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Estimated reading time: 5 minutes
Raw material management system
Do you know what are raw materials and how to manage them properly? Do you know why this is important? Could you define what is the real cost and the estimated cost of manufacturing?
The first step for using good raw material management is to have clear concepts related to it.
These are the most important concepts of raw material management:
Raw material: it is the product (unprocessed or partially or totally transformed, and in the case of sub-assemblies, processed products that are used in the manufacturing process of another product) that we acquire to sell it to the customer, in the form of raw materials in some cases and as a final product in other cases. The raw material is one of the most important expenses, hence the good management of it is essential for the real viability of the business.
Stock: is the amount of raw material we have stored in warehouses and other various locations enabled for that purpose. But not only that. The stock is money, money that we have invested in the purchase of raw materials and that we must manage in detail to turn it into sales and, therefore, into profits. Erpag gives you the opportunity to maintain your stock levels both of the raw materials and finished items by using the qty below minimum option: https://learn.erpag.com/project/create-new-product-1/untitled-4/basic-definition/quantity-below-minimum
Bill Of Materials: it is a blueprint that lists all items that need to be used in the manufacturing process, collects important information about each item (such as cost) and it lists the quantities that need to be used. On the list, you will also see the work operations and the labor cost.
Consumption: the consumption of raw material refers to the total input of raw material from the warehouse into the production process, to manufacture the products that you are selling to your customers. When we talk about consumption, we include all types of consumption: both the one that ends up in manufacturing and that is eventually sold, like the one that goes to waste, returns and mysterious disappearances… It is very important not to confuse the purchase of raw material with consumption. Raw material consumption evolves according to sales (the logic is that purchases also do so) and serves to measure the result of the decisions you make in your company. Consumption management reports in terms of the consumption value of a period and is analyzed from two perspectives: Real and Estimated.
Inventory: the inventory is the reflection of the current stock levels in your company, which corresponds to the specific moment in which you do the raw material count. Knowing the valued stock of the product in your company is essential to know the consumption and, at the same time, adjust the orders and manufacturing. The task of stocktakings must be periodic, in order to compare the data. You don’t always have to do stocktakings of your entire inventory, you can do it by a certain category of products, certain warehouse (if you have multiple locations), you might want to focus on the control of only a certain number of items and to the stocktakings only for them… and you can also choose a certain time period for this, for example monthly, with more frequent inventories, yearly for the total inventory, etc. To read more on how stocktakings work in Erpag, please go to the following link: https://learn.erpag.com/project/create-new-product-1/count-inventory/inventory-checking
Cost: cost is the relationship between two variables. The real cost of manufacturing and the estimated cost of manufacturing.
The real cost is the amount of raw material that has been consumed in a given period and is calculated – as we have seen on more than one occasion – by means of the formula (Initial Inventory + Purchases – Final Inventory) / Sales. The Real Cost is what it has been while the Theoretical Cost is what it should have been. Therefore, the more the Real Cost of Theoretical Cost moves away, the less benefit you will get and the more you will have to work for the profitability to be established.
The estimated cost is the product cost that would be achieved if the bills of materials were followed strictly. It is calculated using the formula raw materials cost + (work operation cost per hour * hours of labor) = estimated cost. The difference between estimated Cost and Real Cost is money you stop earning. The estimated cost will change depending on how three variables change in the bill of materials change: what the product costs you, the work operations cost and the labor included. The real cost will aim to follow that, but the specific work orders will vary from case to case.
Erpag will give you both of these calculations automatically, and you will be able to compare them. This will enable you to identify when and why your manufacturing processes are costing more than it is foreseen so you will be able to address the problem and avoid similar loses in the future.
Raw material purchase management: every time that a customer orders a certain item, Erpag will automatically compare the demand to the stock levels and trigger the back-ordering option to let you know whether you need to go into production in order to fulfill the sales order, or you are lacking in raw materials, so you need to order them from your supplier. This will all be listed in separate fulfillment lists, and you will be able to create work orders/purchase orders in one click. To read detailly about this option, refer to the following link: https://blog.erpag.com/2018/10/fulfillment-backorders.html
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