Inventory Management Techniques: Which Methods Work for Manufacturing

Aleksander Nowak · 2026-02-16 · Inventory Management

Learn 10 inventory management techniques and when to use each. Practical guide for small manufacturers choosing the right methods.

Inventory Management Techniques: Which Methods Work for Manufacturing

Not every inventory technique fits every business. Methods designed for retail warehouses often fail in production environments. Approaches that work for giant corporations can overwhelm small operations.

This guide covers inventory management techniques that actually work for small manufacturers. You'll learn what each method does, when to use it, and how to implement it without overcomplicating your operations.

What Are Inventory Management Techniques?

Inventory management techniques are methods for controlling how much stock you hold, when you reorder, and how materials flow through your operation.

The goals are consistent across all techniques: - Prevent stockouts that stop production - Avoid excess inventory that ties up cash - Reduce waste from expiration or obsolescence - Maintain accuracy between physical stock and records

The difference between techniques is how they achieve these goals. Some focus on ordering patterns. Others prioritize which items get attention. Some track materials through production. Others minimize what you hold.

Technique vs system vs software: A technique is a method or approach. A system is the overall process you use to manage inventory. Software is a tool that helps execute the system. You can use FIFO as a technique within a perpetual inventory system, managed through inventory software.

FIFO: First In, First Out

FIFO means using or selling the oldest inventory first. Materials that arrived first get consumed first.

How it works: When you receive materials, record the date (or lot number with date). When production needs materials, pull from the oldest batch. Physically organize storage so older items are accessible first.

Why it matters: Materials degrade over time. Fragrance oils lose potency. Chemicals can separate. Food ingredients expire. Even stable materials may have warranty periods or regulatory shelf lives. Using oldest first prevents waste from expiration.

Best for: Any material with limited shelf life—food ingredients, cosmetics components, chemicals, pharmaceuticals, or anything with an expiration date.

Manufacturing example: A soap manufacturer receives coconut oil monthly. Each delivery has a 12-month shelf life. By always using the oldest oil first, nothing expires sitting in the back of the warehouse while newer deliveries get used.

How to implement: 1. Record receipt dates or lot numbers for all incoming materials 2. Label storage locations with dates 3. Organize shelving so oldest items are in front or most accessible 4. Train production staff to pull from designated "use first" locations 5. Use software that tracks lot dates and suggests which batch to use

FIFO requires discipline but prevents the painful discovery of expired materials you paid for but can't use.

ABC Analysis

ABC analysis categorizes inventory by value and importance. Not all items deserve equal attention.

How it works: Rank items by annual consumption value (quantity used × unit cost). Divide into three categories:

• A items: Top 10-20% of items representing 70-80% of total value
• B items: Next 20-30% representing 15-20% of value
• C items: Remaining 50-60% representing 5-10% of value

Why it matters: You have limited time. Spending equal effort on a €50,000/year ingredient and a €200/year packaging component makes no sense. ABC analysis focuses attention where it matters most.

Best for: Operations with many SKUs. If you only have 10 materials, you can track everything closely. If you have 200, prioritization becomes essential.

Manufacturing example: A paint manufacturer tracks 150 raw materials. ABC analysis reveals: - A items (12 materials): Titanium dioxide, key resins, main solvents = 75% of spend - B items (35 materials): Secondary pigments, additives = 18% of spend
- C items (103 materials): Packaging, labels, minor additives = 7% of spend

The manufacturer now checks A item levels daily, B items weekly, and C items monthly.

How to implement: 1. Export last 12 months of material usage 2. Calculate annual value for each item (quantity × cost) 3. Sort by value, highest first 4. Mark items until you reach ~80% of total value = A items 5. Mark next ~15% of value = B items 6. Everything else = C items 7. Set different monitoring frequencies and reorder policies for each category

Review your ABC classification annually. Items shift categories as usage patterns change.

Reorder Points

A reorder point triggers a new purchase order when stock falls to a predetermined level.

How it works: Calculate the minimum quantity needed to avoid stockouts while waiting for delivery. When current stock hits that number, order more.

The formula:

Reorder Point = (Daily Usage × Lead Time) + Safety Stock

Why it matters: Without reorder points, you're either checking stock constantly or discovering shortages too late. Automated alerts at the right threshold prevent both problems.

Best for: Materials with predictable consumption and reliable lead times. Less effective for highly variable demand or unreliable suppliers.

Manufacturing example: A cosmetics company uses 50 kg of shea butter per week (about 7 kg/day). Supplier lead time is 10 days. They keep 20 kg safety stock for variability.

Reorder Point = (7 kg/day × 10 days) + 20 kg = 90 kg

When shea butter hits 90 kg, they order more. This provides enough to cover the lead time plus a buffer.

How to implement: 1. Calculate average daily or weekly usage for each material 2. Determine typical supplier lead time 3. Add safety stock based on variability (see next section) 4. Set reorder point in your inventory system 5. Configure alerts or automatic purchase order generation 6. Review quarterly and adjust for changing usage patterns

Start conservative (higher reorder points) and optimize downward as you gain confidence in your calculations.

Safety Stock

Safety stock is buffer inventory held beyond expected needs. It protects against uncertainty.

How it works: Keep extra inventory to cover unexpected situations: supplier delays, demand spikes, quality rejections, or shipping problems.

Why it matters: The world is unpredictable. Suppliers miss delivery dates. Batches sometimes use more than planned. Quality issues force you to reject incoming goods. Safety stock absorbs these shocks without stopping production.

Best for: Critical items where stockouts halt production. Inputs from unreliable suppliers. Items with variable demand or usage.

How much to hold: Safety stock is a balance. Too little and you risk stockouts. Too much and you waste money on carrying costs.

Factors that increase safety stock needs: - Longer supplier lead times - Higher variability in usage - Less reliable suppliers - High cost of stockouts - Seasonal demand swings

Factors that decrease safety stock needs: - Short, reliable lead times - Consistent usage patterns - Multiple supplier options - Quick reorder capability

Manufacturing example: A candle maker uses two main waxes: - Soy wax: Single supplier, 3-week lead time, occasional delays → 3 weeks safety stock - Paraffin wax: Multiple suppliers, 1-week lead time, very reliable → 1 week safety stock

The higher safety stock for soy wax reflects the supply chain risk, not the material cost.

How to implement: 1. Identify critical materials (ABC "A" items especially) 2. Assess supply reliability for each 3. Calculate historical usage variability 4. Set safety stock as days or weeks of typical consumption 5. Include safety stock in reorder point calculations 6. Review quarterly and adjust based on actual supplier performance

Batch and Lot Tracking

Batch tracking records which specific material lots go into which production batches.

How it works: Assign or record lot numbers for incoming materials. When those materials go into production, record which lots were used. Link finished product batches to their component lots.

Why it matters: If a quality problem emerges, you need to know exactly which products are affected. Without lot tracking, you might recall everything produced in a month. With lot tracking, you can identify the specific batches containing the problem material.

Best for: Regulated industries (food, cosmetics, pharmaceuticals). Any product where quality issues could require recalls. Manufacturers wanting to identify root causes of defects.

Manufacturing example: A food manufacturer discovers a supplier's flour batch was contaminated. With lot tracking, they query the system: "Which products used flour lot #FL-2024-0892?" Answer: production batches #1847, #1851, and #1855. Only those specific batches need investigation, not the entire month's production.

How to implement: 1. Record lot numbers on receiving (from supplier labels or assign your own) 2. Include expiration dates if applicable 3. During production, record which material lots are used 4. Assign lot/batch numbers to finished products 5. Maintain the linkage in your inventory system 6. Practice a mock recall to verify you can trace quickly

Lot tracking adds overhead but provides enormous value when problems occur. For regulated products, it's often legally required.

Cycle Counting

Cycle counting means counting a portion of inventory regularly rather than everything at once.

How it works: Divide inventory into groups. Count one group each day or week. Over time, every item gets counted, but you never shut down for a full physical inventory.

Why it matters: Annual physical inventories are disruptive—you might close production for a day or weekend. Cycle counting maintains accuracy continuously with minimal disruption.

Best for: Operations wanting ongoing accuracy without shutdown. Warehouses too large for practical annual counts. Businesses that can't afford the downtime of full physical inventory.

Counting frequency by ABC category: - A items: Count weekly or bi-weekly - B items: Count monthly - C items: Count quarterly

Since A items represent most of your value, they get the most attention.

Manufacturing example: A manufacturer has 200 SKUs across materials, WIP, and finished goods. Instead of counting everything once a year: - Monday: Count 5 A items - Tuesday: Count 10 B items - Wednesday: Count 15 C items - Thursday: Recount any discrepancies from the week - Friday: Update records, investigate causes

Every item gets counted multiple times per year, but daily counting takes only 20-30 minutes.

How to implement: 1. Classify inventory by ABC method 2. Create a counting schedule based on categories 3. Assign daily counting tasks 4. Count items and compare to system records 5. Investigate discrepancies immediately (while context is fresh) 6. Adjust records with documented reasons 7. Track accuracy metrics over time

A good target: 95%+ accuracy for A items, 90%+ for B items. If accuracy is lower, increase counting frequency or investigate root causes.

Recipe-Based Consumption

Recipe-based consumption automatically deducts materials when production is recorded, based on predefined formulas.

How it works: Define recipes (bills of materials) that specify ingredients and quantities for each product. When you record producing 100 units, the system calculates and deducts the required materials.

Why it matters: Manual tracking during production is tedious and error-prone. People forget to record usage, write down wrong quantities, or skip tracking when busy. Recipe-based consumption handles it automatically.

Best for: Batch manufacturing with consistent formulas. Products where the same recipe produces the same output. Operations wanting accurate consumption without production floor data entry.

Manufacturing example: A lotion recipe requires: - 500g emulsifying wax - 2000g distilled water - 300g shea butter - 50g fragrance oil - 50g preservative

Per 100 units. When production records "Batch #2847: 100 units complete," the system automatically deducts these exact quantities from inventory.

How to implement: 1. Document recipes for all products 2. Enter recipes into your inventory system with precise quantities 3. Link recipes to finished products 4. When production completes a batch, record quantity produced 5. System deducts materials based on recipe × quantity 6. Periodically verify actual usage matches recipe (adjust recipes if consistently different)

Recipe-based consumption works when formulas are consistent. If recipes vary batch-to-batch, you'll need manual consumption tracking or a way to record batch-specific variations.

Just-In-Time (JIT)

Just-in-time means receiving materials exactly when needed, minimizing inventory held.

How it works: Instead of stockpiling materials, coordinate with suppliers for frequent, smaller deliveries timed to production schedules.

Why it matters: Inventory costs money—storage space, capital tied up, risk of obsolescence. JIT minimizes these costs by holding the least possible inventory.

When it works: JIT requires: - Reliable suppliers who deliver on time, every time - Predictable production schedules - Short supplier lead times - Low shipping costs relative to inventory carrying costs

Why it's risky for small manufacturers: JIT works for Toyota because they have enormous leverage over suppliers. Small manufacturers typically don't. One late delivery, one supplier problem, one transportation disruption—and production stops.

A better approach for small manufacturers: Instead of pure JIT, use "lean but safe" inventory: - Hold safety stock appropriate to your supply chain risk - Focus on accurate forecasting to minimize excess - Build relationships with suppliers for flexibility - Have backup supplier options for critical items

Manufacturing example: A furniture maker tried JIT with their wood supplier. It worked for six months until a trucking strike delayed deliveries by two weeks. Production stopped. Lost orders. Unhappy customers.

Now they hold 3-4 weeks of lumber—more inventory cost, but operations continue through disruptions.

How to implement (if you still want JIT): 1. Assess supplier reliability honestly 2. Start with non-critical materials 3. Keep backup suppliers ready 4. Monitor supplier performance closely 5. Maintain safety stock for critical items regardless

Economic Order Quantity (EOQ)

EOQ calculates the optimal order size that minimizes total inventory costs.

How it works: Balance two competing costs: - Ordering costs: Processing purchase orders, receiving shipments, paying invoices - Holding costs: Storage space, capital, insurance, obsolescence risk

Small orders mean low holding costs but high ordering costs (many orders). Large orders mean low ordering costs but high holding costs (lots sitting in inventory).

EOQ finds the sweet spot.

The formula:

EOQ = √(2 × Annual Demand × Order Cost / Holding Cost per Unit)

Manufacturing example: A company uses 10,000 units of packaging per year. Each order costs €25 to process. Holding cost is €0.50 per unit per year.

EOQ = √(2 × 10,000 × 25 / 0.50) = √1,000,000 = 1,000 units per order

Optimal: order 1,000 units at a time, which means 10 orders per year.

When EOQ helps: Items with steady usage, consistent costs, and meaningful ordering overhead.

When to skip it: Highly variable demand, items with quantity discounts that change the math, or very low ordering costs (making order frequency less important).

How to implement: 1. Calculate annual usage for key materials 2. Estimate ordering cost per order 3. Calculate holding cost per unit per year (typically 20-30% of item cost) 4. Apply the formula 5. Round to practical quantities (supplier minimums, package sizes) 6. Compare calculated EOQ to current ordering patterns

EOQ provides a starting point. Real-world factors like supplier minimums, quantity discounts, and storage constraints often adjust the final order size.

Choosing Techniques for Your Business

Not every technique suits every operation. Here's a framework for selection:

For most small manufacturers, start with:

1. FIFO — If any materials have shelf life
2. Reorder Points — For core materials
3. Safety Stock — For critical items
4. Cycle Counting — For ongoing accuracy

Add these as you grow:

1. ABC Analysis — When SKU count increases
2. Batch Tracking — When traceability becomes important
3. Recipe Consumption — When manual tracking becomes a burden

Implementing Without Overwhelm

The biggest mistake: trying to implement everything at once. Start small, build habits, then add complexity.

Month 1-2: Foundation - Set up inventory system with accurate counts - Define reorder points for top 10 materials - Establish basic FIFO practices for perishables

Month 3-4: Build Consistency - Start weekly cycle counting (A items first) - Add safety stock to reorder point calculations - Train team on scanning and recording

Month 5-6: Add Sophistication - Implement ABC analysis across all inventory - Add batch tracking for key materials - Set up recipe-based consumption for main products

Month 7+: Optimize - Refine reorder points based on actual data - Adjust safety stock based on supplier performance - Expand batch tracking to all materials

Each step should feel manageable. If a technique causes more problems than it solves, simplify before adding more.

How Krafte Supports These Techniques

Krafte includes inventory management built for small manufacturers, with support for these techniques:

FIFO: Track lot numbers and expiration dates. System suggests which batches to use first based on date.

Reorder Points: Set minimum levels for any material. Receive alerts when stock drops to reorder threshold.

Safety Stock: Built into reorder point calculations. Define buffer levels based on your supply chain needs.

Batch Tracking: Record lot numbers at receiving. Link material lots to production batches. Trace from materials to finished products.

Cycle Counting: Inventory module supports partial counts. Compare counted quantities to system records. Adjust with documented reasons.

Recipe-Based Consumption: Define recipes for all products. Record production output and materials deduct automatically based on formula.

ABC Analytics: Reports show which materials represent highest value. Prioritize your attention accordingly.

The system handles the calculations and tracking. You focus on running production.

Frequently Asked Questions

What is the best inventory management technique?

There's no single best technique—the right choice depends on your business. For most small manufacturers, combining FIFO (for materials with shelf life), reorder points (for consistent supply), and cycle counting (for accuracy) provides a solid foundation.

What is FIFO in inventory management?

FIFO stands for First In, First Out. It means using or selling the oldest inventory before newer inventory. This prevents materials from expiring or degrading while sitting unused. FIFO is essential for any material with a limited shelf life.

How do I choose which inventory methods to use?

Consider your specific challenges. Expiring materials? Use FIFO. Many SKUs? Use ABC analysis. Unpredictable suppliers? Hold safety stock. Need traceability? Implement batch tracking. Start with techniques that address your biggest pain points.

What inventory techniques work best for manufacturing?

Manufacturing benefits from: FIFO for raw materials, batch tracking for traceability, recipe-based consumption for accurate deductions, and cycle counting for ongoing accuracy. Techniques designed for retail (like point-of-sale integration) matter less for production environments.

How much safety stock should I keep?

Safety stock depends on supplier reliability and lead times. For reliable suppliers with short lead times, 1-2 weeks of usage may suffice. For critical materials from single-source suppliers with long lead times, 3-4 weeks or more provides better protection. Start conservative and reduce as you learn your actual supply chain performance.

Is just-in-time inventory good for small manufacturers?

Pure JIT is risky for small manufacturers who lack leverage over suppliers. A late delivery can stop production entirely. Most small operations benefit from "lean but safe" inventory—minimizing excess while maintaining realistic safety stock for supply chain uncertainty.

Tags: Inventory Management, Warehouse Management, Manufacturing