There’re various ways to break down your inventory. One of the most common classifications of inventory is to divide the inventory into 4 main types:
Raw materials
Raw materials include direct and indirect materials to make the products. Direct materials are the ingredients that are parts of your final products. For example, eggs to bake cakes, wood to create tables, and silk to manufacture scarves. Indirect materials are consumables during the manufacturing process, such as oil, glue, disposable tools, light bulbs, etc.
Work in progress (WIP)
WIPs are goods that are in progress and need further modification before going to markets, such as flour, fabric, sheets of glass, or window frames.
Finished goods
Finished goods are ready-to-sell items. They’re either consumer goods or intermediate items for another manufacturer, such as bread to a sandwich shop or fabric to a clothing maker.
Maintenance, repair, and operations (MRO)
MRO are items to keep your business functioning, like tools, equipment, or spare parts.
Some business models involve only 1 of the above inventory types, while some manufacturers require all 4. Therefore, you should establish inventory control procedures customized for your business that include all detailed costs and sourcing in one place.
