What is inventory management?
Inventory management is the planning, recording, monitoring and replenishment of raw materials, parts, semi-finished goods and finished products, so that exactly enough stock is available to keep production, maintenance and delivery running without unnecessary cost or waste. In industry it is about far more than warehouse administration: a missing PLC CPU or variable frequency drive can bring a whole line to a halt for days. In modern OT environments, inventory management is therefore fed with real-time data from SCADA, MES, ERP and Industrial Internet of Things platforms, giving better insight into material flows, consumption patterns and supply chain risk.
π§ What does inventory management cover?
Inventory management spans the whole chain of purchasing, storage, recording, consumption, replenishment, tracking and analysis. The aim is to balance two costs: the cost of holding too much stock (tied-up capital, storage, obsolescence) and the cost of holding too little (downtime, rush deliveries, missed orders). In industry the following types of inventory are usually distinguished:
| Inventory type | Example | Typically managed in |
|---|---|---|
| Raw materials | Chemicals, granulate, metals | ERP, WMS |
| Semi-finished goods | Intermediates, work in progress | MES |
| Finished products | Finished goods ready to ship | ERP, WMS |
| Consumables | Cables, fuses, filters, lubricants | ERP or CMMS |
| Spare parts | Motors, sensors, cards, power supplies | CMMS |
| MRO inventory | Maintenance, Repair & Operations material | CMMS |
Safety stock is not a separate type but a buffer on top of an itemβs normal stock, intended to absorb fluctuations in demand and lead time.
π Why is inventory management critical in industry?
Within industrial automation, inventory management is above all about spare parts for installations that must not stop. Think of spares for PLC systems, Industrial Ethernet switches, industrial firewalls, UPS batteries, drives and safety components such as a Safety PLC. Failure of such a component leads directly to production loss, safety risks, SLA breaches and sometimes compliance issues.
OT parts are therefore managed to higher availability standards than regular IT assets. An office laptop can be replaced within a day; a specific I/O card for a twenty-year-old control system may only be available second-hand.
| Component | Criticality | Reason |
|---|---|---|
| PLC CPU | Very high | One CPU often runs a whole line; type and firmware must match exactly |
| SCADA server | High | Without supervision there is no view of the process |
| Industrial switch | High | A network outage affects every connected controller |
| Variable Frequency Drive | High | Long lead times for larger power ratings |
| UPS module | High | Protects control systems against voltage dips |
| Sensor | Medium | Often standard and quickly available, sometimes redundant |
π What are the core inventory processes?
- Goods receipt - incoming goods are identified with a barcode, QR Code, DataMatrix or RFID tag. Under the GS1 standards a single code (GS1-128 or GS1 DataMatrix) can carry everything: the GTIN (AI 01), the batch number (AI 10), the expiry date (AI 17) and the serial number (AI 21). A pallet gets an SSCC (AI 00).
- Stock movements - consumption, returns, rejects, production reporting and issues to maintenance. Every movement must be recorded immediately, otherwise the stock figure is no longer correct.
- Stock counts - besides the annual stocktake, many companies use cycle counting: counting a small share of locations every day, A items more often than C items.
- Replenishment - automatic or manual restocking based on the reorder point, consumption history, forecasts and production planning.
- Traceability - with tracking and tracing you can establish per batch or serial number where material came from and where it went, which is essential for recalls in food and pharma.
π§ How do you calculate safety stock and the reorder point?
The classic method assumes normally distributed demand and a fixed lead time:
- Safety stock = z Γ Ο Γ βL, where Ο is the standard deviation of demand per period and L is the lead time in the same periods.
- Reorder point = average demand Γ L + safety stock.
- Economic order quantity (EOQ) = β(2 Γ D Γ K / h), the formula published by Ford W. Harris in 1913, where D is annual demand, K the fixed cost per order and h the holding cost per unit per year.
| Target service level | z factor |
|---|---|
| 90% | 1.28 |
| 95% | 1.65 |
| 98% | 2.05 |
| 99% | 2.33 |
Worked example: a plant uses on average 4 pressure transmitters a week, with a standard deviation of 2. The lead time is 4 weeks and the target is a 95% service level. Safety stock is then 1.65 Γ 2 Γ β4 = 6.6, rounded up to 7 units. The reorder point is 4 Γ 4 + 7 = 23 units. With an annual demand of 208 units (4 Γ 52 weeks), an ordering cost of β¬50 and a holding cost of β¬4 per unit per year, the economic order quantity is β(2 Γ 208 Γ 50 / 4) β 72 units.
Bear in mind that many critical spare parts have intermittent demand, for example once every two years. The normal distribution fits such items poorly. For them, organisations use risk-based minimum stock levels (derived from an FMEA or criticality analysis) or forecasting methods for sporadic demand, such as Crostonβs method from 1972.
π Which optimisation strategies exist?
- ABC analysis - ranks items by annual consumption value (price Γ usage), following the Pareto principle. Often 10β20% of items (class A) account for around 70β80% of the value. A items get the tightest control and the most frequent counts.
- Criticality analysis (VED) - classifies spare parts by the effect of a shortage: vital, essential or desirable. A cheap sensor can be a C item and still be vital.
- Just-In-Time (JIT) - originating in the Toyota Production System and part of LEAN: material arrives only when it is needed. This lowers inventory but makes the company more dependent on a reliable supply chain.
- Predictive inventory management - machine learning and Industrial AI combine consumption history, trends and production forecasts. Linked to predictive maintenance and condition monitoring, a part can be ordered as soon as wear indicators signal an upcoming replacement.
π Which KPIs measure inventory management?
| KPI | Calculation or meaning |
|---|---|
| Inventory turnover | Cost of goods sold Γ· average inventory value |
| Days of inventory | 365 Γ· inventory turnover |
| Service level (fill rate) | Share of order lines delivered directly from stock |
| Stockout rate | How often an item is unavailable when needed |
| Inventory record accuracy | Share of locations where system and physical count agree |
| Dead stock | Items with no movement for, say, 12 months |
| Lead time | Time between order and receipt |
These KPIs come together in MES, ERP and Business Continuity reporting. For spare parts, the stockout rate of critical items usually matters more than turnover.
ποΈ How does inventory management fit into the IT/OT architecture?
Inventory management touches both IT and OT systems. Part 3 of ISA-95 names inventory operations management as one of the four main Level 3 activities, alongside production, maintenance and quality. Storage and internal movement belong there; the financial valuation of stock belongs at Level 4 in the ERP system.
| System | Role in inventory management |
|---|---|
| ERP | Financial stock, purchasing, valuation |
| WMS | Locations, picking, receipt and shipping |
| MES | Material consumption per production order, work in progress |
| CMMS | Spare parts, reservation against work orders |
| SCADA | Process data such as tank levels and silo contents |
| Historian | Consumption trends for forecasting |
| IoT and RFID | Real-time location and status of goods |
For real-time insight into stock levels, locations, temperature and condition, organisations use RFID (UHF at 865β868 MHz in Europe), Bluetooth beacons and Wifi scanners. The data flows to higher-level systems via MQTT or OPC UA. A tank level in SCADA can thus automatically create a purchase order in the ERP system.
π What cybersecurity risks affect inventory management?
The digitalisation of warehouses and supply chains has made inventory management a target for cyberattacks. In April 2021, ransomware took down the systems of Bakker Logistiek, a Dutch logistics provider whose customers include supermarket chain Albert Heijn. Order intake and deliveries stopped, and stores ran short of pre-packed cheese for several days.
| Risk | Impact |
|---|---|
| Ransomware | Standstill of logistics and order processing |
| Manipulation of inventory data | Wrong orders or wrongly released batches |
| Supply chain attacks | Compromised suppliers or components |
| Loss of traceability | Compliance risk during recalls |
| Unauthorised access | Theft or sabotage |
Protective security measures include MFA, RBAC, logging, network segmentation between office, warehouse and OT networks, IDS and a Zero Trust approach. On the OT side, IEC 62443 is the reference framework. Organisations covered by NIS2 and the Dutch Cybersecurity Act (in force since 15 August 2026) must also demonstrably manage the security of their supply chain.
βοΈ How do you approach spare parts management in OT?
A practical approach in five steps:
- Inventory the installed base - which OT components, types and firmware versions are in use? An up-to-date asset list from asset management is the starting point.
- Determine criticality - link every part to the impact of failure and the recovery time, for example through an FMEA.
- Monitor the lifecycle - vendors announce phase-out and end-of-life, as with the Siemens S7-300 family. Lifecycle management and the IEC 62402:2019 standard for obsolescence management help you plan a last time buy or migration in good time, especially for legacy systems.
- Set minimum stock levels - combine criticality, lead time and consumption into a minimum per item, and record what is held by the supplier or in a shared pool.
- Safeguard storage and configuration - store spares under the right conditions, test them periodically and keep firmware and configuration backups up to date, so that a replacement CPU can be put into service immediately.
π What does integrated inventory management look like in practice?
A manufacturer links its systems so that a fault triggers a complete chain: SCADA detects a failed drive, the CMMS automatically creates a work order and reserves the spare part, the ERP system orders a replacement because the reorder point has been reached, and RFID shows the technician which warehouse location holds the part. Manual errors and search time largely disappear and downtime gets shorter. Inventory management is thus one link within broader Supply Chain Management.
β Frequently asked questions
What is the difference between inventory management and a WMS?
Inventory management is the discipline of planning, recording and replenishing stock. A WMS is software that supports physical warehouse processes such as goods receipt, locations and picking. A WMS is therefore a tool for inventory management, alongside the ERP system and the CMMS.
How much safety stock do you need?
The safety stock you need depends on the variability of demand, the lead time and the target service level, following the formula z Γ Ο Γ βL. At a 95% service level, z is about 1.65. For critical spare parts with rare consumption, a risk analysis sets the minimum stock better than this formula.
What is the difference between ABC analysis and criticality analysis?
ABC analysis ranks items by annual consumption value, so attention goes to the most expensive stock. Criticality analysis, such as VED, looks at the effect of a shortage on production and safety. Inventory management for OT combines both, because a cheap part can still be production-critical.
Why is spare parts management harder in OT than in IT?
Spare parts management in OT is harder because installations last 15 to 25 years and components often go out of production long before that. Replacement requires an exactly matching type or firmware version, and lead times can run to months. Good inventory management therefore combines obsolescence management with risk-based minimum stock levels.
How does IIoT help inventory management?
IIoT delivers real-time data on stock levels, locations and condition, for example through RFID transponders, level sensors in tanks and silos or smart scales. That data flows via MQTT or OPC UA to the ERP or WMS, so inventory management can replenish automatically. This reduces manual counts and prevents unexpected shortages.
Does inventory management fall under NIS2?
NIS2 and the Dutch Cybersecurity Act do not regulate inventory management itself, but they do require essential and important entities to secure their network and information systems, including their supply chain. The inventory and logistics systems of such an organisation therefore fall within that duty of care. Their failure can also be a reportable incident.
π In summary
Inventory management ensures that materials and spare parts are available when production or maintenance needs them, at the lowest possible cost. In industrial and OT environments it revolves around criticality, lead times and obsolescence, supported by safety stock formulas, GS1 identification and integration between ERP, WMS, MES, CMMS and SCADA. Because inventory and logistics systems are a ransomware target, cybersecurity is an integral part of it.