Types of inventory management

Raw materials

are any items used to manufacture components or finished products. These can be items produced directly by your business or purchased from a supplier. For example, a candle-making business could purchase raw materials such as wax, wicks, and decorative ribbons.

Works-in-progress inventory

refers to unfinished items moving through production but not yet ready for sale. In the case of a candle-making business, work-in-progress inventory might be candles that are drying and unpackaged.

Maintenance, repair, and operations (MRO) goods

are items used to support and facilitate the production of finished goods. These items are usually consumed as a result of the production process but aren’t a direct part of the finished product. For instance, disposable molds used to manufacture candles would be considered MRO inventory.

Finished goods

are products that have completed the production process and are ready to be sold: the candles themselves.

As you’ll see below, there are other terms such as “decoupling inventory” and “pipeline inventory” used to describe types of stock-based on its theoretical purpose and use. Nonetheless, physical inventory almost always falls into one of the four categories above.

SKUs: Organizational building blocks

Stock keeping units — commonly known as SKUs — are product codes that you and others use to search and identify stock on hand from lists, invoices, or order forms.

Setting up an easy-to-understand system for SKUs is important because it’s the main way you’ll identify and differentiate product variants; this includes monitoring…

• Stock availability
• Product locations and types
• Sell rates, margins, profitability, or lack thereof
• Inventory shrinkage due to theft, spoilage, or other loss

Stick to an alphanumeric system for your SKUs and avoid accents and symbols that can cause formatting issues in Excel or elsewhere. Remember that the more stock you have, the harder it is to go back and develop a naming system, so it’s best to choose one as soon as you start holding it.