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Strategies for Inventory Management in Manufacturing

Inventory management in manufacturing involves more than just tracking the total number of items stacked in storage. It is the process of tracking the inventory of products and goods in multiple stages of production, ordering raw materials, utilizing them, and developing finished products. 

Inventory management plays a key role in manufacturing because it directly impacts cash flow. Disturbance at any stage of production –whether it’s in the supply of raw material, work in progress, or finished goods —can lead to cash flow and underproduction issues. A study by Fortune Business Insights reveals that the manufacturing sector leads in adopting inventory management software because of the high need for time management while producing goods. Furthermore, manufacturing holds a 28% global market share for inventory management software. 

manufacturing inventory management

 

In this article, you’ll learn all the important points to adopt smart manufacturing inventory management methods. These methods will help you avoid high storage costs or product expiration and keep you ahead of the pack.

Understanding Inventory Management in Manufacturing

The term inventory refers to the materials and products owned by a company with the intention to sell as a part of a business operation.  Moreover, inventory management in manufacturing is the process of tracking stocks, ordering raw materials, managing and storing finished products, and shipping. 

In a manufacturing business, large amounts of raw materials are needed to produce final products. Also, the entire product manufacturing process is not done in one go. Sometimes, half-made products are stored momentarily and later introduced to the manufacturing line to make the finished product. 

When all of this happens, it is necessary to know how much of everything is currently available. That means being aware of current stock levels, including raw materials, partially developed, and fully made products. Inventory management is done to make the entire manufacturing process orderly. Interestingly, one of the leading causes of the failure of manufacturing businesses is poor inventory management. 

Therefore, accurate inventory management is a key asset of a manufacturing business, as it can impact the financial statement and help manufacturers maintain a balance between supply and demand. 

Types of Inventory in Manufacturing

Since manufacturing inventory management covers the entire product formation journey, several moving parts are involved. As a result, there are 3 types of production inventories under manufacturing inventory management. 

1. Raw materials

The raw material is a primary component of any product to be manufactured and is required in the initial production stage. For instance- cotton is a raw material for cloth manufacturers, wood for furniture manufacturers, flour for bakery production, and so on. 

These raw materials are necessary to initiate the manufacturing process. Proper inventory management of raw materials will guarantee smooth production without any delays that usually occur due to a shortage of raw materials. It will also help avoid stacking excess stocks, which increases storage costs. 

2. Work-in-Progress (WIP)

A work-in-progress inventory contains raw materials that are partially transformed into segments of a finished product. So, WIP products can be explained as materials that have undergone production changes. WIP inventory management is necessary to optimize production flow and help manufacturers track the progress of each item on the production line to predict the completion of tasks. 

3. Finished Goods

As the name suggests, finished goods are the final products of the production line, ready for sale and distribution. These products have gone through the entire manufacturing process and are waiting for delivery to the end users and clients. Manufacturers make certain that sufficient products are available to meet customer demand by managing finished goods inventory accurately

Other than this, the manufacturing inventory also includes packaging materials, in-box cushions, and maintenance toolkits. 

Common Inventory Management Techniques

Manufacturing companies use common inventory management techniques to monitor, control, and upgrade inventory levels. These strategies ensure that the production line is always active and capable of fulfilling orders in a timely and cost-effective manner. By applying the techniques mentioned below, manufacturers improve production efficiency and perfectly align supply with demand. 

manufacturing inventory management

1. Demand forecasting

As the name implies, it involves predicting future customer demand, which will help manufacturers gather and stack the right amount of inventory on time. The demand forecasting technique is followed by taking into consideration the previous sales data, current market trends, and other predictive insights to estimate the required amount of raw materials, WIP, and finished goods. Accurate demand forecasting will help businesses eliminate overproduction and underproduction situations and minimize stockouts and excess inventory conditions. 

For example, with the upcoming Christmas and New Year, decorative light manufacturers can analyze past sales trends and new product release schedules to predict the demand for major lighting components. This will confirm that the right materials are available at the right time. 

2. Determination of optimal inventory level

Determining the optimal inventory level means setting up the necessary amount of stock to manage production flow while decreasing the cost. By using this technique, businesses can avoid the issues of holding too little or too much inventory. For optimal inventory, manufacturers also use strategies like Just-in-Time (JIT) and Economic Order Quantity (EOQ).

For example, a car manufacturer can determine and calculate the optimal number of tires to keep in inventory, depending on production schedules and suppliers’ lead time, so there is enough stock without excessive holding. 

3. Inventory control

The inventory control technique involves tracking and controlling inventory levels throughout manufacturing. This can be done by utilizing methods like RFID tags, Barcode scanning, and any automated software that manages stock movement in real-time. With inventory control, businesses can track stocks accurately while managing the flow of goods from raw materials to finished products. 

For example- a food manufacturer can use inventory control techniques like RFID tags to track food ingredients and use them before expiration, reducing waste and guaranteeing the freshness of finished products. 

Top 5 Inventory Management Methods

The smart method for inventory management is to predict, track, and manage inventory stocks so businesses can meet customers’ demands. Businesses can use several methods to manage their inventory.  After all, inventory management is an important part of a manufacturing business, and using the right tools and techniques lowers the product stocking cost and guarantees business success. Here are the top 5 methods that businesses can use to get started. 

1. ABC analysis

manufacturing inventory management

ABC inventory management or ABC analysis is a method that categorizes inventory into three basic groups based on their importance in the production line and is calculated by their consumption value and contribution to business revenue such as:

Category A: High-value items that cover a large portion of a company’s inventory but are used in small quantities are placed in category A. 

Category B: This category includes moderately valued items that are most frequently used, but their overall value is less than that of the latter category. 

Category C: This category is for low-valued items that account for most inventory but do not have big financial impacts. 

The ABC ranking of items into categories is based on demands, costs, and risks. This can be used to decide which inventory item to stock, how much to stock, and when to order more. 

PROS  CONS 
  • Helps in prioritizing important inventory items that require more attention and control. 
  •  Improves cost efficiency and focuses resources on critical items. 
  • Stockout risks are reduced by closely monitoring category A items.
  • This may lead to the negletion of essential low-valued items that require accurate demand forecasting. 
  • It can be complex to implement, especially in organizations with a diverse inventory. 
  • It is static and thus fails to capture dynamic changes in inventory items. 
  • Provides limited details for items, especially for category C items.

2. Batch tracking

It allows manufacturers to monitor product stock when it moves through different stages of production. The batch tracking method is pretty useful for quality control because it’s easy to track the origin of defects in small batches. 

PROS CONS
  • It allows businesses to trace products back to their origin, which is useful for maintaining the safety and quality of products.
  • Improves quality control by identifying and isolating defective products. 
  • Helps maintain compliance with regulatory standards
  • Gives insights into stock levels and expiration dates to optimize inventory turnover and reduce waste. 
  • It can be costly to implement and maintain. 
  • Managing batch data for large inventories can increase administrative tasks. 
  • If not managed properly, data entry errors can occur, affecting decision-making. 
  • Batch tracking also requires consistent, careful monitoring. Failure to do so can result in unusable stocks. 

3. Cycle counting

The cycle counting method involves auditing inventory regularly in smaller and more manageable sections instead of performing a full inventory count in one go. This is done to maintain accurate inventory throughout the year without delaying daily operations. 

PROS CONS
  • Maintains regular inventory accurately.
  • Reduces the need for full inventory shutdown and Detects errors at early stages. 
  • Since it’s performed in smaller sections, it’s cost-effective. 
  • It offers custom counting schedules where fast-moving items can be counted more frequently. 
  • It can be time-consuming and labor-intensive
  • Requires detailed planning for effectiveness.
  • The initial setup cost is high. 

4. Materials requirement planning (MRP)

MRP is a system that plans and manages inventory based on production schedules. Following material requirement planning, manufacturers can calculate the total amount of material needed, their quantities, and the appropriate time for replenishment based on current stock levels, as well as anticipate production demand. 

PROS CONS
  • Ensures sufficient material is available for production, optimizes inventory levels, and reduces stockouts and overstocking. 
  • It helps lower overall production costs by optimizing material purchases. 
  • Improves customer service by making sure that production schedules are always met. 
  • Relies on accurate demand forecasting, 
  • Complex to manage for large inventories.

 

  • For MRP to work effectively, there needs to be strong cross-department coordination. 

5. Perpetual inventory management

The perpetual inventory management method involves real-time tracking of inventory levels using smart, automated systems like RFID tags and barcode scanners. Following this method will provide accurate and up-to-date inventory levels in no time and help detect errors quickly. Moreover, a perpetual inventory management system offers extensive benefits over traditional tools and techniques, such as real-time visibility of the inventory stocks and automated inventory listings. 

 

PROS CONS
  • Provides real-time inventory data, minimizes manual errors, and improves overall inventory accuracy.
  • Automates manual processes like tracking, counting, and updating stocks. 
  • With real-time inventory data, businesses can provide better customer service. 
  • High initial setup costs for technology and requires continuous monitoring.
  • Setting up and maintaining a system with advanced technology can be complex for smaller businesses. 
  • For the perpetual inventory system to work properly, it must be integrated with other business systems. 

Each of these discussed methods has its pros and cons, so businesses need to choose the right method based on their specific requirements. However, choosing the right technique will depend on several factors, including the type of product your company manufactures, customer demand, and your budget. 

Also read: How to Make Use of Excel For Inventory Management In Jewelry Businesses?

Manufacturing Inventory Management Strategies

We already discussed 5 methods for inventory management, but some other smart strategies that you can use to manage inventory efficiently are: 

1. Just-in-Time (JIT)

The just-in-time strategy focuses on keeping as little stock as possible before reordering materials for a production run. By doing so, business owners don’t have to worry about having large storage spaces or managing large inventories. Plus, it will also save the production cost of manufacturing extra finished items. However, if businesses choose JIT strategy, they must have a highly reliable supply chain that can deliver materials quickly and do not disrupt or delay production. 

2. Economic order quantity (EOQ)

The economic order quantity model is a formula-driven approach that assists businesses in determining the optimal and accurate order quantity for their inventory. To do this, businesses must consider several expense factors, such as holding and ordering, to find the most economical way to manage stock levels. 

EOQ strategy is implemented to balance the purchase order with the storage cost so that manufacturers can order the right amount of inventory at the right time. 

3. Activity-based costing (ABC)

It is another ABC strategy for effective manufacturing inventory management. Here, products are costed based on the resources they consume. This particular approach accurately represents the true cost of manufacturing each product and helps manufacturers decide where to reduce costs and save money. 

Best Practices in Manufacturing Inventory Management

Managing manufacturing inventory is always difficult, so there is a constant demand for improving manufacturing inventory management. Even though there are several techniques and strategies, item shortage and re-production are still to counter. These tips will help you improve manufacturing inventories in a much better way. 

Tip 1: Implement lean manufacturing

Lean manufacturing is an inventory-panning approach that streamlines the production process by reducing product waste. This includes actively fixing production issues to improve WIP inventory. Lean manufacturing is implemented properly by aligning production with demand to reduce storage costs. 

Benefits

  • Reduces unnecessary inventory and product waste
  • Improves production line with quick response time
  • Eliminates non-valued items to reduce operational costs.

Tip 2: Conduct regular inventory audits

Regular inspection of inventory guarantees that the inventory records match the physical inventory accurately. This is best for quality control, as item thefts are detected easily. However, there are several ways to conduct inventory audits, such as counting everything at once, cycle counting, or just a few times a year. 

Benefits

  • Improves inventory accuracy
  • Identifies loss, misplacements, and thefts
  • Helps with demand planning

Tip 3: Prioritize continuous improvement

With constantly changing market demand, it is important to regularly review and refine the inventory management strategy to stay ahead of the market. What if you stocked certain raw materials in bulk for months, but after a few weeks, the market demand changed, and now you are left with unused inventory and excess holding costs? 

To avoid such a situation it is important to regularly analyze inventory performance and adjust methods so that your business can adapt to changing market conditions without facing loss. 

Benefits

  • Provides flexibility and adaptability to changes in demand and supply
  • Helps identify and address inefficiencies over time
  • Leads to innovation in inventory management practices

Tip 4: Utilize manufacturing inventory software

Manufacturing inventory software is introduced to upgrade the standard manual methods and offer real-time tracking and control of inventory stocks. These inventory software systems are automated systems that include barcode scanning and tagging to help process inventory quickly and accurately. Introducing automation in manufacturing has several other benefits, too, like allowing staff to focus on value-added work rather than wasting time on repetitive tasks. Plus, the inventory management software also offers detailed data analysis and reports that encourage data-driven decision-making, ultimately increasing business revenue. 

Benefits

  • Improves visibility and control over inventory 
  • Automates tasks and reduces manual errors
  • Gives real-time data for better decision-making and demand forecasting.

Some Manufacturing Inventory Management Tools

Since we are on the topic of automated inventory management tools and techniques, it is important to note that today, modern tools and advanced inventory planning software are available to optimize inventory processes. These tools include barcode scanners, RFID tags, and automated inventory software. 

1. Barcode scanners

Barcode scanners are not a new term in the e-commerce space; they are widely used in manufacturing facilities to improve productivity and accuracy in inventory control. 

Each item in an inventory is labeled with a unique barcode and scanned at various production and storage stages to determine the stock level. This method eliminates manual data entry and speeds up the inventory tracking process. 

2. RFID tags

Radiofrequency identification (RFID) tags are small stickers with chips tagged inside. These smart tags automate the inventory management task using wireless technology to track items. It’s a part of an RFID system that includes RFID readers. Each product is labeled with RFID tags in large inventory storage spaces, and few RFID readers are installed around the storage space. So when the team wants to find the location of a specific item, they can simply search for it on software, and the RFID reader will scan the particular tag to determine the product’s location, giving detailed location information. 

3. Inventory and production planning software

Inventory and production planning software links inventory management with overall production operations, production schedules, production flow, and demand forecasting. These tools allow manufacturers to plan inventory levels, automate restocking, and increase overall productivity. 

In the above three inventory management tools, the first two- barcode scanners and RFID tags require high implementation and setup costs; however, using advanced inventory and production planning software like ERP comes with zero to little implementation cost and sets up in minutes. 

About Us

WizCommerce is an e-commerce platform developed for manufacturers, distributors, and wholesalers that uses automation and AI to uplevel the functionalities and features of inventory management software. It automates data entry tasks and integrates with inventory management software to give real-time visibility into inventory levels. 

When you integrate WizCommerce with your ERP and CRM software, you can leverage benefits like:

  • Inventory syncing, where the stock quantity, prices, variants, and other related information are automatically updated by syncing with the ERP software. So there are no manual entry headaches. 
  • Purchase orders and live order status are also updated in sync with ERP, reducing the sales team’s workload.
  • Wizcommerce, in sync with inventory management software, gives insightful reports and detailed analyses that are used for demand forecasting. 
  • It helps maintain optimal inventory levels at all times by giving instant access to inventory information regardless of location. 

manufacturing inventory management

Conclusion

Manufacturing businesses rely on proper inventory management to ensure they have everything they need to operate productively and profitably. That is why inventory management for manufacturers is also different from that of other companies. Precision and accuracy are important in manufacturing’s inventory control. The supply chain is always unpredictable, and replacing suppliers is difficult. 

When it comes to tackling these issues, the answer is inventory management software, which can provide a whole suite of features designed to speed up the complex and time-consuming inventory control tasks in manufacturing. 

However, the problem is that not all inventory management software is made for manufacturers, and not all inventory software comes with powerful features. That is where WizCommerce comes into the picture. It’s not an inventory management software in itself; it’s an e-commerce platform developed for manufacturers and suppliers. It integrates with the inventory management software to uplevel and simplify the inventory management tasks by introducing automation and remote real-time visibility features. 

Want to see it yourself? Reach out to our team or request a demo today!

Until next time, happy inventory management. 

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