TMCnet Feature
September 04, 2020

Reasons to Start Using an Inventory Management System

Inventory management is a vital part of the success and sustainability of any business that manufactures, designs, or sells a product. In order to accurately quantify one of these business’s total assets, it’s necessary to understand the monetary value of every part, component, ingredient, raw material, nut, and bolt that comprises whatever it is that the business produces.

It’s all a bit abstract at a high-level, but let’s use a simple example for the sake of conceptual understanding: imagine a bakery that bakes bread. The bakery’s business model is essentially to buy the raw materials – flour, yeast, water, and salt—for a certain price. In this example let’s assume that the total cost is $6. The bakery then combines the ingredients together applies some heat and sells the completed loaves at a price set by the market; in this example let’s say $10. So, the cost of the raw materials for one loaf is $4, and the retail price at the market is $10, generating a profit of $6 per loaf, or 60%.

If the head baker wants to understand his bakery’s balance sheet at any given time, he needs to consider the monetary value of whatever amount of raw materials he has on-hand waiting to be baked into bread the next day. Simply put, every egg, pound of salt, a bag of flour, and a jar of yeast needs to be counted.

While it is perhaps conceivable that a determined baker with a diligent staff could manually count all his units of raw materials, imagine if instead of a baker he was a factory manager, and instead of a loaf of bread with four ingredients his factory produced internal combustion engines with over 30,000 individual parts that need to be fabricated to certain specifications. Could he even consider manually counting those parts on a recurring basis any time he needed visibility into his operational overhead? If the baker must close the bakery unexpectedly for a week, he might lose dozens of eggs to spoilage. If a factory that produces 120 cars every day accidentally under-orders a critical part because of ineffective inventory management data systems, it could lose out on potentially hundreds of thousands of dollars of lost production. So how to keep track of it all? The answer is an effective bill of materials (BOM) management system.

Put simply, a bill of materials is the recipe in our bakery metaphor. It is the list of raw materials, assemblies, and sub-assemblies required to manufacture a finished product. In a process manufacturing context, a loaf of bread in a bakery is the simplest illustration of this concept. It takes raw materials and combines them into a finished product based on a formula that it can sell at a high margin. A biotechnology company that makes prescription biologics to treat rheumatoid arthritis formulated for specific patient populations at different dosages does essentially the same thing at the complex extreme. The common thread between both is that their inventory management requires understanding the conversion relationship between large bulk quantities of raw materials, often perishable, into very precisely formulated finished products, like combustion engines and delicately balanced drug formulas. In order to minimize costly, margin-killing waste, it’s essential to have a flexible, automated BOM management system.

BOM automation solutions (go to website for an example) leverage the power of cloud computing and SaaS (News - Alert) technology to give production managers effective visibility into their raw materials inventories and enable them to make sense of the vast amounts of data generated by the millions of parts and permutations of end products inherent to complex formulaic process manufacturing.

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