What is inventory?

Inventory is everything a company utilizes to sell or produce products, from finished goods
and parts to raw materials. And depending on what goods or services your business provides,
inventory can be anything from bananas to nails to raw silk to priceless works of art.
Usually, inventory is managed via an inventory management system: a sheet of paper or a
notebook, a spreadsheet, or inventory management software. By properly managing your
inventory, your business will know whether you have enough stock to satisfy
customer demand—and exactly when it’s time to place another order.
Businesses practice tight inventory control because it affects productivity and profitability. And
even if a business doesn’t sell or consume every day, just about every company can benefit
from managing assets like computers and furniture.

What are the 4 types of inventory?

The four types of inventory most commonly used are Raw Materials, Work-In-Process (WIP),
Finished Goods, and Maintenance, Repair, and Overhaul (MRO). You can practice better
inventory control and smarter inventory management when you know the type of inventory you
have. That includes choosing the best inventory management software to keep track of all that
inventory.

1. Raw Materials
Materials that are needed to turn your inventory into a finished product are raw
materials. These inventory items are bits and pieces of component parts that are currently in
stock but have not yet been used in either work-in-process or finished goods inventory.
There are two types of raw materials: direct materials—which are used directly in finished
goods, and indirect materials—which are part of overhead or factory costs.
Inventory example: For example, direct raw materials might be leather to make belts for
your company would fall under this category. Or, if you sell artificial flowers for your interior
design business, the cotton used would be considered direct raw materials, too.
Indirect raw materials might be lightbulbs, batteries, or anything else that indirectly contributes
to keeping your shop running.
Related article: What is a Bill of Materials (BOM)?

2. Work-In-Process
Inventory that is being worked on is Work-In-Process (WIP), just like the name sounds. From a
cost perspective, WIP includes raw materials (plus, sometimes labor costs) that are still “in
production” when the accounting period ends.
In other words, whatever direct and indirect raw materials your business is using to create
finished goods is WIP inventory.
Inventory example: If you sell medical equipment, the packaging would be considered
WIP. That’s because the medicine cannot be sold to the consumer until it is stored in proper
packaging. It’s literally a work-in-process.
Another example would be a custom wedding dress that’s not quite finished when the end of
the fiscal year rolls around. That lace, silk, and taffeta are no longer raw materials, but they’re
not quite a “finished goods” wedding dress, either.

Experience the simplest inventory management software.

Are you ready to transform how your business does inventory?

3. Finished Goods
Maybe the most straightforward of all inventory types is finished goods inventory. That
inventory you have listed for sale on your website? Those are finished goods. Any product that
is ready to be sold to your customers falls under this category.
Inventory example: Finished goods could be a pre-packaged fruit salad, a monogrammed
bathrobe, or a custom-built laptop ready for an employee to use.

4. Overhaul / MRO
Also known as Maintenance, Repair, and Operating Supplies, MRO inventory is all about the
small details. It is inventory that is required to assemble and sell the finished product but is not
built into the product itself.
Depending on the specifics of your business, this inventory might be in storage, at a supplier,
or in transit out for delivery.
Inventory example: For example, gloves to handle the packaging of a product would be
considered MRO. Basic office supplies such as pens, highlighters, and paper would also be in
this category. With inventory management you can:
 Keep track of current stock levels so that you know when to order more of the
inventory you need.
 Tell you how much specific inventory items are costing you.
 Monitor inventory activity.

 Save time by effortlessly scanning items using QR codes or barcodes.

Main types of inventory

There are many different types of inventory, but typically they are grouped into 4
categories.

1. Raw materials (including components) are any items that are needed to produce
finished products. For example, if you manufacture clothes, then fabric, threads,
and sewing accessories would be the raw materials that you purchase and use in
the production process.
2. Work-in-progress (WIP) inventory includes items that are partly finished and
not ready for sale yet. In clothing manufacturing, shirts that are finished except
for the buttons being sewn on would be considered WIP.
3. Maintenance, repair, and operations (MRO) goods are items that support the
manufacturing process and are not a part of the finished product. Continuing the
garment industry example, it can be needles, patterns, scissors, and so on.
4. Finished goods are products that are manufactured and ready to be sold.

With the existing types of inventory in mind, let’s define the main stages of the inventory
management process.

Stages of inventory management

As we said, inventory management involves tracking of goods through manufacturing,
storing, and sales. So, we can break this process into five stages.

1. Purchasing (reordering) is buying raw materials needed for manufacturing or

finished goods that are intended to be sold.
2. Production is the process of turning raw materials into finished goods or
preparing items for sale.
3. Storage is holding stock, e.g., raw materials before they are used or finished
goods before they are sold.
4. Sales is transferring goods to the customers.
5. Reporting is monitoring how much a business is selling and how much profit it
makes.
 Obviously, not every company goes through all the stages. For example,
wholesalers would most probably skip production altogether. That said, these stages
go in a cycle and at each stage you need to know exactly what items you have in
store (in production/on the shelves), where they are, as well as when and how much
to order to ensure smooth and uninterrupted business operations.

That brings us to the next question: What are the most common problems and
difficulties associated with inventory management?

Inventory management
challenges
 Managing inventory is a complex process involving many aspects. So,
handling it manually or with the help of disconnected legacy systems easily
causes errors and financial losses. Here are some of the main pitfalls.

How does inventory management work?

Inventory is the goods or materials a business intends to sell to customers for profit. Inventory
management, a critical element of the supply chain, is the tracking of inventory from
manufacturers to warehouses and from these facilities to a point of sale. The goal of inventory
management is to have the right products in the right place at the right time. This requires
inventory visibility — knowing when to order, how much to order and where to store stock. The
basic steps of inventory management include:

1. Purchasing inventory: Ready-to-sell goods are purchased and delivered to the

warehouse or directly to the point of sale.
2. Storing inventory: Inventory is stored until needed. Goods or materials are transferred
across your fulfillment network until ready for shipment.
3. Profiting from inventory: The amount of product for sale is controlled. Finished goods
are pulled to fulfill orders. Products are shipped to customers.

What is inventory visibility?

Multichannel order fulfillment operations typically have inventory spread across many places
throughout the supply chain. Inventory visibility is knowing what inventory you have and where
it’s located. Businesses need an accurate view of inventory to guarantee fulfillment of customer
orders, reduce shipment turnaround times, and minimize stockouts, oversells and markdowns.
Three reasons why you need a better view of your inventory
Why is inventory management important?
Inventory can be a company’s most important asset. Inventory management is where all the
elements of the supply chain converge. Too little inventory when and where it's needed can
create unhappy customers. But a large inventory has its own liabilities — the cost to store and
insure it, and the risk of spoilage, theft and damage. Companies with complex supply chains and
manufacturing processes must find the right balance between having too much inventory on hand
or not enough.
Read how AI overcomes inventory challenges
What are the types of inventory management?

Periodic inventory management

The periodic inventory system is a method of inventory valuation for financial reporting
purposes in which a physical count of the inventory is performed at specific intervals. This
accounting method takes inventory at the beginning of a period, adds new inventory purchases
during the period and deducts ending inventory to derive the cost of goods sold (COGS).

Barcode inventory management

Businesses use barcode inventory management systems to assign a number to each product they
sell. They can associate several data points to the number, including the supplier, product
dimensions, weight, and even variable data, such as how many are in stock.

RFID inventory management

RFID or radio frequency identification is a system that wirelessly transmits the identity of a
product in the form of a unique serial number to track items and provide detailed product
information. The warehouse management system based on RFID can improve efficiency,
increase inventory visibility and ensure the rapid self-recording of receiving and delivery.
Key features of effective inventory management
Inventory tracking
Know exactly where inventory is across the supply chain.
Order management
Customize pricing, send quotes, track orders and manage returns.
Transfer management
Move product to where it's most valuable.
Reporting and analytics
Evaluate patterns in processes to forecast future demand and sales.
Purchasing
Create and manage purchase orders.
Shipping capabilities
Automate shipping to reduce errors such as late deliveries or delivering incorrect packages.

What is an inventory management system?

Spreadsheets, hand-counted stock levels and manual order placement have largely been replaced
by advanced inventory tracking software. An inventory management system can simplify the
process of ordering, storing and using inventory by automating end-to-end production, business
management, demand forecasting and accounting.
Optimize your maintenance, repair and operations (MRO) inventory
The future of inventory management

Globalization, technology and empowered consumers are changing the

way businesses manage inventory. Supply chain operators will use
technologies that provide significant insights into how supply chain
performance can be improved. They’ll anticipate anomalies in logistics
costs and performance before they occur and have insights into where
automation can deliver significant scale advantages.

In the future, these technologies will continue to transform inventory

management:
Artificial intelligence
Intelligent, self-correcting AI will make inventory monitoring more accurate and reduce material
waste.
Internet of Things
Data from IoT sensors will provide insight into inventory location and status.
Blockchain
Disparate parties will be connected through a unified and immutable record of all transactions.
Intelligent order management
Supply chains will master inventory visibility with improved demand forecasting and
automation.
Quantum computing
Unprecedented computational power will solve previously unsolvable problems.
Explore five trends that will shape the supply chain of the future
Inventory management

What is inventory visibility?

Multichannel order fulfillment operations typically have inventory spread across many places
throughout the supply chain. Inventory visibility is knowing what inventory you have and where
it’s located. Businesses need an accurate view of inventory to guarantee fulfillment of customer
orders, reduce shipment turnaround times, and minimize stockouts, oversells and markdowns.
Three reasons why you need a better view of your inventory
Why is inventory management important?
Inventory can be a company’s most important asset. Inventory management is where all the
elements of the supply chain converge. Too little inventory when and where it's needed can
create unhappy customers. But a large inventory has its own liabilities — the cost to store and
insure it, and the risk of spoilage, theft and damage. Companies with complex supply chains and
manufacturing processes must find the right balance between having too much inventory on hand
or not enough.
Read how AI overcomes inventory challenges

What are the types of inventory

management?
Periodic inventory management
The periodic inventory system is a method of inventory valuation for financial reporting
purposes in which a physical count of the inventory is performed at specific intervals. This
accounting method takes inventory at the beginning of a period, adds new inventory purchases
during the period and deducts ending inventory to derive the cost of goods sold (COGS).

Barcode inventory management

Businesses use barcode inventory management systems to assign a number to each product they
sell. They can associate several data points to the number, including the supplier, product
dimensions, weight, and even variable data, such as how many are in stock.

RFID inventory management

RFID or radio frequency identification is a system that wirelessly transmits the identity of a
product in the form of a unique serial number to track items and provide detailed product
information. The warehouse management system based on RFID can improve efficiency,
increase inventory visibility and ensure the rapid self-recording of receiving and delivery.
Key features of effective inventory management
Inventory tracking
Know exactly where inventory is across the supply chain.
Order management
Customize pricing, send quotes, track orders and manage returns.
Transfer management
Move product to where it's most valuable.
Reporting and analytics
Evaluate patterns in processes to forecast future demand and sales.
Purchasing
Create and manage purchase orders.
Shipping capabilities
Automate shipping to reduce errors such as late deliveries or delivering incorrect packages.
What is an inventory management system?
Spreadsheets, hand-counted stock levels and manual order placement have largely been replaced
by advanced inventory tracking software. An inventory management system can simplify the
process of ordering, storing and using inventory by automating end-to-end production, business
management, demand forecasting and accounting.
Optimize your maintenance, repair and operations (MRO) inventory
The future of inventory management

Globalization, technology and empowered consumers are changing the

way businesses manage inventory. Supply chain operators will use
technologies that provide significant insights into how supply chain
performance can be improved. They’ll anticipate anomalies in logistics
costs and performance before they occur and have insights into where
automation can deliver significant scale advantages.

In the future, these technologies will continue to transform inventory

management:
Artificial intelligence
Intelligent, self-correcting AI will make inventory monitoring more accurate and reduce material
waste.
Internet of Things
Data from IoT sensors will provide insight into inventory location and status.
Blockchain
Disparate parties will be connected through a unified and immutable record of all transactions.
Intelligent order management
Supply chains will master inventory visibility with improved demand forecasting and
automation.
Quantum computing
Unprecedented computational power will solve previously unsolvable problems.
Explore five trends that will shape the supply chain of the future

Why is inventory management important?

Inventory can be a company’s most important asset. Inventory management is where all the
elements of the supply chain converge. Too little inventory when and where it's needed can
create unhappy customers. But a large inventory has its own liabilities — the cost to store and
insure it, and the risk of spoilage, theft and damage. Companies with complex supply chains and
manufacturing processes must find the right balance between having too much inventory on hand
or not enough.
3 ways AI can help solve
inventory management
challenges
By Chloe Chang 3 min read
Manufacturing March 4, 2020
Growing businesses have various sources of inventory that require receiving and
sharing their ‘available-to-promise’ picture in real-time. As such, inventory management
has become increasingly complex due to accessing information on a global
scale. According to Forrester, omnichannel fulfillment is a high or top priority for 94% of
retailers. To effectively manage costs and buyer needs, companies must address the
basic issue of tracking quantities of supply and demand at both physical locations and
ecommerce sites to ensure that the inventory pictures are in sync. Ultimately, this a
much larger network than what traditional inventory management systems were
designed to track and manage.
Identify the inventory pain points
It’s no longer just a B2C world where one seller is engaged with multiple customers.
Instead, we’re seeing a B2B world amongst the broader supply chain where multiple
inventory organizations need to share or connect inventory pictures with an intuitive,
seamless user experience for configuration and modification. Sharing and receiving
available-to-promise inventory with, and from, specific suppliers requires access control
to reduce lead times and gain multi-enterprise visibility into each source of demand and
supply.
As external partners read data from an inventory database, they need to understand
how much of their inventory is still at the retailer so they can better plan their production.
With accurate insights, they can use data to predict propensity to buy. This critical
information supplements forecasts for future inventory needs based on historical sales,
contextual information, and promotional plans. It allows key leads to plan inventory
purchases from suppliers based on forecasts from demand planners and changing
supply and demand. The top goal of planning inventory replenishment is having enough
inventory to fulfill all customer orders, while minimizing excess stock on hand. Retailers
can harness this information to understand how much inventory is needed to increase
incremental sales opportunities.
Accuracy is equally important. When an organization runs a national marketing
campaign, not having enough inventory safety stock can directly impact revenue,
customer experience and even brand reputation. At the highest level, a control tower
can help ensure the accuracy of, and provide visibility into, the performance of inventory
across various channels, marketplaces, and sellers. This helps identify any anomalies
(low performance) or issues (delayed supply, low inventory) that course correction can
proactively adjust rather than react too late.
Although architecture to connect various solutions is an initial pressing issue for most
companies, there’s a clear need to interact with inventory from a business standpoint in
three ways. First, addressing the problem of having inaccurate or hidden information
(clear visibility) since users need to constantly monitor supply, demand and inventory
levels to identify potential inventory shortages and stale inventory. Second is being able
to take action in real-time – saying ‘yes’ to the sale. Finally, applying AI insights to
create inventory optimization and remove manual processes.
How AI helps optimize inventory
management

1. Planning inventory replenishment – Fulfillment forecasting is particularly

challenging in predicting demand — even more than supply. In order to predict
allocation, data science is acritical application towards historical supply and demand
because there are uncertainties and anomalies associated with each data set.
Anomalies come from both supply and demand data since there will be unexpected
fluctuations in each. This customer-behavior-centric model needs to consider not just
where, but how and when, people want to receive their products.
By applying AI, inventory management solutions can improve store inventory levels by
analyzing consumer fulfillment choices and shopping behaviors.
2. Estimated time to arrival – Knowing the quantity and location of available-to-
promise inventory and where it resides is critical for businesses to meet and exceed
customer expectations. Being able to communicate to customers the estimated time a
product will arrive is increasingly valuable and necessary in this highly competitive age,
with businesses like Amazon that can offer guaranteed delivery windows. There are
countless inputs to improve the accuracy of these models and retailers must be able to
simulate and drill into how each calculation was reached. This will help to ensure each
fulfillment decision is aligned with the business’ priorities, whether it is cost or time.
3. Safety stock management – Businesses historically set a static quantity or
percentage for their inventory levels. This means defining a minimum par that is
reserved for walk-in sales and is not factored into e-commerce or other channels of
fulfillment. With today’s ever-evolving consumer expectations, on top of omni-channel
engagements, it is no longer enough to use generalized information. Stock levels need
to dynamically shift to leverage and react to incoming demand. With automated re-
balancing, tarnished brand loyalty from promising inventory to customers that cannot be
delivered, or fear of overselling then over-purchasing inventory and leaving money on
the table are two huge problems that can be tackled. Companies like REI use predictive
rules to access in-store and warehouse inventory, going beyond linear, rules-based
sourcing to meet seasonal customer and margin needs.
To achieve profitable omni-channel results, retailers need capabilities that
can intelligently balance fulfillment costs against service to enhance return on
investment, improve customer experience and increase repeat purchase behavior.