The Importance Of Good Inventory Management In Manufacturing
A company’s inventories are a critical aspect of the business to consider, both for SMEs and large companies. Failure to keep good inventory management in manufacturing can lead to serious consequences, ranging from financial problems (including the possibility of closure) to customer dissatisfaction.
For this reason, it is necessary to control everything related to warehouse inventory to the millimeter. The best way to do it is by digitizing all processes through ERP logistics and distribution software.
What is the inventory control of a company?
Carrying out a company’s inventory consists of carrying out the stock count of everything it has stored, locating where each product is, when it has entered, and when it is expected to leave the warehouse. In this way, reducing costs and preventing possible fraud are possible.
A company that practices good inventory management in manufacturing must be able to rely on inventory control systems to assess its current assets, balance its accounts, and provide financial reports. In this sense, the Finance Director of a company plays a fundamental role.
Thanks to good inventory control in manufacturing, the correct balance of stocks in warehouses can be achieved, which prevents the following from happening:
- Lose sales due to lack of inventory. When good inventory management is done in the company, better customer service is guaranteed.
- Not knowing which products sell more and which less. Avoiding this also avoids having excess inventory that reduces warehouse space, minimizes losses, and equalizes gains.
Why are business inventories significant?
Companies that practice good inventory management in manufacturing must have their inventory well controlled and ordered to be able to offer good customer service, reduce costs, optimize space, and increase profits.
In addition, the inventory allows companies to control their merchandise and periodically evaluate the actual economic situation of the business.
There are several types of manufacturing inventories. Among them, the following:
- Raw material inventory
This is the one that takes into account the essential materials that the company needs to be able to carry out production.
Knowing what is in an inventory of raw materials allows you to keep good control and guarantee the supply of the next step in the chain.
- Inventory of materials in the manufacturing process
Raw materials that are not finished are recorded. Therefore, those at the intermediate point between one process and the another are adequately tracked.
The economic value of these materials increases as production progresses. And the meticulous control of this inventory allows for knowing the production costs and adapting the business expenses.
- Finished Goods Inventory
The inventory of finished products is the one in which all the products that, as the name indicates, have completed their manufacturing process and are ready to be delivered to customers.
In addition to these three types of company inventories, it is also essential to know the inventory of products in external warehouses or in transit. Therefore, it is knowing exactly what the company has of economic value that makes it necessary information for both the CFO, the purchasing manager, and the warehouse manager.
Different methods exist to carry out good stock inventory control in manufacturing and better monitor the organization’s assets in its inventories. For example:
- The ABC inventory system organizes the products in the warehouse based on their importance to the company. Therefore, it is necessary to determine which ones provide a more significant benefit and, therefore, need more turnover.
- The continuous or permanent inventory system updates the available stock in real-time. This makes it easier to plan purchases better.
- The periodic inventory system is one in which a count of the products is made occasionally, typically once or twice a year. With this system, periods are spent in which it is not known precisely what assets the organization has in its inventory.
Advantages of good inventory management in manufacturing and using inventories properly
- The possibility of informing the client about the availability of the products. This fosters greater credibility and is part of a good service, which can favor the company in future negotiations.
- Ease of meeting the delivery deadlines for the service provided since surprises and unforeseen events are minimized.
- Guarantee of knowing at all times the quantities of items available.
Consequences of not keeping good inventory control in the company
- Insufficient inventory. Without enough stock to sell, you lose sales and customers.
- Shrinkage. Without the relevant inventory, if there are material thefts, it will not be known.
- Loses. Without keeping an inventory control, it will not be possible to discover if there are losses in any specific warehouse.
What is stock rotation?
Another critical aspect of good inventory management in manufacturing is stock rotation. With it, companies can avoid problems that affect the stock and, therefore, increase customer satisfaction and reduce losses derived from, for example, breakage or expiration. In addition, the rotation of inventory allows the warehouse to be updated and avoids stoppages in the sale to the customer or even in the production process.
Stock rotation can have two different definitions, depending on the sector in which it is applied.
- One of them tells us that product turnover consists of the number of times your warehouse inventory needs to be replenished in a given period.
- The other definition refers to the number of times an article or product goes through its commercial process. In other words, the number of times a customer orders it leaves the warehouse is sold, and collected during a specific period
Ultimately, the objective is to recover the initial investment made to acquire each product, store it and then spend it in the company or sell it, obtaining an indirect or direct profit margin.
Calculations to achieve sound management of stock rotation
To correctly manage this activity a company must calculate each product’s stock turnover rate. The formula is the following:
- Divide the value of the items sold at their cost price (at which you buy them from your supplier) by the average stock value.
The quotient obtained shows the number of times the inventory is renewed in a fixed time.
You can also calculate the average storage period of the stock to know precisely how often the warehouse is replenished. To do so, you have to divide the 12 months of the year by the previously calculated index.
How are the ratios obtained interpreted?
With the previous calculations, an analysis can be carried out to understand if it is necessary to change or improve something in the company’s product rotation.
If the ratio obtained is high, sales are also increased, and in turn, the warehouse workflow is greater and implies a higher management cost.
If the ratio obtained is low, it means that the products take longer to replace, that they are not sold as they should be, or that there is an excessive stock in the company. This results in a higher storage cost and even the risk of some items becoming obsolete if a long time elapses without output.
The ideal circumstance is finding the balance between storing the items and using or selling them at an appropriate time.
In short, when managing stock turnover and making it play in favor of good results, it is crucial to know how to perform and interpret the essential calculations correctly.
As you can see, good inventory management in manufacturing is critical to a company. Therefore, it is necessary to have new technological tools that automate this function. In this way, manufacturers can minimize errors and reduce risk.