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An Essential Inventory Management Guide for SMB Manufacturers


For many years, large-scale companies have embraced the use of advanced inventory management systems. Given the vast number of products they handle and their profit margins, it was logical for them to invest in tools that, despite having a slightly higher initial cost, could benefit them in the long run.

However, a widespread misconception is that inventory management tools are exclusively designed for large enterprises. Nowadays, there is ample evidence demonstrating that small manufacturers can significantly benefit from streamlining their operations using the latest technology.

One of the primary reasons why inventory management is vital for smaller manufacturers is the substantial cost impact of carrying excess inventory. Small businesses cannot afford to miss out on crucial orders due to insufficient stock in their warehouses.

Moreover, numerous small manufacturers deal with seasonal products. Managing a lean inventory for such businesses means avoiding delayed reactions to shifts in demand. With inventory management software, manufacturers can analyze their inventory data and generate reports that help predict future trends effectively.

As a manufacturer, it is essential to seek inventory management software that is both cost-effective and tailored to your specific needs. By adopting a robust solution like Cin7 Core inventory management software, your business is well-positioned for success.

The State of the Manufacturing Industry

The manufacturing industry is a significant contributor to the global economy, accounting for approximately 16% of the world’s GDP. This sector employs over 12% of the global workforce, making it a vital driver of economic growth and job creation. In such a dynamic and competitive environment, small businesses operating in the manufacturing space must employ efficient inventory management techniques to remain competitive and ensure sustainable growth.

Inventory management is a crucial aspect of any manufacturing business, as it involves the tracking, control, and management of raw materials, work-in-process, and finished goods.

Types of Inventory

Understanding the different types of inventory is the first step in managing them effectively. The three main types of inventory are:

Raw materials: These are the basic components required for the production process. They are sourced from suppliers and need to be stored until they are used in the manufacturing process.

Work-in-process (WIP): This category includes items that are in various stages of production but are not yet completed. WIP inventory can help businesses identify production bottlenecks and improve efficiency.

Finished goods: These are the completed products ready to be sold to customers. Managing finished goods inventory ensures that businesses can meet customer demands without overstocking, thus reducing carrying costs.

Inventory Management Techniques

Several inventory management techniques can help small businesses optimize their manufacturing processes:

Economic Order Quantity (EOQ): EOQ is a formula that determines the optimal order quantity to minimize the total cost of inventory, which includes ordering costs, holding costs, and stock-out costs. By calculating the EOQ, businesses can make informed decisions about when and how much inventory to order.

Just-in-Time (JIT) inventory management: This approach aims to minimize inventory levels by only ordering and producing goods when they are needed. JIT can help reduce holding costs and free up working capital but requires accurate demand forecasting and reliable suppliers.

Safety stock: This is a buffer inventory held to account for variability in demand and lead times. Maintaining safety stock can help prevent stockouts and ensure customer satisfaction, but it also increases holding costs.

ABC analysis: This inventory management method involves classifying inventory items based on their value and usage, with A-items being the most valuable and C-items being the least valuable. This enables businesses to focus their resources on managing the most important items and reduce costs associated with excess inventory.

Common Inventory Management Mistakes Made by Small Manufacturers

Inventory management is both an art and a science, and small manufacturers often struggle to keep up with it due to various factors. Here are some of the most common inventory management mistakes small manufacturers make:

Overdependence on Spreadsheets

Spreadsheets can become increasingly challenging to decipher as businesses scale up. Growing manufacturers often find themselves entangled in multiple spreadsheets, hindering their decision-making and efficiency. According to a Ventana Research study, 43% of manufacturing companies still rely on spreadsheets for inventory management, which can become difficult to manage as the business grows, leading to errors and inefficiencies.

Though spreadsheets offer some automation support, fully automating the inventory process is impossible, leading to frequent manual updates. In contrast, powerful inventory management software automates many redundant tasks, freeing up time and presenting data through accurate and easily understandable reports.

Uniform Inventory Levels

If your inventory levels don’t reflect your sales, your inventory may be overstocked or understocked. Inventory quantities should always be based on expected sales numbers.

Maintaining consistent inventory levels may not always be effective. Be as dynamic as possible, considering factors like demand, shelf life, profitability, and return orders before determining inventory levels. A high-quality inventory management tool can help manage these activities cost-effectively.

Neglecting Regular Inventory Maintenance

Your inventory’s health directly impacts your sales in the long run. Manufacturers that overlook regular maintenance of their inventory tracking systems often face unexpected issues. With 24% of small businesses suffering from a lack of inventory management, it’s evident that an effective strategy can lead to significant improvements in operational efficiency.

Always ensure your inventory is fully accounted for. Any discrepancy between your physical inventory and the tracking system can have severe consequences if not addressed. Schedule regular inventory check-ups and perform them diligently, even if they seem redundant.

Ignoring Inventory Shrinkage

Inventory shrinkage refers to the loss of products in inventory due to factors such as expiration, adverse weather conditions, or transportation damage. The (US) National Retail Federation estimates that inventory shrinkage costs businesses $46.8 billion annually. Regularly monitoring shrinkage is essential to avoid overselling inventory or selling products unfit for use, which can lead to order cancellations and dissatisfied customers.

Overlooking Dynamic Pricing

Effective stock clearance is crucial for maintaining a healthy inventory. Prices should reflect the market demand for products. Setting prices too high can result in insufficient sales, while setting them too low can lead to missed profit margins.

The key is to monitor both the market and your inventory costs. Balancing these aspects will enable you to manage your inventory professionally.

Inventory Management Best Practices for Manufacturers

To optimize inventory management, small manufacturers can implement the following best practices:

  1. Adopt an inventory management software: Using a robust software solution like Cin7 Core’s inventory management software can automate tasks, improve accuracy, and provide valuable insights. These inventory management solutions also connect you to important 3rd party systems and vendors such as accounting tools, shipping companies and selling platforms (Amazon, Etsy, etc.). Research shows that companies with advanced inventory management systems can reduce lead times by 66% and stockouts by 30%.
  2. Conduct regular inventory audits: Schedule and perform regular inventory audits to ensure accurate tracking and minimize discrepancies. This practice can help detect errors early and maintain accurate inventory records.
  3. Implement a demand forecasting system: Analyze historical sales data and market trends to anticipate future demand and adjust inventory levels accordingly. Demand forecasting can result in a 15% reduction in inventory levels and a 5% increase in service levels, according to a study by the Institute of Business Forecasting & Planning.
  4. Optimize warehouse organization: Streamline warehouse layout and storage systems to improve efficiency and reduce the time required for storing and retrieving items. Warehouse optimization can lead to a 10-20% reduction in labor costs.

Key benefits of Cin7 Core

Cin7 Core offers a range of key benefits for the manufacturing industry through its inventory and production management software.

These benefits include:

  • A streamlined production process: Cin7 Core simplifies production processes by enabling manufacturers to create and manage bills of materials (BOMs), plan and schedule production runs, and track work orders and work-in-progress (WIP) in real-time.
  • Accurate inventory management: The software offers real-time inventory tracking and optional automated stock replenishment, ensuring optimal stock levels and reducing the risk of stockouts and overstocks.
  • Improved cost control: Cin7 Core allows manufacturers to track production costs, monitor profit margins, and allocate costs accurately to finished goods, helping businesses control expenses and make informed decisions.
  • Enhanced demand forecasting: By analyzing historical sales data and trends, the software helps manufacturers make more accurate demand forecasts, allowing for better inventory planning and production scheduling. Enhanced decision-making is facilitated through comprehensive reporting and analytics, providing manufacturers with valuable insights to make informed decisions about production planning, resource allocation, and purchasing. Improved customer satisfaction can be achieved by maintaining optimal inventory levels and minimizing stockouts, ensuring that manufacturers can effectively meet customer demand. Lower costs can be realized by reducing holding, handling, and storage costs associated with excess inventory.
  • Multi-location management: Cin7 Core enables manufacturers to manage inventory across multiple locations, streamlining logistics, and ensuring the availability of products wherever they are needed.
  • Seamless integrations: The software can be easily integrated with other business applications such as accounting, e-commerce, and customer relationship management (CRM) systems, enhancing overall operational efficiency.
  • Scalability: Cin7 Core is designed to grow with your business, providing the flexibility to add new features and functionality as your manufacturing operations expand.
  • Cin7 Core’s Warehouse Management System (WMS) module and Mobile App give you the full capabilities of a WMS wherever you are, including on the manufacturing floor. From Barcode Scanning to Guided Walk Paths, your business will save time and reduce errors, leading to a more efficient operation.

To explore how Cin7 Core can transform your manufacturing business, you can
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