Manufacturing Business Definition
A simple definition of a manufacturing business is one where the company buys stock, commonly referred to as Raw Materials, and combines these stock items in order to make different items which are then sold, commonly referred to as Finished Goods.
A manufacturing business has various components which need to be taken into account when deciding on the selling price of their Finished Goods items. Essentially, these components are the cost of the Raw Materials, the cost of the labour, the cost of the overheads of the business and the cost of any outwork that may need to happen in the manufacturing process.
The cost of the Raw Materials, Outwork and Labour are what make up the Cost of Sale value, which in turn gives the Gross Profit figures. The overhead expenses are generally then deducted to arrive at the Nett Profit figure.
In a manufacturing business, it is extremely important to have good control over the costs and management of the stock which makes up the Raw Materials. Ensuring that Raw Materials are purchased at the best possible price is obviously important. However, factors such as stock shortages and overstocking are equally as important. Stock shortages impact the efficacy of the manufacturing process and the ability to supply the Finished Goods stock. Overstocking impacts cash flow and ties up monetary resources. Stock shrinkage is also a factor that reduces profitability and often results in stock shortages. So for the manufacturing business, careful monitoring of these factors is essential to ensure that the cost of the end product being sold is kept as constant as possible so that the expected profit margins are achieved. Care needs to be taken that this attention to the cost of manufacture is not taken to extreme measures which can result in an inordinate amount of time and effort being spent on monitoring low-value cost items.
The software which manages Stock or Inventory Control will assist enormously in monitoring costs. Depending on the complexity of the manufacturing process, Bills of Materials (BOMs) can be created which make tracking the impact of changing Raw Material costs much easier. These BOMs can often incorporate a labour factor which increases the actual cost price accuracy.
MRP (Material Requirement Planning)
MRP (Material Requirement Planning) is also an important factor for a manufacturing business. This is a process where the Raw Material stock levels are monitored, to ensure stock availability for the required Finished Goods to be manufactured. This entails looking at what needs to be manufactured and by what date, ensuring that there the Raw Materials levels are sufficient to achieve this and providing suggested reorder quantities. This is often managed by using minimum and optimum levels for each stock item.
The trigger to manufacture Finished Goods stock will depend on the business type. Some businesses will manufacture only on receiving sales orders from customers, some will manufacture to replenish stock holdings in dispatch areas or on the shop floor. Often there might be a mix of these. Some businesses may manufacture a range of standard Finished Goods items, others may manufacture mostly custom made items. Each of these will require different management. For example manufacturing mostly custom made items will benefit from Job Costing software functionality, which tracks the costing on each job being manufactured. Manufacturing to replenish stock holdings requires software that can handle costing and control of manufacturing batches. In this type of environment, it is also important to take into account possible seasonal changes in demand as this must be taken into account when managing Raw Material stock levels. It is vital for a business to have enough Raw Materials to be able to manufacture for high sales demand but also not to carry excess Raw Material stock in times of low sales.
Enterprise Resource Planning (ERP) software
Manufacturing control is part of many ERP software applications. There are stand-alone software applications but having a fully integrated solution is far more advantageous as there is less duplication of effort in capturing information and far greater accuracy. Implementing a Manufacturing system in your business takes time and planning. Having a software solution that is scalable is extremely useful as then the system can be implemented in stages.
Omni Accounts offers a powerful, extremely scalable Manufacturing solution which is part of its ERP functionality.