Manufacturing inventory management: why you need it and how to get started

· 3AG blog,data coach,CHFA

Inventory management is important for the success of any manufacturer. For many young, scaling manufacturing businesses, it’s also a challenge — one that automation can help overcome. Before getting into how businesses can start digitizing their inventory processes, let’s clarify what we mean by inventory management.

What is manufacturing inventory management?

Manufacturing inventory management is the activity of ordering, processing, storing and selling raw materials, work in progress (i.e., partly produced goods) and finished goods. A key goal of inventory management is to ensure you have the required levels of inventory at each stage of the production process. It’s about balancing demand with supply to minimize stock-outs on one hand and a glut of unsold goods on the other.  

There can be significant costs associated with poor inventory management. Too little inventory can be costly in terms of lost sales, while too much inventory can occupy valuable space and resources that could otherwise be dedicated to other, faster moving goods. A glut of inventory also risks wastage, particularly for producers of perishable items such as food, beverages, health supplements and even cosmetics.  

While knowing what you have, how it’s moving, and what you need are big parts of manufacturing inventory management, they are by no means the whole picture. Inventory management also involves understanding how the various costs impact your business. It’s part of the bigger picture of running your business, which is why inventory management software is so often integrated with accounting software and enterprise resource planning (ERP) solutions.

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Why do inventory management?

There are many reasons why businesses prioritize inventory management. These include:

  • Improving the efficiency of production lines by ensuring processes aren’t held up by a lack of materials.
  • Improving the efficiency of order fulfilment so that businesses can ship goods to customers and channels faster.
  • Reducing costs, including wastage, storage costs and transportation costs.
  • Improving the quality and reliability of operations data to drive better business decisions.
  • Ensuring raw materials and parts are traceable in the event of recalls and other issues.

Inventory management challenges: case study

While inventory management is clearly important for manufacturers, too many young, growing businesses lack a proper inventory management solution. Consider the case of a startup manufacturer of packaged health food. This company makes, packages and sells an array of products starting from raw and processed ingredients. It sells direct to consumers (D2C) on its own ecommerce site, and it also sells wholesale to retailers and hospitality businesses.

The company currently uses spreadsheets to manage its inventory of raw ingredients. An operations manager is responsible for conducting daily manual counts to ensure there is always enough supply at hand to cover widely fluctuating sales volumes. Fearful of stock-outs that will delay production and sales orders, the company tends to carry several months’ worth of ingredients (i.e., safety stock) to reduce the risk. The company uses a separate inventory system to track finished goods, which is connected with the order fulfilment software.

Because of this largely manual system, the business knows the quantities of ingredients it has on hand, and it knows how many finished goods are ready to be shipped. But these data sets aren’t integrated. The order fulfilment system does not automatically trigger a reorder of ingredients.

This disconnect also means there can be no automated tracking of ingredient lots or batches from purchase through processing, sale and order fulfilment; traceability — a requirement for food safety compliance — is a complicated and largely manual process.

While this inventory management system is barely sustainable today, it isn’t scalable. The business is planning to double revenues in the current year, and to achieve this goal it needs to adopt a smarter, more automated approach to manufacturing inventory management.

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Costs of poor manufacturing inventory management

Manufacturers that don’t make it a priority to digitize inventory management risk a lot of unnecessary business costs. To start with, there are labour costs associated with having employees on the floor doing manual counts, and for many businesses these are required daily. Time spent manually counting and inputting numbers in spreadsheets could instead be used on other activities that would create more value for the company.

Beyond poor labour utilization, manual counts can also lead to inaccurate data. That, in turn, has an impact on planning and forecasting. Businesses that miss critical restock points for materials risk lost sales due to ingredient shortages and finished goods stock-outs. In other words, there are opportunity costs associated with bad data.

For many growing manufacturers, physical space comes at a premium. Storing excess inventory occupies costly square footage that could be put to better use. What’s more, excess inventory also has a way of turning into expired inventory, another avoidable cost to your business. Businesses that better manage inventory also better manage space utilization, and that can result in cost efficiencies.

Key requirements for manufacturing inventory management

While automating inventory management requires an investment by manufacturers, it’s also proven to save time and money at many points in the production process, and it allows businesses to maximize revenue opportunities.

There are a few things to keep in mind when considering manufacturing inventory management. The first is that it needs to be end-to-end; if a raw material or a part can’t be traced from its supplier through to the final goods shipped to the customer, it isn’t a complete inventory management system, and it won’t yield you all the benefits.

The second point is that the solution needs to be centralized. This means that all data resides in one system where it is available for reporting and analytics. An inventory system that includes data silos makes it difficult to analyse data, see the big picture and make adjustments in production to improve your financial results.

The third requirement of inventory management is that it be real-time, so that you know what your inventory levels are and can respond quickly when issues arise. Manual systems that only provide accurate inventory counts intermittently often run a high risk of stock-outs.

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Three approaches to automating manufacturing inventory management

Returning to our case study, how could this growing CPG manufacturer move from their current system — which is largely manual and siloed — to an end-to-end, centralized and real-time solution? There are three broad approaches to consider.

The first is to implement a full ERP system. This option is most suitable for mid-to-large enterprises, because it’s typically costly, involves a lengthy implementation process and includes functionality that a growing startup doesn’t need.

The second option is to implement inventory management software. These systems are designed to track and manage the flow of goods in a business from suppliers to production and on to customers. As inventory management software is generally less costly than an ERP solution and has a scaled-back feature set, it is better suited to midsize, scaling businesses. Even so, an inventory management package could make other software in use redundant, and there might be some ripping and replacing of existing technology.

The third approach is a custom integration that would integrate existing systems with data engineering and reporting and analytics. A custom engagement like this could be the most cost-effective option for a young, growing company, assuming that existing tools and databases could be leveraged.

Implementing a custom inventory management solution would start with a thorough audit of all the available data sources, followed by an analysis of any gaps in the data. This would help determine where automated data capture would need to be added. Next, all the data would be extracted to a data warehouse, which is key to designing a centralized system. The ingredients inventory, the work-in-progress and the finished data would be integrated in the data warehouse. Once the discrete inventory functions were integrated, automatic reorder triggers would be created based on minimum required inventory levels. Finally, analytics dashboards would be created that visualized the KPIs and provided a view of inventory, from end to end.

Results of automating inventory management

What outcomes can our growing packaged food manufacturer expect to see once they invest in inventory management?

First, they can anticipate lower operating costs as inventory levels are optimized.

Second, manufacturing and order timelines should be shorter, given fewer delays due to ingredient stock-outs.

Third, sales revenues should increase with fewer supply issues affecting sales orders, and margins should also grow as inventory costs decrease and processes become more efficient.

Last, the company can expect more satisfied customers who can always buy what they want, when they want it.

How to get started

Interested in learning more about manufacturing inventory management? Sign up for a 3AG Systems Data Coach session.

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