Manufacturing inventory management is the control of a maker's stock at all three stages: raw materials, work in progress and finished goods. It keeps enough at each stage for production and sales to run, without cash piling up between them. Each stage needs its own measure, because each ties up cash for a different reason.
This guide sets out nine strategies, each with the number that shows whether it works. They are worked through one month at a shirt workshop in Accra, in Ghana cedis. The guide ends with how a small maker runs its stock in ArmPOS.
What does manufacturing inventory management cover?
It covers four kinds of stock, not three. The IFRS Foundation's module on inventories sorts a maker's stock into raw materials, consumable stores, work in process and finished goods.
| Stage | What it is | What goes wrong | The measure |
|---|---|---|---|
| Raw materials | Fabric, timber or flour bought and not yet used | One missing material stops a run, or cash sits in the store | Days of cover, and a reorder point against stock on hand plus on order |
| Consumable stores | Thread, needles, machine oil: used up in making | A cheap item runs out and stops a machine | A minimum and a maximum per item |
| Work in progress | Goods started and not finished | Piles grow between stations, and orders take longer | Units in progress ÷ units finished a day = days in production |
| Finished goods | Goods made and waiting to sell | The wrong sizes get made, and slow sellers age | Days of cover by product or size, and stock age |
Materials themselves, from landed cost to reorder points for imports, are covered in raw materials inventory. Examples of each category by trade are in types of inventory.
For example: one month of stock at a shirt workshop
For example, a workshop in Accra makes school shirts and finishes 80 a day over 24 working days. Each shirt uses 1.2 metres of fabric at GHS 20 a metre, plus GHS 3 of buttons, thread, label and bag. The figures are illustrative.
Labour adds GHS 8 a shirt and production overheads GHS 5, for a full cost of GHS 40. This is the stock at the end of the month, valued at cost.
| Stage | What is held | Value | What it covers |
|---|---|---|---|
| Raw materials | 2,400 metres of fabric, and GHS 6,000 of trims | 54,000 | 25 days of production |
| Work in progress | 1,200 shirts cut, sewn or being finished, at GHS 33.50 each | 40,200 | 15 days in production |
| Finished goods | 3,000 shirts at GHS 40 | 120,000 | 50 days of sales at 60 a day |
| Total | 214,200 |
Work in progress is valued at its materials plus the labour and overhead put in so far. Half done on average, a shirt in progress carries GHS 27 of materials and GHS 6.50 of its GHS 13 conversion cost.
Finished goods hold 56% of the money, and the 15 days in production are the surprise. In this workshop, the sewing itself takes under an hour a shirt; for the rest of those days, the shirt waits in a pile.
9 strategies for manufacturing inventory management
Each strategy below comes with one measure. Start with the stage that holds the most money, or the one that stops production most often.
1. Value every stage at cost, every month
Put a value on raw materials, work in progress and finished goods at each month end, as in the table above. Without it, you can't see where the cash sits, or whether it moved.
Use one cost formula, FIFO or weighted average, and keep it. IFRS for SMEs paragraph 13.18 says the last-in, first-out method "is not permitted"; the effect of each formula on profit is worked in FIFO vs LIFO.
Measure: each stage's value and its share of the total.
2. Reorder materials from the lead time you really get
Set a reorder point for every material that can stop production: use during the lead time, plus safety stock. The shirt workshop uses 96 metres of fabric a day, waits 10 working days for a delivery and keeps 5 days of safety stock.
It reorders at 960 + 480 = 1,440 metres, counting stock on hand plus stock on order. Its 2,400 metres need no order yet; the formula is worked in full in what is a reorder point.
Measure: runs stopped for a missing material.
3. Keep just in time for local supplies
Just in time, ordering materials only as each run needs them, works when deliveries are short and reliable. An imported fabric with a six-week lead time needs safety stock in the store, not a promise.
Use it for what a local supplier delivers in a day or two, such as bags and labels. Hold safety stock of everything else.
Measure: late deliveries per supplier over the last three months.
4. Cap work in progress
Limit how many units can be in production at once, and the time each one takes falls with it. Little's law, as its author restates it for factories, is cycle time = work in process ÷ throughput.
The workshop has 1,200 shirts in progress and finishes 80 a day, so each shirt takes 1,200 ÷ 80 = 15 days. Capped at 400, the same 80 a day means 5 days, and GHS 26,800 less tied up in half-made shirts.
The cap holds output only if the slowest station never waits for work. John Little notes that more output needs either more work in process or a shorter cycle time (Operations Research, 2011).
Mark a space for the pile before each station, sized for the cap, as a production layout sets out.
Measure: units in progress ÷ units finished a day.
5. Decide what to make to order and what to make to stock
Make to order what a customer will wait for, and to stock what is bought off the shelf. A school that orders 500 shirts a month ahead can wait; a parent buying one shirt the day before term can't.
Build finished stock by size, from what sold in the same weeks last year, and turn it into a weekly production plan. Outside the rush before a term, cutting finished stock from 50 days of sales to 30 would free GHS 48,000.
Shirts left with shops on consignment are still your stock until they sell, so count them in finished goods.
Measure: days of cover by size.
6. Rank items by value with ABC
Fabric is GHS 24 of the GHS 27 of materials in each shirt, 88.9%, so it gets the tightest control. Buttons and thread are C items: a monthly check and a minimum are enough.
The method, with a table to copy, is in the 80/20 rule in inventory.
Measure: each item's share of what you spend on materials.
7. Count a little every week
Count the A materials and the fastest sizes every week, and the rest monthly. A weekly count finds a gap while people still remember what happened; see how to perform an inventory cycle count.
Measure: lines counted that match the records.
8. Order the right quantity, not the habitual one
Economic order quantity balances the cost of placing orders against the cost of holding stock. It suits materials used at a steady rate, like the shirt fabric, and misleads for seasonal ones.
The economic order quantity formula is worked, with its limits, on its own page.
Measure: orders placed a month, and the average stock they leave.
9. Record every move the day it happens
Record each receipt, each issue to production, each finished batch and each dispatch on the day it happens. A stock figure is only as good as the last move nobody recorded.
A scan at each move replaces copying by hand. What to label at each stage is in barcodes in manufacturing.
Measure: unrecorded moves found at each count.
How to run manufacturing inventory management in ArmPOS
ArmPOS has no production module: no bill of materials, no work orders and no automatic use of materials when goods are made. A small maker can still keep all three stages in one record, with products, purchases and adjustments.
- Set up materials and finished goods as products. Give each group its own category, such as Raw materials and Finished goods. A shirt sold in sizes is one product with variants, each with its own code, cost, price and stock (Products with variants).
- Receive materials with a purchase. The status received adds the stock; ordered adds nothing until you edit it to received (Record a purchase).
- Record each run with two adjustments. A Subtraction takes off the materials used, and an Addition puts on the goods made. Put the run in the Note, such as "Run 42, shirts size 10" (Count and adjust stock).
- Read work in progress from the open runs. Record the Subtraction when the fabric leaves the store, and the Addition when the shirts are finished. A run with its Subtraction and no Addition yet is work in progress.
- Set a Stock Alert on each material and finished product. Product Quantity Alerts lists what is at or below it, and the alert can reach your phone (Get alerts on your phone). It counts stock on hand only, so add what is on order before you reorder.
- Count by category. Count Stock makes a counting sheet for one warehouse and one category, such as Raw materials.
- Value the stages. Inventory Valuation gives what you hold at cost, and the Stock Aging Report shows what has sat longest. The Stock Adjustment Report shows each adjustment's cost, so the open runs' Subtractions give the materials held in work in progress (Stock reports).
Inventory Valuation counts only what is in stock, so it leaves out work in progress. Add the open runs' cost to it for the full month-end figure.
Frequently asked questions
What are the three types of manufacturing inventory?
Raw materials, work in progress and finished goods. The IFRS Foundation's module on inventories adds consumable stores, the supplies used up in making.
How do you calculate work in progress inventory?
Count the units in progress and value each at its materials plus the labour and overhead put in so far. Over a period, ending work in progress = beginning work in progress + manufacturing costs − cost of goods manufactured.
Is just in time right for a small manufacturer?
For local supplies with short, reliable deliveries, yes. For imported materials with long lead times, no: hold safety stock instead.
Can a manufacturer use LIFO?
Not under IFRS or IFRS for SMEs, which allow FIFO or weighted average. US GAAP still allows LIFO.
How much work in progress should a workshop hold?
Enough that the slowest station never waits for work, and no more. In the example, a cap of 400 shirts at 80 a day would cut the time in production from 15 days to 5.
Count your work in progress this week and divide it by what you finish in a day. To keep materials, runs and finished goods in one record, create a free ArmPOS account and add your first material as a product.
