Types of inventory: the main categories and how to manage them
Inventory is more than the products on your shelves. Raw materials, half-finished goods, packaging, stock in transit, and the buffer you hold for a rainy day are all inventory, and each one is counted, costed, and managed differently.
This guide explains the main types of inventory, how they differ, which ones an ecommerce business is likely to hold, and how to manage them. For the wider picture, see our introduction to inventory management.
What is inventory?
Inventory is the goods a business holds to sell, or to use in making what it sells. That includes finished products, raw materials, components, and the supplies that keep operations running.
On your accounts, inventory is a current asset. Unsold stock doesn’t become a liability, but it does tie up cash, take up storage space, and can lose value, and if it does, it may need to be written down. How quickly you sell through it is measured by inventory turnover, which is a ratio (cost of goods sold divided by average inventory), not a sale itself.
Types of inventory by stage of production
The traditional way to classify inventory follows the journey from material to finished product. Not every business holds all of these. A retailer that buys finished products to resell mostly holds finished goods, while a manufacturer holds all of them.
| Type | What it is | Example |
|---|---|---|
| Raw materials | Basic materials and commodities used to make a product. They’re part of the finished product and are usually unrecognizable once it’s made | Cotton for towels, or an emollient used in beard oil |
| Components | Parts you buy and use in a product. Unlike raw materials, they remain recognizable in the finished item | A screw, a computer chip, or a lightbulb |
| Work in progress (WIP) | Items partway through production that aren’t finished yet | A custom laptop that’s been started but isn’t complete |
| Finished goods | Products that are complete and ready to sell as they are | A packaged day planner, or a boxed toy kitchen |
| Maintenance, repair, and operating supplies (MRO) | Items that support production or the business but don’t become part of the product | Machine lubricants, cleaning supplies, printer toner, and paper |
Raw materials and components
Raw materials are the foundation of a product. Some are called direct materials because they become part of the item itself: the cotton in a towel, for example. Components, such as screws or chips, are used in the same way, but they stay recognizable after assembly.
Work in progress (WIP)
Work in progress is stock that has entered production but isn’t finished. Say a toy company has molded and cooled a play kitchen, but it’s waiting for assembly and packaging. It’s WIP until it’s complete. Tracking its cost matters because it feeds into the cost of the final product. You can work out the value of your WIP at the end of a period like this:
Ending WIP = Beginning WIP + manufacturing costs − cost of goods manufactured (COGM)
- Beginning WIP is the value of WIP carried over from the previous period.
- Manufacturing costs are everything added during the period: direct materials, direct labor, and manufacturing overhead.
- COGM is the total cost of the goods you completed during the period, which moves out of WIP into finished goods.
Example: beginning WIP is $10,000, you add $40,000 of manufacturing costs, and the goods you complete cost $38,000. Ending WIP = $10,000 + $40,000 − $38,000 = $12,000. For more on the costs involved, see our guide to manufacturing overhead costs.
Finished goods
Finished goods are complete products you can sell or ship as they are. They’re what appears in your channels and listings, and for most ecommerce sellers, they’re the largest part of inventory.
Maintenance, repair, and operating supplies (MRO)
MRO supplies are used in operations but don’t end up in the product. In manufacturing, the oil and lubricants for the machines that weave and dye towels are MRO, sometimes called indirect materials. In an ecommerce business, MRO might include packing tape, printer toner, label rolls, and cleaning supplies. They’re easy to overlook, but running out can stop a fulfillment line.
Types of inventory by function
You can also classify inventory by the job it does. These categories apply to any business that holds stock, and they often overlap with the stage-based types above.
| Type | What it does |
|---|---|
| Cycle stock | The stock that results from buying or making in batches. It covers regular demand between replenishments, and it’s used up and refilled in a cycle |
| Safety stock | Extra stock held as a buffer against unexpected demand or supply delays. It costs money to hold but protects against stock-outs. See our guide to the safety stock formula |
| Anticipation stock | Stock built ahead of a predictable rise in demand, such as peak season, a promotion, or a product launch, or ahead of an expected supply disruption |
| Pipeline (in-transit) inventory | Stock that’s been ordered or shipped but hasn’t arrived yet. It still belongs to you or is on its way to you. See our guide to pipeline and decoupling inventory |
| Decoupling inventory | A buffer between stages of production, so that a slowdown at one stage doesn’t stop the next. It applies mainly to manufacturers |
| Excess inventory | Stock beyond what you expect to sell in a reasonable time. It ties up cash and storage |
| Obsolete inventory | Stock that can no longer be sold at a normal price, for example because it’s out of season, outdated, damaged, or expired. Excess stock can become obsolete if it sits too long |
| Packing and packaging materials | Boxes, mailers, tape, labels, and fillers. Primary packaging protects the product, secondary packaging presents it, and tertiary packaging is for bulk transport |
| Theoretical inventory | The stock you should have, based on your records: opening stock, plus purchases, minus sales and usage. Comparing it with an actual count shows shrinkage, waste, or recording errors |
Which types of inventory does an ecommerce business hold?
- Resellers and retailers mostly hold finished goods, plus packaging, MRO supplies, pipeline inventory, and safety stock.
- Brands that make their own products add raw materials, components, and WIP.
- Sellers with seasonal demand also build anticipation stock, and need to watch for excess and obsolete stock after the season ends.
How to manage different types of inventory
- Know what you hold and where. Track stock by SKU and by location, and count regularly. Cycle counting means checking a few SKUs on a rolling schedule, with more frequent counts for popular and high-value items. See our guide to inventory cycle counts.
- Set safety stock and reorder points based on demand and supplier lead times, so you’re protected without overbuying. See our guides to safety stock and demand forecasting.
- Prioritize with ABC analysis. Put the most attention on the items that matter most to revenue. See our ABC analysis guide.
- Track batches and lots where it matters. For food, cosmetics, or anything with an expiry date, record batch or lot information, which also helps with recalls and shelf-life.
- Manage kits and bundles carefully. If you sell sets made of individual items, make sure stock for the set updates from its components.
- Choose a costing method. How you assign costs to stock affects profit and tax. See our guide to inventory costing methods.
- Clear excess and obsolete stock early. Discount, bundle, or move slow stock before it loses more value. See our guide to reducing stockouts without overstocking.
Inventory software helps you keep it all consistent. Linnworks gives you one view of stock across locations, including warehouses, 3PLs, and dropship suppliers, supports kitting and bundling, and syncs stock across 100+ native channel integrations in under 10 minutes. See Linnworks inventory management, and our guides to inventory control and ecommerce inventory management best practices.
FAQs
It depends on how you classify them. The traditional production view has four or five: raw materials, components, work in progress, finished goods, and MRO supplies. By function, there are also cycle stock, safety stock, anticipation stock, pipeline inventory, decoupling inventory, and excess and obsolete stock.
Raw materials are basic inputs that are transformed and usually unrecognizable in the finished product, such as cotton or grain. Components are parts that stay recognizable after assembly, such as a screw, a chip, or a lightbulb.
MRO stands for maintenance, repair, and operating supplies. These are items that support production or running the business, such as lubricants, cleaning supplies, packing tape, and printer toner, but don’t become part of the finished product.
Ending WIP equals beginning WIP plus manufacturing costs minus the cost of goods manufactured (COGM). Manufacturing costs include direct materials, direct labor, and overhead.
Inventory is a current asset on the balance sheet. Excess or obsolete stock is still recorded as an asset, but it ties up cash, costs money to store, and may need to be written down if it loses value.