What is Inventory Management?

Every manufacturing business — whether it makes hydraulic cylinders, auto components, or textile machinery — holds inventory. Raw materials sit in the warehouse waiting to be consumed. Semi-finished parts move between work stations on the shop floor. Finished goods await dispatch. Consumables like lubricant oil, welding rods, and packaging boxes are used daily but often tracked poorly. All of this is inventory, and how you manage it determines whether your cash works for you or sits idle on shelves.

Inventory management is the practice of ordering, storing, tracking, and controlling stock so that the right materials are available in the right quantity, at the right location, at the right time — without tying up more cash than necessary.

What You Will Learn

• The different types of inventory in a manufacturing business
• Why inventory management matters for profitability and operations
• Core inventory concepts: SKU, batch tracking, valuation methods, reorder points
• The categories of inventory costs
• How ERP replaces manual tracking with real-time, data-driven control

Prerequisites

• A basic understanding of manufacturing operations (covered in Chapter 2)
• Familiarity with the Udyamo ERP Lite interface (covered in Chapter 4)

Types of Inventory

Manufacturing businesses hold several categories of inventory, each with different characteristics and tracking needs.

Raw Materials

These are the inputs you purchase from vendors and consume in production. Examples include MS (mild steel) plates, MS round bars, aluminum ingots, copper wire, rubber sheets, and chemical compounds. Raw materials represent the starting point of your manufacturing process and are typically the largest category of inventory by value.

Work-in-Progress (WIP)

WIP consists of items that have entered production but are not yet complete. A steel plate that has been cut and drilled but not yet painted or assembled is WIP. Tracking WIP accurately is critical for understanding production costs and identifying bottlenecks.

Semi-Finished Goods

These are intermediate products that have completed some production stages and may be stocked before further processing. In Udyamo ERP Lite, these are tracked using the semi_finished item type. For example, a machined shaft that will later be assembled into a gearbox is a semi-finished good.

Finished Goods

Products that have completed all production stages and are ready for sale or dispatch. A fully assembled hydraulic press, a set of precision bearings, or a batch of CNC-machined flanges — these are your finished goods.

Consumables

Items used in operations but not directly part of the finished product. Examples: lubricant oil for machines, cutting tools, welding electrodes, safety gloves, packaging boxes, and cable ties. Consumables are easy to overlook but can represent significant expenditure over time.

MRO (Maintenance, Repair & Operations)

A subset of consumables specifically tied to equipment maintenance — spare belts for conveyors, replacement filters, greasing materials, and electrical fuses. Some businesses track MRO separately; others group them with consumables.

Why Inventory Management Matters

Poor inventory management silently erodes profitability. Here is how:

Cash Tied Up in Stock

Every rupee sitting in your warehouse as excess stock is a rupee not available for operations, vendor payments, or growth investment. Indian SMBs frequently carry 20–40% more inventory than needed simply because they lack visibility into what they have and what they actually need.

Stockouts and Production Delays

When a critical raw material runs out, production stops. If you discover the shortage of M10 bolts only when the assembly line needs them, you face either expensive emergency procurement or idle labour and machines. A single day of production downtime can cost a small manufacturer lakhs in lost output.

Overstocking and Obsolescence

Buying in bulk to get vendor discounts sounds prudent — until the material specification changes, demand shifts, or the stock degrades. Steel can rust if stored improperly. Rubber compounds have shelf life. Electronic components become obsolete. Excess stock is not an asset; it is a liability disguised as one.

Inaccurate Costing

If you do not know exactly how much raw material went into a product, you cannot accurately cost it. This means your pricing may be based on guesswork, and you may be selling products at a loss without knowing it.

Key Inventory Concepts

SKU (Stock Keeping Unit)

An SKU is a unique identifier for each distinct item you track. In Udyamo ERP Lite, this corresponds to the Item Code field. A well-structured SKU system — for example, RM-STL-MS-PLT-6MM for a 6mm MS plate — makes searching, reporting, and auditing dramatically easier.

Stock-Keeping and Perpetual Inventory

There are two broad approaches to tracking stock:

• Periodic inventory — You count stock at intervals (weekly, monthly) and update records. The gap between counts is a blind spot.
• Perpetual inventory — Every purchase, sale, production, and transfer updates stock in real time. Udyamo ERP Lite uses perpetual inventory through its Stock Ledger, giving you an accurate running balance at all times.

Valuation Methods

How do you value stock when the same item was purchased at different prices over time?

• FIFO (First In, First Out) — Oldest stock is assumed to be consumed first. Common and generally recommended.
• LIFO (Last In, First Out) — Newest stock is assumed consumed first. Less common in India.
• Weighted Average — Each receipt recalculates the average cost. Simple and widely used by Indian SMBs.

Batch Tracking

When you receive MS rods from a vendor, each lot may have a different heat number, grade certificate, or quality test result. Batch tracking lets you trace every unit of stock back to its origin — essential for quality issues, recalls, and warranty claims. Udyamo ERP Lite supports batch tracking through the batch_number field on stock ledger entries.

Reorder Point and Safety Stock

The reorder point is the stock level at which you should place a new purchase order. Safety stock is the buffer you maintain to absorb variability in demand or supplier lead time. Together, they prevent stockouts without excessive overstocking.

Reorder Point = (Average Daily Usage x Lead Time in Days) + Safety Stock

Lead Time

The number of days between placing a purchase order and receiving the goods. A vendor in the same city may deliver in 2 days; imported specialty steel may take 45 days. Lead time directly affects how early you must reorder.

Inventory Costs

Inventory costs extend far beyond the purchase price of materials.

For most Indian manufacturers, carrying cost alone runs 15–25% of inventory value per year. Reducing excess stock by even 10% can free up significant working capital.

How ERP Transforms Inventory Management

Without ERP, inventory management relies on stock registers, Excel sheets, and periodic physical counts. The problems are predictable: data entry errors, stale information, no location-level visibility, and no automatic alerts.

With Udyamo ERP Lite, inventory management becomes real-time and integrated:

• Automatic stock updates — Purchases, sales, production, and transfers update stock instantly through the Stock Ledger
• Location-level tracking — Know exactly how much stock is at each warehouse, shop floor, or distribution center
• Batch and expiry tracking — Trace every item back to its source; get warnings before stock expires
• Reorder alerts — The system notifies you when stock falls below the reorder level
• Integrated costing — Stock values flow directly into accounting, ensuring accurate product costing and financial reports
• GST-ready — Every item carries its HSN code and GST rate, so tax calculations are automatic on every transaction

The chapters that follow will walk you through setting up and using each of these capabilities. You will start by creating your item catalog, then define units and locations, and finally learn to read and act on stock movements and alerts.

Tips & Best Practices

Tip: Before you start entering items into the ERP, spend time designing your item code structure. A consistent naming convention (e.g., category-subcategory-specification) saves enormous time in searching and reporting later.

Tip: Conduct a physical stock count before going live with the ERP. Opening balances entered during setup must match reality, or every subsequent report will be unreliable.

Warning: Do not try to track every nut, bolt, and washer individually if the cost is trivial. Focus tracking effort on items that represent significant value or are critical to production. Low-value consumables can be tracked in bulk.

Quick Reference