Inventory Tracking – An Essential Guide For SMEs

Inventory tracking means monitoring stock movements to increase visibility in the company’s supply chain. This added transparency helps businesses improve their ordering and overall inventory management practices, ensure traceability, and make sure that goods reach the production floor and the customer at the right time.

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What is Inventory Tracking?

Inventory tracking is the segment of overall inventory management that monitors the physical movement of components and raw materials into and throughout the production operation. By allowing real-time tracking of the movement of inventory items, a company can optimize production processes to find the right stock balances concerning its order position. Inventory tracking encompasses tracking processes for both raw materials, work in process (WIP), as well as finished goods.

Having the suitable raw materials and components in stock at the right time ensures orders are met within quoted lead times. To make sure this happens, companies often employ complex inventory management systems to manage inventory from purchase, receipt, use, and delivery. These inventory management systems can be part of a standalone system or part of an MRP software platform that allows interoperability between inventory and production scheduling, shop floor control, finance, and other departments.

Inventory tracking can be either manual or automated. Larger companies have traditionally used automated systems that include bar code scanners, analytics, automatic or semi-autonomous relief systems tied to BOMs and adjusted when orders are sent to the shop floor, and others. 

SMEs often use manual tracking of inventory which consists of lists, spreadsheets, manual SOPs, and standard work to keep track of the material flow. However, with advances in modern productivity software, there is little reason for SMEs to keep manually tracking inventory. Advanced, agile, and flexible software systems have “leveled the playing field,” making automated standalone software or inventory tracking as part of SME-oriented MRP systems or manufacturing ERPs on par with those used by larger companies.

Why is Inventory Tracking important?

The significant disruptions to traditional supply chains caused by the COVID-19 pandemic have impacted supply chains and companies of all sizes. Other disruptions such as stranded cargo carriers, international piracy, political conflicts and trade wars, and natural disasters have also heavily impacted the global movement of goods in recent years. Together with future uncertainties, these kinds of more or less constant disturbances can make life for small and medium-sized enterprises (SMEs) especially painful.

Inventory movement has always been important for smooth business both for manufacturers and distributors alike. Inventory affects delivery schedules, cash flow, taxes, and other functional areas within a company. If one of these is out of balance, the company can experience a loss of business or run out of operating capital. For SMEs especially, lacking in large-scale capital to fall back on in case of troubles, improper inventory tracking can have disastrous consequences.

Types of inventory

There are many types of inventories. But the three most common types used in almost all manufacturing operations are raw materials (or components), Work in Process (WIP), and finished goods.

1. Raw Materials – Every company uses some form of raw material. Raw materials are the base components that are used to process into finished goods. They include things like flour, fiber, grain, screws, or other commodified components. They may also be components such as a wiring harness or small step motor used to create a subassembly.
2. WIP – Work in process consists of all the materials, partially processed or fully processed, used in production from production stage to production stage. It may also encompass partially completed subassemblies at various stages of assembly.
3. Finished Goods – Finished goods represent the final product that can be used to fill customer orders as a unit or as a count.

Inventory tracking software, MRP systems, and ERP systems always have tracking of these three types of inventories. However, more sophisticated versions may also allow for tracking maintenance, repair, and operations inventories (MRO) such as nuts, bolts, belts, tape, glue, or other material used to maintain the physical plant or assist in operational operations functions. These, too, are included in most MRP/ERP platforms.

Inventory control techniques

How inventory tracking is conducted also depends on the overall inventory management system deployed. Each technique has its own goals that align with the industry, company size, or finished product structure. These techniques include:

Economic Order Quantity

Economic order quantity uses formulaic variables to control cost. This method is often used by process manufacturing make-to-stock (MTS) companies that can purchase materials in bulk. Because they produce in volume and know throughput production rates precisely. They can include demand rate, inventory holding cost, and other variables to trigger large bulk purchases at the best price to reduce the number of times required to purchase. Volume is leveraged to hold down cost improving cash flow.

Minimum Order Quantity

Minimum order quantity (MOQ) represents the smallest subset that a manufacturer will sell, such as a dozen, a hundred count, etc. Because smaller lots are more efficient in many cases, this minimum allows for more efficient manufacturing. It will enable inventory to be ordered and tracked accurately as the manufacturer knows how much is required to produce each MOQ.

Just-in-Time Inventory

Just-in-time (JIT) inventory was introduced with the advent of lean methodologies within manufacturing and has carried into other methods such as Six Sigma. The stock purchase is related to the order position within the company, and materials are not purchased until orders are received. This drastically reduces inventory cost, holding costs, and handling of both raw materials and components and WIP.

ABC Inventory

ABC analysis breaks down finished goods into three ranked categories, with A goods being the most profitable, B in the middle, and C as small or low margin goods. The goal of inventory management in ABC is to ensure that material is always available for A-level production. The urgency for the other categories decreases accordingly. If disruption causes shortages, tradeoffs or sacrifices can be made on the lower tiers to guarantee the most profitable finished goods.

The inventory control technique used will affect the type of inventory tracking implemented. Each of the above techniques also introduces limitations to manual inventory tracking. For example, ABC analysis can be highly subjective when manually done, and MOQ and Economic Order Quantity formulas can be off or error-prone. SMEs can utilize affordable inventory or MRP software to help manage any of these inventory techniques effectively and eliminate the human bias and errors in a manual system.

Inventory Tracking tools

Once the inventory management technique is established, several tools are commonly used to help automate the process. All these tools can be tied through connectivity directly into the inventory software or MRP software to allow complete automation of inventory processes while maintaining the near real-time effectiveness of work orders, including inventory quantity relief against an issued order’s BOM. A few examples of tracking tools are:

Barcoding

Barcodes and QR-codes are standard today, even on bulk raw materials. Scanners can be handheld (some software even allows scanning with a smart device such as a phone or a tablet), mounted on pickers, or built into the framework of the production machine. This means that from receipt through issue to the production floor, to WIP, and into finished goods, it is possible to track a material partially or fully as it moves through production and apply its progress to the BOM of an MRP system.

RFID

RFID, or radio frequency identification, is another form of material identification that can be used to track inventory through production. Active RFID uses chips to signal Wi-Fi or scanners that the goods are in a specific location. Passive RFIDs do not contain the ability to actively signal its progress but can be read by hand scanners or embedded scanners on production equipment.

Embedded Metering

Many OEM machine manufacturers include embedded metering depending on the type of finished good being produced. This may be able to be tied to the inventory tracking software depending on the connectivity capabilities of the equipment in production. Or, it can be manually added as the inventory values are batched in reports and added manually at the operator station or through administrative means.

Inventory Tracking software

Today’s SMEs must deal with fragile or unpredictable supply chains. Because they are smaller companies, manual inventory tracking can cause errors, human bias, and inadequate analysis for decision-making related to stock levels. But because today’s traceability software platforms (such as MRP and ERP) are agile, flexible, and even designed for SMEs, they allow these smaller companies to utilize best-in-class software comparable in functionality to platforms used by large companies.

With the right tools and techniques, SMEs can select software that lets them accurately track inventory. And doing so will make sure that the material they need is always in the right place at the right time.

Key takeaways

• Inventory tracking consists of monitoring and recording all stock movements in the company for the objective of gaining visibility into the supply chain.
• Tracking can be done either manually or with the help of digital tools. Software solutions like ERP/MRP systems are recommended for maximum efficiency and minimal data errors.
• Manufacturing companies mostly track three types of inventory: raw materials (including components), work-in-process, and finished goods. An additional category is MRO (maintenance, repair, and operational supplies) which includes auxiliary supplies like lubricants, adhesives, bolts, screws, etc.
• The specifics of inventory tracking depend on the inventory control methods use. These include Economic Order Quantity (EOQ), Minimum Order Quantity (MOQ), Just-in-Time inventory, and ABC inventory.
• Common inventory tracking tools that are used in conjunction with inventory management software are barcodes, radio frequency identification (RFID), and embedded metering.

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