What is inventory?

Last Modified: February 1st, 2022

5 min read

Inventory is a term used in business and accounting to describe what you have on hand. Inventory can be physical, such as the products you’re selling, or intangible like intellectual property (IP) rights that are part of your company’s assets. Inventory may refer to raw materials, work-in-progress items, finished goods ready for sale, spare parts, and supplies.

Other concepts in (business) inventory

  • • Inventory management

Inventory management is the process of replenishing stocks of products, returning excess stock to a supplier, and tracking inventory levels. Inventory management can be part of supply chain management. Inventory management may determine what an optimal order quantity should be, among other things. Inventory management can also refer to the number of items available for sale during a specific period. Inventory management is important as it can be used as a tool to measure profitability and product marketability because it indicates how well a business is managing its resources. Inventory optimization services can use forecasting tools and provide suggestions for improvement to help you better manage your inventory.

  • • Inventory management system

An inventory management system is a software program that helps keep track of the inventory of a store or company. Inventory management systems allow you to automate your physical inventory and increase efficiency. Inventory management systems can be stand-alone or a module that integrates into a larger system, such as a Point of Sale (POS) system. Inventory management systems can be tailored from basic to advanced depending on what type of inventory needs to be tracked and how much customization is preferred. An Inventory Management System usually includes many capabilities including costing, finance, reporting, valuation, monitoring, forecasting, and analysis.

  • • Inventory tracking

Inventory tracking is a business practice that involves monitoring and recording the number and location of items or goods in stock. Inventory tracking is considered to be an integral part of inventory management (IM) and supply chain management (SCM). Inventory tracking supports IM and SCM activities such as planning, forecasting, replenishment, allocation, order processing, shipping, and customer service. Inventory tracking aids in inventory management tasks such as inventory valuation, reordering levels, and expiring inventory.

  • • Inventory control

Inventory control is the process of keeping track of what inventory is on hand at any given moment. Inventory control usually involves tracking inventory through an Inventory Control System (ICS) that gathers real-time information on inventory quantities, locations, and more. Inventory control helps to minimize overstock while maximizing efficiency by better utilizing the available space in your facility or warehouse.

The different types of inventory

The types of inventory you have in your business can either be a great asset or a huge liability. Inventory is often the largest expense for most businesses, so it’s important to know how much inventory you need, what type of inventory will work best for your company, and how to get the best prices on that inventory. 

  • • Raw Materials

Raw material inventory refers to any unprocessed materials that are used to create a final product. Examples of raw materials include lumber, cotton, soybean oil, and coffee beans. Inventory can also refer to items like hardware components, adhesives, and electronic components.

  • • Work In Progress (WIP)

Work in Progress inventory refers to items that are currently being used to create a final product. Inventory of this nature is also referred to as partially finished goods inventory. For instance, you could have thousands of t-shirts in your warehouse while they wait to be embellished with a logo or sold at a retail store. These work-in-progress items will become part of the finished goods inventory.

  • • Finished Goods

Finished goods inventory refers to items that have been completed and are ready to be sold to the public. Inventory of this nature is also known as merchandise inventory. An example of finished goods inventory would be hundreds of t-shirts with a logo already embellished on them or dozens of new loveseats designed for specific living rooms.

  • • Maintenance, repair, and operations (MRO) inventory

MRO inventory refers to supplies needed to maintain and repair equipment, machines, or facilities. This type of inventory is mostly relevant for manufacturing industries. Inventory of this nature is also referred to as consumable items or parts inventory. Examples of MRO inventory include screws, bolts, washers, batteries, adhesive tapes, adhesives, tools, and equipment.

  • • Cycle inventory

Cycle inventory refers to inventory that moves through a repetitive pattern. Inventory items that aren’t used up in one production cycle may be stored until they are needed for the next production cycle.

  • • Packaging materials

Packing materials inventory refers to items used to hold products or to ship products. Inventory of this nature is also referred to as shipping materials inventory. Inventory of packaging materials includes boxes, paper board, tape, labels, bubble wrap, and the like.

  • • Excess inventory

Excess inventory refers to inventory that is either obsolete or hasn’t yet been sold by your business. Inventory of this nature is also referred to as slow-moving inventory. Inventory of this nature is sometimes liquidated or sold at a discount in order to reduce the overall cost of holding that product in inventory.

  • • Transit inventory

Transit inventory refers to inventory that is currently in transit. Inventory of this nature is also referred to as on-order inventory. Inventory of this nature has yet to be received by the business and will count toward the total amount of inventory once it arrives at your company.

  • • Service inventory

Service inventory refers to intangible, nonphysical inventory. Inventory of this nature is also referred to as service capacity or service level inventory. Inventory of this nature represents the amount of service that a business expects to provide in a specific time period. Inventory of this nature can increase when demand for products and services increases.

The importance of inventory tracking

Inventory is a critical component of your business because it determines how much money you can make, what your cash flow looks like, and what the overall health of your company is. Inventory tracking allows the company to monitor the costs associated with managing its inventory. Inventory tracking can be used to reduce costs by minimizing the size of the company’s inventory, reducing out-of-stocks, and reducing excess inventory. Inventory tracking can also be used to monitor customer service levels, manufacturing quantities, and marketing campaigns.

Manual vs automated inventory tracking

If you’re looking for a way to streamline your inventory tracking, it might be time to consider the different options that are available. There are two main ways an inventory can be tracked – manually or automatically. 

  • • Manual Inventory Tracking

Manual inventory tracking is done with paper and pencil. Inventory can be tracked on paper by writing down the quantity of each product you’re holding in one column of a spreadsheet, for example. Inventory can also be tracked with spreadsheets that are designed to keep track of inventory in a digital format. Inventory tracking can be done on paper or with a spreadsheet, but both of these methods are time-consuming and require a lot of effort from the person tasked with monitoring inventory levels.

  • • Automated Inventory Tracking

Automated inventory tracking refers to using barcode scanners or RFID tags to track the quantities of products in an electronic format. Inventory can be tracked electronically by scanning a barcode on a product and entering that information into a computer or Inventory tracking can be done automatically with the use of RFID tags. Inventory tracking aided by scanners or RFID technology is fast, accurate, and efficient.

Inventory needs to be tracked in either an electronic format or on paper so it can be monitored accurately by managers at all times. Inventory tracking doesn’t need to be complicated or time-consuming. Inventory tracking has evolved over the years with the assistance of new technology that makes inventory management more accurate and efficient than ever before.

Serge is a Managing Partner and the head of sales and business development.

Published on: September 16, 2021