A company’s products and materials, whether ready for selling or production, are referred to as its inventory. When it comes to manufacturing, inventory largely consists of raw materials in various stages of the production process.
Proper manufacturing inventory management is essential; otherwise, resources can fall through the cracks and orders can remain unfulfilled. The data that comes from inventory management, whether through manual or software-powered inventory management, informs a business’s purchasing, production, and sales decisions.
There are roughly four types of manufacturing inventory:
Raw materials inventory
These are the materials you use to produce your finished products. Raw materials may be bought from a supplier, sourced (e.g., fishing, farming, etc.), or produced by your company.
Direct raw materials are those that are readily used in your final product and are easy to quantify on a per-unit basis. Indirect raw materials are not part of the final product per se, but are used in the course of production. They can be harder to quantify, since they cannot be traced according to specific production batches.
Work-in-progress (WIP) inventory
WIP inventory, often called “subassembly” includes everything that you have started manufacturing. Your WIP inventory means that these materials are already on your factory floor, but they are not yet completed and are still in various stages of production.
The exact type of materials within this category may overlap with raw materials, as the only differentiation is that WIP inventory has now moved on to the next stage of manufacturing.
Finished goods inventory
Finally, items that are now ready to be sold are in your finished goods inventory. Depending on your business model and workflow, your finished goods may be ready to ship upon completion (made-to-order) or will be stored in a warehouse in anticipation of being sold (made-to-stock).
Maintenance, repair, operations (MRO) inventory
This part of your operations is not available for purchase by customers, but it is essential in the conduct of your daily operations. These include cleaning equipment, materials, supplies, and other tools you use and consume as you keep the lights on in your business.
There are several inventory management methods used in manufacturing:
Just-In-Time (JIT)
JIT is a system wherein manufacturers only order adequate stock to meet customer demands. The goal is to limit the costs incurred from holding stock for too long and to ensure that raw materials and products are always on hand when needed. This requires businesses to align orders for raw materials from suppliers with production schedules to ensure that everything is produced “just in time.”
First in, first out (FIFO)
FIFO is a common manufacturing inventory management method, and it ensures that the oldest products are used first to reduce the chance of spoilage or storage wear. As such, all materials are used, sold, and disposed of in a strict order, depending on when they were purchased or produced.
Last in, first out (LIFO)
This method involves using the last items placed into inventory first. This allows manufacturers to assign higher costs to goods sold during periods of inflation. For example, if the price of leather suddenly increases, the manufacturer will use the expensive raw materials first — and sell the finished product at an equally high price tag. Then, when prices have stabilized, it will use the lower-priced leather and sell it at a lower price alongside market trends.
Effective manufacturing inventory management involves familiarizing yourself with the different management methods and finding which suits your business best. Then, you can use tools and resources, like inventory management software, to help you streamline operations and complement your existing workflows.