Understanding the basics: The 4 types of inventory for small businesses

What is inventory?

Inventory is everything that goes into a final product that’s available for sale to a consumer. That includes all the individual components it takes to make that product–like buttons or even butter–and the packaging the product is sold in. Once you understand the inventory that makes up your product line, you’ll be able to make better-informed decisions. This could mean knowing what products to put on sale or when to place your next order.

Inventory vs stock

Stock is a subset of inventory. While inventory refers to every component at every stage in the supply chain that goes into a product, stock only signifies the complete product that is available for purchase by a shopper.

Let’s break it down. When you’re looking at what products are on the shelves or display for purchase, for example six chocolate chip muffins, that’s stock. However, if you have the ingredients for another batch of muffins, that’s your inventory. They only turn into stock after coming out of the oven.

Inventory management platforms, such as Thrive, track the value of your inventory and stock in real time. That way you always know how much profit you have tied up in finished goods, as well as individual components to maximize your cash flow.

What types of businesses have inventory?

Any business that produces or sells physical goods has inventory. Here, you’ll find some of the most popular business types and examples of inventory throughout the supply chain they may need to track.

Retail

• Clay to make coffee mugs
• Apparel
• Gallery paintings
• Boxes to package shoes in

Food & Beverage

• Syrup for cocktails
• Eggs
• Cookies
• Coffee cup sleeves

Services

• Branded merchandise
• Shampoo
• Piercing jewelry
• Tattoo ink

The 4 types of inventory (with examples)

The types of inventory most commonly found in small businesses include raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and overhaul (MRO). Once you know what types of inventory your business deals with, you’ll have an easier time finding the best inventory management platform for you.

1. Raw materials

Raw materials include all the individual components that make up your finished product. Imagine taking your product completely apart, and what you’re left with at the end are your raw materials.

For instance, if you manufacture candles, your raw materials may include wax, essential oils, and jars.

2. Work-in-progress (WIP)

When raw materials are being worked on or with, they turn into work-in-progress (WIP) inventory. Basically, this is inventory that is taken off your shelves and moved onto the production line.

Baked goods are a great example of this. When ingredients such as chili peppers, vinegar, and lemons are being used by your kitchen staff to make hot sauce, they are WIPs.

3. Finished goods

When your inventory reaches this state, they are ready to be sold to the consumer. Finished goods, or stock, are the products listed for sale online or displayed on your shelves in-store.

In a convenience store, this may mean wrapped to-go sandwiches, bottles of sunscreen, and even bagged ice.

Safety stock and excess inventory

Included in your finished goods inventory is your safety stock and excess inventory. These are essential to track for your profitability. Your safety stock comprises of finished goods set aside in case of a stockout so you can continue to meet customer demand while waiting for more inventory. Meanwhile, your excess inventory should be top of mind so you can make informed decisions about placing products on sale to make room for more profitable ones.

4. Maintenance, repair, and overhaul (MRO)

This inventory refers to all the products or equipment used in the production of a product, but are not sold to the end-user. Protective gloves, rubber bands, and storage containers are all examples of MRO inventory.

Challenges of tracking inventory

As you’ve just discovered, there are a lot of moving pieces when it comes to tracking inventory for your business. Combined with changes in consumer demand and supply chain issues, that’s a lot to keep up with.

Without properly managing your inventory, you’re likely to run into these problems that can impact your success as a business.

• Physical inventory that doesn’t match your books which leads to stockouts or excess inventory
• Unpredictable consumer demand
• Supply chain disruptions
• Underpriced products
• Unnecessary storage costs
• Poor cash flow management
• Timely and unproductive staff workflows that negatively impact the customer experience

Inventory management solutions

The key to inventory management is getting on top of it quickly to maximize profitability. While most inventory management systems have an associated cost, you’re likely to save thousands of dollars, or more, by expanding the capabilities of your POS system or eCommerce platform. When deciding on an inventory management solution, look for one that integrates with your payment processor, like Clover. Then consider what features you need for the types of inventory you manage. For example, if you manufacture products, you’ll need an app that has bill of materials tracking. Or, if you work with hundreds of products, a robust cycle counting tool is essential.

Not sure where to start? Thrive’s inventory management system is designed to manage all parts of your inventory, even if it’s really complicated. With tools like bundles, modifiers, and multi-channel syncing, you’ll have full transparency over your inventory.

Understand your inventory, understand your business

Mastering the four types of inventory is essential for small businesses striving to optimize operations and drive profitability. With the right tools and strategies in place, take control of your inventory and set yourself up for long-term growth.

Editorial Team

Clover app partners, Clover partner solutions, Inventory, Run your business

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