{"id":2685,"date":"2022-08-01T21:26:18","date_gmt":"2022-08-01T21:26:18","guid":{"rendered":"https:\/\/www.shipbob.com\/uk\/blog\/raw-materials-inventory\/"},"modified":"2025-09-26T16:54:45","modified_gmt":"2025-09-26T16:54:45","slug":"raw-materials-inventory","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/uk\/blog\/raw-materials-inventory\/","title":{"rendered":"Raw Materials Inventory: An Essential Guide for Manufacturers"},"content":{"rendered":"\n

Table of Contents<\/p>

** Minutes<\/p><\/div><\/div>\n

What is raw materials inventory?<\/a><\/p>\n\n\n\n

The importance of mastering your raw materials inventory<\/a><\/p>\n\n\n\n

Why you can\u2019t afford to ignore raw materials inventory<\/a><\/p>\n\n\n\n

Accounting for raw materials inventory<\/a><\/p>\n\n\n\n

How to calculate the value of your raw materials inventory<\/a><\/p>\n\n\n\n

How to calculate your raw materials inventory turnover ratio<\/a><\/p>\n\n\n\n

Best practices for raw materials inventory<\/a><\/p>\n\n\n\n

How ShipBob helps with raw materials inventory<\/a><\/p>\n\n\n\n

Raw materials inventory FAQs<\/a><\/p>\n<\/div>\n\n\n\n

When ecommerce businesses talk about \u201cinventory\u201d, they\u2019re usually referring to finished goods inventory<\/a> \u2014 that is, the final product that is sold and shipped to end customers.<\/p>\n\n\n\n

However, there are many different types of inventory. If you manufacture or assemble your own products, your supply chain will also involve something called raw materials inventory. <\/p>\n\n\n\n

Raw materials inventory is procured, stored, and received before any other products in the supply chain, and is absolutely integral to producing enough high-quality final product. <\/p>\n\n\n\n

In this article, we\u2019ll cover what raw materials inventory is, why it\u2019s a critical element within your supply chain<\/a>, how to calculate it, and best practices for procuring and managing it. <\/p>\n\n\n\n

What is raw materials inventory?<\/h2>\n\n\n\n

Raw materials inventory refers to the materials that are used to create a business\u2019s finished goods. While raw material inventory is not sold to end customers as-is, a company keeps raw materials in stock so that they can turn them into work-in-process (or WIP) inventory<\/a> or finished goods inventory.  <\/p>\n\n\n\n

The importance of mastering your raw materials inventory<\/h2>\n\n\n\n

Raw materials inventory is critical for businesses that manufacture their products, because a business cannot produce finished goods inventory without acquiring raw materials inventory first. <\/p>\n\n\n\n

After procuring raw materials inventory from a supplier or other manufacturer, a business keeps it in storage<\/a> until it is needed for production. During the production process, the raw material becomes work-in-progress inventory as it is being transformed into a new product.\u00a0<\/p>\n\n\n\n

Once the product is complete, the product is considered finished goods inventory, which is ready to be either sold to the end consumer or supplied to a retailer<\/a>. <\/p>\n\n\n\n

Since raw materials inventory plays such an important role in the overall supply chain, manufacturing businesses need to carefully plan their procurement logistics<\/a> to ensure that they always have enough raw materials inventory on hand<\/a> to create enough finished product and satisfy demand. <\/p>\n\n\n\n

Being able to effectively manage it will also help you create a lean supply chain<\/a>, which will reduce costs while increasing efficiency.<\/p>\n\n\n\n

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\u201cWe are very impressed by ShipBob\u2019s transparency, simplicity, and intuitive dashboard. So many 3PLs have either bad or no front-facing software, making it impossible to keep track of what\u2019s leaving or entering the warehouse. <\/p>\n\n\n\n

On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what\u2019s incoming, what\u2019s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.\u201d<\/p>\n\n\n\n

Harley Abrams, Operations Manager of SuperSpeed Golf, LLC<\/a> <\/em><\/p>\n<\/blockquote>\n\n\n\n

Why you can\u2019t afford to ignore raw materials inventory<\/h2>\n\n\n\n

It can be easy to accidentally forget about raw materials inventory \u2014 but doing so can have serious consequences for your business. Here are just some of the reasons why it\u2019s important to manage your raw materials inventory proactively. <\/p>\n\n\n\n

Varying shelf life<\/h3>\n\n\n\n

Raw materials are often perishable, and thus need to be used quickly to avoid losses and maintain the quality of goods produced. Businesses need to properly account for their raw materials inventory to ensure that perishable items are utilised before they expire. <\/p>\n\n\n\n

Prone to becoming obsolete<\/h3>\n\n\n\n

When raw materials aren\u2019t utilised fast enough, they can become obsolete. This may be due to the inventory reaching the end of its life cycle, or because the product has lost its market value and demand. If this occurs, even if the raw materials are turned into finished goods, they will no longer be sellable.<\/p>\n\n\n\n

This type of scenario is particularly common with fashion and apparel<\/a>, furniture, and electronics, as these verticals experience extremely quick shifts in trends and technology updates that replace existing products. <\/p>\n\n\n\n

Obsolete inventory<\/a> can result in major losses for a manufacturing company, as a business must still pay inventory carrying costs, even though the inventory is no longer an asset. <\/p>\n\n\n\n

Prone to damages<\/h3>\n\n\n\n

Some types of raw materials are more prone to damages than others, and may get damaged in the transit process, resulting in high costs and cash burn. <\/p>\n\n\n\n

For instance, the LCD screens used in manufacturing smartphones are extremely prone to damage. Not only must a business pay for any damaged raw materials, but they will also have to spend more money to procure new inventory to replace the damaged items<\/a>.  <\/p>\n\n\n\n

Accounting for raw materials inventory<\/h2>\n\n\n\n

When businesses accurately account for raw materials, they can keep a better track of their inventory investment throughout the production process. This will allow you to get a better overview of your company\u2019s financial health, and make informed decisions about additional investments based on your pipeline inventory<\/a>. <\/p>\n\n\n\n

When it comes to bookkeeping, the most significant difference is whether you\u2019re accounting for direct or indirect raw materials inventory. <\/p>\n\n\n\n

Direct materials inventory refers to the raw materials that are incorporated or transformed into the finished product. For example, for a business that sells miniature paintings, the paint and canvases would qualify as direct raw materials inventory, as these materials are components of the final product ( i.e., the paintings). <\/p>\n\n\n\n

Indirect materials inventory, on the other hand, refers to the raw materials that are consumed during the production process, but are not a component of the finished product. For example, fuel, lubricants, protective equipment, and disposable tools are typically considered indirect raw materials inventory.<\/p>\n\n\n\n

In inventory accounting<\/a>, businesses will need to value raw materials at their comprehensive cost, which would include storage, preparation, and shipping<\/a>. <\/p>\n\n\n\n

Moreover, in accrual accounting, the initial purchase of raw materials inventory is either in the form of cash to credit or debit to inventory. Crediting cash reduces cash assets by the inventory amount, and the debiting inventory increases the company\u2019s current assets. <\/p>\n\n\n\n

How to calculate the value of your raw materials inventory<\/h2>\n\n\n\n

To calculate the value of your raw materials inventory, you first need to calculate a few composite items:<\/p>\n\n\n\n