How the ABCs Drive ROI with Manufacturing Inventory
This article appeared in the April 2025 issue of MiMfg Magazine. Read the full issue and find past issues online.
Inventory control in manufacturing includes reducing costs, monitoring stock levels and tracking the timely availability of materials. The goal is reducing costs associated with holding and managing inventory while finding the right balance between carrying enough inventory to meet demand and avoiding excessive inventory tying up capital.
Effective inventory control confirms necessary materials and components are readily available when needed. By meeting the key objectives of inventory control, manufacturing companies can enhance operational efficiency, reduce costs, improve customer satisfaction and gain a competitive edge in the market.
Challenges Over Time
Many manufacturing companies carry numerous SKUs to satisfy client needs. SKU count grows and grows as new customers and products are added. Over time, companies may see revenue increasing but cash flow unexplainably getting tighter. Inventory control can become costly for manufacturers’ cash flow if not properly monitored.
The ABCs of Inventory
One tool used in inventory control to categorize and prioritize inventory items based on their value and usage is the ABC analysis, following the 80/20 rule. By assessing the value and usage of inventory to categorize items into A – highest value and fastest usage, B – moderate value and usage and C – lowest value and slowest usage.
Manufacturing Client Case Study
Manufacturers who have a philosophy that you can’t sell out of an empty wagon might keep high levels of inventory to satisfy clients and potential clients. But, when inventory increases, it ties up working capital and cash flow, requiring capital contributions for daily operations.
The ROI of ABC
With the introduction of ABC inventory management and data analysis to identify the inventory usage, it was revealed that of the over 2,500 SKUs, 20 percent of finished goods generated 80 percent of their gross profit. These would be categorized as A inventory and controls should be implemented.
C category inventory items were identified and the excess items were discounted to reduce carrying costs. Right sizing inventory helped the manufacturer have the inventory available for sale, increase revenue, cash flow and net operating profit and while also helping to repurpose a full-time employee.
ABC Roadmap
To find, and maintain, the right balance between carrying enough inventory to meet demand and avoiding excessive inventory tying up capital, manufacturers should monitor and evaluate A category inventory weekly and keeping it accessible to maintain high turnover. B category inventory should be monitored less frequently, say monthly, with more moderate inventory levels. C category inventory items are managed with leaner inventory levels.
Ready to Read Your ABCs?
This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.
About the Authors
Jennifer Clement is a strategic sales and marketing leader at CLA, specializing in value creation for the C-suite. She has extensive experience in global leadership roles across manufacturing, distribution and senior care technology She may be reached at 414-238-6785.
Ric Cieslak is a seasoned financial professional with over 30 years of experience. He leads the Client Accounting and Advisory Services (CAAS) practice, specializing in manufacturing. He may be reached at 407-244-9344.
CLA is an MMA Premium Associate Member and has been an MMA member company since May 2023. Visit online: claconnect.com.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader.