14 June 2024

Supply chain management (SCM) encompasses everything from negotiating vendor contracts for raw materials to handling product returns. While it is central for any company producing or selling physical goods or services, this post focuses on the importance and best practices of SCM from the perspective of small and medium manufacturers.

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Table of Contents

1. What is Manufacturing Supply Chain Management?
2. The 5 Main Components of Manufacturing Supply Chain Management
3. Are Supply Chain Disruptions the New Normal?
4. The Importance of SCM for Manufacturers
5. Manufacturing Supply Chain Management Best Practices for SMEs
6. Enhancing Business Operations with Brytebuild
7. Key Takeaways
8. FAQs

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What is Manufacturing Supply Chain Management?

Supply chain management (SCM) is a central concept in commerce that refers to the management of everything related to the flow of goods of a company. It encompasses every process that plays a part in raw materials being transformed into finished products and also involves aspects of after-sale activities like handling warranty claims and returns.

Manufacturing supply chain management includes all aspects of business that deal with physical goods and their logistics: inventory optimisation, vendor management, logistical processes like shipping, distribution, and delivery, as well as manufacturing processes such as WIP (work in process) inventory management, production scheduling, capacity planning, and demand forecasting.

The role of SCM is to ensure that the supply of goods is as streamlined as possible – that raw materials make it to the warehouse or production facility at just the right time and in the right quantity; that production capacities match demand as closely as possible; and that lead times and product costs stay minimal. As such, SCM can be seen as part of the larger inventory management process.

What are Supply Chains?

A supply chain is the entire journey a product takes from the beginning of its manufacturing effort to finished sales. Far more than just logistics management, it comprises the sum of processes, people, businesses, activities, information, and resources needed to get a product or service from scratch to consumers.

Therefore, a supply chain includes not just raw materials but also the procurement management of the materials. On the other end of the pipeline, it includes not just finished goods, but also their distribution network, logistics partners, and returns.

All the organisations that constitute a supply chain are joined together through physical and information flows. Physical flows are the transformation, movement, and storage of goods and materials. Information flows, on the other hand, allow the various players in a respective supply chain to coordinate plans and control the day-to-day flow of goods throughout the supply chain.

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The 5 Main Components of Manufacturing Supply Chain Management

There is no single correct way to manage a supply chain because there are countless different ways of doing business. Still, supply chain management systems usually consist of five essential phases: strategy, sourcing, manufacturing, delivery, and returns. Let’s go over these in a bit more detail.

Planning and Strategy

Every organisation must plan and manage all the resources needed to meet customer demand for their product or service. The supply plan should factor in everything from material availability and production capacity to labour and equipment requirements, logistical constraints, and budgets. The more supply-related aspects of production are considered in the supply plan, the fewer surprises one can expect down the line.

A strategic approach to planning considers both short-term and long-term goals, aligning supply chain activities with the company’s overall objectives. According to the Chartered Institute of Procurement & Supply (CIPS), effective planning can reduce costs by up to 30%.

Sourcing

Ensuring high-quality raw materials from reputable vendors is an essential aspect of any production effort. The process does not end once the suppliers are under contract. Instead, the supply chain manager is tasked with continuous vendor management. Sourcing also involves continuous procurement planning and purchase order management (ordering, delivery, authorising payments, etc.) throughout the manufacturing process.

Building strong relationships with suppliers and having alternative sources can mitigate risks. A report by the UK government suggests that having a diversified supplier base can reduce the impact of supply chain disruptions by 50%.

Manufacturing

This central phase in supply chain management details all processes related to in-house production, i.e., the transformation of raw materials (and services) into finished goods. Things to take into account in the SCM system include production efficiency, planning and scheduling, inventory optimisation, quality assurance, and packaging.

Efficient manufacturing processes are crucial for maintaining product quality and meeting delivery deadlines. The Manufacturing Institute reports that improving manufacturing efficiency can lead to a 20% increase in production output.

Delivery and Logistics

This phase entails the logistics of the whole production operation. Coordinating customer orders, scheduling deliveries, dispatching loads, creating and sending invoices, receiving payments, etc., all fall into the delivery phase. Resilience is crucial here; having an extra distribution partner or delivery method can be invaluable during disruptions.

Implementing technology like GPS tracking and route optimisation can enhance delivery efficiency. According to Transport for London, optimising delivery routes can reduce transport costs by up to 15%.

Returns and After-Sales

For most commercial products, an SCM effort needs to have policies for customer returns and warranty care. Developing a functional and cost-effective system for after-sales equals more customer satisfaction in the long run.

Managing returns efficiently can improve customer loyalty. A study by the University of Warwick found that a well-managed returns process can increase repeat business by 25%.

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Are Supply Chain Disruptions the New Normal?

In recent years, an increasingly globalised marketplace and near-constant supply chain disruptions have become the new normal across the entire manufacturing industry. According to a 2022 study by Deloitte, the era of simple supply chains is essentially gone for good.

Shipping delays, raw material shortages, rising shipping prices, and the resulting production planning and inventory management issues have become mainstays in manufacturing. Increasing control over one’s supply chain by implementing effective SCM practices is therefore increasingly important for companies of any size. This is especially crucial for smaller players that need to juggle tight profit margins and have fewer resources for backups.

A report by the UK Department for Business, Energy & Industrial Strategy highlights that 73% of SMEs faced significant supply chain disruptions in the past year. This underscores the need for robust SCM practices.

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The Importance of SCM for Manufacturers

Supply chain management is a natural part of any company purveying physical goods, be it distributors, retailers, or manufacturers. Still, SCM includes some distinct considerations for the latter.

Manufacturing has Innate Complexities

Manufacturing supply chains are generally more complicated than distribution. Materials and components need to converge with labour and processing in a timely, planned-out manner, often in many consecutive steps. This implies precise forecasting and capacity planning to adequately schedule production.

According to the UK Manufacturing Review, effective SCM can reduce production downtime by up to 40%, highlighting the importance of well-coordinated supply chain activities.

Outsourcing Affects Global Supply Chains

In the modern manufacturing landscape, one brand often has several companies contributing to its products. Many manufacturers, especially in the SME space, rely on partial or total sub-assembly production for their revenue. Conversely, others depend on sub-contractors to produce some or all of their components, assembling the final products in-house.

The Institute of Supply Chain Management (IoSCM) indicates that outsourcing parts of the supply chain can lead to cost savings of up to 25%, but it also requires meticulous management to avoid delays and quality issues.

Manufacturing is Experiencing a Digital Transformation

With the onset of Industry 4.0, modern manufacturing is becoming increasingly reliant on digital technologies and solutions. Manufacturers are adopting Internet of Things (IoT) devices, implementing robotics, and utilising machine learning. This ushers in more control over processes through real-time analytics and data-based decision-making.

A survey by PwC found that 72% of manufacturers plan to increase their digital investment over the next five years, aiming to enhance supply chain visibility and efficiency.

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Manufacturing Supply Chain Management Best Practices for SMEs

To end this article, here are five manufacturing supply chain management best practices that any small or medium manufacturer should focus on.

Facilitate Collaboration with Key Nodes in the Supply Chain

More collaboration with key supply chain partners means faster response times in case of sudden disturbances. Implement supplier relationship management practices to strengthen partnerships. Consider vendors as partners rather than service providers, simplify and facilitate back-and-forth information sharing, and check in with them frequently.

Keep Up to Date with Shifts in Regional Supply

Today’s logistics networks are dynamic and fast-changing. While it certainly makes sense to strengthen existing relationships, it’s also a good idea to keep a close eye on any news and events that can introduce opportunities or alternative sources. A continuous effort to improve the efficiency of the supply chain is among the basic tenets of effective supply chain management.

The Confederation of British Industry (CBI) suggests that staying informed about regional supply trends can reduce lead times by up to 20%.

Measure Supply Chain Performance Regularly

The only reliable way to ensure an efficient supply chain is by measuring its efficiency. This is where supply chain-centric key performance indicators (KPIs) come into play. Examples of useful metrics include On-Time and In-Full Delivery, Customer Order Cycle Time, Fill Rate, and Inventory Days of Supply.

A study by the Chartered Institute of Logistics and Transport (CILT) shows that businesses that regularly measure supply chain performance can improve their operational efficiency by 30%.

Increase Supply Chain Resilience

Utilising production strategies like Just-in-Time (JIT) or adopting pull-type workflows is perhaps the best way to minimise waste and increase manufacturing efficiency. However, these types of optimisations are also more susceptible to disruptions. With global supply chains in turmoil, many manufacturing sectors are seeing a resurgence of Just-in-Case (JIC) manufacturing practices. Always keep a few extra vendors on the quick dial.

Implement Manufacturing Software

Lastly, implementing manufacturing software can make a decisive difference in your SCM efforts. Good MRP systems and manufacturing ERPs include built-in procurement tools as well as vendor and order management modules, integrated with the whole manufacturing operation. This provides you with real-time info on all inventory movements and introduces added visibility and traceability over the whole supply chain. The best providers also include Quality Assurance (QA), Customer Relationship Management (CRM), and Return Merchandise Authorisation (RMA) modules.

A report by Deloitte indicates that businesses using integrated manufacturing software can reduce their inventory carrying costs by up to 25%.

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Enhancing Business Operations with Brytebuild

Brytebuild offers a comprehensive suite of supply chain management tools designed to help businesses of all sizes optimise their operations. Here’s how Brytebuild can support your SCM efforts:

• Real-Time Inventory Tracking: Brytebuild provides real-time updates on inventory levels, movements, and costs, ensuring that you always have an accurate view of your stock.
• Procurement and Vendor Management: Streamline procurement processes and manage vendor relationships effectively.
• Detailed Reporting and Analytics: Access detailed reports and analytics to identify trends, track supply chain performance, and uncover potential issues before they escalate.
• Integrated Supply Chain Modules: Brytebuild offers integrated tools for quality assurance, customer relationship management, and return merchandise authorisation.
• User Training and Support: Comprehensive training and support to ensure your team can effectively use the system and maintain supply chain efficiency.

Try Brytebuild Today

Experience the benefits of Brytebuild’s advanced supply chain management features. Contact us for a demo or sign up for a free trial to see how we can help you optimise your supply chain processes.

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Key Takeaways

• Supply Chain Management: Central concept in commerce that refers to the management of everything related to the flow of goods of a company.
• Components: Includes aspects of inventory optimisation, vendor management, logistical processes like shipping, distribution, and delivery, as well as manufacturing aspects like production scheduling, and capacity planning, as well as customer returns and RMAs.
• Five Phases: Planning and strategy, procurement and sourcing, manufacturing, distribution, and returns or after-sale support.
• Complexities for Manufacturers: Manufacturing supply chains are more complex than distribution due to the need for precise forecasting, capacity planning, and the convergence of materials and labour.
• Best Practices: Facilitate collaboration with key suppliers, measure supply chain performance regularly, increase supply chain resilience, and implement manufacturing software for added visibility and control.

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FAQs

What is manufacturing supply chain management?
Manufacturing supply chain management is the systematic process of managing all aspects of a manufacturing company’s product in its journey from raw materials to finished goods. It comprises the sum of processes, people, businesses, activities, information, and resources needed to fabricate a product and get it to consumers.

Is manufacturing part of supply chain management?
Manufacturing is necessarily a part of supply chain management because SCM includes all phases and processes in a product’s lifecycle from raw material to after-sale care.

Is manufacturing the same as supply chain management?
Not all supply chains include a manufacturing phase because some supply chains comprise goods or services that lack value-added production steps. However, all manufacturing processes are a part of their respective supply chains because any manufacturing is a step in the product’s overall journey from raw materials to finished goods.

What are the five basic components of supply chain management?
The five basic components of supply chain management include the planning or strategy phase, the sourcing or procurement phase, the manufacturing phase, the delivery or logistics phase, and the returns phase.

Inventory shrinkage is a common issue in businesses dealing with physical inventory. The consequences include financial losses, operational disruptions, and loss of competitiveness. But how does it happen, and how can it be prevented?

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Table of Contents

1. What is Inventory Shrinkage?
2. How to Calculate Inventory Shrinkage?
3. How to Calculate the Inventory Shrinkage Rate?
4. Causes of Inventory Shrinkage
5. Consequences of Inventory Shrinkage
6. Tips for Minimising Inventory Shrinkage
7. How to Report Inventory Shrinkage in Financial Statements?
8. Enhancing Inventory Management with Brytebuild
9. Key Takeaways
10. FAQs

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What is Inventory Shrinkage?

Inventory shrinkage occurs when the actual quantities in your inventory are smaller than what is recorded in your books or inventory management system. This discrepancy can arise from several factors, including administrative errors, damage, spoilage, theft, and supplier fraud.

According to a report by the British Retail Consortium (BRC), the average shrinkage rate in the UK retail sector was approximately 1.3% in 2022. No business that deals with physical inventory is immune to shrinkage.

Conducting stocktakes and comparing the results to your inventory records is the most reliable method of discovering inventory loss, as this provides concrete evidence of discrepancies.

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How to Calculate Inventory Shrinkage?

To calculate the inventory shrinkage value, you can use the following formula:

Shrinkage Value = Inventory Value Record – Physical Inventory Value

For example, if £60,000 is marked as the company’s inventory value in their accounting records, and after an inventory count, the real physical inventory value is calculated to be £58,000, the shrinkage value is:

£60,000 – £58,000 = £2,000

Therefore, the company lost £2,000 worth of inventory during the period.

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How to Calculate the Inventory Shrinkage Rate?

As inventory value can fluctuate, shrinkage value is not the most trustworthy metric for tracking shrinkage over time. To continuously measure shrinkage and use it as a KPI of your inventory management performance, start calculating the inventory shrinkage rate.

Inventory Shrinkage Rate = (Shrinkage Value / Inventory Value Record) x 100

Using the previous example, where the recorded inventory value was £60,000 and shrinkage was £2,000, the shrinkage rate would be:

£2,000 / £60,000 x 100 = 3.33%

This means that 3.33% of the inventory value was lost through shrinkage.

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Causes of Inventory Shrinkage

Inventory shrinkage can be caused by many factors that usually work in combination. Here are some of the most common causes of shrinkage:

Damage

Damage to inventory items can occur during various stages of the supply chain, from handling in the warehouse to transportation. Physical damage often results in a reduction in actual inventory levels compared to what is recorded in the accounting books.

Spoilage

Perishable goods or products with expiration dates can suffer from spoilage. When these items go bad before being sold, it leads to a loss of inventory. This is particularly common in the food and pharmaceutical industries.

Production Errors

Mistakes in the production process may cause scrapped materials or defective products that need to be written off. This is often seen in manufacturing environments where quality control is crucial.

Employee Theft

Internal theft by employees is a significant contributor to inventory loss. According to the Centre for Retail Research, employee theft accounted for 33.7% of all retail shrinkage in the UK in 2023.

Shoplifting

Shoplifting by external parties is an extremely common cause of shrinkage in retail environments. It occurs when customers steal products from the store. According to the British Retail Consortium, shoplifting cost UK retailers over £700 million in 2022.

Vendor Fraud

Vendor fraud occurs when suppliers manipulate orders or invoices, providing fewer items than what was agreed upon or charging higher prices. This leads to a discrepancy between the actual inventory and the recorded amount.

Inventory Miscounting

Errors in counting inventory during physical inventory counts or cycle counting can lead to inaccuracies in recorded inventory levels. These human errors can result from miscounts, omissions, or double-counting of items.

Administrative Errors

Administrative errors in inventory accounting, such as data entry mistakes, can create discrepancies between actual inventory and recorded amounts. These are often unintentional human errors but can have serious consequences.

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Consequences of Inventory Shrinkage

Inventory shrinkage can lead to several serious consequences:

Financial Loss

One of the most immediate and direct consequences of shrinkage is financial loss. It reduces the value of a company’s assets and directly impacts your bottom line because the cost of the lost inventory is subtracted from revenue without any corresponding benefit from sales.

Stockouts

Shrinkage can lead to unexpected stockouts, where you run out of products to sell or materials to use in manufacturing. This can delay production schedules and disappoint customers, leading to lost sales.

Overstocking

To compensate for shrinkage, some businesses may overstock inventory as a buffer, tying up capital that could be used elsewhere. This also increases holding costs and the risk of inventory becoming obsolete.

Operational Disruptions

Frequent stockouts and overstock situations disrupt normal operations, leading to inefficiencies and increased costs in supply chain management, production stoppages due to material shortages, and the inability to fulfill orders on time.

Damage to Reputation

Constant late or incomplete deliveries can lead to customer dissatisfaction and loss of business. In today’s competitive market, maintaining a good reputation is crucial for customer retention.

Increased Costs

Maintaining excess inventory as a safeguard against shrinkage-related stockouts increases holding costs. Additionally, dealing with and analyzing inventory loss often requires additional labour hours.

Loss of Competitiveness

A company that consistently struggles with shrinkage may lose its competitive edge in pricing, availability, and customer service compared to more efficient competitors. Efficient inventory management is crucial for maintaining competitiveness in the market.

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Tips for Minimising Inventory Shrinkage

Conduct Regular Inventory Audits

Regular inventory audits involve physically counting and verifying the actual amount of inventory on hand against what is recorded in your records. These audits help identify discrepancies and shrinkage issues promptly, enabling you to take corrective actions. Implementing a schedule for these audits, such as monthly or quarterly, ensures that you stay on top of inventory accuracy.

Using cycle counting methods, where you continuously count a portion of your inventory over time, can provide a more real-time view of inventory levels and reduce the need for massive annual audits. By regularly auditing your inventory, you can uncover issues early, address root causes, and prevent shrinkage from escalating.

Train Employees

Training should cover various aspects, including proper inventory handling to prevent damage, understanding production processes to avoid overproduction or errors, accurate data entry to maintain inventory records, and adherence to First Expired, First Out (FEFO) principles for perishable goods. Well-trained staff can drastically reduce human errors that contribute to inventory shrinkage.

Training programmes should be ongoing, with regular refreshers, and should also include security awareness to prevent internal theft. Engaging employees in the importance of inventory accuracy and making them aware of how their actions impact the bottom line can be motivating factors in minimising shrinkage.

Implement Security Measures

Implementing security measures is vital to prevent both internal and external theft. Internal theft, such as employee theft, can be deterred with security systems like surveillance cameras and access control measures. These not only act as deterrents but also provide evidence in case of suspicious activities.

For e-commerce and point of sale (POS) settings, secure payment processing and order verification processes also contribute to preventing inventory loss.

External theft, such as shoplifting, can be reduced with vigilant staff, proper store layout, and security personnel. It’s essential to regularly review and update security systems to stay ahead of potential threats and maintain a safe environment for your inventory.

Conduct Vendor Audits

Regular vendor audits are crucial to combat vendor fraud. These audits involve verifying that the products received match the purchase order, both in terms of quantity and quality. They also ensure that the agreed-upon pricing and terms are adhered to. Maintaining strong supplier relationships and transparent communication can help reduce the risk of fraud.

Implementing vendor scorecards and KPIs can help you evaluate supplier performance regularly. If a supplier consistently fails to meet expectations, it may be time to reassess the relationship and explore alternative sources to protect your inventory from vendor-related shrinkage.

Use Proper Stocktaking Procedures

Stocktaking procedures should include guidelines for conducting physical counts, reconciliation processes to address any discrepancies discovered during the count, and steps to handle damaged or spoiled inventory items. Double-checking counts and using barcode scanning systems can further improve accuracy and reduce human errors.

Establishing clear protocols for reporting and addressing discrepancies between physical counts and recorded inventory levels ensures that issues are promptly investigated and resolved. Developing standard operating procedures also plays a crucial role in training new employees and maintaining a consistent approach to inventory management throughout your organisation.

Implement Inventory Management Software

Inventory management software offers real-time tracking of inventory levels, automates inventory control tasks, and provides insights into inventory turnover. It streamlines the entire inventory management process, from creating purchase orders and receiving goods to tracking inventory movements and sales.

Barcode scanning capabilities make data entry more efficient and accurate, reducing the risk of errors that contribute to shrinkage. Inventory management software also offers detailed reporting and analytics, helping you identify trends and anomalies that may indicate potential shrinkage issues, allowing for proactive measures to be taken.

Overall, implementing such software increases efficiency, accuracy, and visibility in managing inventory, contributing to shrinkage prevention and minimisation efforts.

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How to Report Inventory Shrinkage in Financial Statements?

Inventory shrinkage is recorded in financial statements as an expense, typically under the category of Cost of Goods Sold (COGS) or as a separate line item, depending on the accounting method used. Here’s how shrinkage is recorded in financial statements:

As a Component of COGS

Under the accrual accounting method, when shrinkage occurs, it is recognised as a reduction in the value of inventory. This reduction is treated as an expense and is included in the COGS section of the income statement. It directly impacts the calculation of gross profit.

Separate Line Item in Expenses

In some cases, businesses may choose to report inventory loss as a separate line item in their income statement under operating expenses. This approach provides a clearer breakdown of expenses and allows for easier tracking and analysis of shrinkage over time. The income statement might include a line item like “Inventory Shrinkage Expense” or “Inventory Losses.”

Specific Accounting Treatment

Shrinkage may be recorded using specific accounting treatments depending on the circumstances and accounting standards followed by the business. For example, if the loss results from a sudden and unexpected event, it may be treated differently than routine shrinkage. Businesses should adhere to generally accepted accounting principles (GAAP) or other relevant accounting standards in their region when recording inventory shrinkage.

It’s important to note that the method used to record inventory shrinkage in financial statements can vary between businesses and industries. The chosen method should align with accounting standards and accurately reflect the impact of shrinkage on the company’s financial performance. Additionally, maintaining accurate records and documentation of loss incidents is essential for transparency and compliance with accounting regulations.

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Enhancing Inventory Management with Brytebuild

Brytebuild offers a comprehensive suite of inventory management tools designed to help businesses of all sizes minimise shrinkage and optimise their operations. Here’s how Brytebuild can support your inventory management efforts:

• Real-Time Inventory Tracking: Brytebuild provides real-time updates on inventory levels, movements, and costs, ensuring that you always have an accurate view of your stock.
• Barcode Scanning: Integrated barcode scanning capabilities streamline data entry, reduce errors, and enhance the accuracy of inventory records.
• Detailed Reporting and Analytics: Access detailed reports and analytics to identify trends, track shrinkage rates, and uncover potential issues before they escalate.
• Security Features: Implement robust security measures, including access controls and surveillance integration, to prevent both internal and external theft.
• Vendor Management: Conduct vendor audits and track supplier performance to mitigate the risk of vendor fraud and ensure you receive what you’ve ordered.
• User Training and Support: Brytebuild offers comprehensive training and support to ensure that your team can effectively use the system and maintain inventory accuracy.

Try Brytebuild Today

Experience the benefits of Brytebuild’s advanced inventory management features. Contact us for a demo or sign up for a free trial to see how we can help you minimise shrinkage and optimise your inventory processes.

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Key Takeaways

• Inventory Shrinkage: Occurs when the actual quantities in your inventory are smaller than what is recorded in your books or inventory management system.
• Common Causes: Include damage, spoilage, production errors, employee theft, shoplifting, vendor fraud, inventory miscounting, and administrative errors.
• Consequences: Financial loss, stockouts, overstocking, operational disruptions, damage to reputation, increased costs, and loss of competitiveness.
• Prevention Tips: Conduct regular inventory audits, train employees, implement security measures, conduct vendor audits, use proper stocktaking procedures, and implement inventory management software.
• Financial Reporting: Inventory shrinkage is typically reported as an expense in financial statements, either within the “Cost of Goods Sold” (COGS) section or as a separate line item under operating expenses.

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FAQs

What is inventory shrinkage?
Inventory shrinkage occurs when the actual quantities in your inventory are smaller than what is recorded in your books or inventory management system.

What common events could result in inventory shrinkage?
Common events that could result in inventory shrinkage include damage, spoilage, production errors, employee theft, shoplifting, vendor fraud, inventory miscounting, and administrative errors.

How to report inventory shrinkage in financial statements?
Inventory shrinkage is typically reported as an expense in financial statements, either within the “Cost of Goods Sold” (COGS) section or as a separate line item under operating expenses, depending on accounting practices.

How to calculate inventory shrinkage?
Inventory shrinkage can be calculated using the formula: Shrinkage Value = Inventory Value Record – Physical Inventory Value. To track shrinkage over time, you can calculate the Inventory Shrinkage Rate using the formula: Inventory Shrinkage Rate = (Shrinkage Value / Inventory Value Record) x 100.