From supplier orders and stock on your warehouse shelves to managing inventory across multiple channels and customer delivery, the ecommerce supply chain consists of a variety of complex and ever-moving parts.
Beginning with types of inventory, understanding these parts and their components can help you make the best decisions for your business — both operationally and financially.
Continue reading to explore the four types of inventory you need to know about to manage your inventory across all channels accurately. We also discuss how inventory management software can assist you in managing your inventory as your company continues to grow.
Inventory has to start somewhere, and that starting point is with raw materials. Raw materials are the foundation of any product. These are minimally processed materials or commodities used to create a finished product. In fact, products simply cannot exist in the absence of raw materials. Occasionally referred to as direct raw materials, these materials used are part of the physical product itself.
For example, grain is a raw material.
Maintenance, repair, and operating supplies (MRO).
Products need more than just raw materials to be completed. There are additional materials required to manufacture a finished good that are not part of the physical commodity itself. These are considered overhaul inventory or maintenance, repair, and operating supplies (MRO inventory). Overhaul MRO is often used interchangeably with the term indirect raw materials.
So what does this type of inventory look like? For example, throughout the manufacturing process of towels, more specifically bathroom towels, materials other than the cotton (the raw material) have to be used to make the towels themselves. The oils and lubricants used on the machines that weave and dye the towels are examples of overhaul MRO and can be referred to as indirect raw materials as well. The oil and lubricant aren’t part of the towels themselves, but the towels couldn’t be woven and dyed on these machines without them.
Work-in-progress inventory refers to products that are in the middle of production. (Work-in-progress and work-in-process are frequently used interchangeably.) Simply put, these are items of stock that aren’t yet finished but will be soon. As a result, tracking the estimated cost of this work-in-progress inventory during the inventory management process is critical to determining the price of the final product.
This guide about WIP inventory by ShipBob highlights the three components of work-in-process inventory used to calculate the cost of your current WIP inventory:
- Beginning WIP Inventory (the WIP balance from the previous accounting period) + Manufactured Costs (all costs associated with manufacturing your product) – COGM (the total cost of good manufactured) = Ending WIP Inventory
An example of work-in-progress inventory? Consider something like a plastic toy kitchen and play food. If the kitchen and food have been poured, molded, and cooled but are awaiting some form of moderate assembly and packaging, they would be considered work-in-progress inventory.
When it comes to types of inventory, what constitutes finished goods? are as straightforward as they sound. Any product that is ready to be sold as-is or that you have in stock for sale (ready to be shipped directly to the customer) is considered a finished good.
So, when the storage containers, bath towels, play kitchen and plastic food referenced above have been manufactured, assembled, and packaged — they’re considered finished goods. As finished goods, they’re listed across your selling channels and platforms and are available — just as they are — for shipment to the customer.
Managing your inventory.
Inventory management software like Linnworks can help you track all of your inventory at every stage across all sales channels for total commerce control. From one central location, Linnworks inventory management system can:
- Generate purchase orders to replenish warehouse shelves to optimal stock levels based on consumption rates and supplier lead times.
- Manage multiple warehouse locations to maintain required inventory levels to fulfill multichannel orders and reduce overselling.
- Tracking consumption rates for top-selling SKUs to avoid under or over-estimating critical stock levels.
- Use historical sales data, tracking seasonal trends, and analyzing similar products to forecast demand.
- Track inventory as it’s moved between warehouse locations.
- Improve traceability across the supply chain.
- Manage products in batches with expiration dates (this is helpful for industries like food) and products that follow FIFO inventory flow (helpful for finished products in beverage industry, for example).
- Manage stock of individual products sold together with other items. The Linnworks platform auto calculates available stock levels for sets of products based on availability of master units. This can save a lot of time to have an ecommerce platform track availability of finished products based on the availability of raw materials.
- Categorize inventory by splitting the inventory into types of products stored.