As products go down a manufacturing line, every added cost and inefficiency eats into the profit margin. But when dealing with inventory, you have to first take a step back before considering ways to streamline your production process.

There are many different types of inventory that move through the process, from raw materials to works-in-progress and, finally, a finished product. If you’re looking to understand and gain more inventory control this year, read on to learn the nine different types of inventory that exist.

1. Raw materials

Raw materials inventory involves the items used to make finished products, such as commodities or components that businesses buy or extract themselves. In other words, it’s all the stock that still has to go through manufacturing.

There are two categories of raw materials:

Direct raw materials: They’re all the materials that make up the finished product which is part of the cost of goods manufactured. For example, all the parts used to make a bed—from the wood to the metal frame—and components like screws.
Indirect raw materials: They’re the materials used during the manufacturing process but aren’t a part of the final product. They typically fall under manufacturing overhead and add to the cost of goods sold.

In accounting, raw materials are an inventory asset, with a debit to raw materials and credit to accounts payable.

2. Work-in-progress (WIP)

Work-in-progress (WIP) inventory includes unfinished products currently being manufactured. Think of WIP inventory as all materials that have been worked on but aren’t completed yet. They’re somewhere in between, thus getting the WIP designation.

When accounting for WIP inventory, it typically gets its own inventory account entry on the general ledger and is a current asset. Costs include raw material costs, labor costs, and factory overhead.

3. Finished goods

Finished goods inventory includes items that are ready to sell to customers. All finished goods that are ready for sale are called merchandise.

For a given accounting period, finished goods are short-term assets because of the expectation they’ll sell as soon as possible. Finished goods, raw materials, and WIP inventory all make up the total inventory line item on a balance sheet.

4. Maintenance, repair, and operations (MRO)

Maintenance, repair, and operations (MRO) inventory consists of items that keep a manufacturing company running smoothly. MRO goods are vital to keeping operations running and make up a large percentage of the total purchase for factories.

This type of inventory includes any items you use during the production process that aren’t part of the finished product. For example, any supplies and equipment necessary for maintenance, repair, and operations, including safety equipment, repair supplies, and office supplies.

5. Decoupling

Decoupling inventory includes any extra components or raw materials that enable a manufacturer to continue production in the case of supply stock outs or a breakdown. Inventory is typically composed of several moving parts before completing the finished goods. Having a decoupling inventory can reduce any bottlenecks and decrease the odds of production stopping completely.

This inventory type is most beneficial for larger manufacturers that produce items on a mass scale. In these cases, unavailable materials can lead to a significant loss. But having stores of decoupling inventory can provide enough buffer time to damage control and find new supplies to continue production.

6. Safety stock

Safety stock is any extra buffer inventory held to protect against going out of stock. Even after calculating average inventory turnover and seasonal trends, there’s always a chance of experiencing unexpected peaks in demand or supply shortages.

In addition to safety stock, you should also consider other types of safety inventory to better meet customer demand:

Cycle stock (or working stock): The inventory a business uses to fulfill customer orders for a given period. Cycle stock is the first inventory to sell and immediately converts into cash flow.
Anticipatory stock: Inventory a business purchases in preparation for increased demand or fluctuations in the market. Examples of anticipatory stock are stocking more inventory of swimsuits and sandals right before summer or increasing the number of turkeys before Thanksgiving.
Psychic stock: This type of inventory tries to stimulate demand in the market. Psychic stock is most common in a retail business, with the most popular example being products displayed on mannequins or in window displays.

7. Packing materials

Packing materials inventory includes any items your business uses to pack the products you sell. There are three types of packing materials:

Primary packing material: Packaging that holds, protects, and usually has the most direct contact with the product.
Secondary packing material: Packaging that protects the primary packing material.
Tertiary packing material: Packaging to protect the product during transportation or storage.

If you make toothpaste, the tube you put the toothpaste in could be part of packing materials, as well as any boxes or packaging you use to ship or store your products.

8. Pipeline stock

Pipeline inventory (also called in-transit stock or transit inventory) is any stock currently moving between manufacturers, distributors, retailers, or other destinations. In most cases, the bigger a company’s operations, the more pipeline stock it has to manage.

This type of inventory requires additional inventory management systems and tracking, as well as more overhead, transportation, and carrying costs. If your business sources components from another country and manufactures the product in the US, you’ll have a significant amount of pipeline stock.

9. Excess inventory

Excess inventory is any unsold or unused stock a company has left over after a sales period. It’s inventory that is unlikely to sell anymore and has lost its projected market value which becomes inventory waste.

The usual causes of excess inventory include inaccurate sales forecasts, mismanaged inventory, a large amount of returned or canceled orders, or an unforeseen decrease in demand.

Excess inventory causes a loss in revenue ties up cash flow, and increases storage and overhead costs. The best thing for a business to do is to cut losses and put its excess inventory on sale, bundle them with other products, or offer them as a gift with purchase.

Best practices when managing inventory

There’s a lot to keep up with when dealing with inventory, from keeping the right inventory levels to overseeing production standards to analyzing demand. If you want to properly fulfill clients’ orders and stay in a competitive market, there are some inventory management strategies you can follow.

Here are some best practices when managing inventory:

Consider inventory management software: Using software to connect all your inventory at every location can help you better organize your inventory and understand inventory levels.
Invest in safety inventory: Keep a safety stock and a decoupling stock to avoid running out of items or halting production in case of high demand.
Use batch tracking: Track your products through the manufacturing pipeline using a batch tracking system that groups products.
Analyze your inventory often: Keep track of your inventory levels and turnover rates to understand the market demand.

Once you have a set strategy for managing inventory, you can find ways to optimize your inventory management and production to reduce costs and improve efficiency.

Navigate midsize business challenges and opportunities

Properly accounting for inventory through every step of the manufacturing process is essential to running a profitable business, but it all starts with understanding the types of inventory.

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.