Australian industrial machinery manufacturers have sharply reduced their inventory levels as businesses respond to uncertain demand, rising costs and pressure to manage working capital, according to new data from Unleashed.
In an exclusive interview with Australian Manufacturing, Jarrod Adam, Head of Product – Production and Distribution at Unleashed, said the decline in inventory suggested manufacturers were becoming more deliberate about the amount of capital they hold in stock.
Unleashed’s Manufacturing Health Index (MHI) for Q2 2026 shows average Stock on Hand among Australian industrial machinery manufacturers fell 79 per cent year-on-year to $180,036, down 57 per cent from Q1 2026.
The sector also recorded a 50 per cent year-on-year decline in revenue, with Unleashed describing the inventory decline as the largest annual fall across all sectors in its eight years of Australian MHI data.
“Demand remains uncertain in parts of the manufacturing economy, while businesses are also dealing with elevated input, freight, labour and financing costs,” Adam said.
“When those pressures are combined, holding excess inventory becomes increasingly expensive.”
However, Adam said lower inventory levels should not automatically be interpreted as a sign manufacturers are struggling, as businesses may also be adjusting purchasing to better match demand.
“The key question is whether businesses are reducing excess stock while maintaining enough inventory to keep production moving and customers supplied,” he said.
Industrial machinery exposed to investment decisions
Industrial machinery manufacturers can face particular inventory challenges because their products and components can be expensive, specialised and relatively slow-moving, according to Adam.
He said machinery purchases are often linked to capital investment decisions by construction companies, miners, manufacturers and other businesses.
“If those customers delay capital expenditure, machinery manufacturers can quickly find themselves carrying inventory that is harder to move,” Adam said.
Australian Bureau of Statistics data cited by Unleashed shows total construction work fell 2.1 per cent in the June quarter, while engineering construction declined 6 per cent.
Adam said the inventory figures could reflect several factors, including weaker construction activity, broader business investment conditions or softer mining-related demand.
“A 50 per cent year-on-year decline in revenue alongside a sharp reduction in stock on hand suggests businesses in this sector may be responding particularly cautiously to the weaker or less predictable demand,” he said.
Leaner stock can create production risks
While reducing inventory can release working capital, Adam said manufacturers also face risks if stock is cut too aggressively.
“If a critical component isn’t available when it’s needed, the consequences can extend well beyond the cost of that individual item,” he said.
“Production can stop, customer orders can be delayed, staff and machinery can sit idle, and businesses may have to pay for expensive expedited freight.”
Adam said manufacturers should therefore assess stock levels alongside demand, sales velocity, open customer orders, incoming purchase orders and supplier lead times.
“The right inventory level will look different for every business and every product,” he said.
Manufacturers urged to target safety stock
Unleashed said manufacturers should avoid applying the same safety-stock approach across every product or component.
Adam said critical components with long or unpredictable lead times and limited alternative suppliers may warrant greater protection than readily available, low-cost items.
“The important thing is that safety stock should be based on risk rather than simply applying the same buffer percentage to every product,” he said.
Adam said manufacturers could also improve inventory management by regularly reviewing supplier lead times, identifying critical components, setting reorder points and maintaining a reliable source of inventory information.
“Resilience isn’t about building the biggest possible inventory buffer. It’s about knowing where the risks are and putting protection in the right places,” he said.
