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Best raw material inventory management techniquesWhen you start to optimize your raw material inventory management, here are some tips and tricks to get you started on your journey. Don’t obsess over work-in-progress inventoryTypically, companies start with finished product inventory tracking, implement basic raw material stock management, and more complex work-in-progress management. We strongly recommend not trying to jump to the latter immediately. Although proper inventory management has great benefits, it also comes at a cost — the time and resources to keep it running and up to date. Thus, if possible, start with basic raw materials inventory management and do not try to track different stages of production immediately. Just take stock of your raw materials and finished products. It’s better to have something simple working well than something complex that does not work at all. Keep everything lean and increase raw inventory management complexity only if there is a clear business need. Update safety stock and reorder level pointsSafety stock describes the inventory a business keeps in the warehouse to protect against spikes in demand or shortages in supply. A good reorder point ensures that your business typically does not dip below your safety stock levels. Most manufacturers employ some minimum inventory principles for raw materials used in production. Manufacturers often fail to calculate raw materials used regularly. As a result, these raw materials inventory levels become inconsistent. All the events below should trigger an adjustment:
Also, don’t forget to adjust safety stock and reorder point levels to account for seasonal changes like an upcoming holiday season. Keeping these levels up to date ensures you always have just the right amount of raw material inventory in your warehouse so that you won’t have too much cash tied up. Don’t try to put all materials on your bill of materialsHaving proper raw materials inventory management in place does not mean you should track every material consumed in your production. For example, several indirect materials could be consumed during the production process (nails, screws, buttons, and so on) that do not cost a lot and are typically purchased by the box in high volumes. It often makes sense not to have such materials on your bill of materials (BOM). Instead, cost them at the time of purchase and do not try to track every piece consumed in production. Getting the high-cost raw material stock in place on a BOM is important, so you know early on if this is a profitable product. Don’t spend hours saving pennies. Focus on what has a greater effect on your margins. Use industry-standard metrics to find out what works for youYour business is unique, and what works for one business might not work for another. The basic guiding principles of this are simplicity, directness, and freedom. There is no dogmatic loyalty to one technique. This is the key to overcoming any challenging situation for your manufacturing business. Take. what works and discard the rest. The key for you is to use all the tools at your disposal to form your unique style of manufacturing. You can find the secret formula to your optimal raw materials inventory game. That’s how modern businesses can rise to the top. Pro tip: Material requirements planning software available on the market gives manufacturers all the tools they need to get their raw materials under control. How much energy needs to go into raw materials inventory management
Have you heard of the Pareto Principle? The famous 80/20 rule is that 80% of the results you get come from 20% of the input. You could be working your socks off for 100 hours a week, but only 20 of those hours get the majority of your results. What’s more, 20% of the stuff you learn about managing your raw materials inventory is used for 80% of your operations. And guess what? This 20% is the tried-and-tested fundamentals that go to the heart of inventory management. Get your foundation right, and the rest will follow. Most disciplines have a core set of principles to learn that will put you at the top of the game if you take the time to master them. Are you spending too long on stocktaking, only to find mistakes still happen? The perpetual inventory workflow could be a better solution for your inventory management. Calculate how much you pay to keep each square foot of stock monthly. You could adopt principles of just-in-time (JIT) manufacturing. We recommend you don’t go for 100% JIT at this stage. Find out what raw material stock you have lying around the longest and ask yourself, “Why does this need to be here?” Your inventory turnover ratio (IRT) should be increased by keeping less stock. There’s no need to keep raw materials hanging around for months on end. If your IRT is low, you could lose a good deal of money each month on carrying costs. Are your costs overtaking your income? Figure out your cost of goods sold (COGS) and calculate how raw materials used in production affect your bottom line. Spreadsheets are fine for calculating turnover. But this doesn’t take into account every cost you have. Dedicated software helps you calculate your actual profitability, covering every aspect of your manufacturing business. Why raw materials inventory management is vital for growing manufacturersImagine you were going on a round-the-world trip. You could take two large suitcases filled with clothes for every weather condition. You might think you’re smart because you’re prepared for anything, but in reality, it’ll weigh you down and cost more to transport. Contrast this to a single backpack:
Bringing two suitcases seems less risky, but the movement is slower and is less effective overall. The second option is the road to success:
This type of thinking goes for keeping extra raw material inventory lying around. Broadly speaking, as a manufacturer, you handle four different types of inventories:
The average time a business focuses on each type of inventory changes at different stages in the business’s life. During the startup stage, companies tend to focus more on finished products. This makes a lot of sense, as getting products to customers is the top priority. You have to make a name for yourself, and your product is everything. As the business grows, the focus might be on manufacturing and small business inventory management efficiency. What was once barely a concern for the business owner becomes the number one thing on their mind. It seems like inventory management is taking over their life. The business owner might spend more time managing their raw material stock with little to show. More raw materials pile up, seemingly enough to last for unforeseen occurrences. This increases your inventory expenditure on your balance sheet. Not to mention the number of hours lost tracking it all. Before you know it, you are spending more than ever to sell a single unit of product. Your business is bigger. It may even be more profitable. But what are you doing it all for if your overheads are destroying a higher percentage of your income? Overcoming challenges with raw material data managementAs you probably already gathered from this article, practicing solid raw material inventory management can be difficult. So, before we move on to the best solution for handling your raw material, here are some things you’ll need to consider when improving your raw material inventory management. Planning and forecastingImproving your raw material inventory management is one thing, but having a dynamic management system that considers your demand planning will help you maintain ideal inventory levels. Data-driven managementHaving the right amount of raw material stocked when needed is only possible by collecting data from your sales, production lines, and anywhere else on your supply chain. It is possible to do it with inefficient spreadsheets. However, it can be difficult to make constant manual updates. CostingYou might know how to calculate the value of your raw material, but that doesn’t mean you have accurate costings of how much it costs to manufacture your products. Other costs you need to track include your raw materials, manufacturing overheads, and labor used in production. Due to various factors, these costs often change (meaning items in your inventory don’t have the same value as others). Tracking these costs alone will be extremely time-consuming and difficult. Many manufacturers turn to ERP manufacturing software to help automate and track their raw inventory management software. Use raw material management software You could have the best managerial mind in the world. Your industry knowledge could be second to none. But your business could still be dead in the water if you don’t have the right tools. Managing raw materials inventory in a scaling manufacturing business without dedicated software will be an uphill battle. Using undedicated software or a pen-and-paper method is like using a brittle training sword. You might deflect a few strikes, but your blade will break eventually. But just having the software is like having the best sword in the world and no skill. You will still be outmatched and beaten. However, many manufacturers sell from e-commerce platforms (the most popular platform being Shopify). It’s important to find a system to help you with your Shopify inventory management and organize your business — including sales, supply chain management, and production. But, regardless of your choice, you will need to combine the best tools with the best knowledge. You can apply the knowledge above while using a spreadsheet, but you risk it only being 20% effective. You might be wondering — How does manufacturing ERP software reduce inventory levels? It does it by:
Katana ERP manufacturing software — don’t let the cost of keeping raw material stock destroy your margins. Try out complete raw materials inventory management that lowers your costs for free. Katana 14-day free trial.
Which type of processing is changing the form of raw material so they can be consumed or used to make other products?Manufacturing involves the conversion of raw materials, usually supplied in simple or shapeless forms, into finished products with specific shape, structure, and properties that fulfill given requirements.
What is the process of transforming raw materials collected by extractive companies into products called?In a word: manufacturing. (In a few more words: mine/grow/collect => process & make a “thing” someone can now use.) The “primary”, or “extractive” sectors of the economy - mining, logging, hunting, fishing, farming, etc., create or obtain the raw materials to make things.
What are businesses that use materials from other producers to make products?POBF Chapter 13 Vocabulary. What is extraction and cultivation?Taking of raw materials and processed goods and turning into finished products. Procurement of products from nature or with natural resources to cultivate.
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Changing the form of raw materials so they can be consumed or used to make other products
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