With the right systems in place, manufacturing inventory management can help to reduce production and ensure all operational processes are carried out effectively and efficiently.
In this guide, we cover the types of manufacturing inventory, the costs, and a few handy strategies for managing it effectively.
What is inventory in manufacturing?
Manufacturing inventory (also known as production inventory) is the process of tracking the supplies, materials, and products being used, made, and sold by a manufacturer. Inventory in manufacturing accounts for all parts, products, raw materials, and factory supplies used in a manufacturing facility.
A manufacturer needs to keep accurate records of all inventory items, as this will ensure there is enough stock available to keep up with production and sustain orders.
Manufacturing inventory incorporates all of the various parts, materials, and finished goods used to create saleable products.
The 4 main types of manufacturing inventory
There are four main types of manufacturing inventory. And as they rely on each other, you need to be across them all to ensure perfect inventory accuracy.
1. Raw materials
Raw materials are what you need to start and finish your saleable products. They’re the unprocessed materials used in manufacturing to build parts and finished products.
Some manufacturers only require a few raw materials to make a product. If you manufacture candles, for example, you need wax, containers for the wax to be poured into, labels, and wicks.
Raw materials you might find in a manufacturing facility include:
- Food ingredients
- Plastic
- Metal
- Wood
- Glass
- Fabric
- Chemicals and gases
- Coal
- Oil
- Minerals
2. WIP inventory
Work-in-progress (WIP) is the inventory that has gone into production but is not yet a final, complete product (that would then go to a customer). In common use, this inventory is called an assembly.
To continue with our candle production example, imagine you’ve poured the wax into the candle containers. The product is almost finished, pending the application of a label. The candles are no longer a bunch of raw materials, but they also aren’t ready to leave the factory.
It’s important to monitor WIP manufacturing inventory. If something goes wrong in the production process, you’ll be able to quickly identify where the issue is occurring.
By keeping records of WIP inventory, you can see whether the issue is a common occurrence or an outlier. This enables you to make smarter business decisions based on historical evidence.
3. Finished goods
Finished goods in manufacturing inventory are the products that have been built, assembled, or produced, and are now ready for sale.
For the candle manufacturer, this means candles that are formed, stickered, packaged and will either be moved into a warehouse or head straight out to retailers or individual customers. They are a final product and fit for purpose.
It’s crucial to keep a record of finished goods to ensure you have enough products to meet the demand of your customers. Real-time manufacturing inventory software is fundamental for the accurate tracking of finished goods, as it keeps records up to date as inventory is moved or sold.
4. MRO
Maintenance, repair, and operations (MRO) inventory pertains to the materials, tools and equipment needed to ensure a manufacturer can continue producing goods for sale.
All equipment will need routine maintenance and repairs at some point, and to do so, you need to have the right supplies available.
Without accounting for MRO inventory, fixes could be delayed. This can interrupt production schedules and have a negative flow-on effect on the rest of the business.
Unlike retail inventory, manufacturing inventory accounts for both finished and unfinished products.
4 more types of manufacturing inventory
Outside of the four main types of manufacturing inventory, there are four additional inventory types that are important to understand.
1. Packaging inventory
Packaging inventory refers to the various packing materials needed for the items you sell. Some businesses might classify packaging as MRO inventory, although the definition must be stretched to include it.
Examples of packaging inventory:
- Envelopes
- Courier bags
- Cardboard boxes
- Styrofoam peanuts
- Bubble wrap
- Shipping labels
- Label printer ink
For smaller businesses, tracking packaging inventory can be less efficient than performing regular visual checks of stock levels and reordering on an as-needed basis. But for large or busy enterprises, keeping track of stock levels for consumables can help to prevent downtime and minimise workflow interruptions.
2. Decoupling inventory
Decoupling inventory is crucial for mass-scale manufacturers or businesses producing items that require specific raw materials.
Decoupling inventory management is the practice of storing extra stock on hand of what’s needed for production to continue where there is an unexpected supply stockout.
Supply chain issues have been evident across most industries over the past few years, and decoupling inventory can minimise disruption to the manufacturing process until a new supply is sourced.
Acting as a buffer, decoupling inventory is for emergency use only, and shouldn’t be seen as a long-term strategy for managing stock.
3. Consignment inventory
Consignment inventory is inventory owned by the manufacturer but stored at their customers’ locations. It requires a business to keep a record of stock that is kept on a retailer’s premises until it is sold.
In this model, a retailer doesn’t purchase the inventory until it is sold to a customer, which means that ownership of the items remains with the supplier.
Only once it exchanges hands to a customer and the retailer has paid for it are you then able to mark it as sold and remove it from your manufacturing inventory.
4. In-transit inventory
In-transit inventory, also known as pipeline inventory, refers to inventory that is on the move. To manage in-transit inventory, you have to keep track of what is where – whether it’s on the way to another manufacturer, or to distributors, suppliers, retailers, or another location.
A significant amount of stock in transit has the potential to impact other areas of the organisation such as cash flow, freight costs, and goods-handling efficiency.
The close monitoring of in-transit inventory also presents many opportunities for improving the time it takes to get inventory to its destination. This allows you to turn stock into cash faster and minimise transportation costs.
Pipeline inventory, or in-transit inventory, must be tracked throughout every stage of its journey.
Accounting for manufacturing inventory
When monitoring your manufacturing inventory, you also need to account for all the costs involved in creating the inventory. Manufacturing accounting will help you understand whether you’re receiving a good return on the investment made to manufacture the products.
COGS
Cost of goods sold (COGS), also known as cost of sales, is about calculating the direct costs related to producing goods to be sold by a business.
Note that it only includes materials and labour, and not indirect costs such as marketing or manufacturing overheads. If an item requires $10 worth of raw materials and half an hour of labour (costed at $30/hour), then the COGS is $25.
Use COGS to calculate your business’s gross profit and margin by subtracting it from sales revenue.
Inventory value
Inventory value is about understanding the total value of inventory that is in stock and available to sell. This is typically calculated at the end of an accounting period and is used on financial statements and balance sheets.
Inventory value isn’t something that should be only looked at once or twice a year. It can help you to establish revenue goals, maximise profitability, and assist with inventory forecasting.
MOH
Manufacturing overheads (MOH) are all the indirect costs required to keep your business open every day.
While direct costs include things like raw materials and labour, MOH covers utilities, such as electricity and water, branding, external suppliers, and property rates. This is a sum that can be used on its own or added to COGS.
Manufacturing inventory management
Effectively managing manufacturing inventory requires a collaboration of efforts. It begins with putting the right strategies in place and extends to using the best tools and software to support your business.
Manufacturing inventory strategies
The strategies you use to manage your manufacturing inventory will depend on the structure of your business and operations. Let’s look at some of the more common methods used today.
3 popular manufacturing inventory strategies:
- The pull strategy. This strategy requires you to supply a product in direct correlation to customer demand. This means your inventory costs are lower, but it can be difficult to get the balance right when it comes to meeting delivery expectations.
- The push strategy. This involves forecasting customer demand and manufacturing products based on predicted sales. While you are less likely to experience a stock-out (and miss out on sales), you could be left with surplus stock at a cost to your business.
- The just-in-time (JIT) strategy. This strategy strikes a balance between push and pull. There’s an element of forecasting customer demand and ensuring a good supply of raw materials ready for manufacture. But production of the items will only begin when needed.
Even the liquids you use to run your production machines can be considered a type of manufacturing inventory.
Manufacturing tools and inventory software
Without the right tools and software, it’s difficult to accurately manage manufacturing inventory. Luckily, there are many fit-for-purpose solutions designed just for manufacturers.
Unleashed manufacturing inventory software has been developed to assist with assembly (Bill of Materials) and production planning, and offers multichannel integration to give you complete visibility of up-to-the-minute stock numbers and sales margins.
5 tips for successful manufacturing inventory management:
- Keep accurate inventory records. Without correct record-keeping, you could jeopardise all areas of your business and its potential for profitability.
- Recognise and remedy processes that aren’t working for your business.
- Establish end-to-end visibility inventory to ensure it’s optimised at all stages.
- Automate processes wherever possible. Automation removes the need for manual input, reducing the risk of mistakes being made.
- Implement the ABC method: Prioritise finished products according to their profitability margins, with A the highest value and C the lowest.
Read more: 5 UK Manufacturing Software Trends for 2023
