At a Glance
Today, manufacturing relies heavily on the ability to acquire raw materials, both directly and indirectly. Examples of direct raw materials are the chemicals, textiles, minerals and other components that become finished products. Indirect raw materials are components added to other parts that together make a finished product. Accurate tracking of these materials is a good way to determine if a company flourishes or fails. Both of these material types are listed as current assets.
Tracking raw materials typically starts when they enter a warehouse. Their value is calculated from the start of a given time and adding costs such as storage, shipping, processing and labor to determine total value. Before you can build, mix or blend your products though, you have be sure to acquire them. Obtaining the essential materials you need to create your products is the end result of an involved process.
One of the first things to do before you start acquiring raw materials for your products is sufficient planning. Raw material planning can be used to determine how quickly you use each item, but only once you understand your inventory turnover rate – the number of times you use your raw materials.
In a previous post, we stated that “Materials planning is the method used to determine the requirements and quantities of raw materials to implement production.” If you don’t have enough raw materials on hand, you can add delays to your production schedule, or even lose orders altogether. If you keep too many materials on hand, there may not be enough budget available for other projects, like capital improvements.
A critical part of materials planning is understanding lead time: how far in advance do you need to place orders with your suppliers to get what you need in order to satisfy your customers?
Being sure you can order what you need requires a procurement management plan that, “defines requirements for a particular project and lays down the steps required to get into the final contract,” including raw materials.
This plan sets and defines everything you need to manufacture your products: what to buy, who to buy it from and how much you’ll pay. This includes determining purchase costs plus delivery and storage costs, also referred to as inventory costs. Placing an order, or receiving one from a customer, often uses an order management plan.
If your departments are unable to report how much of a given product, or the raw materials required in the process, are on hand, entire orders can be lost. When production tells sales one thing, but inventory says something else, the end result can be chaos. This is where accurate, frequent, communication that tracks the flow of raw materials through the entire acquisition process becomes critical.
“Inventory management is important to small businesses because it helps them prevent stockouts, manage multiple locations and ensure accurate recordkeeping. An inventory solution makes these processes easier than trying to do them all manually.”
A chef can make a large salad using a full head of lettuce but only a teaspoon of spices. Managing inventory is often similar: A manufacturer is likely to have some items they use in large quantities, such as active pharmaceutical ingredients (APIs). Equally important are the catalysts and other chemicals bought in much smaller lots. Like a chef making a salad, without their ingredients, they don’t have a product.
Inventory management not only tracks what you have on hand, it also looks at your supply chain: making sure you have options for getting what you need when you need it. One part of inventory management is getting your basic supplies: making sure your customers receive their finished products when they need them is another. Having viable shipping options to ensure your merchandise arrives on time means gathering even more information and constantly updating your options. A common option used by a large number of companies, especially retailers, is vendor managed inventory.
Start tracking and managing raw materials efficiently, schedule a consultation with Xcelpros.
Commonly referred to as VMI, vendor managed inventory is when a company lets its suppliers determine the amount of product a company has in stock. If you walk into a grocery store you might see people who are not market employees stocking shelves. These are vendors – these employees track inventories, place orders, monitor shipments and stock shelves.
According to American Express, benefits of a VMI include:
Figure: 1Benefits of Vendor Management Inventory
Working with a single VMI has some negatives as well as positives. Three of the biggest challenges, according to AmEx, include:
Looking at your options and picking the best ones often comes down to software. Managing your raw materials and inventory accurately, especially when your company is growing and has distant suppliers, generates a lot of data. Managing this vast amount of data requires capable software.
Depending on your needs, two types of software can help with your raw materials management, inventory management, order management, procurement management, stock management and resource planning needs:
Especially today, managing raw materials accurately requires a lot of work and attention to detail. Errors at any stage of the process – from ordering to shipping, storing or using – can result in expensive repercussions.
Finding the right software solution means evaluating your current and future inventory needs. What do you need now? Will solving today’s problem also work in 1-5 years or will it require an expensive overhaul?
The bottom line is that you should consider an investment in a modular product that can grow with your company over time, and not one that becomes obsolete the minute you expand.
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