Inventory and stock are two retail terms that are commonly used interchangeably. However, they aren’t the same thing, and understanding the difference between inventory and stock can improve the management of your business assets.
All stock is inventory, but not all inventory is stock. In this guide, we’ll help you understand what is considered inventory, the types of inventory, and how tracking your stock and inventory in real-time can help you better apply first-in, first-out (FIFO), or last-in, first-out (LIFO), as well as improve other time-consuming management processes.
What is Inventory?
Inventory refers to all the goods and materials a business owns or controls, from raw materials and supplies to finished products.
Examples of inventory for a paper company could be the pulp, chemicals, and equipment used to turn wood into paper; the finished reams of paper; and any materials required for maintenance, repairing, and operating the machines used to create paper.
Inventory is an essential component of any business that deals with physical goods. The process of inventory management encompasses tracking and controlling the flow of goods and materials through a business. Strong inventory management allows a retail business to:
- Ensure that they have enough stock to meet demand
- Avoid stockouts and lost sales
- Optimize their inventory levels to minimize costs
- Track inventory turnover and identify slow-moving items
- Make better decisions about inventory ordering and replenishment
As inventory moves through the supply chain, it is categorized into different types of inventory, such as raw materials, work in progress, finished goods, goods for resale, or MRO and consignment inventory.
Raw Materials
Raw materials are the unprocessed or minimally processed materials that are used to produce finished goods. A raw material is classified as inventory if it is then used to create a work-in-process item. When raw materials are sold directly to a manufacturing company, they are classified as stock.
Work-in-Progress Products
WIP inventory, or work-in-process inventory, is when a product has only been partially processed. It has moved beyond the raw material stage but hasn’t been completely finished. Returning to the example of the paper company, a WIP product might be sheets of individual paper that have not yet been bound into notebooks.
On a company’s balance sheet, WIP inventory items are considered current assets.
Finished Goods
Tracking inventory through the supply chain, finished goods are those ready for purchase by your target customer. Retailers often use inventory management software to monitor inventory counts and ensure that there are enough products available to meet demand.
Goods for Resale
Often, an eCommerce merchant or other small businesses will buy a product in bulk to ensure they have enough goods on hand to meet demand and avoid stockouts. These businesses don’t participate in any part of the supply chain other than selling the final product.
The challenge of this type of inventory is ordering enough without overshooting the mark; high inventory levels can mean expensive overstock and deadstock issues.
Maintenance, Repair, and Operating (MRO) Inventory
MRO inventory consists of items needed to maintain and support the production process and the overall supply chain management of a business. These items are not directly used in the final product but are essential for keeping the production process running smoothly. For instance, MRO inventory could include tools, lubricants, cleaning supplies, and spare parts.
Consignment Inventory
Consignment inventory is held by one party (the consignor) at the premises of another party (the consignee), usually a retailer. The consignor retains ownership until the consignee sells the goods, at which point a portion of the proceeds is paid to the consignor.
Now that we’ve covered the different types of inventory — what is stock, and how does it play a role in supply chain management?
What is Stock?
Stock refers to the finished products that are ready to be sold to the end user. In the case of a manufacturing company, its stock may include raw materials or work-in-process inventory that will be sold directly to another company.
B2B companies often have what’s known as “inventory stock.” For example, a clothing manufacturer would have inventory stock consisting of raw materials like fabric and thread, work-in-progress items like partially sewn garments, and finished goods like completed clothing items.
Accordingly, stock management is the process of tracking and controlling the finished goods that a business has available for sale. It is a subset of inventory management, which includes all the goods and materials that a business owns or controls.
Stock control is important for ensuring that businesses have enough finished goods on hand to meet product demand, while inventory management is important for ensuring that businesses have the right amount of all the goods and materials they need to operate efficiently.
Small businesses and e-commerce companies tend to have two categories of stock: safety stock and cycle stock.
Safety Stock
Safety stock, also known as buffer stock, is the extra inventory of finished products that a business holds to provide a cushion against unexpected variations in demand, supply chain disruptions, or lead time variability.
Safety stock can prevent stockouts and ensure that products are available for customers even under uncertain circumstances. It acts as a buffer to absorb uncertainties and maintain a level of service reliability.
Cycle Stock
Cycle stock refers to the regular inventory that a business orders and uses in its normal course of operations to meet the demand for its products. It represents the final product repeatedly ordered and restocked as part of the ongoing production and sales cycle.
Managing stock levels and storage costs is key to ensuring long-term business success. Too much stock can weigh down your bottom line; too little stock can leave customers empty-handed — and disappointed.
Key Differences Between Inventory and Stock
Clearly, inventory and stock have distinct meanings and business functions. And, as you think about scaling your business, understanding how to manage your supply chain according to your inventory and stock requirements will help you work more efficiently.
The differences between inventory and stock listed below should help clarify how to set up your business to optimize both.
Inventory
Purpose
Inventory is used in accounting and business management, appearing on a balance sheet. Understanding inventory will give business owners the value of parts and raw materials used for manufacturing, work-in-process goods, and the final product.
This can help you determine an appropriate, profitable sale price for your stock.
Valuation
There are a few ways to arrive at the value of inventory: FIFO, LIFO, and weighted average are just a few. FIFO is an accounting method in which inventory purchased or acquired first is disposed of first. LIFO, predictably, is a method in which the costs of the most recent inventory purchased (or produced) are the first to be expensed.
The weighted average model divides the cost of the goods that are available for sale by the number of those units still on the shelf.
Usefulness
Inventory serves the following key business purposes:
- Meet customer demand: Inventory ensures businesses’ products (and materials) are available when customers want them.
- Production continuity: For manufacturing companies, inventory of raw materials and components ensures that production processes can continue smoothly, even if there are supply chain disruptions or delays.
- Bulk purchasing savings: Companies that buy raw materials or WIP inventory in larger quantities can often negotiate better prices with suppliers, leading to cost savings.
- Seasonal demand: Inventory enables businesses to stock up on products anticipating seasonal demand spikes, ensuring they have enough to sell during high-demand periods.
Timing
Inventory is typically ordered and received regularly based on the business’s demand forecast. This means that the timing of inventory arrivals is relatively predictable and stable. Both inventory and stock require monitoring to ensure the right levels of raw materials and final products are in storage.
Stock
Purpose
Stock is used in accounting and sales; it’s listed on the income statement as all finished goods that are available for sale. Stock is technically a subset of inventory, covering the type of inventory known as the final product.
Valuation
The value of stock is based on the current market value or the price at which goods are sold to the customer.
Usefulness
Stock serves to fulfill the following business purposes.
- Revenue generation: Stock is directly responsible for generating sales. The availability of stock determines a company’s ability to fulfill customer orders.
- Customer satisfaction: A business must have enough stock available so that customers can purchase products when they want them, leading to higher customer satisfaction and loyalty.
- Inventory turnover: Managing stock efficiently by keeping optimal levels and reducing excess inventory helps improve inventory turnover, which can lead to better cash flow and reduced holding costs.
- Optimized supply chain: Companies that manage their stock levels can streamline their supply chain processes, reducing lead times and improving overall operational efficiency.
- Demand fulfillment: Buffer stock is crucial for meeting unexpected spikes in demand, especially when demand exceeds the predicted levels. This prevents stockouts and lost sales.
Timing
Stock is typically ordered and received less frequently than inventory, as it is not as essential for day-to-day operations. The timing of stock arrivals can be more unpredictable, depending on the availability of the products and the lead times from suppliers.
Why Knowing the Difference is Important for Effective Management
By understanding the difference between inventory and stock, businesses can make better decisions about how to manage their inventory and stock levels — and improve financial performance, customer service, and operational efficiency.
Proper Allocation of Resources
Companies that recognize the difference between inventory and stock can focus on maintaining the right levels of raw materials and components for production while ensuring adequate stock levels to meet customer demand.
Better Financial Management
Effective inventory management requires minimizing holding costs associated with excess inventory.
Separating inventory management and stock management helps businesses avoid overstocking, which ties up capital and increases storage costs — while still ensuring they have sufficient stock to meet customer needs. Ultimately, minimizing excess inventory and focusing on stock turnover can improve cash flow and use capital more efficiently.
Meeting Customer Demands
First and foremost, the distinction between inventory and stock informs better demand forecasting. Accurate forecasts ensure that businesses order the right quantities of raw materials and components and maintain appropriate stock levels for anticipated customer demand.
Better forecasting also ensures that businesses have enough products available for sale and can fulfill customer orders promptly. Stock management, as a separate function from inventory management, reduces the risk of stockouts, avoiding customer dissatisfaction and lost sales.
Compliance with Regulations
Separating inventory and stock management helps businesses that could be facing an audit. There are different accounting purposes for stock and inventory. Stock appears on the income statement, while inventory appears on a balance sheet. Confusing the two could lead to regulatory issues with the IRS.
Bottom Line
Not all stock is inventory, and reporting it as such can put your business at a disadvantage. Inventory encompasses the materials and supplies involved throughout the supply chain. Stock is simply the final product you sell to your customers.
By separating stock and inventory management into two separate processes, businesses can maintain operational efficiency, meet customer needs, and save money.
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