Inventory Costs & Other Considerations for Manufacturing

  • 23 November 2016
  • CTND
Categories: Manufacturing

manufacturing process

What’s stocked in your warehouse can inform any number of business decisions, from pricing and sales, to ordering and delivery. For those in the manufacturing industry, it can be difficult to manage the fine balance: You don’t want to have an overflowing storage space, but you don’t want to be too short on inventory, either.

As a manufacturer, you need to avoid having too much or too little inventory cutting into your bottom line — and you definitely want to account for any inventory risk, such as obsolete materials, or consigned materials that you’ll need to keep track of.

Here are four aspects of organizing manufacturing inventory that you should keep top of mind:

The Costs

This is a huge component of inventory management, and for good reason: The cost of your inventory largely informs the profit of your company, based on the total value of what items you have in your warehouse.

You must also consider your inventory “carrying cost” as a percentage of the total value — which can include taxes, insurance, the cost of replacing items, and more. Every manufacturer should know the four main categories of carrying cost:

  • Capital cost — The largest of the four, and the cost that businesses accrue on carrying inventory
  • Storage space cost — Rent or mortgage along with any heating, lighting, and so on
  • Inventory service cost — Insurance paid on taxes
  • Inventory risk cost — The cost of expiration, or of parts going obsolete

Altogether, looking at the four components of carrying cost can help give you a better picture of precisely where and how to break down the value of your warehouse.

Warehouse Space

Not only does it cost money to rent a warehouse, but the costs will go up depending on how much space you need. That’s why it’s so important to have a definitive idea of how much inventory you have, as well as how many square feet you’ll need for storage.

Your warehouse organization is just as important as storage space; for example, using the slotting feature in ERP software can help you organize and store parts you frequently need for production jobs near each other. You might also use the cross-docking solution to select components that are needed right away for production.

It’s all about having a good eye on how much warehouse space you’re actively using for inventory — tools like ERP software can easily determine the logistics for you.

Consigned Materials

If you work in discrete manufacturing, you may be using consigned component materials along with the materials in your own inventory. This can require a whole second level of organization within inventory and storage, and it’s another place where ERP comes in very handy.

It’s best practice to use up your own materials before you move on to consigned, and it’s easy to set up your ERP system to choose items already in your inventory before turning to items from suppliers. ERP can also help alert you when those materials must be returned or paid for — one less thing for you to mentally keep track of. Given that many manufacturers are turning towards the option of utilizing both inventory and consigned components, it’s important to keep them both straight in the system.

Obsolete Inventory

Just because you’re working with man-made materials doesn’t mean your inventory won’t have a shelf life. In the event that a material becomes discontinued or recalled, you’ll need to get any pieces with that specific material off your inventory shelves.

If there’s a change in design for something like furniture, your system needs to be able to adjust inventory and costs accordingly. Determining obsolete inventory can even be profitable in some cases — if you can quickly identify how much inventory you have containing the outdated component, you can request or negotiate with your customer to use up your on-hand balance before moving on to implement the new component.

Using an ERP system to pay close attention to changes in materials can help save you money, or even make extra profit; far better than having obsolete inventory go to waste.

Manufacture More Organization

Tracking and monitoring inventory can be a lot of work, but it truly pays off for your productivity and your company’s bottom line. ERP solutions can save the day when it comes to the majority of inventory organization for manufacturing companies. Your inventory and its carrying cost have a very high value to your business; so make sure it’s working for you. Taking advantage of ERP can save you both time and money on your inventory — and might even find you a little bit more of both.

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