How purchasers of raw materials can best manage their stock, and keep the production process running smoothly.
A key component of many businesses is to acquire, produce, or manufacture goods or materials. Inventory management is an important part of any business’ supply chain management, and is crucial to ensuring that a business has the correct amount of products available for sale.
Some businesses can struggle to effectively manage their inventory, ordering too many goods and materials and having to sell stock at a discount. Many businesses also under prepare, which could mean that they are unable to fulfil client invoices due to low stock levels.
When it comes to raw materials, including direct and indirect materials, raw material management is not too dissimilar. But depending on the materials, may involve a lot more preparation and forward planning.
Direct materials generally refer to those that are used and incorporated into finished products, such as wood to be used for furniture. Indirect materials may refer to components not necessarily incorporated into a final product, but are used in the making of them, such as glue, tape, cleaning supplies, gloves etc.
The challenge of practicing raw material management can often come from the perishability of some of the goods. This is particularly prevalent when dealing with food-related industries, such as supermarkets, cafes and restaurants. Over-ordering your regular supply of croissants, for example, can have a detrimental impact on your profits and inventory if they expire.
Both types of raw materials need careful management to ensure enough is at hand to support the creation of a business’s products. Here are 5 effective ways to manage your raw materials
1. Calculate the raw materials inventory
Raw materials inventory is the total cost of all parts and components used to create a product that have not yet been used in work-in-process or finished goods production. Your first step in raw material management should be to calculate your inventory. One way you may calculate raw materials inventory involves adding the cost of the direct materials with the manufacturing overhead to determine the value of your inventory.
For example, a furniture manufacturer orders $30,000 worth of raw materials. This includes direct materials such as the wood, as well indirect materials like glue and wood varnish. To make one production of tables, it involves $5,000 in direct materials and $1,300 in indirect materials - also classified as manufacturing overheads. When added together, the raw materials inventory comes to $6,300.
2. Carefully track raw materials
Record keeping is an important process of raw materials management and can help you prevent issues such as overstock of understock. There are a range of online tracking platforms designed to help businesses stay on top of this, including Matrak, Track’em and inFlow Inventory.
Not only can this help for internal management, but may allow you to graph price changes of importing and exporting goods over time. This may help you better financially manage your business overheads.
3. The 80/20 rule
When it comes to running a business, many experts recommend practicing the 80/20 rule. In layman's terms, this is the idea that 80% of results come from 20% of the work. And when it comes to raw materials management, this may mean striving to earn 80% of your profits from 20% of your stock.
This allows you to have a clear inventory amount as a benchmark to aim for. You can then strive to prioritise inventory management around the 20% of your products that may earn you 80% of your profits.
4. Assess your suppliers
A crucial part of supply chain management involves being aware of the workflow of your suppliers. If one of your suppliers is frequently late when it comes to importing your raw materials, this may have severe adverse effects on your business.
Unfortunately, the impact of COVID-19 on supply chains across the globe was at times devastating, and many businesses have faced and still are facing import and export delays. That being said, if your business is still struggling with managing relationships with late suppliers, it may be worth switching suppliers lest your inventory levels suffer further.
5. Demand planning
When it comes to practicing raw material inventory management, planning for the future is key, especially when dealing with perishables. But unless you have a crystal ball, doing may require demand planning. Demand planning is when a business will analyse previous trends as well as market forecasts to make a prediction about the demand for your products. Not only can this help you to optimise your inventory levels, but by producing only what you may sell you can maximise profits.
The three main ways a business can practice demand planning is through:
- Market Expert Method -
If you are in contact with a number of experts in your industry, consider surveying them for their demand forecasts for said industry.
- Consumer Survey Method -
Similar to the above, instead you survey your client base to gauge their interest in your products in the future.
- Trend Prediction Method -
If you’ve been in business a number of years and have a healthy supply of data to draw from, you may be able to analyse and forecast your product demand from this data.
If your supply chain management has been compromised, it may be worth considering if trade finance could offer a helping hand to your business. Trade finance offers business financial 'breathing room', to purchase products (e.g. raw materials) from suppliers.
Earlypay offers Trade Financing to help Aussie SMEs grow. To find out more, call us on 1300 760 205, visit our website at earlypay.com.au, or simply fill out our 1-minute sign-up form.