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Manufacturers & Distributors

Are You Effectively Managing Your Inventory?

Posted on October 25, 2022 by

Jim Biehl

Jim Biehl

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Inventory ManagementIn today’s competitive manufacturing and distribution market, business owners are taking a fresh look at inventory management practices. For many mid-sized companies (and quite a few larger ones) inventory represents one of their biggest working capital commitments. For this reason, inventory management improvements can be a valuable leverage point for hitting financial targets, meeting customer service goals, and boosting sales performance. 

Considering the raw dollar value of your inventory, it becomes easy to see how relatively minor oversights can build up, leading to expensive material or efficiency losses over time. The ripple effects can have a negative impact throughout your business, ultimately affecting product quality, customer satisfaction, and profit margin. 

Here are three strategies you can use to get more out of your inventory investment. 

Strategy 1 – Process Audits 

In general, the fewer times your inventory is touched, the more money you make. Consider running process audits that follow inventory items all the way through your system. How are they received? Where are they stored? How long do they sit before earning revenue for you? How far do they have to travel when you acquire them and between manufacturing steps? 

Detailed process audits can reveal inventory management steps that either no longer add value or cause costly wasted motion that you can eliminate. They can also uncover instances of hidden loss or spoilage that erode your inventory investment before you can turn it around. A process audit can also show you where inventory practices may cause downstream problems or friction in other parts of your business. 

Strategy 2 – Bill of Materials (BOM) Audits 

A bill of materials gives you clarity about everything needed to support and/or deliver a particular product. Countless small engineering, design, process, and supplier changes at any point in your value chain can shift a bill of materials out of date. The risk here is that people downstream may not know about the change and could be working on faulty and costly assumptions. Buyers or warehouse personnel may continue to stock a component that is no longer needed, or stage inventory in a way that no longer fits the needs of the people who use it downstream. 

The remedy is to conduct bill of materials audits on at least a quarterly basis that check for changes in part configuration, units of measure, finished goods requirements (size, quantity, or color, for example) that apply to different customers or markets, or differences between vendors. The best way to ensure the success of bill of material audits is to have a formal way to capture and share the findings so that everyone can make timely adjustments. 

Strategy 3 – ERP System Optimization 

Another key question to ask is whether you are getting the information you need out of your ERP system. Setting up an ERP can be a long and costly process, and few of them will be fully optimized for your company’s business case out of the box. Success depends on getting everyone in the company to use the system correctly as needed for their various roles. 

The information you get out of your ERP system will only be as good as the information going in. Make sure that you have the right integration in place to get timely inventory updates – a daily refresh is ideal. At any given time, you should be able to get a complete view of what is coming into your inventory holdings, what is going out, and when you are getting low on components that are essential to your manufacturing and product delivery needs. 

There are still companies out there that track things manually and have not made the move to an ERP application. If you are thinking about investing in ERP technology, choose your vendor and implementation partner very carefully. Make sure they have experience in your market sector and that they can handle the integrations you will need with the rest of your IT stack. It is also important to introduce the system in carefully planned stages and fully train your people. 

Continue the Conversation 

While these three strategies are highly effective, they are just a sample of the many ways that inventory management improvements can boost your productivity and profitability. Starting an inventory-related audit regimen can be daunting and it helps to get some guidance before you put your own processes in place. Clayton & McKervey can help you develop an approach that makes sense for your individual circumstances. Contact us today to learn more. 

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Jim Biehl

Shareholder, Manufacturing & Distribution

Leading the firm’s manufacturing & distribution group, Jim has built a reputation for providing strategic tax, accounting and operational support to owners.

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