The whole may be greater than the sum of its parts, but in the manufacturing industry, the “parts” — i.e., raw materials, works in progress, finished goods, packaging materials and maintenance supplies — are no less significant if a manufacturer is to produce the right products, in the right quantities and at the right time to meet demand. Anything short of that can result in lost sales, under- or overproduction, operational inefficiencies, cash flow issues and other consequences that chip away at the financial health of the “whole”: the manufacturer.

This is why inventory management is so critical for manufacturers. This article details nine strategies that manufacturers can employ to manage their inventory, plus nine inventory management tips to help contain costs and maximize profits.

What Are Manufacturing Inventory Management Strategies?

Manufacturing inventory management strategies are the techniques manufacturing companies use to monitor, control and optimize their inventory levels. Some strategies are based on when the inventory arrives from a supplier, while others focus on its importance and value. Effective inventory management is critical because it ensures that manufacturers’ production lines remain able to fulfill orders in a timely, streamlined and cost-efficient manner, while minimizing the costly problem of excess stock.

Key Takeaways

  • Manufacturers must manage their inventory levels for many important reasons, all of which impact their financial well-being.
  • Manufacturers have a variety of strategies they can use to manage their inventory.
  • They include just-in-time inventory management, ABC analysis and average costing.
  • Inventory management systems help manufacturers keep track of inventory in real time to ensure that they are always able to meet demand.

Manufacturing Inventory Management Strategies Explained

Manufacturing inventory management strategies help manufacturers control and optimize their inventory levels to avoid having too much or too little stock on hand, because either scenario can have financial consequences. Too much inventory can result in excessive carrying costs, monetary losses due to possible spoilage or obsolescence, and cash tied up in stagnant inventory that could be put to use elsewhere to grow the business, such as to purchase additional production equipment. On the other hand, an inventory shortage can lead to stockouts that cause customers to take their business elsewhere, resulting in lost revenue for the manufacturer.

If those consequences weren’t enough, all of the above can also negatively impact a manufacturer’s cash flow, profitability and long-term financial health. But with the right manufacturing inventory management strategy, manufacturers can better align their inventory needs with demand, catch problems before they affect production, increase sales (among repeat buyers, too), cut down on costs and even strengthen their relationships with suppliers.

It also stands to reason that the more control a manufacturer has over its inventory, the more accurate its inventory data will be. This data, in combination with historical data and market trends, enables manufacturers to better anticipate demand and informs their strategic decision-making.

9 Inventory Management Strategies for Manufacturing in 2024

Manufacturers must accurately track and manage inventory levels if they’re to keep production lines — and their supply chains — flowing. How they decide to go about managing their inventory will depend on their goals, the types of industries they’re working with and the products they sell. The following inventory management strategies can lead to greater efficiencies, while minimizing waste and lost opportunities.

  1. Just-in-time (JIT) inventory management means a manufacturer has enough stock in place to produce only what is needed to meet customer demand. This “lean” strategy reduces production and carrying costs. It also requires a manufacturer to work with reliable, responsive suppliers. The main “gotcha” with this strategy is a supply chain disruption that disrupts the flow of goods.
  2. First in, first out (FIFO) is a strategy in which the oldest inventory is used in production first. This method is most applicable to manufacturers of products that have a shelf life, such as batteries and medication.
  3. Last in, first out (LIFO) is the opposite of FIFO: The last products added to a manufacturer’s inventory are the first to be used. Manufacturers choose this strategy under the premise that newer inventory costs more, especially during periods of inflation, so they can recoup their investments sooner. LIFO also offers tax benefits, due to the higher cost of goods sold, which decreases the manufacturer’s net income.
  4. Economic order quantity (EOQ) helps manufacturers determine the ideal order size for every item they buy so as not to have too much or too little on hand. This strategy — most useful for manufacturers with consistent inventory requirements — takes into account annual demand (in units), order cost (including discounts) and annual holding costs (per unit) to calculate how much inventory to order.
  5. Weighted average cost (WAC), also known as weighted average inventory costing, averages the cost of all inventory, rather than the per-unit cost. This helps the manufacturer manage and mitigate the impact of fluctuations in costs by spreading it across their entire inventory, which in turn keeps pricing stable for customers.
  6. Cycle counting is used to ensure that the manufacturer’s amount of physical inventory matches its inventory records. An important part of the auditing process, this inventory management method involves counting select batches of inventory on a regular basis — even daily — and resolving discrepancies, for both accounting purposes and to investigate errors.
  7. ABC inventory analysis prioritizes inventory based on the item’s importance to the manufacturer, in terms of demand, cost and risks. Inventory in the “A” group is considered to be the most valuable so is therefore prioritized above the “B” and “C” groups when the manufacturer is deciding which items to stock, how much and when to reorder. This method is also useful for cycle counting.
  8. Consignment inventory management is a strategy in which a consignor (the manufacturer) provides goods to a consignee (the customer, such as a distributor or retailer), which takes possession of the inventory, though no money changes hands at that point. The consignor continues to own the inventory until it’s sold and then gets paid by the consignee. This method reduces the manufacturer’s carrying costs, among other benefits.
  9. Cloud-based digital inventory management relies on technology to support the previous strategies, by means of a centralized platform that is accessible 24/7. For example, a cloud-based digital inventory management system can automatically track inventory in real time, ensuring that manufacturers have enough stock to meet customer demand and notifying them when inventory levels have dropped below a certain threshold. The system can also calculate EOQ and WAC, forecast product demand and enhance collaboration with suppliers.

9 Inventory Management Tips for Manufacturing

Something as seemingly straightforward as having enough stock on hand can make or break a manufacturing business. Clearly, production cannot move forward without it, which also has repercussions for the supply chain; yet, at the same time, the longer inventory hangs around, the higher its carrying costs and potential for lost revenue. On the flip side, well-managed inventory manifests in manufacturing efficiencies that show up on the business’s bottom line. These nine tips for managing inventory will help manufacturers follow the latter path.

  1. Set minimum inventory levels. The minimum inventory level, also called the reorder point, is the lowest quantity of inventory a manufacturer should have in stock before it needs to buy more. Dipping below this threshold risks running out of stock and being unable to meet production demands. The formula to calculate minimum inventory level is:

    Minimum inventory level = Reorder point × (Normal consumption x Normal delivery time)

    Let’s say a sports equipment manufacturer has a reorder point of 5,000 pickleball paddles. Delivery time for an order is typically seven days, and normal consumption is 500 units. Using the above formula, the minimum inventory level is 1,500 = (5,000 – [500 x 7]).

  2. Perform demand forecasting. Demand forecasting is the process of predicting future demand for products or services so the manufacturer has enough inventory to meet it. Demand forecasts are typically based on analysis of quantitative data, such as historical sales; qualitative data, such as customer surveys; and economic conditions. Demand forecasting helps manufacturers make more informed inventory decisions and better estimates about total anticipated sales and revenue.
  3. Regularly inspect inventory. Inventory inspection is essential for a variety of reasons: It ensures that the manufacturer’s inventory records match its physical inventory, it helps prevent stockouts and overstocking, it ensures quality control, and it can help detect theft. There are several ways to inspect physical inventory: by counting everything at once, typically once or just a few times a year; cycle counting, which involves frequently reconciling the number of grouped physical products against the recorded quantity; and spot checking, which is performed on an ad hoc basis.
  4. Champion cross-functional collaboration. Inventory management works best when all distinct manufacturing teams communicate and collaborate closely. That’s because each team is focused on different aspects of inventory that together provide the highest level of insight for decision-makers. For example, production teams are experts on the manufacturing process, while procurement teams are experts about suppliers and costs. Logistics teams, on the other hand, best understand the distribution and transportation pieces of the process.
  5. Establish a process for eliminating excess inventory. Slow-moving inventory can easily become unsellable, leaving manufacturers with “dead stock” that continues to cost them money just by taking up space. Ways to get rid of this excess inventory include heavily discounting prices, bundling the inventory with other products, liquidating the items or donating them.
  6. Manage supplier relationships. From negotiating better pricing and payment terms and ensuring on-time deliveries to collaborating on product development and, perhaps, even to receiving preferential treatment, manufacturers will want to nurture their relationships with suppliers. As such, supplier relationship management, or SRM, is a critical process that can also reveal when it might be time to switch suppliers amid changing conditions.
  7. Identify and fix outdated processes. Simply put, outdated processes stunt business growth and longevity. Manually tracking inventory, for example, is not only time-consuming but can also introduce errors that cause a stockout — and halt production lines — or the opposite: too much inventory that risks possible obsolescence and revenue loss. Lack of integration among business software also slows down processes and leaves decision-makers unable to see the big picture. The same is true when teams fail to collaborate.
  8. Automate your inventory management system. Manually tracking inventory is time-consuming and can result in errors that lead to revenue loss and customer dissatisfaction. An automated inventory management system that includes barcode scanning, for example, assists in processing incoming inventory faster and more accurately, while also providing real-time information about stock levels and sales. Automation in manufacturing has other benefits, too: Not only does automation enable staff to focus on more value-added work, rather than monotonous, repetitive tasks, it also provides improved data collection and analysis. This can lead to faster decision-making, improved production capabilities and, ultimately, increased revenue.
  9. Invest in lean manufacturing. Lean manufacturing is an inventory-planning approach that focuses on routinely eliminating waste and inefficiencies. This might include fixing production bottlenecks that result in storage costs for work-in-progress inventory, for example. Companies that are successful in lean manufacturing hold only what they need at all stages of production and are efficient with their time, materials and effort.

Manage Your Manufacturing Inventory Easily With NetSuite

NetSuite Inventory Management makes it easy for organizations to optimize their inventory levels, boost profitability and decrease the cost of goods it sells. It provides businesses with greater visibility into stock at every location, enabling decision-makers to monitor and reallocate stock as necessary; it also addresses fluctuations in demand, based on historical and seasonal sales data. NetSuite Inventory Management also enables inventory tracking through lot and serial tracing, helping to define fulfillment strategies and reduce waste. These capabilities allow organizations to improve efficiency and save time and money, all while meeting customer expectations.

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Manufacturing Inventory Management Strategy FAQs

How do seasonal demand fluctuations affect manufacturing inventory decisions?

Seasonal demand can make it more difficult for manufacturers to predict their inventory levels. This can lead to overstocking, unnecessary holding costs or understocking, which can result in stockouts and lost sales. Seasonal demand requires manufacturers to choose between two options: either lock into a storage and fulfillment contract that covers peak capacity — but also pay for unused storage during the offseason — or adhere to tight operations during the year and ramp up internal resources to manage seasonal demand.

What is the role of technology in modern manufacturing inventory management?

Technology plays a significant role in modern manufacturing inventory management technology. For example, it improves the accuracy of information; streamlines inventory processes that help boost productivity, reduce waste and lower operational costs; and provides real-time data for better decision-making.

What strategies can manufacturers use to manage supply chain disruptions?

Supply chain disruptions are inevitable, so preparation is key to minimizing the consequences. Strategies and best practices include identifying potential risk factors, such as supplier bankruptcies; developing a contingency plan; monitoring and analyzing supply chain data through the use of digital tools; implementing automation solutions to manage disruptions; and working to strengthen supplier relationships.

What are the three major inventory management techniques?

The three major inventory management techniques are pull, push and just-in-time. A manufacturer using a pull strategy produces inventory based on customer demand. This method helps keep inventory costs low. A manufacturer using a push strategy produces products according to expected or forecasted demand. This also helps keep operating costs low because the manufacturer is creating more products at once. Finally, the just-in-time strategy is a mix of push and pull strategies and ensures that there is enough stock to produce only what is needed, when it’s needed, by having raw materials on hand. This technique can help keep overhead costs low.

How can you improve inventory management in the manufacturing industry?

Inventory management in the manufacturing industry can be improved through a number of tactics. Manufacturers should be sure they’re using the right inventory strategy, identifying processes that need to be removed or updated and keeping accurate records on important inventory data. Manufacturers should also use a digital manufacturing inventory management tool to keep track of inventory in real time. This makes it easier to monitor inventory, ensuring that there is always sufficient stock available to meet customer demand.

What are the inventory management strategies?

A variety of inventory management strategies are suited to manufacturers. Examples include the just-in-time strategy; first in, first out; last in, first out; economic order quantity; average costing; and ABC inventory analysis.

What are the three types of inventory used by manufacturers?

The three types of inventory that manufacturers use are raw materials, work-in-progress and finished goods. Raw materials are the items the manufacturer uses to create the finished products. Work-in-progress inventory consists of the items the manufacturer has started working on but hasn’t finished yet. Finished goods are completed items that are ready to be sold.