Inventory waste costs businesses $163 billion every year, according to Bloomberg. For manufacturers, the problem hits closer to home: carrying costs run 20-30% of total inventory value annually. If your company holds $500,000 in stock, that translates to $100,000 to $150,000 per year quietly draining from your bottom line.
The frustrating part? Most manufacturers know they have too much inventory. They also know that cutting recklessly leads to stockouts, production delays, and upset customers. The result is paralysis: you keep overordering because the cost of running out feels worse than the cost of carrying excess.
If you are wondering how to reduce inventory levels in manufacturing without disrupting production, this guide gives you the complete playbook. You'll get a practical inventory reduction plan, a framework for assessing your current state, seven proven strategies you can start implementing this week, and a 90-day action plan to reduce inventory systematically.
If your warehouse is packed with materials you overbought "just in case" while you still run out of the things you actually need, you are not alone. Excess inventory management is one of the most common challenges in manufacturing, and the root causes are systemic, not personal.
When you have been burned by a stockout, the natural response is to order more. Your shop floor workers tell you they ran out of cutting tools last week, so you double the next order. The next quarter, you bump it again. Over time, these safety stock buffers compound into significant excess, yet they don't actually prevent the stockouts that triggered them in the first place.
Without real-time data on what is being used on the shop floor, purchasing decisions are educated guesses at best. Variable consumption goods like abrasives, adhesives, welding gas, cutting tools, and shipping materials are especially hard to forecast. These items can't be put on the BOM or billed to a customer, so they fall through the cracks of even well-run ERP systems.
In many manufacturing operations, the owner still does the ordering based on what shop floor workers report verbally. Information gets lost, duplicated, or delayed. Conflicts arise about what was ordered, when, and how much. The result is duplicate orders, missed items, and growing frustration on both sides.
When a stockout means a production line stops, a deadline slips, or a customer calls angry, erring on the side of "too much" feels safer. The carrying cost of excess inventory is invisible on most P&L statements. The cost of what stockouts cost manufacturers is immediate and painful. So manufacturers keep ordering more, even when the math doesn't support it.
Most manufacturers sense that excess inventory is expensive. Few know exactly how expensive. Industry benchmarks from ISM and APQC put inventory carrying cost at 20-30% of total inventory value per year.
Here is what that number actually includes:
For a quick self-assessment: multiply your current inventory value by 0.25. That is roughly what excess inventory costs you each year.
The numbers add up fast at every scale. A manufacturer holding $500,000 in inventory pays $100,000 to $150,000 per year in carrying costs alone. At $1 million in inventory, that figure reaches $200,000 to $300,000 annually.
The global picture reinforces the point. Inventory distortion, which includes shrinkage, stockouts, and overstocking, costs businesses $1.6 trillion annually according to industry research cited in our inventory management statistics roundup. That is not a rounding error. It is a systemic problem.
For a growing manufacturer, the most painful cost is often the one that never shows up on a report: the growth you couldn't pursue because your cash was sitting on shelves instead of funding new equipment, product development, or additional hires.
Before jumping to strategies, you need to know where you stand. Most guides skip straight to tactics without helping you diagnose your situation. That is why most inventory reduction efforts stall before they start.
ABC analysis applies the 80/20 rule to your inventory. It is straightforward, and you can run it this week using your existing purchasing data.
For each category, audit the following: current stock levels, average consumption rate, supplier lead time, last order date, and last consumption date. Any item that hasn't moved in 90 or more days is dead stock and an immediate reduction target.
Start by calculating your current inventory turns: cost of goods sold divided by average inventory value. According to Netstock's analysis of 2,400+ SMBs, manufacturing businesses average around 5.3 stock turns annually. A range of 4-8 turns is typical for SMB manufacturers. If you are under 4 turns, you likely have significant excess that can be reduced without impacting operations.
A realistic first-year target is 15-25% inventory reduction. Resist the urge to aim for 50% right away. Aggressive cuts without the systems to support them cause the exact stockouts you are trying to avoid. Sustainable reduction comes from better visibility and smarter ordering, not a one-time slash that bounces back within a quarter.
Each of these strategies is specific enough to start implementing this week. They are listed in order of impact for most manufacturing operations.
Replace forecast-driven ordering with consumption-driven signals. In a Kanban system, when material hits a reorder point, a visual signal (a card, a bin, or a QR scan) triggers replenishment automatically. You order what you use, not what you predict you'll use.
This approach is especially powerful for variable consumption goods that resist reliable forecasting. The system responds to actual usage on the shop floor, eliminating the guesswork that leads to both overordering and stockouts.
The methodology has a proven track record at every scale. General Motors adopted Kanban and just-in-time delivery across its plants in the 1980s as part of a $40 billion capital spending program, reportedly cutting billions in annual inventory-related costs. Toyota still uses physical Kanban cards at massive scale to this day, demonstrating that the system works from small shops to the world's largest manufacturer. Kanban is a basic unit of supply chains that scales beautifully without breaking.
Modern implementations pair physical cards with a digital backend that automates the signal-to-order process. Platforms like Arda connect Kanban cards to automated digital workflows, saving manufacturers 90% of the time they previously spent managing supplies. Shop floor compliance stays high because scanning a card is simpler than entering data into software. You can start with just one part or a single production line and expand as you see results. Arda also works alongside existing ERPs, complementing where they fall short, particularly for variable consumption goods like abrasives, adhesives, welding gas, and cutting tools.
Not all inventory items deserve equal attention. Using the ABC framework from the assessment section above, focus reduction efforts on A items first. These represent roughly 80% of your total spend, so improvements here have the largest financial impact.
For C items, the smartest move is often to shift the carrying cost off your books entirely through vendor-managed inventory or consignment. If a low-value item only accounts for a few hundred dollars per year, the time you spend managing it costs more than the inventory itself.
Practical step: Run an ABC analysis this week using your purchasing data. Rank every item by annual spend and categorize them into A, B, and C tiers.
JIT ordering works best for items with predictable demand and reliable suppliers. The goal is to receive materials as close to the point of use as possible, reducing the inventory you need to hold at any given time.
Apply JIT selectively. It is ideal for raw materials on the BOM where supplier lead times are short and demand patterns are stable. Keep safety stock for long-lead-time items, single-source materials, or anything where a supply disruption would halt production.
A word of caution: JIT requires supplier reliability. If your supply chain is fragile, start with two or three items where you have strong supplier relationships and expand from there.
Replace fixed reorder quantities with dynamic reorder points based on actual consumption data. Fixed reorder points assume steady demand, but manufacturing reality includes seasonal variation, changing product mix, and business growth. Static numbers lead to excess of some materials and shortages of others.
The formula is straightforward: average daily consumption multiplied by lead time, plus a safety stock buffer. Review and adjust quarterly using real consumption data rather than estimates or last year's numbers.
For C-class items (low value, high volume), shift the carrying cost to the supplier. Under VMI, the supplier monitors your stock levels and replenishes automatically. Under consignment, you don't pay for the material until you actually use it.
This inventory reduction strategy is ideal for items like fasteners, packaging materials, adhesives, and shipping supplies. These items are critical to operations but don't justify the management overhead of formal inventory control.
Practical step: Identify your top five C-class items by volume and approach those suppliers about VMI arrangements. Many suppliers prefer VMI because it gives them predictable demand and a closer customer relationship.
Shorter lead times let you order smaller quantities more frequently, directly reducing the inventory you need to hold. The math is compelling: since safety stock scales with the square root of lead time, cutting lead time from four weeks to two weeks reduces required safety stock by roughly 30%.
Strategies to pursue include consolidating suppliers for greater leverage, negotiating stocking agreements for critical materials, dual-sourcing items to reduce single-supplier risk, and identifying local alternatives for long-lead imports.
Identify every item that hasn't moved in 90 or more days. Even in well-managed companies, 20-30% of inventory is typically dead or obsolete according to Manufacturing.net. For each item: sell at a discount, return to the supplier, donate for a tax write-off, or scrap it. Holding dead stock "just in case" is one of the most expensive inventory habits in manufacturing.
Then conduct a full SKU rationalization. If an item hasn't been consumed in six or more months, question whether you need to stock it at all. Removing even 10-15% of your SKU count simplifies ordering, reduces carrying costs, and frees warehouse space for materials you actually use.
This is the question that keeps manufacturers from acting on their inventory reduction plan. If you cut inventory, won't you cause the exact stockouts you are trying to avoid?
The short answer is no, not if you do it with the right systems in place. Inventory reduction and stockout prevention are not opposing forces. They are two symptoms of the same underlying problem: poor visibility into real-time consumption on the shop floor.
Without data on what is actually being used, you guess. And when you guess, you overorder some things (creating excess) and underorder others (creating stockouts). The root cause of both problems is identical.
Consumption-based systems solve both sides simultaneously. Instead of forecasting demand, you let actual usage trigger reorders. Inventory goes down because you stop overordering items based on fear. Stockouts decrease because the system catches low stock before it runs out.
The goal is not zero safety stock. It is right-sized safety stock based on actual consumption patterns rather than gut feelings or worst-case assumptions. Keep small, data-informed buffers on critical items. Let consumption data tell you how much safety stock you actually need, and adjust as patterns change.
For a deeper dive into this topic, see our guide on how to reduce inventory without stockouts.
This is the step-by-step inventory reduction action plan you can hand to your procurement manager or start working through yourself on Monday morning.
Inventory reduction is the systematic process of lowering the amount of raw materials, work-in-progress, and finished goods a company holds. For manufacturers, the goal is to reduce excess stock and carrying costs while maintaining enough inventory to keep production running without interruption.
Industry benchmarks from ISM and APQC put carrying costs at 20-30% of total inventory value per year. This includes warehouse space, insurance, handling labor, obsolescence, and the opportunity cost of tied-up capital. A manufacturer holding $500,000 in inventory typically spends $100,000 to $150,000 per year in carrying costs alone.
For most manufacturers, a 15-25% reduction in the first year is realistic and achievable when backed by systematic effort. Avoid setting aggressive targets like 50% without the consumption data and systems to support them. Sustainable inventory reduction comes from better visibility and smarter ordering, not one-time cuts.
ABC analysis categorizes inventory items into three groups based on value and spend. A items are the top 20% of items representing roughly 80% of total spend. B items are the next 30% at about 15% of spend. C items are the bottom 50% at roughly 5% of spend. This framework helps manufacturers focus their inventory reduction strategies where they will have the greatest financial impact.
Yes. Both excess inventory and stockouts stem from the same root cause: poor visibility into real-time consumption. Consumption-driven systems like Kanban-based replenishment address both problems simultaneously by letting actual shop floor usage trigger reorders rather than relying on forecasts or fixed order quantities.
The manufacturers who will thrive over the next decade are not the ones with the biggest warehouses. They are the ones with the best visibility into what is actually happening on their shop floor.
Every dollar you free from excess inventory is a dollar you can invest in growth: new equipment, product development, hiring, or simply having the cash reserves to move quickly when opportunity appears. The inventory reduction strategies and 90-day action plan in this guide give you the structure. They work whether you implement them with spreadsheets, Kanban cards, or dedicated software.
The shift from forecast-driven to consumption-driven inventory management is not a trend. It is a correction. Manufacturers have spent decades guessing what they need and overcompensating when the guess was wrong. The technology and methodology to stop guessing have existed since Toyota proved Kanban works at scale. The only question is how long you will wait to adopt them.
Arda Cards
Inventory waste costs businesses $163 billion every year, according to Bloomberg. For manufacturers, the problem hits closer to home: carrying costs run 20-30% of total inventory value annually. If your company holds $500,000 in stock, that translates to $100,000 to $150,000 per year quietly draining from your bottom line.
The frustrating part? Most manufacturers know they have too much inventory. They also know that cutting recklessly leads to stockouts, production delays, and upset customers. The result is paralysis: you keep overordering because the cost of running out feels worse than the cost of carrying excess.
If you are wondering how to reduce inventory levels in manufacturing without disrupting production, this guide gives you the complete playbook. You'll get a practical inventory reduction plan, a framework for assessing your current state, seven proven strategies you can start implementing this week, and a 90-day action plan to reduce inventory systematically.
If your warehouse is packed with materials you overbought "just in case" while you still run out of the things you actually need, you are not alone. Excess inventory management is one of the most common challenges in manufacturing, and the root causes are systemic, not personal.
When you have been burned by a stockout, the natural response is to order more. Your shop floor workers tell you they ran out of cutting tools last week, so you double the next order. The next quarter, you bump it again. Over time, these safety stock buffers compound into significant excess, yet they don't actually prevent the stockouts that triggered them in the first place.
Without real-time data on what is being used on the shop floor, purchasing decisions are educated guesses at best. Variable consumption goods like abrasives, adhesives, welding gas, cutting tools, and shipping materials are especially hard to forecast. These items can't be put on the BOM or billed to a customer, so they fall through the cracks of even well-run ERP systems.
In many manufacturing operations, the owner still does the ordering based on what shop floor workers report verbally. Information gets lost, duplicated, or delayed. Conflicts arise about what was ordered, when, and how much. The result is duplicate orders, missed items, and growing frustration on both sides.
When a stockout means a production line stops, a deadline slips, or a customer calls angry, erring on the side of "too much" feels safer. The carrying cost of excess inventory is invisible on most P&L statements. The cost of what stockouts cost manufacturers is immediate and painful. So manufacturers keep ordering more, even when the math doesn't support it.
Most manufacturers sense that excess inventory is expensive. Few know exactly how expensive. Industry benchmarks from ISM and APQC put inventory carrying cost at 20-30% of total inventory value per year.
Here is what that number actually includes:
For a quick self-assessment: multiply your current inventory value by 0.25. That is roughly what excess inventory costs you each year.
The numbers add up fast at every scale. A manufacturer holding $500,000 in inventory pays $100,000 to $150,000 per year in carrying costs alone. At $1 million in inventory, that figure reaches $200,000 to $300,000 annually.
The global picture reinforces the point. Inventory distortion, which includes shrinkage, stockouts, and overstocking, costs businesses $1.6 trillion annually according to industry research cited in our inventory management statistics roundup. That is not a rounding error. It is a systemic problem.
For a growing manufacturer, the most painful cost is often the one that never shows up on a report: the growth you couldn't pursue because your cash was sitting on shelves instead of funding new equipment, product development, or additional hires.
Before jumping to strategies, you need to know where you stand. Most guides skip straight to tactics without helping you diagnose your situation. That is why most inventory reduction efforts stall before they start.
ABC analysis applies the 80/20 rule to your inventory. It is straightforward, and you can run it this week using your existing purchasing data.
For each category, audit the following: current stock levels, average consumption rate, supplier lead time, last order date, and last consumption date. Any item that hasn't moved in 90 or more days is dead stock and an immediate reduction target.
Start by calculating your current inventory turns: cost of goods sold divided by average inventory value. According to Netstock's analysis of 2,400+ SMBs, manufacturing businesses average around 5.3 stock turns annually. A range of 4-8 turns is typical for SMB manufacturers. If you are under 4 turns, you likely have significant excess that can be reduced without impacting operations.
A realistic first-year target is 15-25% inventory reduction. Resist the urge to aim for 50% right away. Aggressive cuts without the systems to support them cause the exact stockouts you are trying to avoid. Sustainable reduction comes from better visibility and smarter ordering, not a one-time slash that bounces back within a quarter.
SHARE ON
%201.svg){kind=logo}
.svg)
.svg)
.svg)
.svg)
.svg)
.svg)
