Manufacturing inventory management is the process of controlling raw materials, components, work-in-progress (WIP), and finished goods as they move through production. Its goal is simple: keep enough materials available to meet production demand without tying too much cash up in excess stock.
Unlike inventory management in retail, manufacturing inventory involves transformation. Materials enter the business, move through production stages, and become finished products. A single missing component can stop an entire production order, while excess materials increase storage costs and lock up working capital.
Effective inventory management connects demand planning, purchasing, warehouse operations, production, and sales. This guide explains how the process works, which methods manufacturers use, what metrics to track, and when spreadsheets should be replaced with dedicated inventory or ERP software.
Key Takeaways
- Manufacturing inventory includes raw materials, components, WIP, finished goods, maintenance supplies, and packaging.
- Inventory records should connect with bills of materials (BOMs), production orders, purchasing, and sales demand.
- Common inventory control methods include ABC analysis, reorder points, safety stock, EOQ, JIT, MRP, and cycle counting.
- Important KPIs include inventory turnover, inventory accuracy, stockout rate, days inventory outstanding, and carrying cost.
- Manufacturers often outgrow spreadsheets when stock, purchasing, and production data must be updated manually across several files.
- An ERP system can connect inventory with production planning, BOMs, material requirements, purchasing, and finished-goods tracking.
- What Is Manufacturing Inventory Management?
- Types of Inventory in Manufacturing
- How Manufacturing Inventory Management Works
- Manufacturing Inventory Example: How BOMs Prevent Material Shortages
- 7 Manufacturing Inventory Management Methods
- Common Manufacturing Inventory Problems — and How to Fix Them
- Best Practices for Manufacturing Inventory Control
- Key Manufacturing Inventory KPIs and Formulas
- When Do You Need Manufacturing Inventory Software?
- How Manufacturing Inventory Software Helps
- Manufacturing Inventory Management Checklist
- How Technology Improves Manufacturing Inventory Control
- To Sum It Up
- Frequently Asked Questions About Manufacturing Inventory Management
Learn how to streamline your processes with Kladana
What Is Manufacturing Inventory Management?
Manufacturing inventory management is the planning, tracking, and control of materials and products throughout the production cycle.
It starts before production begins. A manufacturer needs to know what products must be made, which materials are required, how much is already available, and what must be purchased.
During production, materials move out of raw material inventory and become work-in-progress. When production is completed, the resulting products become finished goods ready for sale or distribution.
Good inventory control answers several important questions:
- What materials are currently in stock?
- How much stock is already reserved for production?
- What materials will be required for upcoming orders?
- What needs to be purchased and when?
- How much WIP is currently on the shop floor?
- How many finished products are available for sale?
- Where are materials and products stored?
- How much money is tied up in inventory?
When these answers are spread across spreadsheets, warehouse records, purchasing documents, and production plans, mistakes become much more likely.
Manufacturing Inventory vs Regular Inventory Management
Manufacturing inventory is more complex than inventory in a typical retail or wholesale business because stock is consumed and transformed.
| Regular Inventory Management | Manufacturing Inventory Management |
Focuses mainly on goods purchased and sold |
Covers raw materials, components, WIP, and finished goods |
Stock changes mainly through purchases, transfers, and sales |
Stock is also consumed and transformed during production |
Replenishment often depends on sales demand |
Replenishment depends on sales demand, BOMs, and production plans |
SKU-level stock tracking may be enough |
BOMs, production orders, batches, and material reservations may be required |
Finished products are usually purchased |
Finished products are produced from other inventory items |
For this reason, manufacturers need visibility not only into how much stock they have, but also into what that stock will be used for.
Types of Inventory in Manufacturing
Manufacturing businesses usually manage several inventory categories at the same time. Each type has different risks and requires different control methods.
Raw Materials
Raw materials are basic inputs used to manufacture products.
A furniture manufacturer, for example, may keep wood, metal, fabric, varnish, and adhesive in stock.
Poor raw material control can create two opposite problems: shortages that stop production or excess inventory that occupies warehouse space and locks up cash.
Components and Parts
Components are individual parts that become part of a finished product.
An electronics manufacturer may use circuit boards, resistors, connectors, cables, and cases. One finished product can require dozens or even hundreds of components.
A shortage of just one critical component may prevent production even when every other material is available.
Work-in-Progress Inventory
Work-in-progress, or WIP, includes products that have entered production but are not yet finished.
For example, a furniture frame that has been assembled but not painted is WIP.
High WIP levels can indicate bottlenecks, long production cycles, poor scheduling, or too many jobs started at the same time. Tracking WIP helps managers see where materials and money are tied up inside the production process.
Finished Goods
Finished goods are completed products ready for sale, shipment, or transfer to another location.
Manufacturers need enough finished stock to meet demand without producing more than they can sell. Excess finished goods increase carrying costs and may become obsolete.
MRO Supplies
Maintenance, repair, and operations supplies support production but do not normally become part of the finished product.
Examples include:
- machine lubricants;
- spare parts;
- cleaning supplies;
- safety equipment;
- tools.
These items can be easy to overlook, but a missing spare part or maintenance supply can stop equipment and delay production.
Packaging Materials
Boxes, bottles, labels, pallets, wrapping, and other packaging materials should also be tracked.
A product may be fully manufactured but impossible to ship if the required packaging is unavailable.
| Inventory Type | Example | Main Risk | Useful Control Method |
Raw materials |
Wood, steel, fabric |
Shortages or excess stock |
Reorder points, MRP |
Components |
Screws, motors, circuit boards |
One missing part stops production |
BOM planning, safety stock |
WIP |
Partially assembled product |
Bottlenecks and hidden inventory |
Production-stage tracking |
Finished goods |
Ready-to-sell products |
Overstock or stockouts |
Demand forecasting |
MRO supplies |
Lubricants, spare parts |
Equipment downtime |
Min/max levels |
Packaging |
Boxes, labels, bottles |
Finished goods cannot ship |
Reorder points |
How Manufacturing Inventory Management Works
Manufacturing inventory management should connect customer demand with purchasing and production.
A typical workflow looks like this:
- Forecast demand or receive customer orders
The business estimates what products customers will need or receives confirmed sales orders. - Create a production plan
Managers decide what needs to be produced, how much, and by what date. - Calculate material requirements
Bills of materials are used to determine which raw materials and components are required. - Check available and reserved inventory
The business checks what is physically available and what stock is already reserved for other production or sales orders. - Purchase missing materials
Purchase orders are created for materials that are not available in sufficient quantities. - Receive and inspect materials
New materials are received into inventory, checked, recorded, and placed in the correct warehouse or storage location. - Issue materials to production
Required materials are reserved or consumed according to production orders. - Track WIP
Products move through production stages until all required operations are completed. - Receive finished goods
Completed products are added to finished-goods inventory. - Sell or ship finished products
The inventory system updates stock after products are sold, shipped, or transferred.
The cycle then starts again as new demand changes production and purchasing requirements.
Manufacturing Inventory Example: How BOMs Prevent Material Shortages
Consider a small manufacturer that produces wooden dining tables. The company receives an order for 100 tables.
Each table requires:
| Material | Quantity per Table | Needed for 100 Tables |
Tabletop |
1 |
100 |
Legs |
4 |
400 |
Screws |
8 |
800 |
Varnish |
0.3 L |
30 L |
The warehouse currently has:
| Material | Required | Available | Shortage |
Tabletop |
100 |
70 |
30 |
Legs |
400 |
500 |
0 |
Screws |
800 |
1,000 |
0 |
Varnish |
30 L |
20 L |
10 L |
Without a connected inventory and production system, an employee may check stock manually and overlook one of these shortages.
The company could then start production only to discover that it cannot complete all 100 tables.
A BOM-based inventory process identifies the shortage before production begins. The business can purchase 30 additional tabletops and 10 liters of varnish before the order reaches the shop floor.
This example also shows why simply knowing the total quantity in stock is not enough. Manufacturers need to compare:
material requirements + available stock + reserved stock + incoming supplies.
That gives a much more realistic view of whether production can actually be completed.
7 Manufacturing Inventory Management Methods
No single inventory method works for every manufacturer. Most businesses combine several methods depending on demand, lead times, production complexity, and the value of individual materials.
| Method | Best For | Main Benefit | Main Limitation |
ABC analysis |
Large inventories |
Prioritizes important stock |
Low-value critical items may be overlooked |
Reorder point |
Regularly consumed materials |
Triggers replenishment before stock runs out |
Requires accurate usage and lead-time data |
Safety stock |
Variable demand or supply |
Protects against shortages |
Increases carrying costs |
EOQ |
Stable demand |
Balances ordering and holding costs |
Less useful with unpredictable demand |
JIT |
Reliable supply chains |
Reduces inventory levels |
Vulnerable to supplier delays |
MRP |
BOM-based production |
Calculates material requirements |
Depends on accurate data |
Cycle counting |
Ongoing stock control |
Improves inventory accuracy |
Requires a regular process |
ABC Analysis
ABC analysis divides inventory according to value or importance.
A common approach is:
- A items: high-value or highly critical inventory that requires close control;
- B items: medium-value inventory;
- C items: lower-value inventory that can usually be managed with simpler controls.
ABC analysis helps manufacturers focus attention where errors or shortages would have the greatest impact.
However, value should not be the only criterion. A cheap component can still be critical if production cannot continue without it.
Reorder Point
A reorder point defines the stock level at which a new purchase should be initiated.
A basic formula is:
Reorder Point = Average Daily Usage × Lead Time + Safety Stock
For example, a manufacturer uses 20 components per day, supplier lead time is 5 days, and safety stock is 40 units.
Reorder point:
20 × 5 + 40 = 140 units
When available inventory reaches 140 units, replenishment should begin.
Safety Stock
Safety stock is extra inventory kept to protect against uncertainty.
It can help when:
- customer demand changes unexpectedly;
- suppliers deliver late;
- production consumes more material than planned;
- lead times vary.
More safety stock reduces shortage risk, but it also increases storage and carrying costs. The right level should balance both risks.
Economic Order Quantity
Economic Order Quantity, or EOQ, helps estimate an order size that balances ordering costs and inventory holding costs.
EOQ is most useful when demand and supplier conditions are relatively stable.
It is less reliable for highly seasonal products or materials with unpredictable prices and lead times.
Just-in-Time Inventory
Just-in-Time, or JIT, aims to keep inventory low by receiving materials close to the time they are required for production.
This can reduce:
- warehouse space;
- carrying costs;
- obsolete materials.
However, JIT depends heavily on reliable suppliers and predictable lead times. A supplier delay can quickly stop production when little safety stock is available.
Material Requirements Planning
Material Requirements Planning, or MRP, calculates what materials a manufacturer needs, how much is required, and when they are needed.
It typically uses:
- production demand;
- BOMs;
- existing stock;
- reserved stock;
- expected deliveries;
- lead times.
MRP is especially useful when finished products contain many components or subassemblies.
Cycle Counting
Cycle counting checks selected inventory items regularly instead of waiting for one large annual stock count.
For example:
- A items may be counted weekly;
- B items monthly;
- C items quarterly.
Frequent checks help identify discrepancies early and improve stock accuracy without stopping all warehouse operations for a full count.
Hold inventory countings, use write-offs and stock movement reports in Kladana to take control of your inventory
Common Manufacturing Inventory Problems — and How to Fix Them
Inventory problems often appear as production problems.
A delayed production order, emergency purchase, or missing component may be a sign that inventory information is incomplete or disconnected.
| Problem | Common Cause | Possible Solution |
Production stops because one material is missing |
Stock is not connected to BOMs and production plans |
Calculate and reserve materials before production |
Too much cash is tied up in materials |
Overordering and weak forecasting |
Use ABC analysis, reorder points, and turnover reports |
System stock differs from physical stock |
Manual entry errors or unrecorded movements |
Use barcode scanning and cycle counts |
Purchasing is always urgent |
Orders are created only after shortages appear |
Use reorder alerts and material planning |
WIP accumulates between stages |
Bottlenecks or poor production scheduling |
Track WIP and production-stage progress |
Materials expire or become obsolete |
Weak batch and demand control |
Track batches, expiry dates, and slow-moving inventory |
Employees cannot find inventory |
Poor location management |
Use warehouse locations or bin storage |
Finished products are available but cannot ship |
Packaging was not included in planning |
Include packaging in inventory requirements |
A useful rule is to investigate the process behind every recurring shortage instead of solving it with another emergency purchase.
Best Practices for Manufacturing Inventory Control
Good inventory management does not depend on one formula or software feature. It requires accurate data and repeatable processes.
Keep BOMs Accurate
A bill of materials should reflect what production actually consumes.
Update BOMs when:
- components change;
- quantities change;
- suppliers or specifications change;
- scrap levels change;
- new subassemblies are introduced.
An inaccurate BOM creates inaccurate material planning.
Separate Available and Reserved Stock
A warehouse may physically contain 1,000 units of a component, but 800 may already be reserved for existing production orders.
Treating all 1,000 units as available can cause double allocation.
Managers should distinguish between:
- on-hand stock;
- reserved stock;
- available stock;
- expected stock.
Set Reorder Points for Critical Materials
Not every SKU needs the same control.
Set more precise reorder levels for materials that:
- have long supplier lead times;
- frequently cause production delays;
- are used in many products;
- have limited alternative suppliers.
Track Inventory Movements in Real Time
Every receipt, transfer, consumption, adjustment, and finished-goods receipt should update inventory records.
Delayed entries create a gap between what the system shows and what is actually in the warehouse or on the shop floor.
Use Barcodes Where Manual Entry Causes Errors
Barcode scanning can simplify repetitive warehouse operations such as receiving, picking, transferring, and stock counting.
It is especially useful as SKU numbers and transaction volumes grow.
Count Inventory Regularly
Do not wait until year-end to discover discrepancies.
Use cycle counting to check important stock throughout the year and investigate recurring differences.
Connect Inventory with Purchasing and Production
Inventory should not operate as an isolated database. Production planning affects material requirements. Purchasing affects incoming stock. Sales affect demand. BOMs determine consumption.
The more these processes depend on separate spreadsheets, the harder it becomes to maintain one reliable inventory figure.
Key Manufacturing Inventory KPIs and Formulas
Inventory KPIs help manufacturers identify shortages, excess stock, slow-moving materials, and inaccurate records.
The exact set of metrics depends on the business, but several indicators are useful for most manufacturers.
Inventory Turnover
Inventory turnover shows how many times inventory is sold or used during a period.
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
A low turnover ratio may indicate excess or slow-moving stock. A very high ratio can be positive, but it may also indicate that stock levels are too low and shortages are more likely.
Days Inventory Outstanding
Days Inventory Outstanding, or DIO, estimates how long inventory remains in the business before it is sold or consumed.
DIO = Average Inventory ÷ Cost of Goods Sold × Number of Days
Lower DIO generally means inventory moves faster, but an extremely low level may increase stockout risk.
Inventory Accuracy
Inventory accuracy compares recorded stock with actual physical stock.
Inventory Accuracy = Correct Inventory Records ÷ Total Records Checked × 100
Frequent discrepancies may indicate:
- unrecorded movements;
- counting errors;
- incorrect units of measure;
- production consumption that was not registered;
- loss or damage.
Stockout Rate
Stockout rate tracks how often required items are unavailable.
For manufacturers, this metric is particularly important for critical components because one missing material can delay an entire production order.
Inventory Carrying Cost
Carrying cost estimates the cost of keeping inventory.
It may include:
- warehouse rent;
- insurance;
- handling;
- damage;
- shrinkage;
- depreciation;
- obsolescence;
- capital tied up in stock.
Reducing inventory is not automatically better. The goal is to reduce unnecessary stock without increasing production disruptions.
Material Yield
Material yield compares usable output with material input.
Material Yield = Good Output ÷ Material Input × 100
Low yield can indicate excessive scrap, quality problems, inaccurate BOM quantities, or inefficient production processes.
When Do You Need Manufacturing Inventory Software?
Spreadsheets can work for a very small manufacturer with a limited product range and simple production. Problems usually appear when the business grows faster than the spreadsheet process.
You may need dedicated inventory or ERP software when:
- several employees edit inventory data;
- the same information is copied between multiple spreadsheets;
- stock levels are often outdated;
- you cannot separate available stock from reserved stock;
- production starts before all materials are available;
- BOM changes must be updated manually in several files;
- you operate several warehouses or production locations;
- purchase orders are created only after someone notices a shortage;
- WIP is difficult to track;
- physical counts regularly differ from spreadsheet records;
- you cannot easily calculate actual production costs.
Spreadsheet vs Inventory Software vs Manufacturing ERP
| System | Best For | Main Strength | Main Limitation |
Spreadsheet |
Very small manufacturers with simple products |
Flexible and familiar |
Manual updates and high error risk as operations grow |
Inventory software |
Businesses focused mainly on stock control |
Better stock visibility and warehouse tracking |
Production may remain separate |
Manufacturing ERP |
Growing manufacturers with connected inventory, production, sales, and purchasing |
One connected operational system |
Requires initial setup and process configuration |
The important question is not whether spreadsheets are “bad.”
The question is whether employees can still maintain accurate information without duplicating work.
When production, purchasing, inventory, and sales all depend on the same data, a connected system becomes much more valuable.
How Manufacturing Inventory Software Helps
Manufacturing inventory software creates a shared source of information for materials, production, purchasing, and finished goods.
Instead of checking several files, managers can see how inventory changes as materials are purchased, reserved, consumed, transferred, produced, and sold.
Useful features may include:
- real-time stock levels;
- multiple warehouses and storage locations;
- BOM management;
- production orders;
- raw material reservations;
- material requirements planning;
- reorder points;
- purchase planning;
- WIP tracking;
- batch and serial number tracking;
- barcode operations;
- inventory valuation;
- production cost calculation;
- demand and inventory reports.
The greatest benefit comes when these functions work together.
For example, a production order can create material demand. The system checks stock availability, identifies shortages, supports purchasing, records consumption, tracks WIP, and adds finished products back into inventory.
Know What You Can Produce Before Production Starts
Kladana connects inventory with manufacturing operations. Businesses can manage raw materials, production orders, BOMs and routings, monitor material availability and requirements, track WIP and finished goods, and plan replenishment in the same system.
Manufacturing Inventory Management Checklist
Use this checklist to identify gaps in your current process.
Inventory Data
☐ Every material and component has a unique SKU or identifier.
☐ Units of measure are standardized.
☐ Warehouse locations are clearly recorded.
☐ Stock records are updated after every movement.
☐ Physical counts are compared with system records regularly.
Production Planning
☐ Every manufactured product has an accurate BOM.
☐ BOM changes are documented.
☐ Material requirements are checked before production starts.
☐ Reserved stock is separated from available stock.
☐ WIP can be tracked between production stages.
Purchasing
☐ Critical materials have reorder rules.
☐ Supplier lead times are recorded.
☐ Upcoming production demand is considered before purchasing.
☐ Incoming deliveries are visible to production planners.
☐ Emergency purchases are tracked and analyzed.
Inventory Control
☐ Critical inventory is identified.
☐ Slow-moving and obsolete stock is reviewed.
☐ Safety stock levels are reviewed regularly.
☐ Batch or expiry information is tracked where required.
☐ Inventory discrepancies are investigated rather than simply adjusted.
Performance
☐ Inventory turnover is monitored.
☐ Stockouts are measured.
☐ Inventory accuracy is measured.
☐ Excess stock is reviewed.
☐ Production delays caused by missing materials are tracked.
If several items remain unchecked, the problem may not be simply “too much” or “too little” inventory. The business may need better connections between inventory, purchasing, and production planning.
How Technology Improves Manufacturing Inventory Control
Technology should reduce manual work and make inventory information more reliable.
ERP Systems
Manufacturing ERP connects inventory with related processes such as:
- production;
- purchasing;
- sales;
- BOMs;
- costing;
- warehouse operations.
This reduces the need to copy the same information between separate systems.
Barcode Scanning
Barcodes help capture inventory movements more quickly and consistently.
They can be used for:
- receiving;
- picking;
- transfers;
- inventory counting;
- identifying batches or products.
Material Requirements Planning
MRP helps convert production demand into material requirements.
Instead of asking only, “How much stock do we have?”, the business can ask:
“How much will we need, what is already available, and what must arrive before production begins?”
Real-Time Production Tracking
Inventory visibility improves when production updates do not happen days later. As materials are consumed and production stages are completed, stock and WIP records should reflect what has actually happened.
Kladana’s current production management tools connect raw-material stock, production orders, material requirements, WIP, finished goods, costing, BOMs and routings, with additional shop-floor task tracking.
Still Checking Raw Materials in Spreadsheets?
Track raw materials, WIP, finished goods, production orders, and stock movements in one connected system. Plan requirements before production and reduce last-minute material shortages.
To Sum It Up
Manufacturing inventory management is more than counting what is stored in a warehouse.
It connects four questions:
What do we need to produce?
What materials will production require?
What do we already have or expect to receive?
What needs to be purchased?
The most effective approach combines accurate BOMs, real-time inventory records, planned replenishment, regular stock checks, and clear production visibility.
Small manufacturers can begin with spreadsheets and simple controls such as reorder points and cycle counting. As products, warehouses, production orders, and material dependencies grow, manual inventory management becomes harder to maintain.
At that stage, manufacturing inventory or ERP software can connect stock with purchasing and production so managers can identify shortages earlier, reduce excess inventory, and make decisions using one source of data.
Frequently Asked Questions About Manufacturing Inventory Management
Below are quick answers to common questions manufacturers ask when improving inventory control.
What is manufacturing inventory management?
Manufacturing inventory management is the process of planning, tracking, and controlling raw materials, components, work-in-progress, and finished goods. It connects inventory with purchasing and production so manufacturers have the materials they need without keeping unnecessary excess stock.
What are the main types of manufacturing inventory?
The main types are raw materials, components, work-in-progress, finished goods, MRO supplies, and packaging materials. Each category serves a different purpose and may require different replenishment and control methods.
What is the difference between WIP and finished goods?
WIP includes products that have entered production but are not yet complete. Finished goods have completed all required production stages and are ready for sale, shipment, or distribution.
How do manufacturers calculate how much raw material they need?
Manufacturers can use BOMs and production quantities to calculate gross material requirements. They then compare requirements with available stock, reserved inventory, and expected deliveries to identify shortages that need to be purchased.
What is the best inventory method for manufacturing?
There is no single best method. Manufacturers often combine MRP for material planning, reorder points for replenishment, safety stock for uncertainty, ABC analysis for prioritization, and cycle counting for inventory accuracy.
The right combination depends on demand variability, supplier lead times, production complexity, and the value or criticality of materials.
How much inventory should a manufacturer keep?
A manufacturer should keep enough inventory to support expected production and protect against reasonable supply or demand uncertainty without creating unnecessary carrying costs.
The right level depends on:
- demand;
- lead times;
- supplier reliability;
- production schedules;
- minimum order quantities;
- storage costs;
- shelf life;
- stockout risk.
How can manufacturers prevent raw material shortages?
Manufacturers can reduce shortages by maintaining accurate BOMs, checking material requirements before launching production, separating reserved from available stock, setting reorder points, keeping appropriate safety stock, and monitoring supplier lead times.
What inventory KPIs should manufacturers track?
Useful KPIs include:
- inventory turnover;
- inventory accuracy;
- stockout rate;
- days inventory outstanding;
- carrying cost;
- obsolete inventory;
- material yield;
- production delays caused by missing materials.
The best metrics are those that lead to specific operational decisions.
Can Excel be used for manufacturing inventory management?
Yes. Excel can work for small manufacturers with simple products, few users, and limited inventory movements.
Its limitations become more serious when several people update the same data, BOMs become complex, inventory is stored across multiple locations, or stock needs to update automatically after purchasing, production, and sales.
When should a manufacturer switch from spreadsheets to ERP?
Consider ERP when manual updates create duplicate work, stock figures are frequently outdated, material shortages delay production, WIP is difficult to track, BOMs and purchasing are managed separately, or several departments depend on the same inventory information.
The goal is not to replace spreadsheets simply because the company has grown. It is to create one reliable operational system when disconnected files can no longer provide accurate, timely information.
