Inventory management methods for manufacturers
Inventory management is a cornerstone of production efficiency, directly impacting manufacturing flow, cost management, and customer satisfaction.
As businesses strive to streamline operations and reduce waste, adopting effective inventory management techniques becomes essential. Here’s how the mentioned methods can enhance stock efficiency and production precision.
1. First in, first out
FIFO is particularly beneficial in manufacturing environments where product freshness and expiry date tracking are a concern. This method ensures that materials or products acquired first are used or sold first, reducing the risk of spoilage and outdated stock.
It’s essential to maintaining quality and minimizing losses, especially in industries with rapid innovation cycles, like the electronics and automotive industry or perishable goods, such as food or cosmetics.
2. Last in, first out
While LIFO is less common in manufacturing due to its risk of older stock being left unused, it can be advantageous for certain types of products or materials that do not degrade over time. In periods of rising prices, LIFO can reduce taxable income, as the cost of goods sold is calculated based on the most recently acquired inventory, which is typically more expensive.
This method can be used in the petroleum and oil refining sector, where the prices fluctuate all the time.
3. Just-in-time inventory
JIT minimizes inventory holding costs by aligning material orders with production schedules. This method requires precise planning and a reliable supply chain. By reducing the inventory on hand to only what is necessary for immediate production, manufacturers can significantly decrease waste and increase efficiency. However, JIT demands resilience against supply chain disruptions to avoid production halts.
The most common users of the JIT method are in the automotive industry, specifically Toyota, who thereby has reduced manufacturing waste, cut down on manufacturing and inventory costs, increased efficiency, and improved its production quality.
4. Economic order quantity
In manufacturing, the EOQ model is critical for optimizing the procurement of raw materials and the production of goods to meet demand efficiently while minimizing costs. The EOQ formula helps manufacturers determine the most cost-effective quantity of inventory to order and produce, balancing between the costs associated with inventory ordering and holding.
With the high prices of raw ingredients, the need for controlled storage conditions, and production usually happening in larger batches, pharmaceutical companies have found EOQ to minimize their costs.
5. Average costing
Average costing is used by manufacturers to allocate the cost of goods sold and ending inventory. It smooths out price fluctuations of components and raw ingredients over time by averaging the costs of all items in inventory, regardless of purchase date.
This method can be particularly useful in industries where item costs vary due to factors like raw material price changes, currency fluctuations, or supply chain variations, such as chemicals or textiles.
6. Cycle counting
Cycle counting is a flexible and efficient approach to inventory management in manufacturing, allowing companies to maintain accurate records of components and finished goods, and improve production efficiency without the need for disruptive, full-scale physical inventories.
For industries with strict regulatory requirements, such as food and beverage, cycle counting can help ensure regular compliance with inventory tracking and management regulations.
7. ABC analysis
Manufacturers use ABC analysis to prioritize inventory based on the components’ impact on the production process and the final product cost. This method helps in identifying critical components (A items) that require more precise supplier management and might benefit from safety stock, whereas C items can be managed with leaner inventory strategies. For manufacturers, the A items are top priority, meaning that the components and materials required to complete and produce these are also more focused on in inventory management operations.
In the aerospace industry, manufacturers like Boeing or Airbus manage a variety of components ranging from highly expensive engine parts (A items) to moderately priced avionics (B items) and low-cost fasteners (C items).
8. Perpetual inventory system
The perpetual inventory system in manufacturing provides real-time, continuous tracking of all inventory types, including raw materials, work-in-progress (WIP), and finished goods. It integrates closely with production planning and procurement processes to ensure timely replenishment of materials, aiding in efficient production flow.
By carefully selecting and implementing these inventory management methods, manufacturers can achieve greater operational efficiency, cost reduction, and customer satisfaction. The choice of method depends on the specific needs and context of the production operation, including the nature of the goods, work processes, and market dynamics. With the right approach, manufacturers can turn inventory management into a strategic asset, driving competitive advantage and business success.
