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Efficient Inventory Management:
How to Track Raw Materials

October 30, 2023

Just like any inventory Management, tracking of Raw Materials requires following best practices in such core processes as receipt and inspection of inventory, storage, handling, labeling and tracking, audits and inspections. However the tracking of raw materials stands apart due to its unique focus on the critical components that form the backbone of manufacturing processes. Unlike tracking finished goods or general inventory items, Raw Materials Inventory demands meticulous attention to a number of additional attributes, such as batch and lot tracking, integration with production processes, quality control, supplier management, and adherence to regulatory standards.

Efficient Inventory Management

Batch and Lot Tracking

Raw materials often come in batches or lots, each with unique characteristics such as production date, expiration date, and supplier. Accurate and easily accessible information about lot and batch for Raw Materials enables accurate Quality Inspections and Expiration and Shelf life Management, which are the processes critical for efficient Raw Materials Inventory Management and Manufacturing.

Inventory Management System

Implementing a specialized Raw Materials Inventory Management System software is the best solution to successful raw inventory management. Such tracking systems can efficiently manage and track batches or lots, ensuring traceability throughout the manufacturing process alongside with quality control parameters, supplier information for each batch or lot.

Raw Materials Inventory Management System can also automatically calculate and generate reports on Raw Materials Inventory and provide valuable financial metrics such as Raw Material Turnover Ratio, giving you a great level of understanding and control over the inventory at any moment.

How to calculate Raw Materials Inventory

Calculating raw materials inventory is typically done within the Inventory Management System. Looking at your Inventory for a period of time, you might be interested in knowing your Beginning Raw Materials Inventory, Ending Materials Inventory, as well as COGS (Cost Of Goods Sold). Once you know that, you may evaluate efficiency of your Raw Materials Inventory management with the Raw Material Turnover Formula.

Beginning Raw Materials Inventory

The following information must be put in the system to calculate Beginning Raw Materials Inventory:

  • A list of the different types of raw materials and the units used for each type
  • The cost of unit for each type of material
  • The number of units for each type of raw material at the beginning of the period

  • Beginning Raw Materials Inventory

Once the data is provided, the system will do the following:

  1. Calculate Total Value for each Raw Material: Multiply the quantity of each type of raw material by its unit cost to find the total value of that type of raw material. For example, if you have 100 board feet of wood at $10 per board foot, the total value of the wood would be $1,000.

  2. Sum Total Value: Add up the total value of all the different types of raw materials to find the overall value of the raw materials inventory.

Ending Raw Materials Inventory

In order to calculate the Ending Raw Material Inventory, we need to know the Beginning Raw Materials Inventory and two more parameters:

  • Purchased raw materials - the materials you’ve purchased within the period between

  • Cost of Goods Sold (COGS) - the direct costs of the raw materials associated with producing the inventory you've sold.

Ending Raw Materials Inventory = (Raw Materials Inventory Purchases + Beginning Raw Materials Inventory) – COGS

Raw Materials Inventory Turnover Formula

The Raw Material Turnover Formula calculates the Raw Material Turnover Ratio, a financial metric used to measure how efficiently a business manages its raw materials inventory. It indicates how many times a company's raw materials inventory is used and replaced over a specific period, typically a year. The formula to calculate raw material turnover is:

Raw Material Turnover Ratio = Cost of Goods Sold (COGS) / Average Raw Materials Inventory

where:
Average Raw Materials Inventory is the average value of raw materials inventory held during the period.

Average Raw Materials Inventory = (Ending Materials Inventory Purchases + Beginning Raw Materials Inventory) / 2

Alternatively, if you have the raw material turnover ratio in terms of days (the average number of days it takes for raw materials to be used and replaced), you can calculate it using the following raw material inventory turnover formula:

Raw Material Turnover Days = 365/Raw Material Turnover Ratio

This formula gives you an estimate of how many days, on average, raw materials remain in inventory before being used in production. A lower turnover ratio or a higher number of turnover days may indicate inefficient inventory management, excess stock, or slow-moving inventory. Conversely, a higher turnover ratio or a lower number of turnover days suggests efficient utilization of raw materials.

Let's consider a manufacturing company that produces furniture. They use raw materials such as wood, fabric, and metal to manufacture their products. We'll calculate the raw material turnover ratio for two scenarios: Scenario A and Scenario B.

Scenario A:
  • Cost of Goods Sold (COGS) for the year: $500,000
  • Beginning raw materials inventory: $50,000

  • Ending raw materials inventory: $30,000

Scenario B:
  • Cost of Goods Sold (COGS) for the year: $700,000
  • Beginning raw materials inventory: $60,000

  • Ending raw materials inventory: $20,000

Let's calculate the raw material turnover ratio for each scenario:

Scenario A:
Raw Material Turnover Ratio (Scenario A) = COGS / Average Raw Materials Inventory
Raw Material Turnover Ratio (Scenario A) = 500,000 / (50,000 + 30,000)/2 = 12.5

Raw Material Turnover Days (Scenario A) = 365 / Raw Material Turnover Ratio
Raw Material Turnover Days (Scenario A) = 365 / 12.5 = 29.2 days

Scenario B:
Raw Material Turnover Ratio (Scenario B) = COGS / Average Raw Materials Inventory
Raw Material Turnover Ratio (Scenario B) = 700,000 / (60.000 + 20.000)/2 = 17.5

Raw Material Turnover Days (Scenario B) = 365 / Raw Material Turnover Ratio
Raw Material Turnover Days (Scenario B) = 365 / 17.5 = 20.9 days

In Scenario A, the company has a raw material turnover ratio of 12.5 times per year, meaning they replace their raw materials inventory approximately 12.5 times annually. In Scenario B, the turnover ratio is higher at 17.5 times per year, indicating a more efficient use of raw materials.

Additionally, in Scenario A, raw materials stay in inventory for approximately 29.2 days on average before being used, while in Scenario B, this period reduces to approximately 20.9 days, reflecting a faster turnover of inventory.

At Britecheck, we can help you with this. Contact us today and see what the best solution for your business is!

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