Manufacturing typically involves dealing with the inventory at every stage of the process, whether in the form of raw materials, semi-finished products also known as WIP inventory, or finished goods. By definition, raw materials refer to the basic ingredients that are used to create finished products.

Maximize your ROI with effective raw material inventory management

12 JANUARY 2022 | BLOGS

Manufacturing typically involves dealing with the inventory at every stage of the process, whether in the form of raw materials, semi-finished products also known as WIP inventory, or finished goods. By definition, raw materials refer to the basic ingredients that are used to create finished products. These materials are then processed to create products that are then delivered to customers.

Even before COVID-19 hit, supply chain disruption had increased dramatically. A McKinsey & Company study reported that every year, one in twenty companies suffers a loss of at least US$100 million. Of course, the pandemic led to a convergence of issues such as shortage of critical goods, factory shutdowns, unpredictable demand, border closings, and transportation gridlocks, which highlighted the need for greater visibility into raw material inventory tracking.

Ensuring the optimum quantity and quality of raw materials is crucial to ensuring a smooth flow of the production process and guarantee cost-effective and timely delivery. Excess inventory levels can result in too much capital being locked up and unnecessary storage costs.

Direct and indirect raw materials inventory

Given that there are a plethora of manufacturing processes for different types of goods, the definition of ‘raw material’ varies from company to company. We can break down the types of inventory for raw materials into two basic types – direct and indirect. Direct raw materials inventory refers to materials that eventually get transformed into the final product. For instance, in the manufacture of sugar, sugarcane would be a direct raw material. The term ‘indirect raw materials’ refers to inventory that is required as part of the manufacturing process but does not go into the finished product.

Need for raw materials inventory tracking

For companies that produce, procure, or trade raw materials, the ability to realize the benefits of well-defined processes is important across all points across their value chains. In fact, if they fail to identify risks and respond quickly to disruptions, the price can be high. Companies have often relied on commodity management solutions to manage their raw material inventory. This includes the buying and selling of commodities, transportation and delivery, and any associated risk management processes.

Gaining a deeper understanding of assets – people, processes, and technologies—that move commodities across that value chain is important. With connected systems/apps, tracking inventory from the time of unloading to trading to invoicing to shipment i.e. the lead time is possible via an all-in-one single view or one single platform for end-to-end visibility. From source to trade, the right applications that deliver real insights, improve collaboration, and drive value are important and raw materials inventory is an important part of this.

By integrating services on a single platform, organizations can build the supply chain capabilities for raw material inventory management – whether it is scanning the stockyard for more precise collision control or better-quality management.

Complexities in raw materials inventory

Raw materials inventory is as critical as finished goods inventory or even more so, but managing it is often difficult due to reasons such as:

  • Global nature of business

    Given the global nature of businesses, the entire process of sourcing, storing, shipping, and processing raw materials often span multiple geographies and national borders. With increased regulation and shifting consumer demand, the movement of goods across regions becomes complicated, bogged down by trade and tariff difficulties.

  • Disparate systems

    Typically, raw materials need to go through multiple systems for handling origination, handling, and processing. Often, organizations rely on legacy systems that are disparate and disconnected systems to handle raw materials. This includes ERP systems, planning and control systems, SCM systems, stockyard and warehouse management systems, task execution and tracking systems, and trading and risk management solutions. These often prove to be inadequate and severely lacking in integration capabilities.

  • Inadequate process support

    Currently, there is little insight available on the movement of raw materials from production to storage to transport. This is little visibility on price fluctuations, and market behaviors and audit trails are error-prone. Financial and contractual detail is not readily available, making it more difficult to manage margins.

  • Limited communication

    While effective collaboration is key to supply chain resiliency, keeping suppliers and producers connected across multiple touchpoints is difficult, even as supply chain processes are now becoming increasingly formalized. Issues such as poor digital communication, especially in remote areas can pose further challenges.

Building optimal raw materials inventory

To enable effective management of raw materials inventory, your supply chain system must enable the following functionalities.

  • Diligent inventory tracking

    In any raw materials supply chain, operations such as storage, blending, and transfer are most critical. Getting adequate visibility into these activities can help improve facility utilization and, ultimately, increase gate throughput.
    Efficient and specialized bulk terminal automation solutions can be extremely useful. Technologies such as IoT sensors and RFID can make stockyard management more efficient but adapting these tools for raw materials can be quite tough. 3D modelling, which Eka is pioneering, can elevate visibility and drive better control of stockyard or terminal operations. By enabling site operators to see all of their assets in a graphic representation to plan and execute receiving, transfer and loading, these tasks can be performed far more effectively.

  • Automated data management

    Access to data is an important part of commodities management. There are opportunities for businesses to monetize their data by using data-driven insights that facilitate the move from decision support activities to predictive insights that drive the business forward. Data from IoT sensors and time series analysis can improve performance and throughput, thereby minimizing capital outlays for infrastructure reengineering.
    For instance, at Eka, we are working to use 3D modelling with predictive simulation and machine learning to answer new questions about stockpile management. For instance, understanding the optimal number of stockpiles or stock levels of any given stockyard or bulk terminal; getting intelligence on the kinds of materials that should be kept separate etc. requires large amounts of data from across disparate sources. Automating access and management of this data can help make the process that much more effective.

  • Quality control and assurance

    Commodities producers must constantly weigh quality against throughput in order to meet contract requirements. While standard processes that producers rely on are effective to a point, these often fail to account for subtle quality differences within the stockpile. Without real-time visibility into the stockpile, the risk of underdelivering on contracts and triggering penalties exists. To address quality challenges, producers often err on the side of overdelivering.
    3D modelling offers an effective solution it allows organizations to manage their stockpiles more precisely by scanning materials as they flow into the stockpile. The data is then modelled, and a digital twin of the stockpile is delivered to operators. Using these models, the raw materials can be tracked in real-time as goods are stacked, reclaimed, blended, and delivered to buyers.
    In addition to improving throughput, this data can ensure precise and predictive quality management. Rather than relying on lab results to certify quality thresholds for delivering, operators can predict the quality of their loads in real-time, allowing producers to make blending modifications immediately, dynamically adjusting how to load a vessel to optimize how they will meet contract requirements.

Enabling this requires a deep understanding of the raw materials supply chain. Read about how Eka Supply Chain solution designed explicitly for direct materials can help commodity-focused organizations improve operations, manage quality, and deploy cutting edge technologies to manage raw materials with more insight and intelligence:

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