How Manufacturers Can Reduce Inventory Costs

How to control inventory costs in manufacturing

How to reduce inventory costs is a significant challenge manufacturers face today. Mid-tier manufacturers say it’s worth the effort to automate inventory cost reporting because it provides an accurate and consistent measure of inventory activity, saving time and contributing to a stronger bottom line.

Manual Inventory Methods Have Hidden Costs

While manual methods are inexpensive, require minimal training, and rely on a simple structure of inventory sheets, these approaches are prone to human error and costly mistakes. Manufacturers don’t need to be locked into doing manual inventory counts forever.

Standalone inventory systems help alleviate the problems with manual inventory tracking to a point. The trouble is that manufacturers often outgrow them fast. Frustrated with not having inventory costing and stock levels available in their financial systems motivates manufacturers to replace standalone inventory systems with an integrated manufacturing ERP system.

The hidden costs of relying on manual approaches or standalone inventory systems for tracking inventory levels are increasing and include the following:

  • Little if any inventory visibility and control. Manual methods can’t track inventory and cost losses in real-time, identify inventory shrinkage from theft, and can’t easily be used to analyze month-to-month cost inventory levels to identify cost gaps. Rekeying inventory sheets into a spreadsheet only goes so far. Standalone systems help reduce the drudgery of physical inventory but don’t deliver real-time visibility and control.
  • When cost variances are found, it’s too late to fix them. Manual approaches are great at capturing what happened in the past. Like a rearview mirror, manual inventory methods and standalone inventory systems will tell manufacturers where they’ve been. However, manually-based data is historical by nature and can’t be easily used to predict what could happen in the future. Relying on manual inventory cost management alone is like driving a car at night with no headlights, speedometer, or gas gauge. Manufacturing moves forward, but no one knows how fast, in what direction, and no one can see if there are obstacles in the way.
  • Demands extra time and effort to get accurate cost data. Manual inventory management approaches also prove costly because they require additional time and effort – and sometimes multiple physical inventory counts – to get accurate cost figures. For example, it’s typical to find up to a 20% cost variance between physical inventory counts and costs derived using a manufacturer’s existing accounting system. Automating inventory tracking with an integrated manufacturing ERP system closes the cost variance gap between physical and system counts from 20% to 2%.
  • Re-doing physical inventory counts when cost variances are too wide. When inventory counts and costs are off, manufacturers double-down their efforts to do more physical inventory counts every quarter or even every month. Doing periodic physical counts gets expensive quickly and ties up valuable time that could be better spent getting orders out to customers. But when a manufacturer is locked into manual inventory management and costing, inaccurate inventory counts almost always lead to customers getting incomplete orders and defective products.

Making An Inventory Management System Pay

Knowing how money is flowing in and out starts with inventory management. Inventories continually update how, where, by how much money is moving in and out of business. Manually tracking raw materials, work in process, and finished goods inventory doesn’t provide an accurate picture of how and where money is going out of and coming into a business. It wastes valuable time and cash. Automating inventory management looks to solve these challenges first.

Standalone inventory systems can’t deliver end-to-end visibility because they’re isolated from other business and manufacturing systems. An integrated manufacturing ERP system provides the end-to-end raw material, through work in progress, to finished goods tracking, utilization, and cost visibility. In addition, they provide real-time production and process monitoring data on raw materials consumption, conversion, waste, and shipments in real-time.

Making inventory management systems pay starts with real-time data that gives manufacturers more visibility to control inventory levels and reduce inventory costs.

How Automation is Helping to Reduce Inventory Costs

Integrating inventory management with an ERP system, mid-tier manufacturers see improved cost control and real-time visibility that pays off in the following areas.

  • Time savings and a real-time view of all raw material inflows by switching from manually recording every inventory purchase to automating them.
  • Accurate view of the pace at which raw materials are consumed in production across all manufacturing centers.
  • Greater visibility of the value and quantity of finished goods inventory by production line, plant location, and production process.
  • Improve waste tracking to meet sustainability initiatives and reduce costs
  • Identifying scrap and spoiled raw materials by machine and production process.
  • Automating all reordering, in-stock, and Economic Order Quantity (EOQ) levels to optimize inventory management and control costs
  • Troubleshoot inventory management problems with real-time data and analytics that deliver new insights

Conclusion

Inventories represent a business’s cash inflows and outflows and are too valuable to be left to manually-based or standalone approaches to managing them. Performing periodic manual inventory counts is no longer the norm for manufacturers. They are expensive, prone to error, and don’t accurately present inventory costs. What’s needed is a more automated approach to identifying and tracking inventory costs across raw materials, work in progress, and finished goods. Standalone inventory systems are a short-term fix to a long-term problem. Integrated manufacturing ERP systems that have real-time reporting and share a common database are helping to automate inventory management and making it pay off with cost, time, and material savings every day.

Learn the values of an ERP system and how it can provide greater visibility of manufacturing costs.

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