Raw material inventory management software: How to Track

October 30, 2023

Similarly, with inventory Management comes tracking of Raw Materials. This also necessitates adhering to best practices with respect to core processes such as receipt and inspection of inventory, storage, handling, labeling and tracking, audits and inspection.

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.

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 entered, the system will do the following:

1. Raw Material Total Value for each Raw Material:
   To calculate the Raw Material Total Value, multiply Quantity per Raw Material Type and Unit Cost: If, for example You need 100 board feet of wood and the price per board foot is $10: 100 x $10 = $ 1,000 — This is the Total Value of the purchase of the wood.

2. Sum Raw Material Total Value:
   Add The Raw Total Value of all Raw Material Types to find The Raw Material Total Value of all raw inventory value.

Ending Raw Materials Inventory

To calculate Ending Raw Materials Inventory, we will use three (3) parameters, beginning raw Materials Inventory, Purchase raw materials and Cost Of Goods Sold (COGS).

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

Raw Materials Inventory Turnover Formula

A raw material turnover formula calculates raw material turnover ratio, which is a financial key ratio to measure Inventory efficiency. The ratio calculates the number of times the raw materials inventory is consumed and replaced over a period, which usually is a year.

The raw material turnover ratio formula is:
Raw Material Turnover Ratio = Cost Of Goods Sold (COGS) / Average Raw Materials Inventory

Where the Average Raw Materials Inventory is
(Ending Materials Inventory Purchases + Beginning Raw Materials Inventory) / 2

For example,
if

• the company valuation = $50,000,
• Ending Raw Materials Inventory = $30,000,
• Beginning Raw Materials Inventory = $50,000

then

• the Average Raw Materials Inventory Used will be ($50,000 + $30,000) / 2 = $40,000,

so

• Raw Material Turnover Ratio = $500,000 / $40,000 = 12.5.

If the raw material turnover ratio is determined in term to days are the Average Days that Raw Material is stored in the inventory before consumed and replaced in the process.

Average Raw Materials Inventory = (Ending Materials Inventory Purchases + Beginning Raw Materials Inventory) / 2
Average Days = 365 / Raw Material Turnover Ratio

For instance,
if

• the company valuation = $700,000,
• Ending Raw Materials Inventory = $20,000,
• Beginning Raw Materials Inventory = $60,000,

then

• the Average Raw Materials Inventory Used will be ($60,000 + $20,000) / 2 = $40,000,

so

• Raw Material Turnover Ratio = $700,000/ $40,000 = 17.5.

Raw Material Turnover Days is 365 / Raw Material Turnover Ratio,
Raw Material Turnover Days = 365 / Raw Turnover Ratio = 365 / 17.5 = 20.9 days

What is the difference between Scenario A and Scenario B?

The Raw Material Turnover Ratio is 12.5 in Scenario A. It means the business depletes the Raw Materials Inventory approximately 12.5 times in one year.

There is an increased consumption of raw materials and the RMT ratio is also higher in Scenario B. The turnover ratio is 17.5 times a year, and the value is higher.

Furthermore, the raw materials remain in inventory for approximately 29.2 days in Scenario A, while it is reduced to approximately 20.9 days in Scenario B.

At Britecheck, our inventory management software can help you with this. Contact us today and see what the best option for your business is!