Types of Inventory
There are four types of inventory, raw materials, work-in-progress (WIP), finished items, and maintenance, repair, and overhaul (MRO).
1. Raw Material: Raw materials are all of the materials that your organization uses to manufacture finished goods. Raw materials can be purchased from any external supplier or can be produced within the organization. There are two types of raw materials, direct and indirect. Direct raw materials are those that are used directly in the final product. These materials are easy to measure and account for on an individual or batch basis. Indirect raw materials are those that are not part of the completed product but are used during the manufacturing process. Indirect raw materials are more difficult to identify and account for since they are not tied to specific batches or units. However, these are necessary for the manufacturing process.
2. Work-in-Progress (WIP): Work-in-progress inventory refers to the inventory the production of which has started but is not completed yet. Work-in-progess inventory needs to go through more stages of production in order to get converted into final goods. It may include both direct and indirect raw materials; the only thing to remember is that the product is not finished and is still in development.
3. Finished Goods: Your finished goods inventory includes all items that are ready to sell. Of course, depending on the manner of operation you choose, this may include slightly different steps. If you employ a make-to-order technique, the finished product is already produced and ready for shipment to clients. If you employ the make-to-stock workflow, the inventory must be stored in a warehouse until an order arrives. In either case, your finished goods inventory should be quite simple to account for and track.
4. Maintenance, Repair, and Operations (MRO): As the name suggests, maintenance, repair, and operations (MRO) inventory is essential for keeping your manufacturing running. MRO inventory is only available for consumption and cannot be purchased by customers.
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