A clean stockroom where cardboard boxes of stock smoothly come in and out at the precise times they should. The spreadsheets get updates by themselves as work goes on. Isn’t this every small manufacturer’s dream? Yes, we think it is. And the solution for this problem is the process called Inventory Management.
Inventory Management is the process of keeping track of all the goods your company has in stock.
The benefits of inventory management have become way clearer now. This is because the costs of doing it badly are so high. In today's fast-paced market there is no way to get around it.
If you have too much stock then you are using up cash. Other than this you are paying unnecessarily for resources like stock room space. On the other hand, understocking can lead to delayed deliveries and mobs of unhappy customers giving negative reviews about you.
Inventory is very important to any business dealing with physical products. Inventory Management also plays a huge role in your success. As a modern manufacturer, you need systems that know your business needs and make life easier. So that you can spend your time on growing the business.
This is why we’ve put together a write-up on everything you need to know about inventory management for small businesses - top to bottom.
Let's get started-
- What is Inventory Management?
- What are different Inventory Management Techniques?
- Common Challenges In Inventory Management
- Inventory Management Systems
- Inventory Management Software for small business
- Taking A Step Further
What is Inventory Management?
Before diving into the details, it’s always best to get to grips with the basics.
There are a lot of definitions of inventory out there. Some offer an interpretation that refers to inventory as the sum of all items used in one's business. This includes anything related to the operations of your business, such as safety or office equipment. Inventory is the sum of all items used in your business that are intended for sale.
To be cost-effective while running a business it is important to understand 4 different types of inventory. They are -
Raw Materials- Materials needed to turn your inventory into a finished product called are raw materials. For Eg- leather required to make shoes in a shoe manufacturing company.
Work In Progress- The labor, and overhead costs incurred for products that are at various stages of the production process is termed as WIP. It is a component of the inventory asset account on the balance sheet. These costs are subsequently transferred to the finished goods account. Eventually, they go to the cost of sales. For Eg- WIP would include the labor and machine cost required to manufacture shoes in a shoe company.
Finished Goods- It is the most straight-forward of all inventory types. That inventory you have listed for sale on your website? Those are finished goods. Any product that is available for sale to customers comes in this category. For Eg- Different types of manufactured shoes can come in this category.
Maintenance Repair and Overhaul - Maintenance, Repair, and Overhaul inventory is all about the small details. It is required to assemble and sell the finished product. For example, MRO will be gloves to handle the packaging of a shoe. Basic office supplies such as pens, highlighters, and paper would also be in this category.
Let’s look at an easy example of making earthen lamps.
Raw materials would be clay, water, and colors.
Work-in-progress would be labor costs.
The finished good would be beautiful lamps.
Unfortunately, though, this process isn't always so linear and simple.
Clay being used can be of different types, to make a variety of lamps' shapes.
That’s one of the main issues that manufacturers often have – dealing with the constantly moving pieces of raw materials as well as the finished products themselves. This is why understanding that inventory management is important.
Having a clear picture of your inventory is helpful at any moment in business. However, during the COVID-19 outbreak, knowing what you have in stock is more important than ever. During a pandemic with shipping delays and material shortages, you want to be able to clearly track what was ordered versus what was delivered. You also want to keep in close contact with suppliers so you know which materials you will be able to replenish and which items you might not be able to purchase for a while.
Pro Tip: Read more on Important Strategies for Inventory Management at the time of COVID 19
Why is Inventory Management important?
Let’s see the scenario of what will happen when you don’t manage inventory? If you have too much stock then you are tying up cash. Also, you are paying unnecessarily for resources like stock room space. On the other hand, if you’re understocked, it can lead to late deliveries and a large number of unhappy customers. Inventory is quite central to any business dealing with production. It plays a big part in any business’s success.
Unlike popular belief where most businessmen are trying to sort their production process, sorting inventory can do wonders. Figuring Production issues is part of the inventory management process. But it has a small role in the whole process which has different departments namely- Purchase, Sales, Design, Stores & Production. Solving the transactional process instead of the production process can be much easier for businesses. Therefore it'll be easier to solve inventory problems.
Pro Tip- Read more on How to Streamline Inventory Management easily.
Keeping track of all that inventory can feel overwhelming with your raw material is stored all over the place.
This is specifically true if one is using outdated systems like Excel. But with the right inventory management software or ERP platform like TranZact you can keep everything organized. It gives you real-time updates on your inventory and alerts you when there is a shortage.
But with the right inventory management software, you can keep everything organized. Inventory software reveals in real-time exactly how much product you have in stock. It also alerts you when you need more. It is also an easy way to monitor which stage of the process all your inventory is currently in. Ever-changing features according to the industry's trends make it even more intuitive.
Inventory Management Vs Inventory Control
Inventory Control and Inventory Management are two terms that are often used interchangeably. But they aren't synonyms. Inventory control is one part of the broader subject of inventory management. Think of inventory control as a slice of delicious inventory management cake.
Inventory control is about knowing where your inventory is and making sure it travels to the right place for efficient and timely manufacture of finished goods. Inventory management is concerned with the above, but also how fits it into the bigger picture.
This includes costs like purchasing raw materials, carrying costs of inventory, and inventory processing overheads.
You could say that inventory control is the organization and logistics of your inventory. The operational mind if you will. Whereas inventory management is about how inventory fits into your overall business plan and success metrics. It makes sure production is efficient enough to be profitable.
As the old saying goes: “Nothing worth having comes easy.”
The same goes saying effortless inventory control. It takes time for you to find out what will work best for your business. Your policies depend on many factors. These include your industry, the cost of your raw materials, the amount of MRO you require, and the frequency and the average size of your sales orders.
Pro Tip: Read more on 6 best Inventory Control techniques here
What are different Inventory Management Techniques?
Time to learn all the popular types of managing inventory today. The foundations that you need to be taking full benefit of in 2021 and beyond. It's important for you to understand them. This is because the manufacturing companies use them often.
These principles work regardless of if you have a small family-run business or aspire to head a multi-national company. But there's one important point to take note of: these methods aren't in competition or conflict with each other. You don't need to choose one and ignore the rest. Find useful aspects in each theory that fits your business. In other words, find what works best for your business.
So here are inventory management techniques for small manufacturers.-
Once upon a time, there was a slam between the two main models of inventory management techniques of that time namely Periodic and Perpetual. Periodic inventory is worked by tracking inventory with regular stock-takes every week, month, or longer. The tracking of 'the process in-between' didn't happen. It doesn’t take a genius to realize that, despite its simplicity, it is not ideal.
Perpetual inventory consisted of constant inventory updating every time an order is placed or stock is moved around. This would have been too time-consuming in older times. But now cloud-based into inventory management software exists to accurately keep track of stock 24/7. For Example When you receive a new order, for example from a store, the system automatically deducts the necessary inventory from your total and lets you know if you have the materials available.
The Just-in-Time inventory system is the philosophy of manufacturing to exactly fill the demand. That is, make goods when orders come in, not before. Cutting down costs from the production process is the main goal of the JIT process. This requires careful planning. The main purpose is to create a high-quality product while cutting down costs. All the resources contribute to making this happen.
Supermarkets use a form of JIT. When you go into a supermarket, there is an unbelievable amount of choice, but only a few of each item. When an item runs low, the supermarket system flags this up, so the manager can order more. This leads to a good amount of reduction of inefficiencies and waste.
These are the elements to focus on if you want to get in the game:
1. Eliminating waste — look at all your resources here
2. Constant performance evaluation — Check what could you be doing better?
3. Improving continuously — aim higher with all your processes;
4. Become customer-focused — use supply-chain strategies that account for customer demand
5. Balance your work setting – create a clear and focused atmosphere.
ABC Inventory is a widely used method of categorizing your product inventory into what sells best and what doesn’t. This model supposes that most of the manufacturing business’ sales are for a minority of the products you sell.
Every single item we order does not have equal value. Some parts cost more while some are used more frequently. ABC inventory analysis helps categorize those items so we can understand which ones should receive our full attention.
As the name suggests, this inventory categorization technique groups your inventory into three buckets: A, B, & C.
- ‘A’ items are the most important to an organization. This material should receive your full focus due to its high usage rate or a high price (or both).
- ‘B’ items have a lower dollar volume and are thus less important than ‘As’.
- ‘C’ items are the lowest in the ladder. Out of the three groups, you’ll have the highest number of ‘C’ items, but they will account for the lowest portion for your inventory value.
Consignment inventory is where a manufacturer gives products or materials to a customer (this could be a retailer or a business that uses a product) who only pays once the items have been sold to the consumer. This is a good idea for trying out a product that has had no market research.
If vendors don’t have any risk they will most likely agree to this proposition. So it can be used for that purpose. On top of that, you get to save a lot of money by reducing the number of deliveries you make. Rather than selling products one by one, you just send off a big batch to a customer and then they return what they didn’t sell months later.
It’s a specific way of doing things and you need to find a supplier that is willing to play ball.
But if it’s right for your business or products then your stock room is going to be very tidy indeed. Because you're not the one holding onto inventory, it’ll be your customer themselves.
Challenges faced by SMEs in Inventory Management
SMEs are always under a lot of pressure to produce goods of consistent quality that lives up to the client's requests. However, if a manufacturer faces problems in keeping up with inventory numbers, it could lead to shortages and numerous other difficulties.
Let's take a look at some of the most common inventory management challenges that manufacturers face:
Aligning Inventory & Demand Planning
Manufacturers must be able to predict demand and ensure they have enough materials on hand to suit these needs. It's important for businesses to align their inventory and demand planning and management solutions to have full visibility into the supply and demand within their organizations. All systems must be able to speak to each other in order to integrate well and cover all necessary bases. Manufacturers will likely spend a lot of time integrating software into existing systems and configuring them to work with ERP solutions and other essential tools.
Old habits die hard and if a new system isn't working as expected, employees may fall back to their tried-and-true methods. Thus the inventory management efforts will be full of errors. Thus it should be carefully handled. There should be a customer support team in place to monitor implementations and ensure that users become comfortable with the system to take advantage of it as soon as possible.
The team should be explained and onboarded while they start using new processes and software. This will ensure that workers have the information they require to effectively utilize the system, gaining value from the very beginning.
Handling Access Or Obsolete Stock
No matter how good your prediction skills are, you'll likely order too many materials or have items that sit on your shelves for an extended period of time. It's important to have visibility into these types of situations and have a plan to either sell it or reduce the stock. Leaders should perform root-cause analysis to determine why excesses are occurring, as well as ways to reduce the creation of new excess or obsolete stock and how to sell off stock more effectively. Discounting these products may be an easy way to get them off your shelves.
Navigating Complex systems
The introduction of new software into existing workflows and operations can make systems significantly more complex. Existing dependencies can put limitations on implementations and even cause things to break. In addition to these complications, a new solution like an ERP system can create issues if there are a ton of bells and whistles within it. ERP solution or any other new solution should be simple so as to alleviate challenges and make them easier to use. Manufacturers should adopt only the capabilities and features that are necessary to solve problems and improve processes.
Inventory management is a critical part of manufacturing operations, and it's integral to understand the challenges that come along with it. With knowledge of these difficulties, leaders can better adapt their workflows to improve inventory capabilities.
Pro Tip: Here are 3 Inventory Management Mistakes You Could Be Making. Read to find out.
Inventory Management Systems
Inventory Management is something that businesses have been doing for decades. Some have evolved in their ways some are still using the traditional ways.
The first port of call, as always, is a pen and paper system to manage inventory.
This includes written stock-takes and order invoices. Many micro-businesses use this method to manage inventory, if only in part.
But as the data increases limitations will be reached very quickly here.
A step up the ladder is using Excel spreadsheets for inventory management.
Again, these work fine for a while, as long as good practices are followed, like backing up data. However, efficient utilization of Excel for online inventory management requires time, and setting up your initial template accurately is crucial.
Pro Tip- Read more on How to use Excel for Inventory Management
However, there is some restriction in this functionality.
You will have to constantly update a web of spreadsheets to keep your purchases, recipes, raw materials, final products, and sales all in check at the same time.
Sooner or later problems will occur, regardless of your spreadsheet skills.
The more inventory data that is added, the more human errors will crop up – at least one error every 300 characters according to one study. A spreadsheet offers virtually endless columns for categorizing and sorting the data you need. You can create a spreadsheet or download a pre-filled template to help you manage your inventory. You will have to constantly update a web of spreadsheets to keep your purchases, recipes, raw materials, final products, and sales all in check at the same time.
Here are the Pros and Cons of using Excel -
- Inexpensive – Download free or low-cost spreadsheets.
- Customizable – Add or remove columns and use formulas.
- Shareable – Upload the document to cloud storage like Dropbox or Google Docs and share it with your team.
- Complications – As your business grows, so do the columns and rows on your spreadsheet. “At-a-glance” is not a feature on a lengthy spreadsheet.
- Time investment – It takes time to create or adapt formulas and to increase spreadsheet functions to match your business growth.
- Data protection – If you mistakenly delete or alter information on a spreadsheet, it may not be easy to restore it.
- Limitations – Unlike inventory management software that scans QR codes and barcodes and captures the data they provide, an Excel inventory spreadsheet requires manual entries. And you won’t have real-time data.
This leads us to the final option for small businesses: inventory management software.
These are more robust than spreadsheets and come with functions specifically designed for the purpose of inventory management. Therefore you don’t have to do any tinkering.
Many small manufacturers have reported their satisfaction with getting their inventory management under control using these systems. Some are even surprised about how much easier it is than spreadsheets.
But it makes total sense.
Because trying to keep up-to-date records of product recipes, ongoing costs and the stock itself is a nightmare with spreadsheets alone.
Inventory management software simplifies the process. Some features include:
- Customizable, sortable views.
- Built-in formulas and calculations.
- Automates data entry process, thus reducing human error
- Real-time data that is safely stored and easy to sync, retrieve, and shared.
Pro Tip: Read more on Why having accurate inventory is important
Inventory Management Software For Small Business
Whenever manufacturers hear about digitizing their business, all that comes to their mind is complicated ERP systems that require a lot of money and are difficult to implement. It's no wonder ERP has such a bad reputation: The history surrounding the complex and expensive enterprise software market is packed with tales of outrageous hype and epic failures.
Why does it happen?
The size and maturity of a company bring differences while implementing any software system. This happens because small companies have different needs than big companies. Large companies usually require more routines in order to manage their business efficiently. the responsibility areas amongst departments are clearly divided. it takes more time to pass information from one management level to another.
Why do ERPs fail in small companies?
While small companies are usually multi-taskers, faster in reacting to change and flexible in their daily operations, and low on bureaucracy. Also, it might be the first or second time they have implemented a business management system. Therefore, in order to have a successful project they either need will to educate themselves really fast on what matters when implementing software. Thus they will need a team that helps them onboard easily.
Read More - 4 ERP Failure Stories and How to Not Be One
That is why we never call ourselves an ERP platform. TranZact is a platform for SMEs to digitize business processes right from customer inquiry to dispatch. We want every Indian SME to use our software product without having to think over silly amounts of money i.e. truly free. But, just being free will NOT be enough. Our product needs to add immense value to our customers and our support has to be available 24×7–365, with a commitment towards absolutely delighting our users. Then only ever do we look to monetize at that junction where our customers derive value and benefit.
The theory is all well and good, but how do you manage inventory in the real thing?
One of the main problems that manufacturers come across when fulfilling their sales orders and when scheduling their production is the constant need to check inventory — whether that means going into the stock room or trawling through spreadsheets to see what finished goods and raw materials are available.
TranZact will do all the hard work for you by keeping an up-to-date inventory, which shifts every time a sales or manufacturing order comes in. There's no need to be modifying data every time an order comes in because the system does that for you.
Minimum & Maximum Stock Limit
Manufacturers face a lot of problems of being either under-stocked or either being overstocked to the limit that inventory goes to waste. Setting inventory levels is a crucial feature of any inventory management system. You can always set a minimum and maximum stock limit so that the system can remind you when you are under-stocked and won't cause trouble with overstocking.
Read More about - What is the Significance of Accurate Inventory Levels?
Managing multiple transactions and doing back and forth within the team and with customers can be cumbersome, and is prone to either get delayed or have errors. TranZact makes this
‘Transaction’ module can be used to track the order confirmations & sales orders. Every order has a separate transaction timeline of all the documents made with respect to that particular order. Sales teams can also coordinate effectively within themselves and with clients using the ‘comment’ feature. Work order is created so that the production team is updated as soon as any OC (order confirmation) gets updated to the system. Following up on pending orders is also made a lot easier using the ‘comment’ feature on the platform. GRN or QIR can be generated and sent against received orders. Following up on pending orders is also made a lot easier using the ‘comment’ feature on the platform.
Read more on the 6 ‘Must Haves’ Features For Your Inventory Software
There is no doubt that inventory management has an effect on the profitability of a business. In fact, it influences a number of factors. The first factor is the overall organization of the inventory, meaning that the inventory items are stored in a clean area, where it is easy to distinguish items from one another. The second factor is a high turnover of products. You don’t want stock gathering dust on the shelves; the most efficient businesses have a high turnover. Another factor that affects profitability is overheads. By reducing overheads as much as possible, the profitability of your business will increase accordingly.
Pro Tip: Read more on How Inventory Management software can increase Sales and Profits in your company
Taking A Step Further
Let’s be real – no business wants to be spending all their days keeping up with their inventory. The whole point of this guide is to guide you into streamlining your inventory management process. So that you can spend time growing your business and focusing on the things that really matter. After all one only has 24 hours in a day.
Work smart, not hard !
The trick is not just to read about manufacturing inventory management. Absorb this information. Think about it. Teach it to someone. And most importantly implement it in a way that’s relevant and sensible to your business.
You can’t apply everything at once – improving your inventory management practices is a long-term process. But of course, nobody expects you to do this alone. You need the right tools to apply it, whatever is the best inventory management software for you.
We have already mentioned how TranZact is empowering SMEs in streamlining their business processes, from purchasing to manufacturing, with a friendly interface.
You can implement all that’s been covered in this article, by molding it to your specific business needs. That means being able to spend time on what you really want to be doing – growing your business.