One of the most overlooked sources of profit in a formula manufacturing organization is in the existing business processes. Do you need to reduce inventory shrinkage?
Take the Inventory Shrinkage Quiz:
Go to your system (manual or computerized) and look up the quantity on hand of 10 raw materials. Then go count the inventory on hand. Of those items how many times was your system equal to your physical count? Were 8 correct? How about 7? Surely it is better than 6. If 9 items do not agree by more than 5% - you have a problem.
How often are you performing a physical inventory? Is it more than once per year? Do you have to count all of your inventory or just certain items? If you are counting all inventory more than once a year for reasons other than a financial audit—you have a problem.
Why should you care about Inventory Shrinkage?
For most formula manufacturers the highest cost of operations is raw materials consumed to produce finished goods. We typically keep our inventory levels low to reduce the use of our operating capital. This way we have more flexibility to manufacture multiple products. Therefore—because we keep low levels of raw materials and inventory is critical to our business—stock outs can cost us significant profits in lost sales or customer goodwill.
You would be amazed to know that many formula manufacturers are attempting to run their business with 75% or less inventory accuracy. This means that 75% of their items in their systems do not accurately reflect what is on the floor.
How can you possibly schedule production with such inaccurate information? How do you know which products are making you money? Don’t you have better things to do than to count inventory that you know is going to get out of sync in no time?
4 Ways to fix Inventory Shrinkage
1) Identify items with the most variance - Review the results of your last physical inventory. Rank the items that experienced the highest level of variance (quantity adjustment cost).
2) Focus your attention on those items that have the highest variance - You will get the most bang for your buck if you fix those items first. Addressing the issue in a high volume but low cost item or a low volume and high cost item will have little impact on profits today. Add a policy to mark all existing inventory and inbound receipts of these items with a red dot so all in your company knows this item has experienced problems in the past.
3) Identify ways to better track items on list - Review the ways that you currently record receipt and usage of these items. You should look for ways to increase the likelihood that you get good counts for these items. Focus on the following activities:
o Inbound materials from Suppliers – Work with suppliers to receive inventory in usable quantities
o Usage of materials on batch tickets – Add processes to double count these items when added to production
o Return of excess materials to stock after production – Avoid movement of these items if possible. If inventory must be returned to stock add procedures to ensure the open container is the first to be used in the next production.
o Recording disposal of obsolete/expired inventory – Add procedures to ensure disposal of material is recorded in your system.
4) Cycle count these items on a monthly basis – Record the variance each month. When you get 3 months of minimal variance remove this item from the list and proceed to the next highest item on your list.
In the longer term it is probable that you will want to automate much of this task with a computer system written specifically for the formula manufacturing industry. Vicinity software (along with other applications) utilizes multiple units of measure to assist your organization in recording information in a way that best fits your business. Additionally a few applications provide tools to address recording broken container quantities (smaller than a drum) to increase the level of precision in recording raw material usage.
In general, your organization will need to get inventory accuracy in the 90% range before it has addressed this issue entirely. While the formula industry is known for inventory variations there is no reason any organization should not be achieving very high levels of accuracy.
Interested in reading more tips for formula manufacturers? Download the white paper “
By Randy Smith, Vicinity Manufacturing,