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A tidy stockroom where cardboard boxes of stock smoothly float in and out at the precise times they should.
The spreadsheets update automatically as you go along.
Isn’t that every small manufacturer’s dream?
It certainly is a blissful picture.
But it’s not just the peace of mind you get by making this a reality.
Inventory management is the process of keeping track of all the goods your company has in stock.
And the benefits of good inventory management have become clear as day, just because the costs of doing it badly are so high. There’s no getting around it in today's fast paced market.
If you have too much stock then you are tying up cash, as well as having to pay unnecessarily for resources like stock room space.
On the other hand, understocking can lead to delayed deliveries and mobs of unhappy customers wielding pitchforks at your door.
Inventory is just so central to a business dealing with physical products, and your inventory management plays a huge role in your success. It can be the difference between sinking and swimming.
Surviving or thriving.
And that includes choosing the right solution so you can manage your inventory on a next level.
As a small manufacturer you need systems that know the maker’s needs and make life easier, so you can spend your time on growing the business.
This means solutions which harmonize your raw materials and finished products inventory.
Solutions that can help you move on from the burdened world of Excel.
Solutions that seamlessly incorporate inventory management into your order fulfillment cycle.
Which is why we’ve put together the low-down on everything you need to know about inventory management for small businesses - top to bottom.
Many manufacturers and productions planners don’t apply the following principles.
Get on top of the stuff written below and you will put yourself ahead of 99% of your competition.
So, let’s get stuck in.
What is Inventory Management?
Before diving into the details, it’s always best to get to grips with the fundamentals.
Otherwise you’ll end up following others like a blind sheep.
At best you’ll always be one step behind the leaders, and worst-case scenario they might take you over a cliff.
So, in this case we must understand not only what inventory really is, but also the aims and objectives of solid inventory management.
Once we unpack these a bit, the inventory management definition should come into focus.
What is Inventory?
There are many definitions of inventory out there. Some offer an interpretation that refers to inventory as the sum of all items used in your business.
This includes anything related to the operations of your business, such as safety or office equipment.
We believe it’s more helpful to think of inventory as the sum of all items used in your business that are intended for sale.
That means looking at all the bits that go into getting your products made.
When it comes to materials directly related to your manufacturing process, it includes items ready to be sold as well as items you intend to sell in the future.
You could break down the types of inventory to the following:
Raw materials - Components which can be used to create products;
Work-in-progress - Items in the process of becoming finished products; and
Finished goods - Products that are completed and ready to be sold.
Let’s look at the example of making candles (fun fact: you can do this yourself).
Raw materials would be wax, wicks and colors.
Work-in-progress would be colored or shaped wax.
And of course, the finished good would be a fully formed candle with a wick on top, ready to burn for a cheesy romantic dinner.
Unfortunately though, these progressions aren’t always so simple and linear.
You could have all kinds of different waxes being used to make a variety of candle shapes.
That’s one of the main issues that makers often have – dealing with the constantly moving pieces of raw materials as well as the finished products themselves.
Inventory can be like a sneaky shapeshifter that always finds a way to slip out of your grasp before you get a full hold on it.
Which is why understanding that inventory is dynamic and fluid is the first step to attaining good inventory management.
Because then it becomes clear that keeping track of your stock is not something you can force. You need to look for the right tools that can help you tame it.
It’s the whole reason that recording and tracking inventory digitally became the staple as soon as it was possible. Inventory management software helps you keep your inventory information up to date and free from human errors.
The Difference Between Inventory and Stock
The question of whether there is any difference between "inventory” and “stock” has been the root of much unnecessary confusion.
Many business owners, retailers, and manufacturing experts use both terms interchangeably.
Some note that “inventory” is used more in US English, and “stock” in UK English.
Honestly, this is mainly a matter of personal preference and shouldn’t lead to trouble.
But minor distinctions can be made, so you should be aware of those too. It could come in handy if you have to explain or describe your inventory management practices accurately.
One area that you can be more specific with is how you distinguish the types of inventory your business deals with.
Some dictionaries define stock as referring to the finished goods you have ready for sale. This is why the term “in-stock” is commonly used in retail.
Whereas “inventory” can refer to finished goods as well as raw materials and works-in-progress.
So, it’s a good idea to mention the type of inventory you are talking about if there is room to cause uncertainty.
Here are the main forms of inventory:
Raw material inventory;
Finished goods inventory;
MRO (Maintenance, Repair, Overhaul); and
Remember, the word “inventory” can be replaced with the word “stock” in these terms and still be perfectly valid.
It just makes life easier to be a bit more specific sometimes.
Inventory Management vs Inventory Control
So, we found that inventory and stock are mostly the same, now for inventory management and inventory control.
Because like inventory and stock, these two terms are often used interchangeably.
But unlike with inventory and stock, equating inventory management and control is inaccurate.
Inventory control is one part of the broader discipline of inventory management. Think of inventory control as a slice of delicious inventory management pie.
Inventory control is about knowing where your inventory is and making sure it travels to the right place for efficient and timely manufacture of finished goods.
Inventory management is concerned with the above, but also how fits it into the bigger picture.
This includes costs like purchasing raw materials, carrying costs of inventory, and inventory processing overheads.
You could say that inventory control is the organization and logistics of your inventory. The operational mind if you will.
Whereas inventory management is about how inventory fits into your overall business plan and success metrics. It makes sure production is efficient enough to be profitable.
Both are essential and should be understood as best as possible.
PRO TIP: Read more about inventory control best practices.
What is the Aim of Inventory Management?
If you want to do something well, it can help a lot to have some targets that you can visibly see.
You wouldn’t want to walk along a rickety old bridge with your eyes closed, would you?
Well, same goes here.
Having aims when managing your inventory can make stacks of difference to the end goal.
And we know how much harder inventory management is than walking blindly over a terrifyingly deep canyon.
Here are the common aims of inventory management to keep in mind:
Improve the accuracy of your manufacturing and order fulfillment cycle;
Keep your inventory organized, using space to its full effect;
Cut down on waste like inventory carrying costs, and transport time; and
Save time and money by improving organization and lowering production time.
You get more out of what you focus on, so place your crosshairs on the positives – reading the best resources and emulating those manufacturers you aspire to be like.
With these objectives in mind, we can sum up a useful inventory management definition:
Inventory management aligns all inventory types to the efficient creation of finished products and delivery to customers’ satisfaction.
The overall aims of inventory management are universal, but your business will be aligned towards different goals than your neighbor.
That definition spells out the end-goal that every manufacturing business owner should have when it comes to inventory management.
Can you hazard a guess as to what it is?
The effects of good inventory management are saving time, money, and resources (including human energy) thus lowering stress levels all-round.
However, these are positive side-effects of good practice, not the end goal.
The end goal is 100% complete customer satisfaction.
It makes sense: if you don’t have customers, you don’t have a business.
Don’t underestimate the effect customer satisfaction has on your business. Reviews and word of mouth contribute to a reputation, and it’s hard to shake a bad one.
Constantly having this goal in mind will make it a lot easier to focus on optimizing your inventory to achieve your business potential.
Types of Inventory Management
Time to get to grips with the popular types of managing inventory today.
The foundations that you need to be taking full advantage of in 2019 and beyond.
They are widely practiced in manufacturing circles and are here to stay, so the sooner you get to know them the better.
Some are so successful that they have been adopted by other industries like software development.
And the following principles work regardless of if you have a small family-run business or aspire to head a multi-national company.
But one key note before we start: these methods aren’t in competition or conflict with each other.
You don’t have to choose one and ignore the rest.
The optimal approach is to find the most useful aspects of each theory that fits into your business as it stands. In other words, you find what works for you.
Because the real purpose here isn’t to make life more difficult for you.
They are there to free your business up and give you the space to focus on growing rather than dealing with the boring stuff.
So, let’s get down to the real nitty-gritty of inventory management practices for small manufacturers.
Once upon a time there was a great toss-up between the two main models of inventory management: periodic and perpetual inventory.
Periodic inventory worked by tracking inventory with regular stock-takes every week, month, or longer.
What happened in between was not tracked, so business owners hoped the books added up at each stock-take.
It doesn’t take a genius to realize that, despite its simplicity, this is not exactly ideal.
Perpetual inventory was known as the more accurate method, but far more time consuming.
The way it works is by constantly updating your inventory every time an order is placed, or stock is moved around.
Manufacturers of old would shake their heads and say: “who’s got time for that?”.
And back in the day, they would have been right.
But now cloud-based inventory management software exists to accurately keep track of stock 24/7.
When you receive a new order, for example from a Shopify store, the system automatically deducts the necessary inventory from your total and lets you know if you have the materials available.
The system tracks all kinds of inventory (raw materials, work-in-progress, and so on) by itself, and reassigns everything depending on its stage in the production schedule.
Another positive effect of constantly keeping track of everything is that inventory won’t go missing, be wasted, or be assigned to two things at once.
Your workshop will run way more smoothly.
Perpetual inventory is an inventory management technique that should always be going on in the background and makes the following methods that much easier to follow.
That’s why it is at the top of our list for most useful inventory management practices.
The Just-in-Time inventory system is the philosophy of manufacturing to exactly fill demand. You make goods when orders come in, not before.
The goal of just-in-time (JIT) inventory is to cut down costs from the production process. This is done by careful planning.
All resources (human, material, space, and time) are used to create the highest-quality product, while cutting down costs.
Supermarkets use a form of JIT.
When you go into a supermarket, there is an unbelievable amount of choice, but only a few of each item. When an item runs low, the supermarket system flags this up, so the manager can order more.
All waste and inefficiencies are identified and reduced as much as possible.
These are the elements to focus on if you want to get in the game:
Eliminating waste — look at all your resources here;
Constant performance evaluation — what could you be doing better?
Improving continuously — aim higher with all your processes;
Become customer-focused — use supply-chain strategies that account for customer demand; and
Balance your work setting – create a clear and focused atmosphere.
ABC inventory (as easy as 123) is a widely used method of categorizing your product inventory into what sells best and what doesn’t.
This model supposes that most of a manufacturing business’ sales are for a minority of the products you sell.
In other words, 15% of your product variations may account for 70% of your sales (Item A).
Conversely, certain products that take up around 50% of your inventory only account for around 10% of your total sales (Item C).
The rest lie somewhere in the middle ground, neither very fast or slow-moving inventory.
These aren’t exact numbers, but a rule of thumb. It is designed to help you identify that different parts of your inventory have different inventory turnover rates.
Knowing the average “lifespan” for each inventory item tells you where your inventory flows most effectively, what is the average, and what is dead weight.
If you have inventory that sticks around for months at a time, it’s a good idea to think about cutting loose, because it’s taking up space that could be used for more useful (and profitable) products.
Once you know your average inventory counts over a set time (like a month) and your cost of goods sold (COGS) you can work out the inventory turnover ratio for that item.
Your inventory turnover ratio tells you if you are:
Keeping too much inventory at one time;
Costs too high; and
Keeping up with customer orders.
Some experience and sound judgement are needed, but you can unlock so much information about how well your inventory works for you if you do this right.
Though you can do the calculations yourself, a specialized inventory management system can help you find average lifespans and cost of goods sold to save you time.
Consignment inventory is where a manufacturer gives products or materials to a customer (this could be a retailer or a business that uses product) who only pays once the items have been sold to the consumer.
This is a good idea for trying out a product that has had no market research. It could even be used for that purpose because vendors are likely to agree to take stock if they don’t have any risk with whether they get sold.
On top of that you get to save a lot of money by reducing the number of deliveries you make. Rather than selling products one by one, you just send off a big batch to a customer and then they return what they didn’t sell months later.
It’s a specific way of doing things and you need to find a supplier that is willing to play ball.
But if it’s right for your business or products then your stock room is going to be very tidy indeed. Because you're not the one holding onto inventory, it’ll be your customer themselves.
Essentials for Inventory Management
So we got the theory in place, but what about the practice?
Of course there’s a lot that inventory management software can do to help you (we’re getting to that), but there are also some steps you can take to aid your optimization efforts.
Don’t worry, the methods aren’t too complex. You won’t be staying up all night, tearing your hair out after your sixth cup of coffee trying to understand what’s going on.
They’re just practices we think every small manufacturer should use so they can get the absolute most out of optimizing their inventory.
In short, a reorder point is a stock threshold that you don’t want to go below.
A safety net that keeps you from falling into stockroom chaos.
The ideal inventory reorder point allows for adequate time to make a new order before your stock reaches this threshold.
You set a reorder point to let you know two vital things:
The right time to order more materials from your supplier(s); and
The right time to manufacture more sub-assemblies and products.
When the stock level for a material or finished product is about to reach the reorder point, a new order needs to be placed immediately.
Your inventory reorder point levels should cover every item in your inventory, including every product variation’s product recipe.
This takes away any doubts or second-guessing. Your reorder point is there, clear as the sun, and you just need to react when it is reached.
Your stock will be better regulated, with fewer interruptions like supply-chain breakdowns or bottlenecks.
Gone will be the days where you go to start a new manufacturing order but realize too late that you don’t have enough supplies which would otherwise delay production.
Reorder points are an essential inventory management technique that makes sure your schedule is not delayed or interrupted.
Want to know how to calculate your safety net?
Check out our blog post on Reorder Point Formula to find out how.
Safety stock describes the amount of inventory a business keeps in the warehouse to protect against spikes in demand or shortages in supply.
It’s a helpful buffer to help you out in emergencies, like when a supply order does not get to you in time, or you have a particularly busy holiday season.
The make or break periods you could say.
Many retailers have safety stock for finished goods. As you are a manufacturer, safety stock principles can and should be applied to both final products and raw materials inventory.
That means you should have a buffer of raw materials to create manufacturing orders, as well as finished goods in case you need a lightning fast way to fulfill a customer order.
This ensures the availability of materials for production and products for delivery.
The point is that your customers get their deliveries on time, and safety stock is there behind the scenes making it happen.
However, the trick (like with every other inventory management principle here) is balance. You don’t want to swamp your workshop with safety stock.
That is why you apply a safety stock formula to make sure you don’t go overboard. It probably won’t be as much as you expect.
But this is one of those methods that will make a quickly noticeable difference.
The bonus is that it’s measurable too, which every manager loves.
Quick Inventory Management Tips for Small Businesses
We’ve gone through the principles you can apply to get the most out of your inventory.
But there’s a whole palette of approaches you can take to bring the brighter colors out of your manufacturing business.
Because all businesses are unique, and as an owner, only you know what is best for your organization. What works for large manufacturers does not work for small ones.
Here are some tips that you could use to spice things up:
Use SKUs — these are unique ID numbers for each product variation. They let your system process orders more accurately and integrate better with e-commerce channels.
Anticipate changes — notice and learn trends in customer activity. Then you can keep up with changes in demand without straining your operations.
Be a good customer — make sure you’re the ideal company for your supplier to work with. Pay invoices early, develop a good relationship, and they’ll become a dependable partner. If you’re ever in a pinch, you'll be at the top of their list.
Get to know the cloud — use cloud-based inventory management so your inventory can be managed from multiple locations, keeping you up-to-date at all times.
Listen to your customers — find out about customer satisfaction. How many receive their orders on time, or early even? Research ways to improve management to create a better experience for your customers.
It can be useful to incorporate all the above, but obviously it’s up to you to select the focus points.
Take a bit of time to come up with a general strategy, and the whole thing will start making sense quicker than you can say “safety stock formula”.
Inventory Management Software for Small Businesses
Often when people think of “manufacturing” they imagine giant brick buildings filled with machines, endless production lines and hundreds of staff scurrying about.
Not to mention the gargantuan warehouses packed to the rafters with cardboard boxes of stock.
This image stems from the mass production model of manufacturing that was popularized by high consumer demand of the USA after the 1950s.
Manufacturing required lots of expensive machinery and wasn’t considered something to be done small-scale.
Today, thanks to more accessible equipment and manufacturing education we are experiencing the makers’ revolution.
It includes small-scale manufacturers, artisans, and makers of all stripes – beautiful.
This is also thanks in part to changing customer trends driven by millennials – moving from a preference for cheap, mass-produced goods, to more unique and lasting items.
As this new form of manufacturing has arisen, businesses have been begging for inventory management techniques that work for them. Especially when it comes to getting a hold on their raw material availability.
Inventory management that gives you the space, time and resources to really work on growing your business.
But what are the options for the small manufacturer?
Inventory Management Systems
The first port of call, as always, is a pen and paper system.
This includes written stock-takes and order invoices. Many hobby and micro businesses use this method to manage inventory, if only in part.
But the limitations will be reached very quickly here.
A step up the ladder is using Excel spreadsheets for inventory management. Again, these work fine for a while, as long as good practices are followed, like backing up data.
However, this functionality is restricted.
You will have to constantly update a web of spreadsheets to keep your purchases, recipes, raw materials, final products and sales all in check at the same time.
Sooner or later problems will occur, regardless of your spreadsheet skills.
The more inventory data that is added, the more human errors will crop up – at least one error every 300 characters according to one study.
Which leads us to the final option for small businesses: inventory management software.
These are more robust than spreadsheets and come with functions specifically designed for the purpose of inventory management, so you don’t have to do any tinkering.
Many small-manufacturers have reported their satisfaction with getting their inventory management under control using these systems. Some are even surprised about how much easier it is than spreadsheets.
But it makes total sense.
Because trying to keep up to date records of product recipes, ongoing costs and the stock itself is a nightmare with spreadsheets alone.
Challenges for Small Businesses
Making sure all staff are working from and updating the master copy of the inventory;
Accounting for lost stock due to manufacturing or employee error;
Keeping up-to-date whilst not interfering with daily operations;
Estimating manufacturing time to meet customer demand;
Finding the best inventory management software that suits your business; and
Training employees in the use of specialized software.
The Difference Between Small-scale and Large-scale Inventory Management
Remember that stereotype of the manufacturer with their giant warehouses?
From afar it looks like they have enough stock to last them through an apocalypse.
It’s a grand painting for sure, but realistically this method of stockpiling inventory should remain something for the large enterprises. They have bigger budgets, bigger orders, and are less flexible with what they can do.
Enterprise Resource Planning (ERP) is software specifically designed for these huge companies to deal with this. The crazy thing is that many times the solutions are tailormade for each business separately.
They are integrated with the entirety of their business including areas such as human resources and marketing automation. So, these systems serve as the spine of the entire organization.
You can imagine how much of an expensive endeavor that is. And most manufacturers cannot afford these systems that cost between 75,000 to 750,000 dollars a year.
Smaller scale manufacturers instead have been relying on inventory management software often termed as MRP (Manufacturing Resource Planning) for decades.
Most small manufacturers don’t have enough workers to require a dedicated HR tool. And if they do, then they don’t necessarily need it to be incorporated into their inventory management software.
There’s just not enough data to justify putting money in to that. Which is why ERP doesn’t make sense for small manufacturers.
Instead they turn to inventory management software or MRP, that is slimmed down for easy use.
This is the solution which has been most implemented to tackle inventory management for businesses once spreadsheets don’t work anymore.
The only thing is, times are a changing.
And there’s a new kid on the block...
What Should Good Inventory Management Software Do?
There’s no doubt that inventory management software is the solution for small manufacturers to optimize their inventory.
The real question here is: which software do you need exactly?
Well as mentioned the main ones that have been implemented in the last half century has been MRP.
They manage inventory as well as the following:
Advanced demand forecasting;
Machine capacity scheduling;
Quality assurance; and
For a maker that might seem like a little bit of overload.
So, what are the bits that you really need?
Here are some features to look out for in good-quality inventory management software:
Store your entire product portfolio in one place with no need to enter something twice;
Attribute as many variations (size, color, embellishments etc.) to each product;
Enter product recipes and manufacturing processes so you can track your product flow more effectively;
See orders come in real time so you can get to work straight away;
Allocate materials to the priority orders in the list, so that it gets out the door first, and minimize work-in-process, and fight over-ordering;
Track orders from suppliers so you know when stock is expected;
Manage your team by assigning duties and daily goals on your production schedule; and
Be accessible to you anywhere while still being secure, also known as cloud inventory management.
How to Choose the Best Inventory Management Software for Small Businesses
Good software has the features above, but great software targets your specific requirements so that you can get the most out of your inventory.
You want to be able to trim all the fat off and keep only what is necessary to get products to your customers.
As a small manufacturer this means solutions which:
Harmonize your raw materials and finished products inventory.
Help you move on from the burdened world of Excel.
Seamlessly incorporate inventory management into your order fulfillment cycle.
Offer the option to integrate with e-commerce channels.
Are simple to navigate and easy to understand.
This is an exciting time for workshops everywhere with all the options on offer, though it might seem daunting to find the right fit.
Thankfully there has been a recent development with the emergence of Smart Workshop Software which targets the maker’s needs.
The difference with conventional MRP is that it is a cloud-based inventory management software that focuses on integrations that are most vital to small manufacturers.
For example, Katana Smart Workshop Software integrates with the ecommerce platform Shopify, to allow sales to become directly part of the manufacturing flow.
Let’s see how it works in the next chapter!
Smart Workshop Software in Action
Theory is all well and good, but how does it all pan out when you get to the real thing?
Let’s look at Katana Smart Workshop Software and see how we can implement some of the points we’ve covered.
One of the main problems that makers come across when fulfilling their sales orders and when scheduling their production is the constant need to check inventory — whether that means going into the stock room or trawling through spreadsheets to see what finished goods and raw materials are available.
Katana will do all the hard work for you by keeping an up-to-date inventory, which shifts every time a sales or manufacturing order comes in.
There's no need to be modifying data every time an order comes in, because the system does that for you.
Setting Reorder Points
Katana allows you to set reorder points for each of your items, so that you always know when to make additional products or purchase more materials.
You can easily see under the column “Missing/Excess” how close you are to the optimal level of 0.
If it’s red you know you’re in the negative and should be filling up on that item.
Missing/Excess = In Stock - Committed + Expected - Reorder Point
The real magic with inventory management comes when you take raw materials into account.
One of the difficulties with making products is that products can share the same materials as each other. This would usually make keeping stock difficult because you must keep track of where your materials are always being used.
Katana however, will keep track of all these so called “committed” materials so that you never run short.
On top of that, you can prioritize your orders with a simple drag and drop. That means that if you have an order you want to get done faster (maybe the customer is a little bit of a VIP), then you can just pull the order up the line.
The software will automatically book your available material stock to higher priority orders. This means that you can easily see what the effects are going to be on all other production orders, in a color-coded visual chart. Katana will highlight any resulting delay risks of getting the customer orders shipped on time.
By having your entire flow from purchasing to sales in one place, it’s easy to make decisions and changes. With integrations to Shopify for example, all your sales are synced to Katana, so your inventory doesn’t need to be managed in more than one place.
Every time an order comes in on Shopify, your inventory and production line will be adjusted accordingly without any extra input needed on your behalf. You will immediately see whether you have the necessary products in stock or raw materials available to make the products ordered by the customer.
Plus, everything has been color-coded and laid out with the maker’s eye in mind, so it’s easy to spot when something is off.
But that’s just a few of the many benefits that Smart Workshop Software can bring you.
If you want to know more on what Katana can do for you then check out our video below.
Taking the Next Step
Let’s be real – no business wants to be spending all their days keeping up with inventory.
The whole point of this guide is to show you how to make managing your inventory as streamlined as possible. So, you can spend time growing your business and focusing on the things that really matter.
We all have the same 24 hours in a day, it’s the way you use them that matters.
Work smart, not hard.
And guess what?
This is the effect of having inventory management knowledge.
Increased efficiency – so you have more time to do what matters to you while still developing your business.
This word has become a bit of a business cliché, with many so-called “gurus” offering wild promises from everything from world domination to crime-busting superpowers.
We don’t promise anything outside the realms of possibility. In fact, we know nothing is a dead certainty.
But with some careful study and planning of these concepts, you can get more done whilst breaking less of a sweat.
The more you practice, the better you get.
The trick is not just to read about inventory management. Absorb the information. Reflect on it. Teach it to someone (seriously, this can increase information retention to an astonishing degree).
And most of all – apply it.
Apply it in a way that’s relevant and sensible to your business. This is your baby we’re talking about here. Half-measures or cop-outs won’t cut it.
Remember, this guide is not going anywhere.
Come back to it whenever you like to refresh your memory. You can’t apply everything at once – improving your inventory management practices is a long-term process of iteration, just like design.
But of course, nobody expects you to do this alone.
You need the right tools to apply it, the most appropriate inventory management software for you.
We already mentioned how Smart Workshop Software is changing the inventory management landscape.
It brings together every facet of your inventory management while fitting in the most vital parts of your small manufacturing business.
From purchasing to manufacturing to online sales, with a friendly interface.
You can implement all that’s been covered in this article, by molding it to your specific business needs.
That means being able to spend time on what you really want to be doing – growing your business.
Try out Katana Smart Workshop Software for free on a 14-day trial to see if it works for you.
Soon enough managing your inventory will become second nature, and you’ll be wondering what all the fuss was about.