and directly impacts cash flow and revenue generation.
The benefit to the customer is that they do not expend capital until it becomes profitable to them.

Implement a Reliable Inventory Management System

Understanding the different types of inventory management systems can help businesses select the one that best suits their operations. Inventory is one of the most critical assets in a company’s consolidated financial statements guide statement of financial position. It primarily includes raw materials, work-in-progress, finished goods, and spare parts. Inventory valuation methods—such as Last In, First Out (LIFO) and First In, First Out (FIFO)—significantly influence Firms’ stock valuation and directly impact the costs of goods sold.

Safety Stock Management

You need to know where your inventory is, where it’s going, and how much it’s worth. Smoothing inventory, also known as buffer inventory, balances fluctuations in demand and supply to maintain consistent production output. Built up during low-demand periods, it supports high-demand peaks without disrupting production schedules. This approach stabilises workforce levels, optimises machine use, and reduces reliance on overtime staffing. Economic Order Quantity (EOQ) is the optimal quantity of inventory that a business should order to minimize total inventory costs, including ordering costs and holding costs.

Businesses may purchase and hold inventory as an investment, hoping to sell it at a higher price in the future when demand exceeds supply. Pipeline inventory is inventory that is in transit between locations, such as from suppliers to warehouses or from warehouses to retail stores. It represents goods that are en route but have not yet arrived at their final destination. Flowspace’s order fulfillment software makes it easy for brands to manage their inventory and orders. With Flowspace, brands can seamlessly connect their DTC and B2B sales channels, in one centralized dashboard.

Key Manufacturing Industry Trends to Watch in 2025

Demand-based inventory refers to stock managed according to market needs and consumption patterns. Key types include cycle stock and smoothing inventory, each addressing specific demand dynamics. Effective management ensures consistent product availability, reduces excess stock, and aligns inventory levels with fluctuating market demand. Obsolete inventory includes unsellable or unusable items, often due to technological changes, expired products, or shifts in customer preferences. Effective management involves timely identification, disposal, and strategies to prevent future accumulation, such as better forecasting and regular stock reviews.

If you were a bicycle manufacturer, the complete bikes would fit into finished goods. Raw materials can be commodities they buy on the open market or extract themselves or components that are used in manufacturing. For example, if you’re a bicycle manufacturer, you would consider processed steel — which you purchase from a steel fabricator — part of your raw materials inventory. It is defined as the array of goods used in production or finished goods held by a company during its normal course of business. Integrating inventory management with other business systems significantly enhances operational efficiency by centralizing data, reducing manual entry, and improving accuracy.

Strategies for effective inventory management

Hence “just-in-time.” This system is commonly referred to as lean manufacturing since it significantly reduces the amount of inventory a business has at any given time. Choosing an inventory management strategy depends on the industry you operate in. For example, businesses that deal in raw materials and commodities might need to store large quantities of inventory, while a retailer or drop shipper might utilize a lean approach. Some manufacturing businesses have thousands of items they need to keep track of and forecast demand for. One way to track the performance of a business is the speed of its inventory turnover.

Understanding the various types of inventory—raw materials, work-in-process, finished products, and MRO supplies—is fundamental for any business involved in manufacturing and logistics. Effective inventory control and management ensure that companies can meet customer demand efficiently while maintaining optimal inventory levels. These features not only improve operational efficiency but also support better decision-making. By having access to accurate, real-time inventory data, businesses can optimize their stock levels, reduce carrying costs, and ensure that they are always prepared to meet customer demands. Whether you’re a small business or a large enterprise, leveraging these key features can significantly enhance your inventory management process.

Properly managing your inventory can make or break your business, so here are two critical best practices all businesses can utilize to keep their warehouses running efficiently and profitably. Obsolete inventory refers to stock that are no longer usable or sellable due to expired shelf life, outdated, damaged, or irrelevant to current market demands. Decoupling inventory refers to stock kept between different production stages to avoid delays caused by equipment failure or supply issues. Safety stock is an additional quantity of inventory that is kept on hand to protect against uncertainties in demand or supply, to prevent stockouts. Consignment inventory is the inventory owned by the supplier/producer (generally a wholesaler) but held by a customer (generally a retailer). The customer then purchases the inventory once it has been sold to the end customer or once they consume it (e.g., to produce their own products).