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Too often, companies do not know how to control inventory in manufacturing. Handling such a complex problem requires a solution to manage the multiple factors that impact the total inventory count. Without the right system in place, efficiency decreases and both loss and waste increase.
Software can track incoming supplies, produced items, damaged goods, sold products and shipped items. The information collected from an inventory management software manufacturing solution will help make more accurate production decisions to avoid over- or underproduction and stock inaccuracies.
Using an inventory control system protects manufacturing companies. Businesses that fail to integrate this technology may find their operations suffering from an inability to track their products. Deciding to use software to handle inventory and finding the best type of management system are vital choices for any business looking to become more productive.
What Is an Inventory Management System?
Inventory management systems take many forms based on the precise control techniques used. However, they all can benefit manufacturers by closely tracking the supplies and goods produced by using software to monitor incoming supplies, produced products, stored items and shipped goods.
Companies must embrace careful inventory control principles to see the benefits of a management system, especially ones with tight margins of error, such as just-in-time (JIT). One of the most well-known types of inventory management systems is just-in-time. This inventory system — which includes only stocking supplies that the company immediately needs — started with Toyota Motor Corporation in the 1960s and 1970s. Toyota credits JIT with its rapid expansion in the second half of the 20th century.
The automobile manufacturer reduced the need for larger warehouses, thereby cutting overall costs. With precise planning and inventory tracking, parts would arrive at the warehouse and be delivered to the factory hours before piecing them together. Because this form of managing inventory reduces warehouse needs, it increases the company’s working capital.
JIT is not the only available technique for starting an inventory management system. However, the example of Toyota Motor Corporation shows how effective implementing a system such as this can be for increasing productivity and efficiency.
Periodic vs. Perpetual Inventory Management Systems
The methods used for counting inventory include periodic and perpetual. While periodic counting prevailed before computerized inventory control, the perpetual method is more popular today. Retail companies almost universally choose perpetual inventory control. But is this the best choice for manufacturing?
Periodic inventory management requires regular counting of the products and supplies on hand. These numbers go into an accounting system to determine the cost of the goods sold (COGS). This value equals the sum of the inventory beginning balance and the purchase cost for goods minus the cost of current inventory items. This system works better for small companies that can make inventory counts easily or lack the capital to invest in equipment for perpetual counting.
For large manufacturing companies, especially those that operate multiple facilities, perpetual inventory management offers many advantages. With perpetual inventory systems, incoming and outgoing products from the warehouse automatically update the inventory balance. This type of system ensures the computer’s number accurately reflects the products available in the warehouse.
For example, a food manufacturer needs to know exactly how much of its products are available and how many supplies it has waiting. As supplies enter the facility, the inventory management system tracks their numbers until the manufacturing floor needs to turn them into products. The finished product numbers also enter the system. Any goods shipped out to sellers subtract from the total inventory count to keep the number up to date.
Benefits of Inventory Management Systems for Manufacturing
Integrating an effective inventory management system provides multiple benefits for manufacturers, which include:
1. Save Money
The cost of storing unsold products adds up, especially if the goods must sit in a large warehouse waiting to ship. Depending on the location, high real estate prices could make having a large warehouse cost-prohibitive. With a carefully managed inventory system, the number of products that require storage decreases, thereby using a smaller storage space.
2. Reduce the Risk of Out-Of-Stock Problems
Effectively managed inventory systems that use perpetual counting keep up with the most current numbers of stock available. Knowing what products a warehouse has on hand avoids issues of customers buying out-of-stock items, which can cause shipping delays and buyer dissatisfaction.
3. Simplify Inventory Management
Inventory management systems take the effort out of tracking orders, production and stored products. By using this type of system, managers can focus their attention on running a business instead of fielding complaints from customers due to out-of-stock items.
4. Accurately Forecast Future Sales
The information obtained from an inventory management system gives insight into past sales trends. Manufacturers can use this data to make informed decisions on production amounts for the future, avoiding over- or underproducing.
Inventory Control Techniques for Manufacturing Companies
A main benefit of inventory management systems is their flexibility to adapt to any common control techniques. Some companies have preferred methods of ensuring their inventory levels will meet demand. Common control techniques include the following.
JIT inventory management is highly rewarding but also carries risks. This method requires manufacturers to stock only the supplies that they will immediately need. Parts arrive within hours of use, reducing storage space. However, this method can cause problems from unexpected delays such as delivery issues, spikes in demand or natural disasters. These events can disrupt the delicate balance of JIT inventory management.
Assigning inventory items based on their sales potential is the basis of ABC analysis. The highest valued items have an assignment of A, which should equal about 20% of the total. B items are those with middle values or lower selling demand and account for 30% of the inventory. The remaining half of the stock falls into category C, which has the lowest demand or value.
Economic Order Quantity
Economic order quantity (EOQ) attempts to find the ideal balance between supply orders and sales to minimize excess stock and order occurrences. Unlike other models, EOQ uses both the setup and holding costs of inventory to calculate the total cost.
Establishing minimum and maximum values for inventory items is the first step in set-the-levels inventory management. When values drop below the minimum, the company orders more. However, once they reach the maximum, purchasing or production of that item stops until the stock drops.
First-In, First-Out (FIFO)
For perishable goods, first-in, first-out (FIFO) prioritizes sending the oldest inventory items out first to keep them from expiring or spoiling during storage. Food manufacturers may use this method to sell food before the labeled expiration or “use by” date.
Discover the Importance of Inventory Management Technology for Manufacturers With MANTEC
Inventory management for manufacturing companies improves efficiency, cuts waste and streamlines production processes. Start this process with guidance from MANTEC. Contact us today to find out more about our services, return on investment (ROI) and affordable solutions.