Managing Material Inventories

Managing Material Inventories
Monday, September 3rd, 2012 Scott Bossart

                Consider your material inventory that is sitting in warehouses, storerooms, and other storage areas.  Do you know the exact inventory levels?  Do you know the age of the oldest inventory?  Are there obsolete inventory that is being stored and taking up valuable space?  Material inventory is one area of business management which can become difficult to control.  Typically, stock inventory and even the amount of actual inventory used in a product, is not tracked with the level of precision required to truly minimize losses within an organization.  By losses, I refer to obsolete materials on hand, excessive inventories beyond what is normal or customary for normal usage, estimated inventories calculated for product or service usage above actual required inventories, etc.  The impact to the bottom line is how these inventories are tracked, monitored, and measured.  This method can dramatically change the fiscal landscape of the organization.  While it may seem to have only small incremental impacts with regards to the bottom line, over a longer period of time or even the course of a year, the total impact can have far greater fiscal negatives. This is not to mention the output impacts for products or services by not having a good measure of product and/or a good method of measuring and tracking.

                Consider how materials are being tracked in your organization.  A main key to accurately tracking inventory status and usage, is to be able to run reports at any given point in time.  You should be able to report on all measurable amount of inventory currently in your storage areas.  You should be able to report and track all measurable amount of inventory currently used in any salable product or service as well as what is wasted and/or part of operations.  Lastly, you should also know the level of materials that may not be used in any product or service again as well as those no longer applicable/usable for operations.  Consider the calculation required in determining pricing structures for offered products and services.  The different materials and the quantities used are important factors to accurately determine a price structure.  In some cases, material usage can encompass very high percentage of final outputs.  If the amount required or utilized is not accurate, the final product margins can be greatly impacted in a negative manor.  Consider the products or services you offer.  Consider again, what you believe to be the level of profit margins on the final sale.  If you method of tracking your material usage is not accurate, the level of opportunity for increased profits could be fairly several percent or more.  Factor this opportunity over the entire course of a week, month, or even a year, and the total impact to the organization can be significant.

                Tracking material usage doesn’t have to be elaborate, difficult, or even extensive at a first.  The level of activity and amount or flow through the organization will dictate the amount of effort which will be required for tracking, measuring, and monitoring.  Higher levels of activity will require a more robust system.  On the most basic side, something as simple as an Excel file, if set up correctly at the onset, will provide adequate tracking and monitoring in order to measure usage.  Identification in the system for each material should have a defined and consistent naming convention as well as sizing characteristics.  This is the only way to maintain accurate reporting and tracking measures.  Any related and important specifications should also be identified for each material, with each material.  A solid process must exist to track material usage to include both additions into inventory and extractions from inventory.  Once this is properly established, linkage to jobs, projects, or products becomes fairly easy to maintain.  If the processes are established properly and consistently tracked, the impacts to final outputs will be easily tracked and measured.

                Material decisions should be a part of the total organizational decision process.  Decisions such as pricing structures, purchasing structures, inventory levels, and inventory turnover becomes feasible and measureable.  Material tracking should be consistent and with a certain level of precision.  If not established properly, tracking will be sloppy and inaccurate.  The minimum tracking units of measure should be at a level required to provide accurate tracking and reporting.  Impacts to products and services must be fully understood and reported against if there is ever a hope to minimize carrying inventory.  As stated before, if tracked properly, a full understanding of material usage impacts to profit margins can be monitored and reported.  This piece alone could have huge impacts to total profit within the organization.  If you are not tracking your material usage or are only tracking base quantities, it would pay to dig into your total material management practices.  Don’t be afraid to ask for help.  The cost for guidance could provide a greater return in the long run.

Stay Well

Scott B.


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