What are the 4 types of inventory?
The four types of inventory are raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and overhaul (MRO) inventory. Knowing which items belong to which category allows you to optimize your operations and account for each step of the production process more efficiently.
Now that different types of inventory have been laid out, let’s dive deeper into what each category consists of and what to keep in mind when managing them.
Raw materials
Raw materials are all the items that your business uses to manufacture finished products.
These materials can be sourced, produced by your company, orprocured from a supplier. Raw materials can be further classified into two categories:
- Direct raw materials
- Indirect raw materials
Direct raw materials
Direct raw materials are the components that are used directly in the final product. These materials are easy to quantify and account for per unit or per batch basis.
Indirect raw materials
Indirect raw materials are the components that are not part of the final products but are used during the production process. Indirect raw materials are harder to identify and account for since they can’t be traced to specific batches or units. However, these are essential for the production process.
For instance, one of Acme Corp’s top-selling products is its Plush Couch 5000. To manufacture each Plush Couch 5000, Acme Corp requires high-quality metal frames, foam, andleather as raw materials. However, the main component of the Plush Couch 5000 happens to be one ridiculously large spring that can shoot your target to the stratosphere. These are the components that it can easily quantify and price.
So Acme categorizes these as its direct raw materials.
Of course, making a couch isn’t as simple as throwing foam and leather on top of a frame. The company also requires tools, screws, glue, staples, and leather wax to manufacture the couches. However, it is pretty hard to quantify how much leather wax or how many staples are used on each couch.
So these raw materials are categorized as indirect raw materials.
Work-in-progress (WIP)
All the materials that your factory floor has started working on, but the product isn’t quite finished yet, consist of yourwork-in-progress (WIP) inventory.
It can comprise direct and indirect raw materials — the only thing to note here is that the product is not complete and is a work in progress.
Continuing with the Acme Corp example, let’s assume that every couch has a production time of one week. So once the metal frames, foam, and leather has been cut to size and the factory has started working on a couch, those materials stop being part of the raw materials and should be considered WIP inventory.
Finished goods
All the items ready to be sold are considered part of yourfinished goods inventory.
Of course, depending on the workflow you adopt, this could mean slightly different things.
If you follow amake-to-order workflow, then the final product is made and can already be shipped to your customers. Whereas, if you follow the make-to-stock workflow, the inventory will have to be stored in a warehouse until an order comes through. In either case, your finished goods inventory should be pretty clear and straightforward to account for and track.
In the case of Acme Corp, once the couches are ready, they are stored in a warehouse until a shipping company picks them up and delivers them to customers. The finished couches are part of Acme’s finished goods inventory.
Maintenance, Repair, Operations (MRO)
As the name suggests, maintenance, repair, and operations (MRO) inventory is essential to keep your factory operational.MRO inventoryis strictly for your consumption and is not available for customers to purchase.
For example, Acme Corp maintains extremely clean and safe working environments for its employees.
So every day the facilities are cleaned by a team of janitors. All the equipment and materials required to accomplish this job, like vacuum cleaners and cleaning supplies that the janitors use, are part of the MRO inventory. Similarly, the tools and spare parts required to repair and fix broken machinery are also part of the MRO inventory.
