Maintaining an appropriate amount of inventory is directly related to a business’s profit margin. Your supply of goods needs to adequately meet the demands of your customers. If you produce too little, you will run out of product, and producing too much means you will waste money on unnecessary inventory.
Tracking and maintaining your business’ inventory in all of its stages is critical to the bottom line. For this reason, inventories are broken down into different categories to increase efficiency. All of these types of inventory must be tracked efficiently so your business can properly manage finances, sales, demand and supply. Familiarizing yourself with the different types of inventory can help improve sales, save money and adequately meet customer demands.
Oftentimes, businesses neglect to consider merchandise that is not complete or not available on the salesroom floor. Instead, inventory should be thought of as a network of goods. Regardless of where the materials are in the product lifecycle, they should always be counted as inventory. For a complete inventory count, be sure to consider the following.
1. Merchandising Inventory
This inventory consists mainly of finished, pre-packaged products that you buy from others (i.e. wholesalers or contractors) to sell. This type of inventory does not include products that you produce yourself. Keep in mind that if your business sells products on consignment, these products are not counted as part of your merchandising inventory, as you don’t own these products.
2. Raw Materials
Raw materials are the materials your business buys to create your in-house products. These goods, usually purchased from suppliers, include everything used in the production process that has not yet entered into production. Being aware of these items is a must for managing future inventory, because you need to know what you have on hand and how much of a product you are equipped to make.
3. Works in Progress
These are products that are in some stage of development and/or production. These products are not yet complete, but are in the process of being made. This inventory also typically includes the labor directly involved in production, as well as products being made by a contracted manufacturer.
4. Finished Products
This inventory includes all of your business’ complete and finished goods. These products are the things that you have created in order to sell to consumers, and they can be located either in storage or on your sales floor. This inventory consists only of products that are packaged, completely developed and ready for purchase by a customer.
5. Transit Inventory
In-transit goods are inventory that is being transported; they are also a common oversight when conducting inventory counts. This category includes products or raw materials that are on a truck, plane or other form of transportation instead of in your warehouse or store. This inventory is often difficult to track because it only “exists” in your books. These products are often managed by numerous people and carriers, so it is important to track shipments to completely maintain your in-transit inventory.
6. Service Inventory
Maintaining adequate labor, other staff, and production plans and machinery is often missed in inventory management because it does not consist of goods or materials. Despite this, it is one of the most important aspects of inventory management. While service inventory is often neglected, being able and ready to complete the services that are necessary to make, design, sell and regulate your product is crucial to production. Keeping the required level of production staffing will ensure that your inventory management is complete.