Inventory Management Reports for Manufacturing SMEs
What are the Inventory Management Reports?
Inventory management reports enable manufacturing SMEs to have an accurate representation of the amount of raw material, components, and finished products, on hand, and decide when to order inventory, how to store inventory, and use inventory as efficiently as possible to run the production process smoothly.
There are different types of inventory reports that manufacturing companies should focus on to improve their productivity & efficiency. We will provide more details of these reports in the following sections of this article. Let us now discuss, what is the importance of inventory management reports and how manufacturing companies should make the best use of inventory management reports to reduce costs and improve profits.
What is the Importance of Inventory Management Reports?
Inventory Management is of primary concern for manufacturing SMEs, to ensure enough inventory without having their precious funds locked up in large amounts of inventory. Because Inventory is Money Sitting Around in Another Form!
Manufacturing companies that have implemented a good inventory management system are able to have real-time and accurate insights into their company’s inventory at all points of time. They can generate various inventory management reports that are useful for managing your inventory efficiently & effectively.
Accurate Inventory reports help to define reorder points so companies can determine when to order inventory, how much inventory to order etc. All this ensures uninterrupted production without having to face situations of out-of-stock or overstocking.
Inventory reports also help ensure effective storage & movement in the warehouse. You can organize your inventory as per the order of priority it is required. This will prevent any loss of inventory during movement, unnecessary handling, etc.
Inventory reports also help keep a check on the perishable products and avoid any losses due to expiry. It helps to track whether inventory meets the desired quality standards or not and raises a flag for rejection. It also keeps a track of inventory which is damaged during transit or storage and needs to be returned etc.
Inventory reports provide valuable information for identifying trends in inventory such as which items are in stock, how long items are in stock, what the value of the items in stock and all this information can be used effectively to reduce procurement costs, inventory holding costs, and overall production costs.
Which Key Inventory Management Reports must Manufacturing SMEs focus on?
1. Average Inventory Report
The average inventory is calculated as an average of starting and ending inventory over a period of time. Avg. Inventory = Current Inventory + Previous Inventory / Period of Time.
Knowing average inventory is important to judge how much money is locked in inventory.
You can also compare whether the average inventory is above or below the estimated inventory level. It is also important for calculating inventory turnover ratio as well as
for accounting purposes
Example: If we want to calculate 3 months average inventory then, we will take into consideration, opening inventory of 1st month & closing balance inventory of all 3 months.
Opening inventory is Rs.5000 and closing inventory for 3 months is Rs.4500, Rs.4000, Rs.6000 then Average Inventory = (5000+4500+4000+6000)/4
Therefore average inventory is Rs. 4875 over the 3 month time period.
2. Ageing Analysis
Inventory aging analysis report depicts how long a given item quantity is in storage. It helps to determine which items are getting expired, becoming obsolete, or items that are probably not required that much as they are lying in the inventory for a long time. The company can decide whether to order or discontinue ordering these items accordingly.
Example You purchased 100 items named “X” on 1 Jan 2020. As of 31 May 2020, you have only utilized 45 items of X as follows: 15 items of X were used each in Jan, Feb, and March, while the balance is in stock. This means for the balance of 55 units of “X” items the storage duration is 152 days.
3. ABC Analysis
ABC analysis provides a mechanism for identifying items that have a significant impact on overall inventory consumption cost. It also provides a mechanism for identifying different categories of stock that will require different management and controls.
When carrying out an ABC analysis, inventory items are ranked as per their total consumption value. The results are then grouped into 3 bands, called as, ABC Classification
(a) “A class” inventory = 80% of total consumption value OR 20% of total items.
(b) “B class” inventory = 15% of total consumption value OR 30% of total items.
(c) “C class” inventory = 5% of total consumption value OR 50% of total items.
4. XYZ Analysis
XYZ Inventory Analysis is based on the current value of the Inventory in Hand.
(a) “X class” inventory = 70% of store value OR 20% of store items count
(b) “Y class” inventory = 15% of store value OR 30% of total items count
(c) “Z class” inventory = 5% of store value OR 50% of total items count
The inventory control should be such that:
• Only extremely important items should fall in the X class category
• Essential items must fall under the Y class category and
• Less important items must fall under the Z class category
XYZ Analysis is important to monitor inventory as per their classification and reduce situations of stock-outs.
5. Inventory Turnover
Inventory turnover ratio is a very good indicator of overstocking or stock out situations.
Inventory turnover is a ratio that depicts how many times a company sold and/or replaced inventory during a certain period.
Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory.
Inventory Turnover = Sales/Average Inventory
For example, an inventory turnover of 120 will mean that inventory has to be replenished almost every three days. While an inventory turnover of 5 will mean inventory has to replenished after almost 70 days.
6. PO Analysis Value-Wise
Purchase Order Value Analysis Report provides information on all purchase orders based on their order value over a period of time.
Consistent High-Value Purchase Orders indicate the efficiency of the procurement team; as they must have aggregated demands from various departments & locations to improve negotiation leverage and reduce procurement costs.
While, recurring generation of small value purchase orders are a sign of poor planning of purchases, as these must have been generated to fulfill immediate requirements. Multiple Small orders also increase all stakeholders workload regards papers work, approvals, follow-ups, etc
7.Inventory Valuation Report
Inventory Valuation is the monetary value of all goods in stock at a specified point of time. Inventory valuation is based on the total costs incurred to acquire the inventory and make it ready for sale/consumption. It includes costs such as direct labor, materials, overheads, freight charges, handling charges, etc.
Inventory valuation reports form the basis for calculating the cost of goods produced or goods sold and determining the gross profit of the companies.
There are different methods of inventory valuation
• First in First Out (FIFO)
• Last in First Out (LIFO)
• Weighted Average Cost (WAC)
• Specific Identification Method / Standard Item Value
Companies usually choose an inventory valuation method that suits their specific business situation.
Leverage the information from inventory management reports to understand trends and take corrective measures to achieve optimal inventory, as well as, reduce inventory-related costs and improve profits.