Extend the Inventory capabilities and functionality in your ERP.

Most of today’s ERP solutions are packed with great features and tools, and they do their job exceptionally well. Still, they can’t possibly do it all. There are certain areas where additional functionality is required, and this functionality is found using add-on solutions. The ERP features that we discuss in this blog are based on what is generally available and may or may not be relevant to your ERP.

Let’s look in more detail to see where your ERP functionality ends, and inventory management begins.

Most ERP solutions include the following features:

• Inventory costs
• Locations
• Lot numbers 
• Serial numbers
• Bin locations 
• Bills of material
• Production planning
• Material requirements
• Purchase orders 
• Sales orders and freight costs

Some ERPs have entry-level forecasting and demand planning capabilities. However, most only take into account the standard lead time and order data based on sales history. To have a more dynamic view of your inventory, you must consider other factors such as supplier performance — what is their track record on lead times, and what percentage orders are filled to completion? Having this information allows you to trigger the re-order date, facilitating more accurate safety stock calculations. This is where the extended functionality available in an inventory management solution comes into play. 

The ability to forecast inventory in a “make-to-order” manufacturing environment is often managed very well within the ERP. But when it comes to “make-to-stock” manufacturing, you need to look at inventory management to assist with your demand planning and forecasting.

Typically, most companies try to extend their ERP by exporting their sales and order information into a spreadsheet where they perform calculations to help them with their forecasts and orders.  This method is immensely time-consuming, and it’s also prone to human errors, which could end up costing the company a fortune. These are just a few of the issues that come with inventory spreadsheets. Now let’s look at the type of functionality that most inventory management systems provide to improve on this process.

The foundation of an inventory management system lies in the classification of items — only once the foundation has been laid are you able to proceed with setting up your policies and parameters. The ABC analysis is commonly used for item classification; with this criterion, you arrange your items according to their value, i.e., your A items are your highest in terms of value. In contrast, your C items are your lowest. 

However, using this analysis in isolation has its downfalls. Some inventory management solutions like NETSTOCK introduce a second criterion, which we refer to as the HML criterion, and this is based on your sales velocity, H=high, M=medium, and L=low. Overlaying the ABC with the HML analysis is far more precise. Classifying your inventory provides better, more meaningful insights. Your CL items as an example, being your low-value, slow movers aren’t a focus for you, but there may be a C item that is a crucial component in a “make to stock” of an AH item, in which case you would never want to run low on that. Depending on sales, demand fluctuations, trends, and seasonal changes, your item classifications may also change. This kind of data is not usually available in your standard ERP functionality.

Once your items are classified in your inventory management system, you can set up your inventory policies, such as your safety stock parameters and your target fill rates. Typically, your ERP is integrated with your inventory management tool, and your sales and order data is pulled through into the inventory management system. This is where the magic happens. Your data is crunched in the forecast engine, where numerous calculations are made based on various demand types and out pops a bunch of forecast recommendations. Now you can make order decisions based on statistical learning, as opposed to gut feel and a min/max order level.  

You can start to see how many algorithms are required for item classifications alone, not to mention the complex forecast engine algorithms and the many other factors that come into play to give a true and accurate picture of your inventory. You can also see that the standard functionality within your ERP won’t provide this. Standard ERP functionality will not enable you to make informed ordering decisions, nor the insights to fully optimize your inventory. It is to this end that an inventory management solution needs to be implemented.

Your ERP and inventory management will work symbiotically to provide a holistic inventory solution. The inventory management delivers the data insights and intelligence needed to forecast your inventory accurately, and the ERP is ready to execute these tasks to completion. 

Together creating a more balanced and profitable inventory outcome.