Inventory management is an essential part of every business that sells a physical product. If a business runs out of inventory, they lose their ability to make money.
Most inventory management guides are written for businesses choosing software platforms or learning textbook concepts. This one is written from the perspective of a precision machine shop — a business that manages raw material, work-in-progress, and finished part inventory every day to deliver machined components on time.
Our customers are OEMs across industries like power and electrical, fluid handling, measurement instrumentation, and agricultural equipment. We don't sell products off a shelf. We machine custom components to print, which means our inventory management challenges look very different from a warehouse or retail operation.
Understanding how a machine shop handles inventory is valuable for manufacturers running their own machining operations, and OEM procurement teams who want to know what happens on the other side of their purchase orders.
Inventory management is a system that tracks inventory (raw materials, unfinished goods, and finished goods) from start to finish. An inventory management software can track everything from material purchases and inventory costs to the sale of finished products to ensure a business has everything they need to function.
The goal of inventory management is to increase the efficiency of a business.
A company becomes more profitable and reduces waste when they know exactly what to order, when to order it, and how much to order. Of course, there isn’t a flawless system, but businesses can take steps to improve supply chain processes and reduce wasted resources.
Proper inventory management is essential for the longevity of every product-based business. Running out or running too low on inventory can cause a business to lose money and put extra strain on customer relationships. If a business’s inventory doesn’t match the current customer demands, you can expect lots of issues.
Inventory control and management doesn’t solely apply to companies that sell physical products. Even service-based businesses need to have the right resources on-hand to provide their services.
Proper inventory management is necessary if you want to scale a business and reach sustainable long term growth.
Every manufacturing operation manages multiple categories of inventory. In a precision machine shop, the three primary types are raw materials, work-in-progress, and finished goods. Each has its own management challenges.
Raw materials are the metals and plastics that arrive at the shop as bar stock, plate, forgings, or castings before any machining takes place. For a shop like Spex, this includes materials like 303 and 316 stainless steel, 6061 and 7075 aluminum, C360 brass, various carbon steels, and specialty alloys. Managing raw material inventory means balancing the need to have common materials on hand against the cost of tying up capital in stock that may sit on the rack for months.
Work-in-progress (WIP) covers everything between the first machining operation and the final inspected part. In precision machining, WIP can include parts waiting between first and second operations, parts in queue for deburring or secondary processes, parts staged for outside services like plating or heat treatment, and parts in the inspection queue. WIP is often the hardest category to manage because it moves through multiple workstations and can stall at any point — a machine goes down, an operator calls out, an outside process takes longer than expected.
Finished goods are completed, inspected, and packaged parts ready to ship to the customer. Some shops ship immediately upon completion. Others hold finished inventory for scheduled releases, blanket order call-offs, or customer-managed safety stock programs.
In a machine shop, raw material is the single largest inventory investment. How a shop manages material procurement directly affects lead times, part costs, and the ability to respond to urgent orders.
There are two basic approaches, and most shops use a mix of both.
Stocking common materials means keeping a supply of frequently used bar stock and plate on the racks. If a shop regularly machines parts from 303 stainless and 6061 aluminum, it makes sense to maintain a buffer of those materials in popular sizes. The advantage is responsiveness — when a repeat order comes in, the shop can start machining immediately instead of waiting weeks for material delivery. The tradeoff is the carrying cost: storage space, capital tied up in stock, and the risk that material sits unused if demand shifts.
Buying material per job means ordering raw stock only after a purchase order is received. This keeps inventory investment low and eliminates the risk of unused material, but it adds the full material lead time to every job. For specialty alloys, large-diameter bar, or materials with minimum order quantities, this can add significant time to the production schedule.
At Spex, we stock commonly used materials in standard sizes and buy specialty or unusual sizes per job. This hybrid approach lets us start most repeat orders quickly while avoiding excessive material inventory. For customers with consistent demand, we can also set up material stocking agreements where we hold a defined quantity of their specific material, reducing lead times without the customer needing to manage that inventory themselves.
One factor that many people outside of machining don't consider is material yield. A finished part that weighs two ounces might require a piece of bar stock that weighs twelve ounces. The rest becomes chips. Material yield varies dramatically based on part geometry, and it directly impacts both cost and the amount of raw material a shop needs to keep on hand. A shop running a hundred parts from two-inch diameter bar consumes that material much faster than the finished part count might suggest.
WIP is where inventory management gets complicated in a machine shop. Unlike a warehouse where inventory sits on a shelf with a barcode, WIP in a machine shop is physically moving through the facility — loaded on machines, sitting in bins between operations, staged for inspection, or waiting to ship to a secondary process vendor.
Effective WIP tracking requires knowing where every job is in the production process and how long it has been there. The key questions are: which operation is the job currently on, how many pieces are completed versus remaining, are there any quality holds or non-conformances, and when is the job expected to reach the next stage.
Shops manage this through a combination of job travelers (paper or digital documents that follow the job through every operation), production scheduling software, and physical organization of the shop floor. The discipline behind WIP management matters just as much as the system. A shop that tracks WIP in software but does not consistently update job status gets no benefit from the technology.
For OEM customers, WIP visibility translates directly into delivery reliability. If your machining supplier can tell you exactly where your order stands in production — not just "it's in process" but "first operations are complete on 80 of 100 pieces, second op starts Tuesday" — that's a sign of strong WIP management.
One WIP challenge specific to precision machining is outside processing. Many machined parts require secondary operations that happen off-site: anodizing, plating, heat treatment, grinding, or passivation. When parts leave the shop for an outside process, they temporarily exit the shop's direct control. Managing the timing of outside services, including pickup schedules, processing time, and return delivery, is a critical part of WIP management that affects the overall job schedule.
How a machine shop handles finished parts inventory depends on the customer relationship and order structure. The three most common approaches are ship-complete, scheduled releases, and blanket orders.
Ship-complete means the shop finishes all parts on an order, inspects them, and ships the entire quantity at once. This is the simplest approach and works well for one-time orders or jobs with relatively short production cycles. The finished parts sit in inventory for the shortest possible time.
Scheduled releases involve producing a larger batch and shipping portions on a defined schedule. For example, a customer might order 1,000 parts but request delivery of 250 per month over four months. The shop machines the full run to capture setup efficiency, then holds and releases finished inventory per the schedule. This reduces per-part cost through larger batch sizes while matching the customer's consumption rate.
Blanket orders are standing agreements where the customer commits to a total quantity over a defined period, and the shop produces and ships against that commitment as the customer calls off quantities. Blanket orders give the shop predictability for scheduling and material procurement, and give the customer flexibility on delivery timing. They are one of the most effective tools for reducing lead times on repeat machined parts.
Each approach has inventory implications for the shop. Scheduled releases and blanket orders mean the shop is holding finished goods longer, which ties up floor space and adds carrying cost. But they also enable more efficient production planning — the shop can batch similar jobs together, optimize machine utilization, and stage material in advance.
The classic inventory management techniques — JIT, safety stock, ABC analysis, economic order quantity — all apply in a machine shop, but the specifics look different than in a textbook.
Just-in-time (JIT) in a machine shop context does not mean ordering one piece of bar stock the moment a purchase order arrives. It means aligning material procurement, machine scheduling, and outside processing timing so that everything converges with minimal idle time between stages. True JIT in precision machining requires reliable suppliers, predictable machine capacity, and disciplined scheduling. It works best for repeat parts with stable demand patterns.
Safety stock for machined parts is a calculation that balances the cost of carrying extra inventory against the risk and cost of a stockout. For high-value precision components with long lead times — say, a part machined from Inconel that requires heat treatment and final grinding — the cost of a stockout to the customer (a stalled assembly line, missed delivery to their end customer) can far outweigh the cost of holding a few extra pieces. This is why many OEMs ask their machining suppliers to maintain safety stock on critical components.
ABC analysis helps machine shops prioritize which parts and materials deserve the most inventory management attention. The A category might be high-volume repeat parts for the shop's largest customers — parts that run every month and represent a significant share of revenue. These get dedicated material stocking, standing programs, and close WIP monitoring. The C category might be one-off prototype jobs where material is bought per order and finished parts ship the day they pass inspection.
Economic order quantity (EOQ) in machining is heavily influenced by setup time. Every production run involves CNC programming verification, fixturing, tool loading, and first article inspection. This fixed setup cost means there is a natural minimum batch size below which the per-part cost becomes uneconomical. Understanding this is important for procurement teams placing orders — asking for 10 pieces when the setup cost alone makes 50 pieces nearly the same total price is a missed opportunity.
Tracking the right metrics helps a machine shop (and its customers) evaluate how well inventory is being managed.
Inventory turnover measures how many times a shop's total inventory cycles through in a given period. Higher turnover generally indicates efficient material usage and minimal dead stock. For a machine shop, healthy turnover means raw material is being consumed in production rather than aging on the racks.
Days of inventory on hand indicates how many days of production the current raw material and WIP inventory can support. This metric helps shops anticipate when material needs to be reordered and gives an early warning when inventory levels are drifting in the wrong direction.
On-time delivery rate is an output metric that reflects, among other things, whether inventory management is supporting production schedules. If a shop consistently hits delivery dates, it usually means raw material is available when needed, WIP is flowing through production without bottlenecks, and finished goods are shipping on schedule.
Scrap rate ties directly to inventory efficiency. Every scrapped part represents consumed raw material that produced no revenue. In precision machining, scrap can result from tool wear, programming errors, material defects, or operator mistakes. A shop with a high scrap rate is effectively carrying more raw material inventory than its shipment volume would suggest, because some percentage of that material is being wasted.
Inventory management in a precision machine shop is not just an internal concern. It directly affects the OEMs we supply — their lead times, their costs, and their ability to meet their own production schedules.
At Spex, our approach to inventory is built around a few principles: stocking common materials to reduce lead times on repeat work, maintaining clear WIP visibility so customers know where their orders stand, offering blanket order and scheduled release programs for customers with recurring demand, and communicating proactively when material availability or production schedules shift.
We are an ISO 9001:2015 certified precision machine shop in Rochester, NY, specializing in CNC milling and turning for OEMs across power and electrical, fluid handling, instrumentation, agricultural equipment, and chemical processing industries.
If you're sourcing precision machined components and want a supplier who manages inventory as carefully as they manage tolerances, reach out to our team for a quote.
