operations and accounting

Your raw materials are everything when it comes to manufacturing. However, there exists an unknown profit-drainer on many factory floors, incorrect tracking of material consumption.  While you might have designed a product, which requires ten pounds of steel to produce, your operators consume eleven pounds due to waste or defects. Consequently, your inventory levels will be incorrect, cost of goods sold will be off, and your company’s profitability will only be a guess.  For the sake of precision and efficiency in operations and accounting, correct tracking of what materials go out of your warehouse and into the production is essential. This is how it is done in modern manufacturing companies.  But Why Else Does This Matter?  Recording material consumption goes far beyond reconciling the materials in your inventory. Every time you consume materials during production, you’re setting in motion the financial mechanisms of your company. The value of that raw material moves from your Balance Sheet (Inventory Asset) to your Income Statement (Cost of Goods Sold). Lazy or inaccurate consumption recording will result in your financial statements reflecting inflated profits that you did not make.  The Three Approaches to Material Consumption Recording  Most ERPs, like Microsoft Dynamics 365 Business Central, have three different ways to record material consumption. Knowing when to apply each approach is crucial.  1. Manual Consumption Recording  The most accurate approach to consumption recording. Operators record every item, lot, and amount of material consumed by hand in the consumption journal.  For: Expensive items, materials with mandatory traceability (such as aerospace or pharmaceuticals), or customized production, when you need to keep track of every scrap produced.  The drawback: it slows down production with data input on the shop floor.  2. Forward Flushing (Auto-Consumption)  Forward Flushing involves the automatic subtraction of the expected number of materials from inventory the moment the production order status becomes either “Released” or “In Process.”  Ideal For: Products that are high in volume but low in value, such as nuts, bolts, or packaging materials where the cost of administrating them manually outweighs the cost of the materials themselves.  3. Backward Flushing  This method entails the system waiting for the production order to finish first. Once the completed product is posted, the system then automatically calculates the expected raw materials using the Bill of Material (BOM).  Ideal For: Lean manufacturing plants with predictable and repetitive processes.  The Risk: If the machine breaks down in the middle of processing and spoils the whole batch of raw plastic, backward flushing will not be able to detect it. It will just assume that all the materials were processed correctly.  The Importance of Scrap and Variance  No production system is absolutely accurate. Even if your BOM states that 5 gallons of paint are required, spilling 1 gallon of the same paint means that the gallon is gone despite not being used for any output.  To be able to measure the real situation, the consumption process must incorporate reporting of Scrap. Your operators should have an easy method of stating the fact that they used material without producing anything valuable out of it. Also, production managers must frequently analyse Consumption Variance Reports that show how close you are to the expectations of your BOM.  Best Practices for Success  Don’t adopt a one-size-fits-all solution. Employ manual tracking for high-value and traceable materials and flushing for cheap materials.  Empower the shop floor. Enable operators to employ barcode readers or tablet-based systems that allow them to enter consumption and scrap information without returning to a desktop computer.  Update BOM’s in real time. When a design or dimensional change happens for a component or material, update the BOM immediately. Any inaccuracy in the baseline data translates to inaccurate consumption tracking.  Effective material consumption tracking serves as a bridge between the physical shop floor and the finance team. With the proper tracking tools applied to the proper materials, you safeguard your material inventory, minimize your profit margin risks, and increase visibility over manufacturing costs.