Formula Manufacturers: Inventory Control Issues A Recipe For Disaster
Posted Wednesday, January 18, 2012 by Peter Kelly
Most formula manufacturers that I encounter are constantly looking at ways to improve their inventory costs and reliability. Nothing is worse for them than having a customer order and/or production ticket ready for staging only to find that the raw materials are not available. During my review of business processes for prospects many times the Material Planner/Purchasing Manager is doing a visual review of the raw
materials in the warehouse to verify inventory quantities to either complete purchase orders or create the production schedule. They don’t trust their ‘system’ numbers. Raw material inventory integrity is often one of the biggest problems that I encounter with prospects.
There could be many reasons why inventory control is such a pervasive problem:
- The use of separate accounting/financial systems for the inventory and manufacturing systems. Raw materials are ordered on one system and manually updated in another system.
- The purchase receipts are not completed in a timely and correct manner. Raw material is received at the wrong cost or wrong quantity. Human error. By the time the vendor invoice arrives the raw material has been consumed.
- Raw material quantities are purchased on one unit of measure but consumed in another unit of measure with incorrect conversion methods.
- Quality control is not tracked therefore inferior materials are hitting production causing production to use more than the formula or batch ticket calls for. Production is not recording actual.
- Not inputting quantities used for production or staging in a timely manner to relieve raw material inventory. Not having a work in process (wip) of the manufacturing process takes several steps and time.
- Cycle counting is not in place. Physical inventories occur once a year. Once a year is pretty extreme! Some companies complete this task once a month due to poor inventory controls.
The majority of the companies I encounter with these problems are using two or more systems to manage their business. Sometimes one or more of the business tools is a spreadsheet. I have nothing against spreadsheets as long as they actually tie back to a database that is driven by real transactions. One system for accounting and one system for manufacturing makes no business sense to me. This use of disparate systems can cause many problems; one being inventory control. If you are selling out of one system and manufacturing in another how do you know what your demand is for production? Is someone taking the sales orders and then filling out a production schedule? Then someone is updating one system with the finished goods to ship and invoice… I have to enter vendor invoices into the accounting system to cut checks, but I am purchasing in another system… Confusing? This scenario demands a lot of manpower just to function on a day to day basis.
These problems of course point to operational and personnel issues, but they also point out to the need for an integrated financial and manufacturing system that is inherently designed to track items 1 – 6 and more. A production and material planner should not be spending his days looking for raw material in your warehouse; he should be on the phone getting you the best price available for the items. He should be able to feel confident that your system data is accurate and so should you.