Streamlining Success: The Importance of Effective Manufacturing Inventory Management

Last Updated on June 26, 2023

Manufacturing inventory management is a crucial aspect of any successful manufacturing operation. Effective inventory management can help businesses optimize their production schedules, reduce costs, and improve customer satisfaction. However, for small and medium-sized businesses with limited resources, managing inventory can be a significant challenge. This is where nearshore manufacturing partners like NovaLink can help. In this blog post, we will explore what manufacturing inventory management is, why it is essential for manufacturing operations, and how partnering with NovaLink can help small and medium-sized businesses optimize their inventory management processes and reduce costs.

What is Manufacturing Inventory Management?

Manufacturing inventory management is the process of effectively tracking, controlling, and optimizing a manufacturer's inventory levels. It involves developing and implementing a system for tracking inventory, determining optimal levels of inventory, managing inventory replenishment, and minimizing inventory costs. Manufacturing inventory management is essential for manufacturing operations as it helps to ensure that businesses have the right materials and products on hand when they need them, while also preventing overstocking and reducing waste.

Inventory management is an overarching term that refers to your tracking system for every phase in the product life cycle. It can include your sales forecasting, product ordering, supply chain management, warehouse management, and customer fulfillment solutions.

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Why is Manufacturing Inventory Management Important?

Effective manufacturing inventory management requires careful planning and analysis. Manufacturers must understand the demand for their products and accurately forecast future demand, so they can order the right amount of raw materials and finished products. This requires a deep understanding of the manufacturing process and supply chain management. Manufacturers must also have the right tools and technology in place to track inventory levels, monitor production schedules, and manage replenishment.

Why is inventory management in business important? Inventory management can make or break a business. Inventory is often the largest item in the current assets category on a balance sheet. Issues with inventory can contribute to business losses, even failures. Proper management of the supply chain, on the other hand, can allow a business to thrive. Good inventory management strikes a balance between the amount of inventory coming in and going out. It controls the timing and costs of non-capitalized assets and stock items, allowing a business to reach optimal profitability.

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According to Manuel Campos, Engineering and Information Systems Manager at NovaLink, another key question that needs to be asked of a production to maintain good inventory balance: how well do you understand your bill of materials and how do you handle the waste and the costs of newer materials?

A common error is the belief that if I buy a thousand pieces of X components that it will translate into a thousand finished products. However, that's not the case in most scenarios: there will be some waste that may be incurred by your suppliers or vendors, and some by process of execution which might be material related or even manpower related.  Once we start touching the material for producing the product, new material needs to be applied in order to satisfy or guarantee a good quality product at the end of the line.

Setting an Inventory Ratio

The inventory turnover ratio refers to the number of times a business replaces its inventory during the course of a year. The key to knowing what you have on hand (or do not have) and how much you will need to purchase to maintain viability in your production lines is having accurate and current data available.  For many manufacturing industries, the definition and quality of data pose substantial challenges, often due to a lack of sound data management practices. When procurement and manufacturing lead times are inaccurate, a company is forced to rely on judgment-based inventory planning. As a result of this type of inaccurate planning, excessive orders and stock levels may be required to meet customer service requirements.

This can be avoided if manufacturers have sound data that will allow them to establish an inventory ratio that prevents overstocking and shortages in the manufacturing process.

The inventory ratio for manufacturing typically ranges from 1 to 2 on a national scale. According to the Census Bureau, the inventory ratio in all manufacturing sectors ranged from 1.21 to 1.39 from 2000 to 2010. The turnover ratio in the durable goods sector ranged from 1.40 to 1.82, while the ratios were lower in the nondurable goods sector at 0.91 to 1.14. Therefore, manufacturers should expect to maintain ratios in these general ranges.

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Key Benefits to Effective Manufacturing Inventory Management

There are several key benefits to effective manufacturing inventory management. For one, it helps to prevent stockouts and backorders, which can result in lost sales and revenue. It also helps manufacturers avoid overstocking, which can lead to excess inventory costs and reduced profitability. Additionally, effective inventory management can help manufacturers optimize their production schedules, reduce lead times, and improve customer satisfaction by ensuring that products are available when customers need them.

For small and medium-sized businesses (SMBs) with limited resources, effective inventory management can be especially challenging. SMBs often have less visibility into their supply chain, which can make it difficult to accurately forecast demand and manage inventory levels. Additionally, SMBs may lack the resources to invest in the technology and tools needed to effectively manage inventory. As a result, many SMBs struggle with inventory management, which can impact their ability to grow and succeed in a competitive market.

This is where nearshore manufacturing partners like NovaLink can help. NovaLink is a Mexico-based manufacturing partner that offers a range of services to help SMBs with manufacturing inventory management. By partnering with NovaLink, SMBs can leverage the company's expertise and resources to optimize their inventory management processes and reduce costs.

One key advantage of partnering with a nearshore manufacturing partner like NovaLink is access to lower-cost labor and materials. Mexico is a top destination for nearshore manufacturing due to its proximity to the United States and Canada, as well as its lower labor costs and favorable trade agreements. By outsourcing manufacturing to Mexico, SMBs can take advantage of these cost savings, which can help to offset the investment required to implement effective inventory management processes.

Another advantage of partnering with NovaLink is access to advanced technology and expertise. NovaLink invests heavily in the latest manufacturing technology and tools, including advanced inventory management software and automation systems. This allows the company to offer cutting-edge solutions for inventory management, supply chain management, and production planning. By leveraging NovaLink's expertise and technology, SMBs can optimize their inventory management processes and reduce costs, without having to invest in expensive technology and training.

NovaLink also offers a range of supply chain management services to help SMBs manage their inventory more effectively. This includes demand forecasting and planning, inventory optimization, and vendor management. By working closely with SMBs to understand their specific inventory management needs, NovaLink can develop customized solutions to improve inventory visibility, reduce lead times, and minimize inventory costs.

Manuel Campos of NovaLink elaborates:

“Another important thing to know (in manufacturing) is how do you plan to do your purchasing according to your manufacturing demands? If you are able to plan ahead for these questions and have the materials and availability in place, then starting production is actually the easiest part: we can then support you in preparing for available stock for keeping your line running. If that knowledge is not available, which usually gets done during the ramp up process, you may have the risk of having lines down because of lack of materials, or you have the risk of having a line down because of a product variation that was not considered at the very beginning of the planning phase.”

Manufacturing Inventory Management Is a Critical Process for Manufacturing Operations

Effective manufacturing inventory management is crucial for any business, as it involves accurately tracking and forecasting inventory levels to ensure that materials and products are available when needed. Satisfactory inventory management not only refers to what is currently available, but also to predicting when more materials will be needed to keep the production line running. Poor tracking of inventory levels can lead to disruptions in the production process, potentially bringing the entire operation to a halt.

Partnering with a nearshore manufacturing partner like NovaLink can help SMBs to focus on their core competencies and business priorities. By outsourcing manufacturing to a trusted partner, SMBs can free up resources and reduce the time and effort required to manage inventory and production schedules. This allows SMBs to focus on areas of their business where they can add the most value and achieve the greatest competitive advantage.

FAQs about Inventory Management: Best Practices and Strategies

Q1: Why is effective inventory management important for businesses?
A1: Effective inventory management is crucial for businesses as it helps optimize cash flow, reduce carrying costs, minimize stockouts, and improve customer satisfaction. It enables businesses to have the right amount of inventory at the right time, ensuring smooth operations, cost control, and efficient order fulfillment.

Q2: What are some best practices for inventory management?
A2: Some best practices for inventory management include implementing accurate demand forecasting, adopting inventory tracking systems, setting optimal inventory levels, implementing just-in-time (JIT) or lean inventory principles, conducting regular inventory audits, and establishing effective supplier relationships. These practices help businesses maintain optimal inventory levels and minimize excess or obsolete stock.

Q3: How can businesses optimize inventory turnover?
A3: Businesses can optimize inventory turnover by implementing strategies such as demand forecasting, improving supply chain visibility, reducing lead times, optimizing order quantities, implementing efficient inventory replenishment processes, and analyzing sales and demand patterns. By improving inventory turnover, businesses can reduce holding costs and increase profitability.

Q4: What role does technology play in inventory management?
A4: Technology plays a significant role in inventory management by providing advanced tools and software solutions. Inventory management systems, barcode scanning, automation, and data analytics help streamline inventory tracking, order processing, and demand forecasting. Technology enables businesses to make data-driven decisions, improve accuracy, and enhance overall inventory management efficiency.

Q5: How can businesses reduce the risk of stockouts while managing inventory levels?
A5: Businesses can reduce the risk of stockouts by implementing strategies such as safety stock management, setting reorder points, maintaining reliable supplier relationships, monitoring lead times, and establishing effective communication channels with suppliers. Regularly reviewing and adjusting inventory levels based on demand fluctuations and market trends can help ensure adequate stock availability.