Learning to Manage Your Inventory Efficiently
One of the primary reasons a business implements an ERP system is to better manage inventory – in an attempt to reduce inventory and improve customer satisfaction. Why then do companies frequently reporting dissatisfaction with ERP implementations?
A report on zdnet.com about a research survey conducted by Panorama Consulting Solutions shows that some 60% of ERP implementations realized less than half the expected benefits from their ERP implementation.
I am not here to give reasons for these failures – there is already plenty of advice out there. Instead, I want to focus on an area of the ERP system where a company can realize real pay-back from the ERP system – as well as improve business processes.
In many companies, it’s realistic to imagine that there is a lot of capital tied up in inventory. If this capital can be freed up for use elsewhere, it can have a real impact on cash-flow and investment in the company growth. Further benefits are then realized through customer satisfaction and loyalty as long as the reduced inventory does not impact service levels to the customers.
In this series, I’ll bring some clarity to the key factors that will influence the success of the ERP with respect to inventory control and customer satisfaction. In this instalment I cover the somewhat mundane but often over-looked prerequisites.
Making Sure You Get Your Inventory Setup Properly
The first key to a successful ERP implementation is having the right information in the right place when you need it. This is especially important in a manufacturing environment where the delivery of your finished products depends on the accuracy within all the components that are used in production.
If this is a new ERP implementation, this information will often be imported from another system or from spreadsheets populated by users with the internal knowledge.
The following information / data is required for any successful ERP implementation:
Minimum/Maximum Stock Levels
- These are assigned at the warehouse level, and will often be used anywhere stock is held. If products are special order or made to order, then these should both be set to 0.
Economic Batch Quantity
- The EBQ is used when suggesting recommended jobs or purchases. On manufactured goods, it may also be used when calculating the estimated cost of the labour component on the bill of materials.
- This is the time it takes for a supplier to deliver goods after placing a PO (purchase order) with them. Wherever possible, you want to use proven lead times for this value. Setting this too high may result in excess inventory sitting in the warehouse because it was received a few weeks early. Setting it too tight may result in last minute calls looking for the goods to satisfy tomorrow’s production.
- The lead time on production goods will be the longest critical path in a bill of material, which will depend on the component lead time, and when the operation is within the bill of materials. This is usually calculated by the ERP system on made-in products.
Manufacture Lead Time
- This is the time it takes to manufacture a made-in product, from the time an order is placed to when it is available for picking, assuming all the components are in stock. This is usually calculated by the ERP system.
Dock To Stock
- This is the time required to unload, process, and stock the product in the warehouse to have it ready for picking against orders. This may be a critical factor if the goods need to go through any kind of inspection process.
- This setting will determine how a product is “batched” when purchasing or producing and may be used in combination with min / max levels. In its simplest form, if a product is set Lot for Lot, then one is ordered for every one that is required. If a product is set for Multiples of EBQ, then the product will be ordered or produced in EBQ quantities only.
Gross Requirements Rule
- In an environment where forecasting is used to determine future sales, this rule determines whether forecasts and/or sales are to be used for determining requirements, and in what combination.
- A typical example may be to use Highest of Forecasts and Sales. In any given period, the Forecast predicts what the sales will be, but in four weeks there may be open sales orders that exceed the forecast. In this case, the outstanding sales quantity will be used instead of the forecast.
Assuring You Get the Data Quality Right
The quality of the data goes a long way to ensuring a successful ERP implementation. The old adage of “garbage in – garbage out” rings so true here.
If the keys elements above are not accurate – you won’t get the results you are looking for when the system makes suggestions on what to order or to produce.
- There are two other pieces to this puzzle – the history and the forecast. If the company’s model is based entirely on the use of min/max values for determining inventory requirements, then forecasting is not required.
- However, in most environments, forecasting provides the ability to produce expected order and production schedules based on past performance, future growth, and seasonal trends. After all, do we need 2,000 in stock during a 4 month period when customer only order 50 a month?
Getting Historical Data Quality Right Helps Drive Accurate Forecasts
In a new ERP implementation, there might not be any history to base forecasts on. In this case, forecasts may come from manually produced spreadsheets, or entered directly into the system.
When data migration takes place, another common function is to collect historical sales from an old system and import this information into the forecasting system for use in forecasting.
Before importing this data, it is often a good idea to have it reviewed to ensure accuracy. Remove or adjust for obvious outliers (one-time sales that should not be used in predicting future sales).
Forecasting can be done manually as mentioned. However, if the company works through predictable sales cycles, the forecasting capabilities of the ERP can be used to predict future sales. Most common statistical analysis methods can be used for sales predictions, including moving averages, seasonal profiles, and trend analysis.
The graphs provided with a typical ERP can also show these predictions prior to writing them back to the system, and will allow you to adjust them. You can also use sales trends of other items to determine the forecasts of new items added to the system.
Making Sure You Sort Out Your Business Processes At the Same Time
A company’s business processes can also have an impact on the ERP’s ability to manage the inventory. This is an area that is often glossed over in an ERP implementation. To note:
- It is vital that a Business Process Review (BPR) be conducted, and business process re-engineering be done where it makes sense to strengthen the supply chain
- Data accuracy is vital to the integrity of the system and timely entry of data is crucial for efficient movement of goods
If it takes two days to process a receiving due to the collection and entry of serial numbers, then this is lost productivity time. Remember:
- Delays in receipting completed jobs may result in delayed deliveries to the customer
- Failure to entry labour on jobs in a timely fashion may result in jobs being posted incorrectly
- Entry errors cause further productivity issues with the need to correct the resulting errors
In the Next Instalment
In the next instalment, we look at the use of Master Production Schedules to stream-line the production environment and how a Material Requirements Planning system provides the just-in-time inventory you need to reduce inventory levels.
After that, we will look at forecast reviews, and service levels. How are you really doing with managing the inventory, and what advanced tools are available to better manage our service levels to the customer.
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