How Can I Manage Inventory to Support Smart Manufacturing?

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Smart Manufacturing is about visibility, connectivity and interoperability – connecting systems, machines, and work units to create intelligent networks along the value chain. It’s about getting information about the manufacturing process to where it is needed, when it is needed, and in the form it is needed to power smart decisions.

If your company is implementing Smart Manufacturing operations, you will need to adapt your inventory management and while doing so, ask yourself these key questions:

  1. With Smart Manufacturing, what changes do I need to make to our inventory management practices?

Industry 4.0 and smart manufacturing entails getting things done faster without compromising on quality. What used to take a week now could take a day and this means reinventing your inventory management operations and getting and using information in real-time. Active inventory management will be essential and replace your old manual tracking. You will have to know in real-time what’s happening with raw materials, work in process (WIP), and finished goods.

  1. What impact will it have on some other functions in my supply chain?
  • Receiving: this is where many warehouse management problems occur, often due to human error. However, in a smart manufacturing operation, you will use mobile technology to scan and enter items immediately into inventory.
  • Inventory management: You will monitor inventory availability continuously, not cycle counting or reviewing periodically, like you used to.
  • Tracking items: you will have real-time visibility of inventory quantities and locations, including traceability data such as lot and serial numbers.
  • WIP: by using an ERP system that integrates inventory with production, and includes Manufacturing Operations Management, you will have real-time visibility of which inventory is allocated to which jobs, when it was consumed, and if there were variances.
  • Picking: the accuracy, speed, and visibility of the picking process is improved using mobile scanners and/or RFID tags. The ERP or WMS can direct employees on what to pick (including multiple orders and zones) and where to pick it from. They can either scan using mobile scanners, or if inventory items have RFID tags, the movements will be tracked and posted automatically.
  • Shipping: When inventory items have an RFID or IoT tag, the loading of trucks can trigger automated downstream processes such as printing the bill of lading for the driver, sending the customer an advance shipping notice and/or invoice, and marking the sales order as shipped/invoiced in the ERP system.


  1. What metrics should I use to evaluate how we are doing?

Interestingly, a number of academic articles have provided metrics for Industry 4.0 inventory management to evaluate progress against baselines. These include:

  • Carrying cost – combines the main costs of managing inventory, including labour and storage costs as well as the costs of obsolescence. It’s a useful metric in tracking how much working capital is being allocated to inventory.
  • Fill rate effectiveness – measures the success rate of fulfilling orders, for example On Time in Full and similar KPI’s.
  • Order cycle time – the total elapsed time from when a customer places an order to when they receive it. It’s useful for determining the effectiveness of the processes from sales to production to fulfilment.
  • Order pick, pack, ship accuracy – manual systems tend to have a lot of errors here, resulting in costs such as returns, expediting, and credits. Automated systems greatly improve this metric.
  • Perfect order performance – measures how well you deliver accurate, damage-free orders to customers on or before their delivery due date.
  • Supplier quality index – this metric shows how effective you are in isolating supplier quality problems before they impact production. It’s useful for determining how integrated inventory management, quality, and compliance systems are.
  • Inventory turnover – an old favourite that defines the number of times a company sells and replaces its stock of goods in a period.


  1. What common problems do I need to watch out for?

There are some issues you need to be aware of. Some of these are:

  • Inadequate leadership support of the change
  • Insufficient financial resources that are required to make the changes
  • Skill gap – new skills which may be required to implement these changes
  • Focusing only on improving the tactical “point of work” inventory transactions but not improving the strategic “in the office” planning and inventory management methods.

Inventory management has been a long-standing challenge in manufacturing businesses. The rise of Industry 4.0 is exposing the limits of conventional inventory management regarding accuracy,  visibility, and efficiency. Adopting Smart Manufacturing is the start of a revolution that will change how you use inventory management to achieve competitive success.

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