Inventory management means keeping track of how you buy, manufacture, store, and use your stock; from purchasing to sales, making sure that you always have the right materials and components on hand, at any given time. The reason why proper raw material inventory management is so important is because it helps you understand what exactly you need to order and when, in order to meet your customers' demands.
On one hand, understocking – or having too little inventory – puts you in a position where you simply do not have enough products to meet customers' demand. Consequently, you will lose customers to your competition.
On the other hand, perhaps from fear of understocking, many businesses will have too much cash in inventory. This is called overstocking items. Even though you'll always have the products your customers are looking for, valuable cash flow is tied up and you’ll face significant costs in storing and tracking that aren’t justified.
Effective inventory management is found in the middle of these two extremes. The efforts you put into planning an efficient process will be seen in your manufacturing business’ profitability and growth.
In this article we’ll discuss 10 of the most effective inventory management tips to help you identify and overcome challenges in your business operations.
1. Understand the four types of inventory:
- Raw materials – the parts necessary to manufacture the final products you sell.
- Unfinished products – some companies hold but don’t sell unfinished products because they’re used to create the final goods (e.g. airbags, brakes, steering wheels, engines that are necessary to build a car). This type of inventory falls between the raw materials and finished goods.
- Finished goods – anything that can be sold directly to another business or consumer.
- Maintenance, repair and operating supplies (MRO) – supplies that aren’t directly used to make products, but still essential to keep your warehouse running smoothly (tools, safety gear, fuel for machines, etc.).
2. Build strong relationships with suppliers
A manufacturing business relies on solid supplier relationships. If you find yourself in a situation where you need to ask vendors for help and they provide a quick and positive answer, your business might avoid struggles.
Communicate well and often, keeping your suppliers informed with regards to trends in your stock needs. Make sure to let them know well in advance if you anticipate high inventory turnover periods. Study their processes and what it takes for them to manufacture the products you buy. You’ll build trust and have a better understanding of the challenges they may encounter. Your suppliers are your golden partners, so make sure to pay your bills on time, be courteous, and even if you need to terminate an agreement, don’t burn bridges.
3. Follow the 80/20 inventory rule
The 80/20 rule says that, generally, 80% of profit comes from 20% of inventory. This doesn’t mean you should completely eliminate the less profitable part of your inventory, but that the profitable 20% meets its full potential. Ensure that these products are carefully in order to avoid damage and that they are easy to access in your warehouse.
4. Base your decisions on accurate data
It’s vital to keep track of data in order to be able to optimize your inventory, processes, eliminate waste, and run an efficient facility. Inventory managers strive to optimize warehouse storage, minimize costs and improve processes. It’s also useful to produce accurate forecasts based on historical data of top-selling periods. Tracking this information can give you an invaluable data store representing a foundation for your analytics practice.
5. Use inventory management software
While you could keep track of inventory manually, for example using spreadsheets, you’ll reach a point where you are overwhelmed. That’s perhaps a suitable option for micro businesses, but when you’re scaling, software is the way to go. Modern solutions available on the market today are cloud-based, affordable, and offer features that meet your needs depending on the stage you’re at. They integrate with popular e-commerce platforms (like Shopify or WooCommerce), accounting, and shipping tools, in order to provide you an all-in-one view of your inventory and manufacturing operations.
Adopting digital technology to manage inventory helps you reduce costs, save time, and focus on growing your business and perfecting your products.