Ecommerce Owners’ Guide to Inventory: Definition, Types & Examples
Inventory is truly the backbone of a successful ecommerce company. It’s what your customers purchase, what generates the most income, and what sets your brand apart from the competition. While there are a few different types of inventory your store might use, each plays a vital role within supply chain management and inventory accounting as a whole. When your inventory levels are properly monitored and managed, you’ll reap significant benefits to help your business scale and expand in a sustainable (and profitable) way.
What is inventory?
Inventory represents one of the most important assets of an ecommerce business, as it encompasses all the goods, merchandise, and materials that are sold to earn a profit. The ultimate goal of inventory is resale, production, or utilization, which helps explain why inventory turnover is a primary source of revenue for product-based brands.
In general, inventory items appear as a current asset on the balance sheet and serve as a buffer between manufacturing and order fulfillment. When inventory is sold, however, its carrying cost is transferred to the cost of goods sold (COGS) for that income statement.
What are the 5 types of inventory (and what to do with them)
While inventory is an umbrella term for the array of goods you sell or produce, there are actually separate subcategories of inventory you’ll want to pay attention to. The five types of inventories are: raw materials, work-in-progress, finished goods, packing materials, and MRO supplies.
Raw material inventory
Raw materials are the unprocessed materials used in the production of merchandise. In essence, raw materials are what’s needed to deliver finished goods; direct raw materials are those that will actually constitute the finished product, whereas indirect raw materials are all the components used during the production process but not a part of the final product. An example of raw materials in the real world is the aluminum and steel used in car manufacturing.
Work-in-progress (or work-in-process) inventory is the unfinished or partially finished goods waiting to be completed and sold. This type of inventory consists of all the raw materials, overhead costs, and labor at each stage of the production process. Simply put, WIP covers everything after raw materials and before finished goods. A half-assembled airliner is an example of work-in-progress inventory (since it has yet to be completed).
Finished goods inventory
Finished goods are the ending inventory that have completed production and are now ready to be sold. In the world of ecommerce, finished goods inventory is generally referred to as ‘merchandise,’ and includes the likes of cars, clothes, and electronics. For many retailers, this is the most straightforward inventory type, given that finished goods are the ones appearing on your website. Any product that’s ready to be sold to customers will fall under this category.
Packing material inventory is anything your business uses to pack and ship its finished goods. These materials are classified as either primary, secondary, or miscellaneous packing. Primary packing is the box or bag used to enclose your product while on retail display; secondary packing is the box or bag used for convenient storage and transportation of your product; and miscellaneous packing is all the add-ons like bubble wrap, foam peanuts, pallets, and labels.
Maintenance, repair, and operating supplies is the inventory that’s required to assemble and sell the finished product (but not built into the product itself). Depending on the specifics of your ecommerce business, MRO supplies might be held in storage, kept with the wholesaler or supplier, or in transit out for delivery. Examples of MRO items are things like gloves to handle the packaging of a product, or basic office equipment (i.e. pens, paper, Sharpies, etc).
Inventory & your supply chain
Modern ecommerce companies face a range of supply chain challenges, namely having to match their supply volumes and product categories to meet customer demand, while still keeping their overall costs as low as possible. Fortunately, inventory optimization can have a huge impact on supply chain performance and inventory control, from reducing the amount of money you have tied up in physical inventory to improving cashflow across the board.
With targeted optimization, merchants can support the operational side of their company — that is, warehouse and transport management — as well as the strategic side of things, like inventory analysis and forecasting. And undeniably, the best way to optimize your inventory levels is by implementing an innovative and automated inventory management system.
Well-executed inventory management will not only streamline your supply chain, but it’ll reduce the possibility of inventory stockouts or overstocks (since it helps define your unique reorder point and safety stock needs). Advanced inventory management software delivers automatic, real-time updates on your stock levels and inventory data, by monitoring these metrics across product ranges, fluctuations in demand, supplier lead times, and changes in order volumes. The results are a better, more balanced supply chain, and a more satisfied customer base.
2 reasons to get your inventory management right from the start
Effectively managing your inventory is the foundation for a thriving ecommerce business, as it impacts nearly every aspect of your daily operations. But more succinctly, it’s important to get your inventory management right from the start so you always have the ideal amount of available inventory, and can likewise reduce your carrying costs (to then improve revenue).
Have the right amount of inventory at all times
The primary purpose of an inventory management system is to guarantee you have the right amount of average inventory at any given time. In other words, an inventory management strategy ensures you have enough goods or materials on hand to adequately (and accurately) meet customer demand without creating excess inventory or an understock situation.
Inventory management tools tell you what you already have in stock, so you only reorder whatever SKUs you need to meet demand — meaning you won’t accumulate costly dead stock. What’s more, there’s much less risk of overselling, since inventory management closely tracks backordered items (so you don’t continue to sell products that aren’t on your shelves).
Reduce carrying costs and improve cashflow
It probably goes without saying, but inventory is the largest asset for any retail business, with the majority of cashflow tied up in whichever products a company is selling. By utilizing trusted inventory management techniques (FIFO, ABC, etc), ecommerce brands can keep production running smoothly and save money on costly last-minute purchases — which is just one way good inventory management can have a direct impact on your profits.
On top of that, inventory management lowers the costs of keeping items in stock, because a greater understanding of availability and demand leads to higher inventory turnover. And when you’re able to rotate stock faster, you’re sure to see a boost to your bottom line, as well.
How Skubana helped these 3 companies take ecommerce inventory to the next level
Thanks to Skubana’s custom inventory management solutions, DTC brands and marketplace sellers can find the support they need to enhance every stage of their supply chain (without breaking the bank or allotting countless hours to do so). The following are just three companies Skubana has helped scale up and take their inventory management to the next level.
How Nomad went from Kickstarter to global brand
Nomad Goods launched their Kickstarter campaign in 2012, in hopes of securing funding for their super-slim USB cable charger. In the six years following, they worked to expand their product catalog to more than 30 items, distributed by the likes of Best Buy and Staples. But as they grew, Nomad encountered some major inventory miscommunication, which ultimately led them to Skubana. Skubana was the only inventory management service that permitted Nomad to have inventory in transit and warehoused in multiple locations, thus allowing them to sell hundreds of barcodes across multiple channels and grow into a global brand.
How Vincero scaled their multichannel game
Vincero is a quality, yet affordable watch brand that gives its customers a serious confidence boost. When it came time for the company to scale their business and enter into new regions, channels, and volumes, Vincero looked to Skubana to bring their vision to life. With Skubana’s inventory and order management solutions, Vincero was finally able to move away from their tedious accounting methods and manual processes, and instead automate their order handling for multichannel optimization. Today, things like routing, editing, and canceling orders are easily accomplished through Skubana’s unified and comprehensive order management platform.
How LastObject fights single-use plastic with their inventory
LastObject’s mission is to create sustainable alternatives to single-use plastic products. After raising nearly $800,000 from their crowdfunding campaign in 2019, LastObject started shipping their products worldwide. But handling all the taxes and legal issues involved with international shipping proved to be a huge challenge for this small business. By teaming up with Skubana, LastObject secured a reliable operating system that could manage multichannel sales, and offer seamless, worldwide fulfillment. Skubana’s software easily integrated with many of LastObject’s existing processes, offering them a holistic view into all their sales channel activity.
Frequently Asked Questions
What is the purpose of inventory?
The purpose of inventory is to provide retail operations with an ongoing, perpetual supply of goods and materials. To see this purpose fulfilled, your business needs to find a ‘sweet spot’ between carrying too much and too little inventory, without ever running out of stock completely. This balance (often achieved with the help of inventory management software) will provide a notable increase to profitability and keep your company’s services running smoothly.
What are the main types of inventory?
While inventory is an umbrella term for the array of goods you sell or produce, there are actually separate subcategories of inventory you’ll want to pay attention to. The five types of inventories are: raw materials, work-in-progress, finished goods, packing materials, and MRO supplies. Although there are other kinds of inventory on the market, these five are generally the most popular or prevalent, and most often found on a company’s official financial accounts.
What does inventory reveal about a business?
Tracking and/or analyzing inventory data is a great indicator of business performance, especially when looking at inventory turnover. When a company is able to sell its inventory faster than its competitors, it’s likely to enjoy lower holding costs and better profit margins — which, in turn, lends itself to greater efficiency of sale and more success in the long run.
Matthew Rickerby is the Director of Marketing at Extensiv, the leading solution for multichannel, multi-warehouse D2C brands. For the past ten years, he’s covered e-commerce topics ranging from SEO to supply chain management.