Inventory management isn’t just a warehouse of “things needed for production”. It is a dynamic and critical part of the production effort itself. Inventory is as much an asset like a piece of production equipment and must be managed with the same level of care. In fact, inventory value can often exceed the value of production equipment and is an important non-capitalized asset.
Inventory management is an integral part of overall supply
chain management and consists of the order process for materials and components
needed to produce finished goods. It can
include materials that need to be processed or assembled and can include
consumables such as chemical solutions needed for processing as well as
complete sub-assemblies such as circuit boards, housings, and other items.
Inventory management also stretches from raw materials through finished goods, and depending on the industry or mode of production, may include work in process (WIP). Because modern manufacturing covers a large range of complexity and must keep track of an enormous number of SKUs, there is more than one way of managing inventory. Methods such as Just in Time (JIT) or Materials Requirement Planning (MRP) are two such methods and which method used will depend on the type of manufacturing being done.
The best way to understand the importance of inventory and the importance of having a dependable and accurate system in place to manage it is to look at the extremes – stockouts and overages. But here lies one of the failings of “old-school” inventory management that relies on spreadsheets, paper counting, and manual inputs. For while stockouts and overages account for the extremes, there is little middle ground, and companies can find themselves veering from one extreme to another.
The reason for this back and forth between “too much” and “not enough” highlights the dangers of manual inventory management but also highlights the importance of good, dependable, accurate, and real-time inventory management. And while this is a drain on any manufacturer, it can be especially destructive to the cash flow and overall, health of SMBs.
Good inventory management strikes a balance in that “thin”
middle ground to help a company reduce costs.
With the right balance of materials, cash is only expended for what is
needed, and even then, it is expended as close as possible to the point of
That balance allows companies to fulfill orders and drives customer satisfaction. Customers can get what they want when they want it without having to seek alternate sources. This provides better customer service and strong brand recognition.
But good inventory management is also important to the
long-term financial health as well. By
knowing with a high degree of accuracy the trends and seasonal aspects of
inventory, companies can find pathways to innovation for new products, offer
value added services and negotiate more lucrative supply contracts with
Inventory Management Software
As mentioned, it is easy for a company to find itself in the extreme of shortages or overages. Both can cause headaches and impact the bottom line for manufacturers. But software exists that can help manufacturers find that narrow “middle” where a balanced, accurate, and reliable inventory exists.
In the past, inventory could be an all-day or all-week affair with manual counting, Excel spreadsheets, and manual input of the data followed by a nerve-wracking “reconciliation”. Because the system was manual, many companies didn’t know the results of their inventory until they were at the reconcile stage. At that point, the losses and inefficiencies were long past, and the money expended, never to return.
Today, manufacturers have a lot of options for effective inventory management software. There are many good standalone software packages, and these are in themselves much better than the old way of taking inventory. However, the most optimal path to better inventory management is a software system that includes an inventory management component or module as part of an overall ERP or MRP system.
Because inventory isn’t just a stock review, it is important
that it be integrated as part of a whole.
By tying inventory to an overall supply chain, production, labor,
maintenance planning system, accuracy is improved, and data is actionable for
the entire enterprise.
Inventory management is recognized as a critical key to success and is often found as part of the supply chain and MRP systems. In addition to accurate counting, modern inventory management software can also calculate inventory costs in multiple currencies, an advantage for companies with production across international borders. The logic that these systems can and should be integrated so they can extend the visibility to the entire factory is undeniable.
Manufacturing also carries another type of inventory. To keep complex manufacturing operations going it requires a lot of spare parts and consumables that never make it into the finished product. Nuts, bolts, screws, housings, lubricants, and other items are also required to be kept as part of a company’s Maintenance, Repair, and Operations goods that keep the equipment and physical plant running smoothly.
These parts can also number in the thousands as well. And today’s strong inventory management software can keep an accurate inventory of these parts as well. Because Maintenance, Repair, and Operating supply (MRO) goods are usually considered “overhead” or “non-value-added” in relation to finished goods, there is usually a high level of concern over cost. And inventory management software can help manage and optimize those costs.
These systems are also flexible and agile. Regardless the mode of production – MTS, MTO,
ETO – or whether a company is a process manufacturer or a Just in Time
producer, inventory management software can make the difference between a good
company and a “best in class” manufacturer.
Why use Inventory Software?
While there is a heavy focus on the shop floor aspects of MRP and ERP systems, it is important to remember the “supporting cast” that goes with them. Planning, scheduling, forecasting, purchasing, inventory management, and a myriad of other departments are critical to the success of the modern-day factory.
A particularly important area is inventory management. Done right, a well-managed inventory can improve cash flow, optimize production, and propel a factory to higher efficiency. Done wrong, a poorly managed inventory will tie up valuable cash and lead to increased waste, lower efficiency, higher costs, and reduced production rates due to stockouts.
But with the arrival of agile, cloud-based ERP systems, inventory management isn’t out of reach for small and medium-sized manufacturers. Now, with advanced software, manufacturing companies of all sizes can enjoy the same benefits as larger companies and control their inventory with effective and accurate inventory management.
Every company’s inventory needs are different. This may be due to the type of product they
produce or the scale of the company itself.
The advantage of a good inventory management software is that it can be
adapted to any variation of inventory type:
Just in Time
The Just-in-Time (JIT) model of production has some tremendous advantages. By only purchasing and holding the amount needed for a short term of production, companies can save a significant amount of money in inventory costs, holding costs, and can realize improved cash flow.
Just in Time depends on very specific and knowable production
rates and cycles. If the demand shifts up
or down suddenly due to external factors, the company can find itself short of
critical components. It can also result
in bottlenecks as entire production lines may wait on a single component.
Materials Requirement Planning
Materials Requirements Planning (MRP) is often used for process manufacturing and for goods that have been largely commodified. MRP is dependent upon an accurate sales forecast so that inventory is ordered confidently based on knowing where, when, and how the finished goods will be produced. Key components and raw materials are stocked based on the sales forecasts.
Some companies have a wide range of complexity of inventory depending on the product. They may also have a wide range of costs from a few cents for the cost of a material or consumable to tens of thousands of dollars for a specialized component.
Because of the wide range of variation in the cost of inventory, many are not comfortable with simply counting units and assigning a cost. Rather, the inventory value as a function of cost significance is used as a tool to control higher cost inventory items. Goods are generally split into three categories including high value/low quantity, moderate value/moderate quantity, and low value/high quantity.
Inventory Management Formulas
Just as there are different types of inventory types, there
are also many formulas for calculating inventory:
Economic Order Quantity
Economic Order Quantity (EOQ) is an inventory management type whereby a company calculates how much product is needed with each run to keep inventory cost consistent in the face of steady demand. The idea is to balance the amount of inventory with the scheduled run of a batch so that production runs for specific products do not have to run too frequently. This is helpful in companies where changeover times are very long or complex.
Days Sale of Inventory
Days Sale of Inventory (DSI) is a calculation used to determine the average number of days of stock that can be turned into sales. It looks at raw materials and WIP to make this determination. Many companies with long cycles in net terms for customers experience significant swings on cash flow. As a result, they may tie the value of their inventory to short term financing in the form of bridge loans – also called “factoring”. In cases such as this, the value and age of inventory is used to determine the amount of short-term financing is made available to cover cash flow. The number of turns per quarter or year is a critical part of these calculations.
Inventory is considered a current asset that must be indicated on a company’s balance sheet. Regardless of the product, all companies must count their inventory accurately to be able to count it on their balance sheet. Usually, that inventory consists of raw materials, finished goods, and merchandise.
It also includes the important category of Work in Process
(WIP) but this can vary from company to company depending on the mode of
manufacture. Companies with a strong
Assemble to Order (ATO) production mode will hold significantly less WIP than
those who have a lot of midstream sub-processing steps where material may be in
some state of production for hours, days or weeks.
Inventory accounting is done using one of three methods:
FIFO, LIFO or weighted cost averaging.
FIFO is most useful during times of deflation as older and cheaper
materials are used. FIFO is best used
during periods of inflation as the most expensive materials are considered used
as the cost of goods sold. And when inventory
cannot be accurately taken, weighted averaging is used. The advantage will vary from company to
company and the method used is usually determined by the impact it will have on
Inventory is a critical component of any manufacturer’s
operation. But the good news is that
with today’s modern software programs, especially those included in advanced,
cloud-based and modular ERP and MRP systems, all of the issues above can be
managed with a high degree of accuracy and a with real-time, actionable results
to give buyers optimized data and the lowest inventory cost possible for their
mode of manufacturing.
MRPeasy makes inventory management easy
Stay on top of your manufacturing inventory, stock movements, shipments, tracking of stock lots and serial numbers, plus much, much more. What’s more, all transactions completed in other areas directly influence the stock!
Integrated Inventory Software for Manufacturing Companies
Accurate automatic planning and realistic production schedule. Reschedule dynamically by just dragging and dropping manufacturing orders and operations in the calendar or Gantt chart.
Inventory management, stock movements, batch and serial number tracking. Set and optimize stock levels and avoid stock-outs. Have a clear history of your stock operations.
CRM (Sales Management)
Just a few clicks to calculate the product cost and the best delivery time. Send quotations and invoices, prepare shipments. Send confirmed customer order to production. Track the sales process all the way from quotation right down to delivery using a simple pipeline view.
Simple environment for line workers to follow tasks on desktop or mobile device. Real-time shop floor reporting. Real-time overview of the need and availability of human resources.
Manage purchases and raise pre-filled purchase orders with a single click. Vendors, prices, lead times, it’s all there. Manage your supply chain with the help of accurate statistics. Forecast your procurement needs.
Enjoy clear visibility to your business performance. Follow your cash flow, balance sheet and profit/loss in real time. Understand the profitability of the business, and more.
More than 1000 manufacturers and distributors trust MRPeasy
CEO, Anicell Biotech
MRPeasy gives us the ability to track all of our manufacturing lot costs right down to the individual serial number of our products. MRPeasy provides the software as a remote service and has never been unavailable to us except in very rare maintenance windows.
CEO, Business Solution Providers, Inc
“Ahead of its time” Easy of use and simplicity to understand. This is one of the best programmed software out there for this industry. We setup, train and implement manufacturing software for multiple companies, and clients find it easy to understand and operate.
CEO, Sox Trot LLC
Best value in the small manufacturing space by far. With MRPeasy our capacity doubled. It streamlined our production, and procurement so well that I’m now able to spend a lot more time on growth and sales. Extremely comprehensive and works seamlessly with Xero and Shopify.
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