Raw materials form the basis of production processes across industries. Effective management of the raw materials inventory is thus vital for ensuring smooth manufacturing and maintaining supply chain efficacy. Be it small manufacturing units or large factories producing tons of products, managing raw materials inventory efficiently is important for everyone. If you are struggling with it then this guide will help you understand raw materials inventory, the importance of managing it efficiently, approaches to managing it, and more.
Raw material inventory includes all the materials that a company uses to manufacture its end product. These are stored in their raw form. During the production process, they are cut, moulded, and even merged with other raw materials to create the finished product. Raw materials used in each industry vary depending upon the kind of goods it manufactures. For instance, a leather bag-making business uses raw materials like different types of leather, buckles, zippers, and leather dyes among others. Likewise, raw materials for a furniture company include wood, leather, springs, fabric, screws, paints, glue, laminate sheets, foam, cardboard, and more. Although the raw materials may vary vastly, it is important to manage them efficiently irrespective of the industry.
It is important to achieve efficiency in raw materials inventory management owing to the reasons mentioned below:
Mastery of raw materials inventory management is crucial as these materials form the basis of production. Disruption in their supply can lead to interruptions in the manufacturing processes. This delays production and results in costly downtime.
Inventory management is necessary for reducing the cost associated with storing excess raw materials. On the other hand, a shortage of raw materials can result in increased prices because of high demand and low supply.
It is critical to maintain an adequate stock of raw materials to fulfill customer demand quickly. Shortage of them leads to delays in producing the end product. This, in turn, leads to dissatisfaction among customers.
A well-managed raw materials inventory enables quick response to customer orders. This helps decrease the lead time and enhances the overall customer experience.
A well-maintained raw materials inventory gives the chance for better negotiation with the suppliers. It empowers you to make an informed decision when it comes to bulk purchases and providing discounts.
It is important to manage raw materials inventory in your accounting. The process involves keeping track of the quantity of the raw materials. It also includes monitoring the value of the raw materials and their movement within the organisation.
Here is a look at all that you must take into account to determine the value of the raw materials inventory:
This helps calculate the total value of the raw materials in your inventory at the beginning of the accounting period.
The raw materials bought during the given accounting period must be taken into account to reach the correct value.
All the expenditures associated with the manufacturing of finished goods using the available raw materials inventory should also be taken into account. This includes labour costs, transportation charges, lease payments, utility bills, insurance, taxes, depreciation costs, office supplies, maintenance charges, etc.
Here is the formula to calculate the value of your raw materials inventory:
Available raw materials inventory = (Raw materials inventory available initially + total raw materials purchased during the accounting period) – (Cost of goods sold)
Here are some of the optimal approaches you can take to manage your raw materials inventory efficiently:
A demand forecast is necessary to manage your raw material inventory effectively. You can do so by collating and analysing your available data as well as the latest market trends. This helps in the timely restocking of raw materials to avoid running out of stock.
The supply chain cycle may face disruptions owing to many unavoidable reasons. This can lead to delays in production but not when you have adequate essential raw materials stored safely in your warehouse.
You must make sure that a Just-in-Time inventory system is in place. This is necessary to lower the carrying expense and respond effectively to demand fluctuations. This ensures that you get the raw materials when needed without spending a huge amount on storage space.
It is important to maintain cordial relationships with suppliers to ensure a smooth flow of raw materials supply. Effective communication is necessary for this.
Advanced inventory control systems help in efficiently monitoring the raw materials inventory levels and controlling them. They give a clear picture of the real-time availability of raw materials. So, you can make better decisions about new purchases as well as production.
It is important to carry out audits regularly to know the updated status of the raw materials inventory. It helps in identifying discrepancies. By having a clear understanding of the loopholes, you can take action to rectify them.
Inventory valuation methodology involves assigning a monetary value to your raw materials stock. It is essential to select an inventory valuation method that aligns with your business needs and your accounting protocols. FIFO (First In, First Out) and LIFO (Last In, First Out) are famous methods. In FIFO, the oldest inventory is sold first, and in LIFO the newest one is sold first. The choice of method influences the financial statements and tax liabilities. It impacts how costs are matched with revenue. It is a crucial aspect of financial management. It reflects an accurate representation of a company’s assets and income.
It is important to use sustainable options to source raw materials. Sustainable sourcing refers to materials that have a lesser impact on the environment. This strengthens the goodwill of your company especially among environmentally conscious consumers.
Effective raw materials inventory management is necessary to thrive in this competitive world. It enables a smooth manufacturing process, better cost management, and enhanced customer satisfaction. It is suggested to use advanced inventory control systems, maintain cordial supplier collaboration, and ensure stock safety to ensure the same.
How to keep track of the raw materials inventory in a company?Several methods are there to keep track of the raw materials inventory in an industry. A popular technique is the use of inventory management software and barcode systems. This method is increasingly being used by large organisations to keep manage their inventory efficiently. You can also track and record your inventory by using the manual counting system. However, this works only when the raw material inventory is limited.
What are the ways to manage raw materials inventory efficiently?To manage raw materials inventory efficiently, it is imperative to forecast customer demand, ensure stock safety, and leverage inventory control systems. Conducting regular audits and making use of correct costing methods is also necessary for efficient management.
What is raw materials inventory turnover?Raw materials inventory turnover refers to the rate at which raw inventory is used up and subsequently replenished.
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When you start to optimize your raw material inventory management, here are some tips and tricks to get you started on your journey.
Typically, companies start with finished product inventory tracking, implement basic raw material stock management, and more complex work-in-progress (WIP) management.
We strongly recommend not trying to jump to the latter immediately.
Although proper inventory management has great benefits, it also comes at a cost — it takes a lot of time and resources to track your WIP inventory. Thus, if possible, start with basic raw materials management and do not try to track different stages of production immediately.
Just take stock of your raw materials and finished products.
It’s better to have something simple working well than something complex that does not work at all. Keep everything lean and increase raw inventory management complexity only if there is a clear business need.
Safety stock describes the 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 businesses employ some minimum inventory principles for raw materials used in production. Manufacturers often fail to calculate raw materials used regularly. As a result, these raw materials inventory levels become inconsistent.
All the events below should trigger an adjustment:
Also, don’t forget to adjust safety stock and reorder points to account for seasonal changes like an upcoming holiday season.
Keeping these levels up to date ensures you always have just the right amount of raw material inventory in your warehouse so that you won’t have too much cash tied up.
Having proper raw materials management in place does not mean you should track every material consumed in your production.
For example, several indirect materials could be consumed during the production process (nails, screws, buttons, and so on) 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 your bill of materials (BOM).
Instead, cost them at the time of purchase and do not try to track every piece consumed in production.
Getting the high-cost raw material stock in place on a BOM is important so you know early on if this is a profitable product. Don’t spend hours saving pennies. Focus on what has a greater effect on your margins.
Your business is unique, and what works for one business might not work for another.
The basic guiding principles of this are simplicity, directness, and freedom. There is no dogmatic loyalty to one technique. This is the key to overcoming any challenging situation for your business. Take what works and discard the rest.
The key for you is to use all the tools at your disposal to form your unique style of manufacturing. You can find the secret formula to your optimal raw materials inventory game.
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