If you’re a manufacturer, you know all too well how easy it can be to feel overwhelmed by the complexity of managing various types of inventory. After all, the stakes are pretty high since a single missing component can bring an entire production line to a standstill.
In episode 12 of Secret Life of Inventory, we dive into inventory management for manufacturers, covering everything from bill of materials (BOMs) to barcode systems and the difference between manufacturing software and MRP systems. For the whole conversation, watch the full episode below.
Full Episode – Mastering Inventory Management for Manufacturers | Secret Life of Inventory (XcluJ7s1BHA)
What exactly is a bill of materials (BOM)?
Think of a BOM as your manufacturing ingredients list. Instead of calling for two eggs, a cup of flour, and a sprinkle of sugar, it spells out every component you need to build a finished product. That might mean two screws, four bolts, a sheet of aluminum, or any other components or raw materials your team needs to finish the manufacturing process.
Simply put, a BOM lists out all the components and quantities you need to create your finished product. But it’s important to note that not all BOMs are created equal. There’s actually two main types of BOMs you need to know about:
- Single-Level BOMs are the most straightforward version of a bill of materials. For example, if you’re assembling office chairs by purchasing pre-made seats, armrests, and bases, you would only need a single-level BOM for these preassembled components.
- Multi-Level BOMs are much more complex by comparison. These come into play when you’re manufacturing products from the ground up. Each subassembly (such as the seat, base, or armrest) has its own BOM, creating a nested structure that can resemble a complex nervous system.
Beyond organization, BOMs create standardized communication across departments. BOMs put everyone on the same page, which makes inventory management for manufacturers much more efficient.
To decide which BOM is right for you, ask yourself how many production rounds you need. Basic assembly operations can often get by with single-level BOMs, but as you bring more processes in-house, you’ll need the complexity of multi-level BOMs.
How manufacturer orders (MOs) fit in
While BOMs tell you what components you need, manufacturing orders (also called work orders or travellers in other systems) tell you how to use those components. If a BOM is your ingredients list (two eggs, a cup of flour, sugar), then the manufacturing order is your recipe (preheat oven, grease pan, mix for 3 minutes).
Manufacturing orders provide step-by-step instructions for the entire production process and connect all your BOMs. For that office chair example, the manufacturing order pulls in BOMs for the seat, base, and armrests, coordinating the entire assembly process: no guesswork, no confusion, just clear direction for every team member.
Creating BOMs: the smart way vs. the hard way
Sure, you could create BOMs manually with pen and paper or spreadsheets. But as your business scales, this approach becomes a nightmare to maintain. The smart approach? Manufacturing software that automates the process and connects your BOMs directly to manufacturing orders with just a few clicks.
How barcodes improve inventory management for manufacturers
While retailers use barcodes mainly for checkout and basic inventory tracking, manufacturers’ needs are far more complex. Inventory management for manufacturers isn’t just tracking finished products; you’re managing components, subassemblies, expensive equipment, and the entire production workflow.
The functionality of barcodes is binary. They either scan or they don’t. This functionality is what helps them significantly reduce human error, all while speeding up stock level tracking, streamlining shipping and receiving, and (drum roll please) helping you accurately track your cost of goods manufactured.
Many manufacturers unknowingly undercharge for their products because they don’t properly track production costs. Barcodes solve this problem.
Pro tip: You need GS1 barcodes for finished products you’re selling (retailers and Amazon require them), but for internal tracking, you can create your own barcodes to save money.
Manufacturing software vs. MRP: which software solution is right for you?
Which software solution is right for you boils down to scale and budget. Good manufacturing software provides inventory tracking, BOMs, manufacturing orders, barcoding, and often even includes sales orders, purchase orders, and invoicing. Everything most small to medium businesses need.
MRP (Materials Requirements Planning) systems offer all of that plus production planning, demand forecasting, and more. They use all the gradual details in historical data to predict exactly what you’ll need, when, and even how long a specific production process should take. But here’s the catch: they can cost tens of thousands, sometimes hundreds of thousands of dollars to implement.
For most small- to medium-sized manufacturers, robust manufacturing software offers excellent functionality without breaking the bank.
Inventory management for manufacturers: the bottom line
Effective inventory management for manufacturers isn’t just about organization; it impacts your overall efficiency, cost savings, and ability to scale. Whether you’re a manufacturer just starting out or looking to optimize your current operation, implementing proper BOMs, MOs, barcode systems, and the right software can completely transform your business.
Want even more in-depth insights? Watch our full episode of Secret Life of Inventory for detailed real-world examples and step-by-step implementation tips.
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