The Benefits and Types of Manufacturing Inventory Management

Keeping track of all the goods in your inventory is easier said than done.

Having an overstocked inventory makes things worse, and if you don’t have a proper system to track your stock levels, stockouts, or shortages, you’ll be spending too much money on unused goods.

Enter manufacturing inventory management and inventory control software to make things easier.

What is manufacturing inventory management?

Put simply, inventory is all the items you use in your business. This includes everything related to the smooth functioning of your business, such as office equipment, furniture, or machinery.

Alternatively, inventory is the sum of all the items you wish to sell in your business.

There are three types of inventory since the materials in your manufacturing process also have an effect on them.

• Raw materials are the components that you use to create your products and fill up most of your inventory levels.
• In-progress inventory goods are in the process of becoming finished goods or finished products.
• Finished goods are the products that are ready to be sold.

Consider a car. Metal is one of its raw materials, the in-progress ones constitute the body of the car, and the car at the dealership is the finished good ready to be sold.

Why is inventory management important?

Inventory management makes a big difference when it comes to your goals, whether you’re a small manufacturer or a large one. While smaller manufacturers rely on manufacturing resource planning (MRP), having a solid policy makes sense. Since it’s a hard tactic to perfect, it can be a game-changer for your business.

Most importantly, inventory management aims to align all your inventories, so the end customer is satisfied when the finished product reaches them. The end goal of inventory management is high customer satisfaction and ensuring that the finished product does not deviate from that.

Manufacturing inventory plays a crucial role in supply chain and supply chain management and directly affects the capability to meet demands. Manufacturing inventory is required for production, and insufficient levels lead to an inability to keep up with orders, putting a strain on the budget. 

These problems echo throughout the supply chain and cause something known as the bullwhip effect in supply, which causes financial loss for businesses. 

Types of inventory

Product life cycle management is crucial for every good before it reaches the customer. You need to account for different types of inventory to reduce costs and increase efficiency.

Raw material

Raw materials are components that the manufacturing unit needs to create a product. A wood furniture manufacturer has different kinds of wood, varnish, and paint in their raw material inventory. Other materials could include armrests, legs, or backrests.

In-progress or work-in-progress (WIP)

WIP items in the inventory are raw materials and goods that have not been finished yet. An example of a WIP item is an outer frame of a car that doesn’t have wheels or an engine attached to it. This is important for accounting managers since they have already incurred production costs. Hence, it gets taken into account while bookkeeping.

Finished goods

Finished goods are items in the inventory that have gone through the entire production process and are waiting to be sold. Some companies sell finished goods to other manufacturers, who then use them to make the final version of their product. Distributors are the third parties who buy goods from manufacturers and resell them.

Apart from the three primary types of inventory, there are four smaller categories.

Non-inventory items

Non-inventory items are goods bought in bulk but only used in very small amounts per produced product. For example, screws and glue in furniture are non-inventory items. These are crucial components for a product, but only a limited set gets used per product.

Consignment inventory

Consignment inventory is held and owned by separate parties. There are two parties: the consignor and the consignee. While the former retains ownership of the goods, the latter keeps them in their inventory to be used. The consignee pays the consignor according to how the goods are consumed.

Vendor-managed inventory

Vendor-managed inventory is a supply chain management method whereby the supplier and the buyer collaborate. The supplier optimizes and replenishes the buyer’s stock while the buyer shares their inventory data with the supplier. The supplier then makes the decision of how much extra inventory to store in the buyer’s facility.

This method leads to a reduction in inventory costs.

Goods in transit or transit inventory

Transit inventory has left the seller’s warehouse but hasn’t reached the buyer yet. This type of inventory is used to assign an owner of the goods once it leaves the supplier's warehouse. The ownership is assigned to the shipping partner, freight, or land transportation until it reaches the buyer.

Inventory management strategies

Like the different types of inventory, there are different types of inventory management, and these principles apply to companies of all sizes, small, large, and even wholesalers. The best approach is to take the highlight of each type and incorporate them into one that works best for your company.

Perpetual inventory management

Rewinding the clocks sometimes, there used to be a type of inventory management known as periodic, in which the inventory is tracked regularly every week, month, or year. What happens in between doesn’t get tracked.

Perpetual inventory management is a much more accurate method but takes more time. It works by constantly updating your inventory every time an order is placed.

While this was previously difficult, real-time automated inventory management systems are now available to assist companies with their stock tracking.

Just-in-time inventory management

Just-in-time inventory management, or JIT, aims to cut down costs incurred during the production process, which is done through careful planning. It tracks your work-in-process inventory against supplier requirements to produce goods on time.

Grocery stores or e-commerce companies use this method of inventory management. While there are many options for every product, there are only a few units of each item. When an item goes out of stock, a system flags this, and the manager places orders for more.

ABC inventory management

ABC inventory management categorizes products into what sells and what doesn’t. This model assumes that most of the manufacturing business’ sales are for small units sold.

For example, 10% of your product categories could account for 80% of your sales. Let’s call this Item X. On the other hand, there are products that take up around 50% of your inventory space for 10% of your total sales. Call this Item Y. This would prove that Item X sells more than Y.

This method applies to small businesses that need to account for everything.

Consignment inventory management

This inventory management method is when a manufacturer provides products or materials to a customer who makes payment only when the product is sold to a consumer.

This method can be very useful for products that have not yet been sold.

This method helps you save a lot of money since it reduces the number of deliveries you have to make. It makes you sell the products in one big batch instead of individually. The unsold amount of inventory then gets returned.

How to keep inventory organized

Inventory control is a must for efficiency. Modern manufacturing companies usually feel they can handle all inventory processes without organizing their physical inventory. However, as businesses grow, making this happen is increasingly difficult. 

Organize your inventory once you have space and a warehouse. Let’s run through some steps to ensure that you get high efficiency and traceability in the warehouse.

• Labeling: Label everything from raw materials to in-progress items and finished products, so they’re easier to find when you need to.
• Stock keeping units (SKUs): Create an SKU system that manages your stocks in a better way. You can easily make a note of which cycle of production your inventory has reached. 
• Mark areas: Marking your warehouse with signs or signals with tape makes it easy for personnel to identify different areas within your warehouse (sometimes even through a mobile device), such as break zones, workstations, or storage locations. Apart from this, visual cues help improve safety in the work area. 
• ABC analysis: ABC analysis organizes your inventory whenever your product moves. ABC divides items into three categories: A, B, and C. Class A items make up 80% of your movements and need to be stored next to production materials or finished ones. B items comprise 15% of the total movements, and C comprises 5%.
• Recording movements: Keeping track of what comes inside and goes out is important. It’s necessary to keep records clear, track physical inventory, and make up for inconsistencies in quality or handling. You can do this faster and more easily with manufacturing inventory management software.
• Barcodes: Barcodes with enterprise resource planning (ERP) software make it easy to record every single movement. It helps automate a lot of admin tasks and reduces human errors.
• Cleanliness: Regular maintenance audits are critical to ensure equipment doesn’t break down. It’s important to proactively check the items needing servicing,  cleaning, or removal.
• Quality checks: You can’t let the goods in your inventory go bad. Doing so wastes money and increases the chances of defective finished goods.
• Expiry dates: Keep track of expiry dates and dispose of the ones that expire. Forecasting is apt for non-perishable goods.
• Regular audits: Inventory tracking can be done in three ways: physically, spot checking, and cycle counting. While physical inventory requires that every product on the list gets counted once a year, spot-checking seeks to verify quantities of the product, and cycle counting tracks inventories at a particular location on a specific day. 

What is manufacturing inventory management software?

Manufacturing inventory management software lets manufacturing companies quickly determine inventory balance, track raw materials, and record WIP items and finished goods.

Good inventory management systems track purchased materials and stock items by assigning lot numbers or serial numbers. These software solutions also have barcodes and the ability to track items using radio frequency identification (RFID), scanning functionalities, and tracking purchase orders.

Essential features of manufacturing inventory management software

Manufacturing inventory management software works better with these features.

• Bill of materials (BOM) lists raw materials required to manufacture a product.
• Inventory costs assign a cost value to inventory items to improve profit tracking and manage tax accounting.
• Purchase order management allows manufacturers to reorder raw materials and supplies before running out. The orders then get sent to the vendor automatically.
• Inventory tracking keeps up with inventory items, pricing, and location stock through various workflows.
• Inventory matrix helps track products by size, color, or dimensions.

What's next for manufacturing inventory management?

Keeping up with inventory manually is a tedious process. It’s important to streamline your inventory management as quickly as you can. This helps you grow your business and focus on the critical elements. You need to apply inventory management in your business the best you can so it becomes second nature.

Learn more about how to improve stock control with a barcode inventory system.