Inventory refers to all the goods, items, and materials purchased or manufactured by a business for selling to the customer to make a profit. All companies need to maintain inventory to fulfill their customer's demand.
The three types of inventory most commonly used are:
- Raw Materials (raw material for making finished goods)
- Work-In-Progress (items in the process of making finished goods for sales)
- Finished Goods (available for selling to customers)
It is essential to understand the type of inventory you have, so you can make better decisions while choosing the best Inventory system to calculate the cost of goods sold (COGS).
Raw materials are any items used to manufacture finished goods. Raw materials are mainly purchased or produced by your company to make your finished product.
- A bread-making company will buy raw materials such as flour, butter, yeast, etc. from the supplier to make the finished product bread.
- If you sell wooden furniture, the wood bought from the supplier to make furniture is your raw material.
- If a sugar manufacturer is growing and maintaining inventory of sugarcane, it is their raw material.
Work-in-progress inventory refers to unfinished items in the process of making finished goods for sales. Work-in-progress inventory is unfinished items or components currently in production, but not yet ready for sale to the customers.
- A bread-making company will bread dough to make bread. The bread dough is their work-in-progress inventory.
- For furniture business, all unfinished parts before the assembly of the finished product are work-in-progress inventory.
Finished goods are your completed products available for selling to customers. Finished goods can be manufactured or purchased from a supplier. Any product that is sold to your customers is your finished goods.
- Most supermarkets buy finished products from suppliers to sell to their customers.
- For a bread-making company, packaged bread, which is ready for sales, is their finished product.
- For the furniture business, the table which assembled, painted, and ready for sale is their finished product.
The inventory you own can be stored in different locations. Here are some most common places:
- On the Shelf- It may be displayed in the store and ready for sale to the customers.
- Storeroom- It may be stored in your storeroom located at the back of a showroom.
- Warehouse- Most big businesses store their inventory in their warehouse.
- In Transit- Inventory can be stored in a vehicle during delivery from supplier to buyer.
- On Consignment- Inventory can be stored in your seller shop or storeroom
waiting to be sold.