Manufacturing Inventory Management
A good inventory management system can be the difference between success and failure, but these strategies are far from simple to execute. At modern manufacturing facilities, the amount of inventory being moved each and every day can reach the thousands. Couple that with the fact that pieces of inventory are being transformed from raw goods into finished processes and it’s enough to make most people feel at least a little lost. That’s why tracking and analyzing it is so important, and that’s where a solid inventory management system comes into play.
But what exactly is inventory management, and what techniques can be deployed to realize the benefits that come along with inventory management? We’ve compiled this guide to manufacturing inventory management to answer these questions and more.
What is Inventory Management?
Inventory management is the business process of tracking a company's inventory through the cycle of ordering, storing, using, and selling. This includes the tracking of all forms of inventory—including raw materials, materials in transit, components, finished products, and more. To take it a step further, inventory management is also an important tool for maintaining the right stock levels (quantities that aren’t too high or too low) and understanding when to purchase more inventory—and ideally for the right price.
Inventory management techniques and practices vary from company to company depending upon the types of products sold, the channels they are sold through, and the sheer quantity of inventory that must be managed. However, even for the smallest manufacturing companies, understanding how and when to reorder can be complex. That’s why an inventory management system is important for companies of all sizes.
What is the Main Purpose of Inventory Management?
The main purpose of inventory management is to help companies understand how much stock to order and when. Understanding this complicated process can help reduce the risks of too much or too little inventory (we’ll talk more about these risks later in this article) and increase profits.
Other benefits of inventory management include:
Saving money: Understanding stock and inventory trends (including the best times to buy it and how much you use during certain parts of the year) can help you better understand how to use your stock, when to reorder, and how much to order. All of this can decrease costs associated with inventory storage, inventory obsolescence, price increases, and more.
Improving cash flow: Spending money on purchasing inventory that sells—and sells quickly—means more money flowing through your company.
Satisfying customers or clients: Today’s customers don’t want to wait long for their order. An inventory management system can ensure you have the stock on hand to fulfill orders quickly, which will satisfy your customers and potentially create loyal, repeat business.
What is the Importance of Inventory Management in Manufacturing?
For manufacturing, the importance of inventory management is even more apparent. Manufacturing companies—no matter where they fall in the supply chain—must make sure they have an adequate amount of each individual piece of stock needed to process and create finished products and to ship them out to their next destination.
An inability to fill orders can cause the bullwhip effect (also known as the Forrester effect), which is a term used to describe instances when demand forecasts lead to supply chain inefficiencies. The bullwhip effect can lead to a slew of issues for all businesses involved, including excessive investment in inventory, lost revenue, over- or under-estimated capacity plans, delayed or missed production schedules, and more. Proper inventory management can help reduce the likelihood of these unintended and harmful consequences.
What are the Challenges of Inventory Management?
Unfortunately, inventory management isn’t a set it and forget it process. There are many challenges that accompany inventory management. Here are some of the most common:
Maintaining accurate inventory counts: Without accurate inventory and stock details, it’s impossible to know when to reorder stock, which pieces move well, and generally understand your overall inventory trends. Yet, without automated procedures in place, maintaining accurate inventory counts can be a tricky—and time-consuming—process.
Bottlenecks due to missing pieces: Parts and pieces, including labels and decals, are often required to finalize a product. Having these pieces arrive late can severely impact processing time and contracts. Working with a vendor to produce these labels on your production schedule can support a better just-in-time delivery system. Read about how DuraMark helped Genie with their labeling process to save time and money.
Poor processes: Outdated, manual processes take time and they leave room for human error. This can slow down your operations or even lead to missed production schedules.
Using warehouse space the best way possible: If products are hard to locate or aren’t labeled effectively, it can make it difficult for your employees to quickly locate the item they need. One of the ways DuraMark helps our customers is by creating quality, long-lasting labels to help manufacturing companies create better warehouse organization.
What are the Types of Inventory?
While retailers typically only have one type of inventory (merchandise they are selling) to account for, manufacturing companies have several different types of inventory to account for the different stages of processing the goods. It’s a lot to keep track of, especially as individual units may enter a facility as one type of inventory and leave as another.
Here are some of the most common types of inventory that manufacturers handle:
Raw materials are the materials and components that are used to create finished products. They are often divided into three categories: plant-based, animal-based, and mineral-based. Raw materials might include oil, lumber, steel, iron, or corn. Components are often also categorized as raw materials. These include pieces like screws, glue, or nails, that are needed to create finished goods.
Work in Process
Work in process (also known as WIP or goods in process) refers to items that are currently in production. WIPs can include any type of inventory, so long as it’s in a stage of production. This might include precut lumber, steel parts being welded, or food products like corn being ground into meal.
Finished goods are products that are ready to sell or move along to another manufacturer for additional work. Finished goods are somewhat relative in that one company’s finished goods may become another company’s raw materials. So, for example, this might include finished pieces of farm equipment, clothing items, or furniture. It might also include pre-stained lumber or pre-cut pipes that are destined to become another good.
MRO stands for maintenance, repair, and operations inventory. It refers to any supplies that support the production of goods. Examples include PPE like gloves or earplugs, cleaning supplies, office supplies, repair components, and lab equipment used in the testing of products. While MRO doesn’t result in revenue for companies, it’s an essential part of every company.
Packing and Packaging Inventory
For companies that ship products out, boxes, packing materials, labels, skus, and other items are necessary to keep on hand. Just like any other form of inventory, not having enough packing and packaging materials can result in unwanted delays.
There are other types of inventory that some companies keep track of, too. This includes the following:
- Safety Stock: Extra inventory to account for shortages or other unplanned circumstances.
- Decoupling Inventory: Extra inventory kept at the production line to prevent production stoppages.
- Cycle Inventory: Inventory that’s ordered to get the right amount of stock for the lowest storage costs.
- Transit Inventory: Stock that’s in transit between manufacturers, warehouses, and distribution centers.
- Theoretical Inventory: The amount of inventory needed for a company to produce their products without stoppages.
- Excess Inventory: The amount of obsolete, unsold, or unused inventory.
What are the Types of Inventory Management in Manufacturing?
There are many different techniques of inventory management used in manufacturing. Depending upon who you ask, there are also many different ways to categorize these techniques. And, to complicate matters even further, these techniques are not exclusive to one another. Many companies make use of many of the following types of inventory management to meet all their needs, procedures, and types of inventory. Let’s break down some of the common terms you’ll hear.
Push vs Pull Inventory Management Systems
First, we’ll talk about the differences between push and pull systems along the supply chain. These broad categories refer to the overall structure of supply and demand along the chain.
In a push-based supply chain, goods are pushed through the chain from manufacturers up to the retailers. Essentially, this means that the production of goods is based upon demand forecasts and not retail needs. In push-based systems, the ability to intelligently—and accurately—forecast demand is of the utmost importance. To account for fluctuations, manufacturers may need to keep additional stock (sometimes referred to as safety inventory) on hand. Push systems work best in highly-predictable markets.
In a pull-based supply chain, production is demand-driven. This means that goods are produced when they are needed—and in the amount they are needed—rather than ahead of time. Pull systems require less safety inventory, which means upfront investments are lower for manufacturers. However, pull systems often face longer lead times and may also require companies to place more orders in smaller quantities—which can result in higher manufacturing costs. Pull systems are best used when there’s a high degree of uncertainty in the market.
Perpetual vs Periodic Inventory Management
Another common way to look at inventory management techniques is to look at how companies take stock of their inventory. The two most common ways include perpetual inventory and periodic inventory.
In perpetual inventory management, inventory balances are maintained constantly. Often done through inventory management software, updates are made whenever a product is shipped or received. Assuming no damages, theft, or other issues… the inventory is accurately maintained at all times. While perpetual inventory management systems are often more accurate, the software systems can be costly, especially for small manufacturing companies.
Periodic inventory management is another option for managing inventory. In this system, counts of current inventory are taken regularly (often weekly, monthly, quarterly and/or yearly) by employees. These counts are compared against the cost of goods sold (COGS), to yield inventory levels. While this method is more affordable as it doesn’t require costly software, it can take a lot of employee time to count individual pieces of inventory and the potential for human error is certainly present. Nonetheless, periodic inventory management is a viable option for small businesses, especially those with small amounts of physical inventory.
Other Common Inventory Management Terms and Techniques
In addition to the methods discussed above, there are many other techniques used in factory inventory management. Again, it is important to note that these techniques are not exclusive, and companies may find the most luck when utilizing many inventory management practices.
ABC Analysis: In ABC analysis, companies identify the most and least popular items, with the most popular being labeled as A, the least being labeled as C, and those in the middle being labeled as B. Then, companies can make decisions about how much inventory to carry, how to better move items, and more.
Consignment: In consignment production, manufacturers provide products to retailers, who then pay the manufacturer once the product sells. This can be a great method to help companies along the supply chain better understand the demand for a product.
Batch Tracking: In batch tracking, companies group and track a set of inventory that have similar properties. A batch tracking manufacturing inventory example might include tracking shared expiration dates for products with the same shelf-life.
Bulk Shipments: In this system of inventory management, companies order mass quantities of inventory in bulk (typically based on demand forecasts). Companies may have to store larger quantities of inventory—which can be costly—but may be able to save with discounts on bulk orders.
Cross-Docking: Cross-docking is used to eliminate or reduce costs associated with storage. In this system, companies unload products directly from a supply truck to a delivery truck. The three types of cross-docking are continuous, consolidation arrangements, and deconsolidation arrangements.
Demand Forecasting: Demand forecasting is a form of predictive analytics where companies use historical sales and market trends to predict the future demand for a product.
Dropshipping: With this form of inventory management, companies purchase products from a third-party when an order is placed, and the products are shipped directly from the third-party to the customer. This reduces the amount of inventory on hand.
Economic Order Quantity (EOQ): EOQ is a technique where companies determine the optimal quantity of an order to minimize logistical costs, storage, stockouts, and overstock. To calculate EOQ, companies use the following formula: EOQ = square root of: [2SD] / H, where “S” is the setup costs per order, “D” is the demand rate, and “H” is the holding cost.
FIFO and LIFO: First in first out (FIFO) is a practice where the oldest products are moved first. On the other end of the spectrum, last in first out (LIFO) is a practice where the newest products are moved first.
Just-In-Time Inventory (JIT): Just in time inventory management is a common method where manufacturers produce what is needed to meet current demand. Essentially, products and goods are created to order. When using a JIT process, it’s important to work with partners who can understand and meet your production schedule. DuraMark, for example, works with many JIT manufacturing companies to deliver decals and labels on an as-needed basis.
Lean Manufacturing: In this form of inventory management, removing waste and inefficiencies is the primary concern. To practice lean manufacturing, companies are continually analyzing and streamlining their manufacturing processes to improve the production line.
Materials Requirements Planning (MRP): This computer-based inventory management system is designed to boost productivity by identifying what inventory is needed, how much is needed, and when it is needed to produce finished products. With MRP, companies essentially work backward from a finished product to create a schedule of what’s needed.
Minimum Order Quantity: This inventory management technique is designed to boost profits for companies. A minimum order quantity is created based on a company’s total cost of inventory and other additional expenses to help companies recoup these costs and maintain a steady cash flow.
Reorder Point Formula (ROP:): The ROP is designed to ensure inventory levels never reach zero. It is a formula used by companies to calculate the minimum quantity of inventory they can have before needing to reorder. The ROP is calculated using the following formula: Reorder Point (ROP) = Demand during lead time + safety stock where “demand during lead time” is the amount of days it takes to receive additional inventory and “safety stock” is the extra stock on hand that can be used if needed.
Six Sigma: Six Sigma is a process designed to eliminate manufacturing waste and faulty finished products, which can help companies eliminate or reduce the need to carry extra stock.
Vendor Managed Inventory (VMI): With VMI, the supplier manages the inventory held by the distributor. This is counter to most forms of inventory management where the distributor makes their own decisions about order quantity.
What are the Tools of Inventory Management?
Generally speaking, the tools of inventory management can be divided into two categories: software and hardware. Let’s break down each of these categories and explore what to look for when selecting the right tools for your company.
Inventory management software is one of the most important tools a company can use. While some small businesses with low levels of inventory may be able to get away with inventory management software that’s free by using an Excel spreadsheet, most companies can benefit from a more robust system that can control inventory, run reports, trigger alerts, and more.
Whether you’re looking for inventory management software for a small manufacturing business or a large multi-location business, keep an eye out to see if the software has the ability to:
- Add multiple production stages to better track inventory and production
- Track and create multiple work orders within a manufacturing order
- Convert sales orders into manufacturing orders
- Manually and automatically create purchase orders
- Create work orders for maintenance and repair
- Run reports to track inventory, manage reorders, and more
- Generate cost estimates for finished products
- Integrate the software with other existing software solutions like a CRM or financial tool
On the other side of the spectrum, inventory management tools in this category include the physical tools that employees use to track and maintain inventory. Two of the most common physical tools used by companies include RFIDs and barcodes.
- RFID (Radio Frequency Identification): A newer technology than barcodes, RFID tags can be placed on products, and they contain information like how to use the product and where it is to be stored in a facility. RFID tags do not require line-of-site scanning; instead a scanning device can be placed anywhere within a specified distance and hundreds of tags can be read at once, meaning it can make quick work of inventory. And while this is certainly a benefit, RFID tags require a very large upfront investment on the part of companies, so it’s not typically a cost-effective solution for smaller companies.
- Barcodes: Barcodes have been around much longer than RFID tags and are a common choice for retailers and manufacturers alike. Barcodes can be printed and placed on a bin where units of inventory are stored, and the barcodes themselves can store information about the product. Barcodes do require manual scanning, but they are much more affordable than RFID tags. At DuraMark, our fast and affordable variable data printing technology can get you the barcodes you need right when you need them to maintain accurate inventory.
What are the Steps in the Inventory Management Process?
You might be wondering how it all ties together to create an inventory management process. While it may not always be as linear as we describe below, here are the core steps in the inventory management process.
1. Materials are delivered to a manufacturer and received. This includes any and all forms of inventory.
2. Materials are reviewed, sorted, and stored in their appropriate location. To best perform this step, many manufacturing companies use SKUs, barcodes, and labels to products for easier tracking. At DuraMark, we produce many different kinds of variable data printing labels, giving our clients the flexibility they need for their inventory.
3. Inventory levels are monitored, either manually or through automated tools, so everyone has an accurate understanding of inventory levels at all times and can work to minimize stockouts.
4. Orders are placed by customers, internally or externally, to trigger movement in the production line.
5. Orders are approved against a purchase order, sales slip, requisition, or another document to verify them.
6. Materials are taken from stock and moved into the production line, sent to other departments, or sent directly to the customer. Tracking when and how many pieces of stock are removed is imperative to maintaining accurate inventory counts.
7. Inventory levels are updated after completion and sent to the appropriate people.
8. Low levels trigger purchasing of restock to ensure an appropriate amount of inventory is kept on hand.
DuraMark Technologies: Your Partner in Inventory Management
At DuraMark, we pride ourselves on the long-term partnerships we develop with our partners. As the leading label supplier in North America, we are committed to using our expertise to help each of our clients find the best solution for their unique situation. Our variable data printing technology and durable labels can be seamlessly integrated into your existing manufacturing inventory management system. Our team can also work with your company to improve upon or develop an inventory management system using our labels and barcodes. From just-in-time inventory management to bulk shipping and all the other techniques, we’re accustomed to working with your production schedule to find a solution that works.
We’d love to talk to you about how our solutions can benefit your company. Reach out today to get started.