For manufacturers, inventory is constantly moving. Materials arrive, components move to the shop floor, finished goods go into warehouses, and orders are picked and shipped—all while purchasing and production plans continue to change.
The challenge is keeping inventory data as current as the physical movement of goods. Without accurate, connected inventory information, manufacturers can end up carrying too much stock in one area while facing shortages somewhere else, tying up working capital, delaying production, or missing customer commitments.
Modern inventory management goes beyond simply tracking quantities. Manufacturers need a clear view of what is available, where it is, what is committed, what is moving, and what needs attention. Microsoft Dynamics 365 Business Central for Manufacturing brings inventory, purchasing, sales, warehousing, and manufacturing processes together to give manufacturers greater visibility and control over their inventory.
In this guide, we explore how Business Central supports smarter inventory management across the manufacturing lifecycle.
Common Inventory Challenges in Manufacturing
Disconnected Inventory Data and Manual Updates - When purchasing, production, and warehouse teams use separate spreadsheets, manual stock sheets, or unlinked software instead of a single shared system, it leaves teams working from different views of inventory. A planner may see a component as available even though it has already been allocated to another order. An early supplier delivery can create a different timing gap: the goods may have arrived physically, but remain unavailable for production until they are received, inspected, and recorded in inventory.
Stockouts, Excess Inventory, and Unplanned Shortages - Manufacturers may carry excess quantities of slow-moving materials while facing shortages of fast-moving materials needed for current production orders. These imbalances can occur when demand, production schedules, lead times, existing supply, and replenishment policies are not mapped together. The result is inventory that ties up capital without improving material availability.
Limited Inventory Traceability - Manufacturers working with lot, serial, or quality-sensitive materials may need to identify which supplier a component came from, which production orders consumed it, and which finished products contain it. Without structured item tracking and bi-directional (forward and backward traceability), item tracing history depends on manual record-matching across purchasing, inventory, and production data.
Gaps in Material Consumption Visibility - Production consumption can differ from planned quantities because of scrap, variances, material substitutions, or changes in output. When material consumption is recorded by manual data entry or delayed reporting, it creates a mismatch between planned and actual inventory usage. This data gap directly compromises future order planning and distorts production cost calculations.
Inconsistencies in Inventory and Financial Values - When physical inventory records and financial accounting are maintained separately, differences can emerge between actual inventory movements and their financial values. This creates a reconciliation gap that often requires manual effort to trace and resolve as materials move through the production cycle.
These challenges point to the need for an inventory model that keeps operational and financial data connected, gives teams a reliable view of availability and commitments, and reflects inventory changes as they happen.
Business Central Inventory Management Capabilities for Manufacturers
Microsoft Dynamics 365 Business Central Inventory Management is a core, built-in capability of Business Central, with native functionality for tracking stock, managing inventory movements, planning material requirements, maintaining item traceability, and connecting inventory values with financial records. These capabilities address a broad range of operational challenges, helping manufacturers improve visibility, control, accuracy, and coordination across the inventory lifecycle.
Model Multi-Level Product Structures with Production BOMs
A Production Bill of Materials (BOM) defines the components and subassemblies required to manufacture a finished item across multiple levels. For example, a heavy machinery manufacturer can structure a custom pump around its motor assembly, housing, valves, fasteners, and other components. Business Central cascades requirements through the BOM hierarchy when the finished item is planned, accounting for its dependent materials and subassemblies. It also supports assembly BOMs for simpler builds and phantom BOMs for grouping components without stocking an intermediate subassembly.
Business Benefits:
- Automated requirements planning: Cascades demand through BOM levels so planners know exactly what to produce and procure.
- Scrap-aware planning: Factors expected scrap into material requirements to reduce shortages.
- Rolled-up costing: Combines component, subassembly, and capacity costs to improve product cost visibility.
- Accurate production requirements: Links BOM components to production orders, routings, and capacity needs for a complete build plan.
MRP and MPS for Demand-Driven Planning
Master Production Scheduling (MPS) and Material Requirements Planning (MRP) translate customer demand and forecasts into a timed production and material plan. In Business Central, the MPS run calculates gross and net requirements for finished products based on sales orders and demand forecasts, while the MRP run takes the MPS-generated production schedule and breaks it down layer-by-layer into the individual parts and raw materials required through the BOM. For example, if an electronics manufacturer receives a large new order with an earlier delivery date, inventory management in Business Central can identify the additional component requirements and highlight which existing purchase, or production orders need to be adjusted to meet the revised schedule.
Business Benefits:
- Eliminates guesswork: Recommends lead-time-based supply actions so planners can respond without manual expediting.
- Prevents shortages and overstock: Nets demand against available supply to keep inventory levels balanced.
- Synchronizes procurement to production: Links finished-goods requirements to component procurement so missing parts don't stall production.
- Responds to demand changes: Recommends supply changes so production can adjust as demand shifts.
Reserving Order-Specific Inventory
Available inventory is not always available for every demand. Business Central can reserve quantities against sales, purchase, production, assembly, service, and transfer orders, creating a direct link between supply and the demand it is intended to fulfil. This reservation also helps warehouse teams identify stock committed to a specific requirement, so it is not allocated elsewhere during picking or movement. For example, a furniture manufacturer can reserve a specific hardwood panel and hinge set for a custom conference table as soon as the material is received, keeping those components committed even when they are stored alongside general inventory.
Business Benefits:
- Links supply to demand: Keeps inventory committed to the order that needs it.
- Prevents allocation errors: Stops reserved stock from being picked for another requirement.
- Handles partial receipts: Preserves reservations as supply arrives in parts, avoiding manual re-matching.
Material Consumption Tracking and Backflushing
Business Central lets manufacturers choose how raw material consumption is recorded: manually, through forward flushing, or through backflushing. For example, a metal fabrication shop can backflush standard steel consumption when finished brackets are posted, while manually recording materials that require more precise tracking.
Business Benefits:
- Reduces manual entry: Automatically records predictable material consumption as production progresses or completes.
- Improves inventory accuracy: Matches the consumption method to how each material is used and controlled.
Lot and Serial Number Traceability
Business Central tracks lot and serial numbers as inventory moves through receipt, storage, production, consumption, and shipment. Its item tracking feature allows forward traceability (containment) in case of defective material batches and backward traceability (root cause analysis) when a finished product fails in the field. With this, teams can investigate item history in either direction, connecting a component lot to the finished products and customer orders it affected, or tracing a finished item back to its source. Warehouse locations can form part of this traceability record to identify where affected inventory is currently held.
For example, an electronics manufacturer can trace a defective microchip lot to affected device serial numbers and customer shipments, while also identifying any remaining stock held at different warehouse locations.
Business Benefits:
- Speeds investigations: Finds affected materials and finished products faster when quality issues arise.
- Enables targeted recalls: Identifies affected lots or serial numbers without pulling unaffected products.
- Improves recall accuracy: Links supplier lots to production, inventory, locations, and customer shipments.
- Supports compliance: Provides traceability records for regulated processes.
Bin and Multi-Location Management
Business Central organizes inventory through locations, zones, and bins, giving teams visibility into where stock is held and whether it is available for use. Locations can represent warehouses or plants, while zones and bins provide more granular visibility into physical placement. It also supports warehouse-execution activities such as receiving, put-away, picking, and internal movements. For example, an automotive parts manufacturer can receive forged components into a quality-control bin, where the quantity is recorded in inventory but remains unavailable for production until inspection is complete.
Business Benefits:
- Separates available from held stock: Keeps quarantined or staged inventory out of production and planning.
- Improves inventory visibility: Shows where stock is held across warehouses, plants, and locations.
- Reduces warehouse errors: Directs warehouse-execution activities to defined bins.
- Supports multi-site operations: Gives teams a consistent view of inventory across locations.
Inventory Costing and General Ledger Integration
Business Central links inventory movements with their financial value through Item Ledger Entries, Value Entries, and the General Ledger. As materials are received, consumed, transferred, or sold, the associated costs flow through the ERP. It's costing methods like FIFO, weighted average, standard cost, and specific identification let manufacturers value inventory according to their operational and costing needs. For example, if a supplier changes the cost of a component after it has been consumed or sold, Business Central can recalculate the affected costs and post the resulting adjustment to the General Ledger.
Business Benefits:
- Keeps financials accurate: Reflects inventory cost changes in financial records automatically.
- Improves cost control: Shows the financial impact of every inventory movement.
- Improves cash-flow visibility: Records expected costs before supplier invoices are received.
- Cuts reconciliation work: Automates cost adjustments and G/L postings as costs change.
Match Business Central Inventory Capabilities to Your Business Needs
Not every manufacturer needs the same level of inventory management. Not every manufacturer needs the same combination of inventory capabilities. The right setup depends on the manufacturing model and the specific inventory requirements of the operation, such as how production is triggered, how materials are planned and tracked, whether products require lot or serial traceability, and whether the business operates across multiple locations or handles high-volume inventory movements.
| Manufacturing Model | Inventory Capabilities to Consider |
| Make-to-stock | Demand forecasting, MPS/MRP, replenishment policies, production BOMs, inventory availability, physical counting |
| Make-to-order | Reservations, order-specific supply, production BOMs, demand-linked planning, material availability |
| Assembly-to-order | Component availability, reservations, assembly orders, inventory movements, replenishment |
| Complex / multilevel products | Multilevel BOMs, MRP, production orders, component planning, consumption tracking |
| Lot-sensitive products | Lot tracking, expiration-related controls where applicable, item tracing, physical inventory |
| Serial-sensitive products | Serial tracking, item tracing, order-specific inventory, controlled warehouse processes |
| Long-lead components | MRP, lead-time planning, reservations, purchase planning, supply-demand visibility |
| Multiple manufacturing locations | Location-based inventory, transfer orders, replenishment planning, warehouse processes |
| High-volume warehouse operations | Bins, warehouse receipts, picks, put-aways, directed put-away and pick, warehouse execution tools |
| Highly variable demand | Demand forecasting, MPS/MRP, inventory availability, planning parameters, AI-assisted insights |
The goal is not to activate every available capability, but to match inventory controls to the specific requirements of the business. The right combination depends on the manufacturing model, material characteristics, demand patterns, and operational scale.
Extending Inventory Management Capabilities with Business Central Accelerators
Business Central gives manufacturers a strong foundation for managing inventory across purchasing, production, sales, and warehousing. But as warehouse operations become more real-time and mobile, manufacturers may need capabilities that go beyond standard ERP functionality—particularly for barcode-driven execution, automation, and shop-floor visibility.
This is where accelerators such as Alletec’s Xtended WMS extend the capabilities by adding a mobile-first warehouse execution layer that helps manufacturers keep physical inventory movements synchronized with Business Central in real time. It supports:
- Receiving and put-away: Scan incoming shipments, process full or partial receipts, and use multi-bin put-away with automatic line splitting.
- Shipping and Picking: Use guided or unguided picking, bin-based suggestions, and scan-based shipment posting directly from handheld devices.
- Packing Order: Automatically add picked items to packing orders, suggest suitable container types based on Business Central configurations, and post and release packing for shipment through scanning.
- Location Transfer: Scan items, bins, and lot numbers to create and post inter-warehouse transfers while maintaining accurate stock movement records.
- Bin Movement: Create ad-hoc bin movement requests by scanning items and keep inventory locations updated in Business Central.
- Stock Check: Check inventory on the spot by scanning an item or bin and view stock levels across relevant inventory dimensions.
- Physical Stock Take: Conduct parallel physical inventory counts using handheld scanners for faster and more accurate stock-taking.
- Reporting and Analytics: Record warehouse activities in Business Central with timestamps and user IDs, enabling managers to monitor daily operations, review transactions, and analyze warehouse activity.
Conclusion
Effective manufacturing inventory management connects material availability, inventory movements, warehouse operations, costing, and financial value. Business Central provides the foundation for managing these processes, while industry accelerators and extensions can address more specialized requirements and help reduce time to value.
The right inventory approach depends on the manufacturing model, warehouse requirements, scale, and process complexity. With an apt combination of Business Central capabilities and supporting solutions, manufacturers can build an inventory operation that provides better control today and scales with changing business needs.
Connect with Alletec’s experts to explore how Business Central can support your manufacturing inventory requirements.
