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Manufacturing Inventory: Everything You Need to Know in 2024

4.5 minutes

In this article, we explore what manufacturing inventory is and why it’s important. We also share our 8-step process to help you manage it more effectively, with real-world examples. Read on to learn more.

manufacturing inventory

What Is Manufacturing Inventory?

Manufacturing inventory refers to the total stock of physical items, components, or products that a company holds in various stages of the production process, from raw materials to finished goods. It is essential for fulfilling customer orders, supporting production, and ensuring a smooth flow in the manufacturing operations.

Example: Tech Glow Inc. initially recorded its smartphone inventory at $1,000,000. Due to market saturation and newer models, the value of the inventory dropped by 20%. Tech Glow then recorded an inventory write-down of $200,000.

Types of Manufacturing Inventory

There are several types of manufacturing inventory, which include: 

Raw Materials: These are the initial inputs or components needed to produce a product. They are procured from suppliers and are in their unprocessed state, waiting for manufacturing procedures.

Work-in-Progress (WIP): This pertains to items that have begun the production process but aren't yet completed. It's a transitory stage in which materials are undergoing transformation but haven't become the final product.

Finished Goods: These are the end products, which have gone through the entire manufacturing process and are ready to be sold or distributed to retailers or customers.

MRO (Maintenance, Repair, and Operations) Inventory: These are essential items, not directly involved in the product's manufacturing, but critical for production processes, such as spare parts, tools, and lubricants.

what is manufacturing inventory

Importance of Manufacturing Inventory in the Production Cycle

Manufacturing inventory is essential for the smooth and effective operation of the production cycle. We list some key reasons why below:

Continuous Production: With adequate manufacturing inventory, production lines can operate without interruptions. A consistent supply of raw materials ensures there are no unnecessary halts.

Meeting Customer Demand: Manufacturing inventory ensures that finished goods are ready for shipment, allowing companies to meet customer demands promptly and maintain a reputation for reliability.

Cost Efficiency: Holding the right amount of inventory can lead to cost savings. Overstocking can result in increased carrying costs, while understocking might cause missed sales or rush shipping charges.

Flexibility and Responsiveness: An efficient inventory allows companies to respond swiftly to market changes, be it a sudden spike in demand or the need for a product modification.

Reduced Wastage: Proper inventory management minimizes the risk of spoilage for perishable goods or obsolescence for items that have a technological or fashion lifecycle.

8-Step Process to Manage Manufacturing Inventory More Effectively

Here’s our simple 8-step process to help you manage your manufacturing inventory more effectively. Simply follow the steps below: 

Step 1: Detailed Bill of Materials (BOM) Analysis

Understand every component, material, and sub-assembly required to produce each product.

Example: SafeDrive, a car manufacturer, breaks down their sedan model into 3,000 individual components. Knowing the exact quantity and cost of each component helps streamline procurement and production.

Step 2: Production Cycle Time Assessment

Analyze the total time required to convert raw materials into finished goods.

Example: MegaMachines Inc. found that their machinery production cycle was 40 days. They then scheduled raw material procurement to match this cycle, ensuring continuous production without overstocking.

Step 3: Establish Safety Stock Levels

Determine the minimum stock level to cater to unforeseen demand spikes or supply delays, reducing stockouts.

Example: SolarTech, a solar panel manufacturer, maintains a safety stock of essential silicon cells to cater to unpredictable order surges.

Step 4: Adopt a Kanban System for Inventory Replenishment

Use visual cues or cards to signal when a particular item's inventory falls below a predetermined level, triggering restocking.

Example: GearUp, a gearbox manufacturer, uses kanban cards. When the gearbox assembly line is down to the last 50 units, a card is displayed, signaling the need to restock.

Step 5: Implement a Material Requirement Planning (MRP) System

Use software to plan and control the types and quantities of materials needed for production.

Example: PlaneCrafters, an aircraft manufacturer, uses MRP software to ensure that the thousands of parts needed for each aircraft are available just when they are needed in the production process.

Step 6: Conduct Regular Supplier Reviews

Regularly evaluate suppliers based on reliability, quality, lead-time, and cost. This ensures a consistent and high-quality supply of raw materials.

Example: TextileMakers, after reviewing a supplier that had frequent delays, shifted to a more reliable supplier, reducing production halts by 70%.

Step 7: Optimize Storage and Warehouse Management

Design warehouses for easy access, quick retrieval, and minimal handling, reducing storage costs and retrieval times.

Example: AutoParts Ltd. redesigned its warehouse layout using a U-flow system, decreasing retrieval times by 40%.

Step 8: Continuously Train Inventory Personnel

Invest in training staff on best practices, new technologies, and lean manufacturing techniques.

Example: ElectroBox Co. introduced bi-annual training for their inventory managers, leading to a 20% efficiency boost in stock management.

manufacturing inventory example

Case Study

HyperDrive Motors is on the brink of launching a new electric vehicle (EV) model. However, they're dealing with frequent production halts, overstocked components, and supply chain inefficiencies. 

Determined to streamline operations before the launch, they decided to follow our 8-step process:

Step 1: Detailed Bill of Materials (BOM) Analysis

HyperDrive meticulously breaks down their new EV model into 5,000 distinct components, from battery cells to minute dashboard switches. This detailed analysis aids in precise procurement, ensuring no surplus or shortages.

Step 2: Production Cycle Time Assessment

Through an internal assessment, HyperDrive identifies that the total production cycle for their EV is 50 days. This knowledge helps them synchronize raw material orders to the production timeline, ensuring materials arrive just when needed.

Step 3: Establish Safety Stock Levels

Given the unpredictable demand for EV components (like battery cells), HyperDrive decides to maintain a safety stock. This buffer ensures they can manage unforeseen demand spikes or supply delays.

Step 4: Adopt a Kanban System for Inventory Replenishment

HyperDrive introduces kanban cards in their assembly line. When the battery assembly unit dips below the last 100 battery sets, a kanban card gets displayed, prompting the procurement team to reorder.

Step 5: Implement a Material Requirement Planning (MRP) System

To better manage the vast array of components, HyperDrive integrates an MRP system. This software assists in scheduling and coordinating all required materials for the EV's production, ensuring timely availability.

Step 6: Conduct Regular Supplier Reviews

HyperDrive starts monthly evaluations of their suppliers. A specific supplier providing tire sets had consistency issues. Post-review, HyperDrive collaborates with the supplier for quality assurance, leading to a 50% reduction in component defects.

Step 7: Optimize Storage and Warehouse Management

HyperDrive restructures its main warehouse, ensuring components used together in the assembly line are stored closely. This revamp reduces retrieval times by 35%.

Step 8: Continuously Train Inventory Personnel

Understanding the importance of skilled staff, HyperDrive introduces quarterly training sessions for inventory teams. As a result, misplacement incidents in the warehouse dropped by 25%.

We hope you now have a better understanding of what manufacturing inventory is and how to manage it more effectively. 

If you enjoyed this article, you might also like our article on available inventory or our article on content inventory. 

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