The ultimate guide to raw material inventory management

Brahm Meka
October 3, 2022
9 Minutes
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raw material inventory management

Manufacturers have a lot to account for. From labor to the supply chain to what happens on the factory floor, it can be overwhelming to consider every step your products go through to reach completion. 

Raw material inventory management can go a long way toward helping you manage everything. This post will cover everything you need to know about managing your raw material inventory, why you should do it first, and some best practices you can follow to get started. 

What is raw material inventory management?

Raw material inventory is the total value of components, subassemblies, and materials that go into building your products. If, for example, you produce wooden rocking chairs, then your raw material inventory may consist of oak planks or logs. 

Even though your raw material inventory hasn't been manufactured yet, it's still important to consider when creating and managing your financial documents. 

You can further organize your raw material inventory by dividing them into:

  • Direct materials and 
  • Indirect materials

Direct Materials

Direct materials are materials that are used to make up your final product. If that's a rocking chair, then wood would be a direct material. 

Indirect Materials

Indirect materials are necessary for manufacturing a product but aren't necessarily a key part of the product itself. In the rocking chair example, this might include glue, nails, screws, etc. 

How to calculate raw material inventory

Calculating your raw material inventory is central to raw material inventory management, and fortunately, it's pretty simple. 

First, you need to add how much of one raw material you have at the beginning of a period (i.e., a fiscal quarter). You can technically lump all of your raw materials into one number, but it's best to be more organized. 

Once you've added up the total amount of that raw material you have at the start of a period, subtract how much of that material you've used by the end of that period. So if you start with 1,000 planks of wood and use 750, you've ended the period with 250 planks that quarter. 

1,000 Planks - 750 Planks Used = 250 Planks Remaining

Finally, you're going to assign value to that remaining inventory. To do this, simply multiply each raw item by how much you paid per unit. If you paid $1.00 per plank of wood, then your raw material inventory for planks of wood is $250.00. 

$1.00 x 250 Planks = $250.00

After you've accounted for the raw material inventory of each of your raw materials, you can add them up to view the total cost for all raw materials. 

Note that this can be time-consuming, especially for businesses with a long list of raw materials. That's why many manufacturers opt for a software platform like Brahmin Solutions, which makes calculating your raw material inventory fast and easy. 

The importance of raw material inventory management

Raw material inventory management is critical to increasing your insight into how your products are manufactured, what goes into them, what it's costing you, and how you can optimize all of these factors. 

It also comes with many benefits, like reducing waste and idle time. By calculating your raw material inventory, you can see exactly how much of each raw material you need. You can use this information to start ordering an amount closer to your demand, preventing idle time or wasted materials. 

You can also improve delivery times by investing in raw material inventory management. You can be a more consistent manufacturer by streamlining your raw material orders and manufacturing. 

Nine tips for raw material inventory management

We've curated several best practices to help you get started with raw material inventory management. By following these tips, you can confidently embrace raw material inventory management. 

1. Use a raw material inventory management system

The first and most important step is to start using a raw material inventory management system. Several platforms are available, each with unique benefits that will make your raw material inventory calculations more accurate, automated, and frequent. 

At Brahmin Solutions, we offer one of the best and most versatile platform for manufacturers. It's an excellent choice for raw material inventory management and other manufacturing management needs. 

2. Update safety stock and reorder level points

Safety stock is the amount of inventory a business keeps in its warehouse to protect against sudden increases in demand or shortages in supply.

Having a good reorder point helps ensure your business never falls too low on inventory. Most manufacturers have a minimum amount of inventory for raw materials used in production. These manufacturers often do not regularly update their calculations. A good reorder point helps ensure your business never falls too low on inventory.

You should adjust your reorder points if there are significant changes in how much people are buying, how long it takes for them to get the things they want, or how much product is being made.

Also, don’t forget to adjust safety stock and reorder point levels to account for seasonal changes like an upcoming holiday season.

Keeping track of your inventory levels will help you make sure you always have the right amount of raw materials in your warehouse. This will help keep your cash flow healthy by preventing you from having too much money tied up in inventory.

3. Embrace a data-driven approach 

Another important way to make raw material inventory management work is to embrace a data-driven approach. Calculating raw material inventory is all about having the correct data at your disposal and putting it to work for you.

Becoming data-driven means collecting data frequently and automatically, transforming it in meaningful ways, and understanding how it fits your business's bigger picture. 

4. Watch out for overstock and understock

You should keep a close eye on overstock and understock as well. If you're managing your raw material inventory accurately, these issues should be few and far between. 

On the other hand, if you find that you keep running into stocking challenges even after calculating raw material inventory, you may need to reconsider how you're approaching your raw inventory management. Again, the software can help prevent these issues by making you more accurate and automated. 

5. Use automation to improve your data

Speaking of keeping your business automated, that's our next tip! Automation is key to any data-backed strategy for obvious reasons. It allows you to have real-time insights into your production floor without needing to do any manual counting. 

Automation is also key to staying as accurate as possible and accounting for factors like demand predictions. This can greatly impact your raw material inventory management, so don't overlook it!

6. Focus on what matters (and ignore what doesn't)

You do not need to track every material consumed in your production to have proper inventory management of raw materials.

For example, nails, screws, buttons, and other materials that are not expensive and are usually bought in large quantities can be costed when purchased instead of tracking how many of each item was used in the production process.

Getting the high-cost raw material stock in place on a production recipe is more important so you know early on if this is a profitable product. Don't spend a lot of time trying to save pennies. Instead, focus on things that have a more significant impact on your profits.

7. Ensure that your cost calculations are accurate

Remember that raw material inventory is not the be-all-end-all of your manufacturing costs. It doesn't account for critical factors like labor costs or manufacturing overheads. 

Keeping track of your overall manufacturing costs can help you get a big-picture understanding of your operations. 

8. Don't overlook quality control

Don’t overlook quality control. It can be easy to let quality control fall by the wayside when you're focusing on raw numbers. 

But even if quality control isn't a quantitative factor, like raw material inventory, it still plays a role in your production times and sales. Don't hesitate to reject or return defective materials, and never cut corners. 

Don't over look quality control - raw materials guide
Further Reading: Quality control vs. quality control 

9. Use industry-standard metrics to find out what works for you

Lastly, there is no one-size-fits-all solution to the business. What works for one company might not work for another.

This approach is simple, direct, and flexible. You can use what works and discard the rest. This will help you overcome any challenges in your manufacturing business.

You need to use all the tools you have to create your own style of manufacturing. You can find the right formula for raw materials so your business can succeed.

How much time needs to go into raw materials inventory management

Now you know what raw materials definition is. How much hard work will you need to put into your raw material tracking?

The Pareto Principle is a rule that states that 80% of the results you get come from 20% of the input. This means that if you work 100 hours a week, only 20 of those hours will be responsible for most of your results.

Most disciplines have a core set of principles that will make you successful if you learn them. Moreover, 20% of the stuff you learn about managing your raw materials inventory is used for 80% of your operations. And guess what? This 20% is the most important information to know if you want to have successful inventory management. Get this information down, and the rest will follow.

Are you spending a lot of time checking your stock, only to find that mistakes still happen?

You could try using the perpetual inventory workflow to manage your stock. This way, you can calculate how much it costs to keep each square foot of stock each month. You could also try adopting the principles of just-in-time (JIT) manufacturing.

We recommend you not go for a 100% JIT approach at this stage.

Think about the raw materials you have lying around for the longest time, and ask yourself why you need them. You can increase your inventory turnover ratio by keeping less stock. There's no need to keep raw materials hanging around for months.

If your IRT is low, you are losing a lot of money each month on carrying costs. Are your costs more than your income?

You need to figure out your cost of goods sold (COGS). This will tell you how much it costs to produce goods. You must also know how the raw materials used affect your bottom line. Spreadsheets are good for figuring out how much things cost. This doesn't include every cost.

There is software that can help you figure out how profitable your manufacturing business is. This software is designed to cover every aspect of your manufacturing business.

Automate your raw material inventory management with intelligent manufacturing software

Even if you know a lot about your industry, you still need the right tools to be successful. It will be very difficult to succeed if you don't have software to help manage inventory for a scaling manufacturing business.

Using undedicated software or a pen-and-paper method is like working against yourself.

Keeping up with these best practices for raw material inventory management can be a challenge initially, but eventually, it will become second nature to how you operate. You can speed up adopting these strategies with software like Brahmin Solutions. 

This is not just any ordinary manufacturing software.

Brahmin Solutions was designed to make the lives of SMB manufacturers easier by providing automated, accurate, and valuable features in an all-in-one package. Reach out to our team today to learn more

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Brahm Meka
Founder & CEO

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