Raw Materials Inventory Management Guide
... for small manufacturers looking to expand their business.
As a workshop or as a small factory you typically handle two different types of inventory: raw materials and finished products. During startup stage companies typically focus on the latter. This makes a lot of sense as their primary focus is to get first products successfully delivered to happy customers. As time passes and business starts to grow then more focus is shifted towards manufacturing and inventory management efficiency. Typically the need to improve raw material purchasing and tracking is often related to materials inventory piling up and lack of cash to finance these inefficiencies.
This short guide presents recommendations for manufacturers setting up or reviewing their raw material inventory management principles.
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Keep it simple
In most of the production companies, there is some form of a work-in-progress element. That is a semi-finished product in the process of being converted from raw materials to a final product. Typically, companies start with finished product inventory tracking, then implement basic raw materials management followed by more complex work-in-progress management. We strongly recommend not to try to jump to the latter immediately. Companies sometimes make the mistake of trying to implement something ideal too early in their development cycle. Although proper inventory management has great benefits it also comes at a cost - cost of time and resources to keep it running and up to date. Thus, if its possible, then start with basic raw material inventory management and do not try to immediately track different levels work-in-progress elements. Rather have something simple working well then have something complex in place that does not work properly. Keep it lean and increase the complexity of inventory management only if there is a clear business need to do so.
Update your safety stock and reorder point levels
Safety stock describes the amount of 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 kind of minimum inventory principles for raw materials used in production. More info available here on how to calculate safety stock and reorder point levels. What manufacturers often fail at is keeping these levels up to date. All the events below should trigger an adjustment:
- significant increase/decrease in sales volumes
- major change in supply lead times
- increase/decrease in production volumes
Also, don't forget to adjust safety stock and reorder point levels periodically when your sales are seasonal. Keeping these levels up to date ensures you always have just the right amount of raw materials in your warehouse. So you do not have too much cash tied up.
Don't try to put all materials on production recipes (bill of materials)
Having a proper raw materials inventory management in place does not mean you should track every material consumed in your production. For example, there could be several indirect materials consumed during the production process (nails, screws, buttons) 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 bill-of-materials. Rather cost them at the time of purchase and do not try to track every single piece consumed in production. It is important to get the big cost elements in place on a production recipe so you know that what you produce is profitable. Getting the margin right down to the very last penny is often not worth the investment of time and money.
Use dedicated software for managing your raw material inventory
Managing raw materials in a workshop or a small factory without dedicated software is like fighting a Jedi without a lightsword. You will lose, rather sooner than later. The fight is simply unfair. Inventory management software combined with production planning allows you to automatically deduct raw materials from inventory based on the bill-of-materials of the final product produced. Trying to keep it all in line on a piece of paper or in an Excel spreadsheet is just extremely inefficient. Good manufacturing software does not have to be expensive. Check out Katana MRP and give it a try.