What is manufacturing inventory management?
Manufacturing inventory management is the process of keeping track of your company’s finished goods and raw materials during manufacturing. Managing manufacturing inventory is much more complex than the simple in-out inventory of ecommerce stores that do not produce their goods. For each product you produce, several items go into the manufacturing process, and managing the stock of these efficiently is critical to your success. Running out of raw materials for production can halt your entire manufacturing line while overstocking means having cash tied up in stock that can’t be used or sold.
Katana is an efficient manufacturing inventory management system
At OptimizeWP, we always recommend our clients use Katana as their manufacturing inventory management system. It integrates seamlessly with both WooCommerce and Shopify. Read more in our post on what Katana can do for you.
Manual manufacturing inventory management using sheets
What can you do if you do not have the funds for a professional inventory management system like Katana? Make your own using Google sheets! In this section, we will run down the basics for you.
Start by making three sheets: one for finished goods (products), one for semi-finished goods, and one for raw materials. You can include a fourth sheet for packaging materials if you use those.
The sheet for finished goods (or products) will include all entries concerning items that need no further manufacturing and are ready to be sold. The sheet for semi-finished goods includes all entries for goods that have been processed but are not ready for sale. Finally, the sheet for materials includes all entries for raw materials that have been purchased but have not been processed into finished or semi-finished goods.
The columns you will need for each sheet include Name, SKU, Unit, Stock, Average Cost, and Value.
- Name. This is the human-readable name of the product or material. Choose a descriptive name so there is no doubt as to what the item is.
- SKU. This is the ‘Stock Keeping Unit”, a shorthand code for designating each single across different software and systems. This is a code that identifies the items.
- Unit. Inventory items are measured in different units. This can be pieces, weight, volume, etc. In the Unit column, note down the unit type each item is measured in.
- Stock. This is the number of items you have in your physical stock. The number of products or materials on the shelves of your warehouse or storage room.
- Average cost. This is the cost of acquiring the product or material you currently have in stock. The cost includes the different steps of manufacturing, such as purchasing and processing of materials.
- Value. This is the value of the items currently in your stock. The value reflects the purchasing and processing costs incurred in acquiring or manufacturing the item.
How can I calculate the average cost of inventory items?
The average cost of inventory items is calculated in the following way: the cost of purchasing plus the cost of processing divided by the number of items.
Let’s look at an example. Let’s say you manufacture face masks. To calculate the average cost of one mask, you would add up the costs of all materials involved in making them, plus the cost of processing those materials into finished goods:
- raw fabric (material)
- cutting the fabric into pieces (processing)
- sewing the masks (processing)
- elastic bands for earloops (material)
- cutting and attaching the earloops (processing)
The calculation should include any shipping, tax, or duty costs involved in purchasing the raw materials, along with any salary or service fees involved in processing. Finally, the total cost calculated is divided by the number of finished goods you end up having produced.
How can I calculate the value of items in my inventory?
The value of each item in the inventory simply reflects its cost. So we can easily calculate the stock value in the following way: the average cost of the items multiplied by the number of items in stock.
For example, let’s say you have 10,000 face masks in your stock and the average cost of producing each is $1.95. The total value of your 10,000 face masks would then be: 10,000 x 1.95 = $19,500.
Whenever the cost of manufacturing your items increases, so does the value of your inventory. Similarly, whenever you produce more items the value of your inventory increases. On the other hand, when you sell finished goods and the number of items decreases, so does the value of your stock.
The difference between raw materials and semi-finished goods
The difference between the two is their state of processing. Raw materials are unprocessed, such as a roll of fabric for sewing face masks. Once the material has been processed in any way, it is no longer raw but is now classified as semi-finished, i.e. in the middle stage between raw material and finished goods.
In our example from before, before you can make a face mask, you need to cut the fabric (raw material) into separate pieces (semi-finished goods) that can be sewn into the masks (finished goods).
Managing your inventory using production recipes
Making production recipes for your finished and semi-finished goods is an easy way to handle the inventory of materials involved in the manufacturing process. Let’s take the example of face masks again.
A production recipe for a face mask (finished good) might look like this:
- 2 pieces of cut fabric
- 2 pieces of earloop
- 1 nose clip
- 10 mins of sewing time
Similarly, a recipe for the cut fabric (semi-finished goods) might look like this:
- 5 grams of raw fabric
- 1 min of cutting time
And for the earloops (semi-finished goods):
- 25 cm elastic band
- 0.5 mins cutting time
Just like a cooking recipe, the production recipe includes all materials and processing steps that go into making the finished (or semi-finished) goods. Knowing the ‘ingredients’ of the recipe makes it easy to manage your stock of materials. Likewise, knowing the processing steps makes it easy to calculate costs.
Let’s say you produce 1,000 face masks. You would then add 1,000 pcs to your stock of finished goods, and at the same time reduce the stock of raw materials and semi-finished goods that go into making them. In this case, you would reduce your stock by 2,000 pcs cut fabric, 2,000 pcs of cut earloop, and 1,000 nose clips.
Similarly, when you manufacture semi-finished goods, you would then reduce the inventory of raw materials. In this case, you would reduce 2,000 x 5 grams = 10 kg of raw fabric, and 2,000 x 25 cm = 50 meters of elastic band earloop.
Effective production planning starts with tracking semi-finished goods
Let’s say that each piece of cut fabric for sewing face masks weighs 5 grams. Since you need 2 pieces of fabric for sewing 1 mask, this means you need 10 grams of fabric per mask. So why would you not just include ’10 grams of raw fabric’ in your mask recipe? Why track semi-finished goods at all?
The answer lies in production planning. By tracking the number of pieces of cut fabric, you will know when it’s time to cut more fabric so that they are ready for the sewing process. This is especially important for companies that outsource services (e.g. fabric cutting) to third parties, as this takes time. Without tracking semi-finished goods, you might run out of them at a critical stage of the manufacturing process.
Summing it all up
Now that you know the steps involved from raw materials to finished goods, it is much easier to track your items in stock and manage your production inventory. Here are the steps:
- Enter all raw materials into their sheet and calculate the cost and value of each.
- Make recipes for your semi-finished and finished goods (products).
- Manage the stock of your inventory items using your production recipes.
Tracking inventory manually using sheets is affordable and effective, but can be time-consuming. If you are a spreadsheet wizard, you might be able to automate some of the functions and processes. However, if you have a huge production line with lots of different products and materials you will be better off investing in a professional software system such as Katana.
If you have any comments or questions about inventory management, please contact us.