Why inventory modules are important for the business – traders and Distributors.
When someone asks about Inventory management, it is not easy to explain, because it’s a complex process with Raw Materials (RM), Semi Finished Goods, Consumables and Finished Goods (FG) etc.
Many factories have separate stores to keep Raw Materials, Semi Finished Goods and Finished Goods. The reason for this is the value of the product changes as the value is added and converted from RM to FG. Many companies have the complex process of Supply chain and Order processing mechanism and converting these materials into Finished Goods and sell them off. Manufacturing process is depending on the supply of Raw Materials or Semi Finished Goods on time with right quantity and on time to meet the demands.
ACTouch Inventory Management Software for small businesses – Manufacturing, Retail, Ecommerce, Restaurants, Jewelry, Grocery Store etc.
For many business, the RM, Finished Goods are the main importance as the shortage of the same could create a Sales problem as they cant manufacture enough Finished Goods results in the under utilization of machines and resources. At the same time, having more items can create Money / Capital block and unnecessary money / cash-flow problem.
This is an asset of a company and its essential that we don’t loose it or allow it to get scraped. At the same time, having too much inventory can create problems of loosing it, getting scrapped, theft etc. One of the major concerns for the Management is the “Inventory Carrying cost” and how to track and reduce them.
So Inventory management is one of the crucial act of business survival such that balancing the stocks on Assets or Liability is important. It is important to know when to place an order with sufficient times to deliver, how much to plan for re-order level so that stocks are replenished. Costing of an item is also important as it could impact your selling price and profits.
Small SME can manage the situations by maintaining the data in an excel format and that’s shared with their management. Few companies use ERP software that helps to track, verify and analyze the details. So using a software is depending on the management and how they want to progress.
As the manufacturing process become complex as there is a necessity to meet the Sales demands, the inventory management process is expanded into multiple areas like JIT, Planning and procurement etc. Manufacturing helps to convert the RM to FG with a value addition at each stage like cost of the people, machines and overheads. This is called Activity based costing (ABC). ACTouch.com is an expert in ABC and Weighted Average costing approach for each products.
Inventory Product Costing
Inventory costing is an important aspect of the business. This helps to value the Inventory / Asset in the company. This also helps to manage your Cost of Goods Sold (COGS) as it would help to identify the actual profit of selling an item.
There are multiple ways to find the product costing –
- First in First out (FIFO model) – This is typically a good method in case of batch items as it helps to clear the old items first and it’s costing added to Finished Goods. Sometime, this method would give the largest possible profit to your Finished Goods, which may not be right.
- Last in First out (LIFO) – The last / recent cost of the materials is applied to the product.
- Weighted Average Method – This method is one of the preferred one as it averages the cost of the items based on old quantity and the new Quantity and unit purchase price.
So based on the business needs, you can decide and adapt the right method. Please take the guidance from your Accountant or Auditors.
There are cases of the “Expense items” and what are these?
These are those items that are purchased but are not tracked separately. One of the reasons is, the usage of these are not attributed to a specific product or a machines. These are general items used across the factories or in few cases its of low value items.
For example cutting oils, waste clothes for the hands cleaning, Grease etc. The traditional model is to purchase and show them in the accounting books as “Expenses” and don’t track them separately to issue them.
Inventory Management Methods.
The focus of this is to control the inventory and ensure that the wastage are reduced to the maximum. One of the factor to consider as part of the inventory management is “Inventory carrying cost” and many business don’t consider this. In summary, the focus is to manage the inventory such that the flow of the materials is smooth and it doesn’t affect the manufacturing of Finished Goods and Invoicing of the Finished goods based on the demands.
How we manage the inventory and its stocks? There are many methods like Just In Time (JIT), Material Requirements Planning (MRP), and Economic Order Quantity (EOQ)
How Materials Requirements Planning (MRP) happens?
Material Requirement Planning (MRP) works based on the Demands and Supply of items. The major feature is the “Backward scheduling”, if the lead time is OK to manufacturer else the MRP will plan in Forward Scheduling. Application identifies the stocks and its shortages and also considered the Bill of Materials (BOM) to arrive at the child products and drill downs to find the RM etc.
The typical demands for MRP are –
- Confirmed Orders
- Forecasted items to produce based on the Product Due dates.
- Items below REORDER LEVEL.
The Supply is –
- Confirmed Purchase Orders
- Available Stocks (RM or WIP or Finished Goods)
- Confirmed Work Orders
- Subcontracting operations items.
It also considers many factors like Purchase Lead time, Manufacturing Lead time, Quality lead time, Minimum Order Quantity, Reorder Level, Order Multiple, %age of the materials gets wasted in the transit etc.
Read here for more on Materials Requirements Planning.
Just-in-Time Management (JIT Concept)
JIT was started in Japan by Toyota company. In fact there are many concepts to manage the inventory like KAN-BAN too has the basic principle to manage the inventory at the time of assembly. This helps to reduce the Inventory carrying (storage) costs, reduce wastages and also helps to fix the issues, if any. This helps to save Money and Time.
Please note that this model looks good on the paper, unless the supporting eco-system is strong. Few of the factors are
- Production Planning has to be 100% perfect. Demand information of RM is with supplier properly.
- Suppliers are expected to give a 100% defect free items. So the quality is self-assured by them.
- Communication between Customers and Suppliers to be of highest quality.
If the above is a challenge then we recommend not going for it.
Economic Order Quantity (EOQ)
This is an important step that’s used in production as it helps to maximize the productivity, while minimizing the cost of the production. The approach is to arrive at a manufacturing the product quantity such that resources are maximized and wastage is reduced.
This also helps to reduce the Inventory holding costs, its insurance etc.