At first glance the cost of an ERP system can be unsettling. But an instant plug-and-play calculation will not give you a full understanding of the value of ERP and it certainly won’t provide a detailed picture of the part that inventory plays in the success or failure of your organization.
Demand is unpredictable. Goes without saying, right? Wrong.
Many successful, well-run businesses still get caught off guard with the ebb and flow of customer spending. Small changes in real demand can lead to big fluctuations down the supply chain and this can have a devastating effect on the bottom line.
And change, unfortunately, is inevitable. Imagine a furniture manufacturer that is established as a leading player in its target markets and has an enviable reputation for delivering reliably and timeously to its customers. This success generates growth, rapid growth, and suddenly everything changes.
Deliveries begin to turn up late or disappear completely, and the information that the furniture company has on file is either inaccurate or contradictory. Happy customers quickly become angry customers and they start looking for an alternate service provider.
A familiar tale? In today’s economic climate, there’s a tendency for some companies to become victims of their own success. In the case of our hypothetical manufacturer, the company may invest in expensive third-party consultants to identify the problem and it may become clear that as the business has grown, every decision-maker in every department has implemented their own systems, processes, software applications and information silos.
Instead of a streamlined operation with company-wide access to business-critical enterprise information, our manufacturer is actually a tangled mess of incompatible systems.
What becomes increasingly evident is the role that inventory plays in the success or failure of the organization and how all of the disparate systems and processes can impact on the management of this critical element of any business.
There are four basic principles of inventory management that most business owners know but seldom take into consideration when a problem arises:
- Inventory costs a lot to acquire
- Inventory costs a lot to keep
- Inventory affects service levels
- Inventory is a form of waste that can mask other forms of waste
Holding large amounts of inventory allows a business to be very responsive to fluctuation in customer demand. However, the production and storage of inventory are costs that need to be kept to a minimum in order to remain competitive. Herein lies the conundrum: how do we improve service levels and simultaneously reduce inventory levels?
“Optimizing inventory presents an opportunity for large gains,” says David Waller, Sales Consultant at specialized ERP provider, K3 Syspro Limited. “It’s more about maximising the effectiveness of the process as opposed to trying to make them more efficient.”
The financial view on inventory is that it ties up cash and working capital which could be more lucratively deployed elsewhere. The challenge is to assess the level of basic stock required, keeping as little safety stock as possible and providing ‘just the right amount’ of seasonal stock. The search for optimal inventory levels is therefore a key objective.
“Inventory optimization takes inventory management to the next level, providing a more dynamic and holistic approach which allows managers to assess various signals in the supply chain that may be relevant,” says Waller.
“Overcoming the misconceptions that plague the process of managing inventory and forming a realistic picture of the actual costs involved can go a long way towards ensuring a higher return on your assets.”
And when it comes to inventory, misconceptions abound.
Take the belief that increasing your order size will reduce the risk of stock-outs. Unfortunately, bigger order sizes often extends lead-time and can result in lengthening the period of stock-outs instead of avoiding them.
Or what about the idea that holding large quantities of stock will make your business more profitable. This becomes difficult to prove when you calculate that your stock is costing you as much as 10% of its value to store.
“Many organizations still face the challenge of traditional attitudes and behaviours in which production and supply issues are seen as more important than demand-related ones. In the trade-off involving inventory and supply chain improvement versus production and cost-related concerns, business decision-makers have to assess whether to stay with the older production-driven approach or adopt newer demand-driven practices,” says Waller.
“Demand forecasting, minimizing inventory and understanding the level and cause of supply chain variability can have a massive impact on service levels and simultaneously boost your income statement.”
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SYSPRO is one of the longest standing and largest independent, international providers of ERP systems for manufacturers and distributors worldwide. SYSPRO has for more than 35 years delivered on its promise to provide thousands of its customers globally with the tools required to effectively operate and compete. Backed by a truly dedicated and professional team of employees and partners around the world, the company’s ability to innovate and develop technologies based on the needs of customers is one of the reasons why SYSPRO enjoys one of the highest retention rates in the industry.