The firm and stable inventory management system is a critical aspect of a business. The way you manage your inventory can make or break your business.
In this post, we have analyzed the benefits of having a managed inventory. We’ll go through different types of inventory, techniques to manage them, and about ERP inventory module. We’ll also discuss a case study of an optimized warehouse system.
An inventory system can ease the management of inventory operations. The system enables the management of the entire inventory from a single location.
Prominent features of inventory management systems
Stock tracking and transfers
This system enables the organization of specific items. It can identify an item with an identification number and its location. Related term inventory records or perpetual inventory record is a continuous account of the incoming materials, outgoing materials, and the balance on hand.
It increases the visibility of warehouse management. It allows real-time data to integrate with the system and reduces negative inventory.
Managing Purchase and the Sales order
It consists of a tracking mechanism; this helps to track the details of bought and sold items.
ERP payment gateway enables the inventory system to buy or sell inventory items.
Businesses are switching from offline to online stores. A B2B e-commerce solution helps the wholesalers and retailers to sell in masses, which empowers them to connect to the world.
Intelligence reports and analytics
ERP system creates detailed analytical reports, and this includes all the aspects of the business, including inventory control and analysis.
ERP Inventory module assists in organizing and maintaining the warehouse. The analysis of the surplus stocks, rejections, repairs of the warehouse, enabling the smooth functioning of your manufacturing unit.
Benefits of ERP Inventory Management
The SME and large industries can handle the complex inventory scenario’s using ERP. An ERP inventory model for an organization benefits in many ways.
End to End inventory analysis
ERP inventory gives a complete view of your inventory. It assists in stock optimization along with quality control. It optimizes and streamlines the entire inventory activities. It provides real-time analysis across all the activities of operation and supply chain management.
Administration of stocks
It assists in analyzing the items according to their cost, demand, and supply. It can measure the items in different units. It sets up the validation methods along with expiring dates for each item.
It can track individual items or the entire batch. The system captures all the details of goods from their buying to sales. In the case of complaints, the inventory system can backtrack the items or the entire batch.
Maintaining an adequate-amount
Decides and maintains the precise quantity of items stored. The inventory management techniques help to identify the right amount of items stored.
Inventory maintains an adequate amount of items. It reduces the loss of storage and maintains the healthy flow of goods for production. It is also useful in managing the risk during crises by storing the surplus amount of goods.
With an ERP system, you can have audits of your inventory along with the result and analysis. In some cases, a manual check of inventory items is necessary — the item details displayed in the ERP system assists in performing audits. Physical inventory is also known as wall-to-wall inventory.
There are different management techniques to handle inventory. These techniques differ as per the type of industry. An ERP system helps in planning inventory management techniques. These techniques depend on the type of inventory.
Types of Inventory
Inventory type depends upon the type of industries and their operations — the inventories in the merchandising sector stores the end product. In manufacturing industries, the inventory has raw materials along with the subassemblies.
Below are the types of inventory,
The manufacturing process producing subassemblies or final products uses raw materials. Inventory stocks these raw materials which are available for production.
This type of inventory consists of materials like raw and component materials. The manufacturing process for its end product utilizes these materials. Once the final quality check gets over, these materials are part of the finished goods.
The finished goods are the end product or the part of another item. Supplies and dealers use the finished goods inventory type to store the bought goods.
MRO stands for Maintenance, Repair, and Operating. The product includes the necessary items used for maintaining and repair work.
You can see examples of MRO inventory in the clothing industry. This industry usually provides extra items like buttons, along with the finished product.
Shipment and movement of the goods are essential in most companies. This type ships the goods and transports them to different warehouses.
Buffer-inventory stores the buffer stock to meet the forecasted demands. Buffer inventory reduces out-of-stock situations and ensures proper business to customers.
This inventory works for manufacturing units. The production process is usually couple with many processes. These processes are interdependent. The decoupling inventory separates the inventories of another process.
This type is for a standard business cycle. For every cycle manufacturing of a regular amount of product takes place.
Inventory Management Technique
For any industry managing the inventory is an important task. There are different techniques to manage inventories efficiently. These are useful in maintaining the profit for a business.
Just in time (JIT)
The company stores the exact amount of inventory required for the production process, which avoids the storage of the excess amount. This technique saves the cost of storage and insurance for the items. The new stock buying needs to happen only when the older stock is close to replenishment.
This type of management technique is called “zero inventory.” In this type, an order initiates the cascade of events needed for the production.
It reduces wastage, eliminates stockpiling, and increases efficiency by maximizing inventory turnover.
Minimum order quantity
It allows you to order the lowest set of amount of stock a supplier is willing to sell. If a supplier is unwilling to sell below the minimum quantity, you are not able to buy the item. Strong the stock for some time results in a delay in realizing the profit. This method helps the suppliers to maintain healthy cash flow.
ABC stands for Always Better Control analysis. Here the inventory items are classified into A, B, and C categories. The items in A category are expensive and strictly controlled. B category is lesser expensive as compared to A and is moderately controlled. C category items require lesser investments and are highly available. So the level control level of the C category items is minimal.
More on ABC Analysis and classification.
FIFO and LIFO
In the case of FIFO ( First-In-First-Out), first utilization happens for the first entered items. The food industry observes this kind of management technique. In this process, the consumption of the first-in perishable items happens first.
LIFO (Last-In-First-Out) technique is for the non-perishable and homogenous items. These goods are easy to manage and do not need a re-arranged warehouse for each batch or order.
Economic order quantity
Economic order quantity helps to reduce inventory by ordering the lowest amount of inventory. It saves the storage cost and achieves the target during peak demand hours. This method is the safest. It does not allow us to drain the inventory items and achieves the required target.
According to Kenneth Boyd, the calculation of EOQ is,
EoQ uses three variables,
D = Demand, in the units required for the production.
S = Ordering cost per purchase
H = Carrying cost per unit.
Safety stock Inventory
Base stock is stored to deal with the market variations of particular items. This technique deals with serious unexpected business issues. It stores just the required amount of inventory before completely drying out.
It prevents stock-out and protects against unexpected spikes and demands. It buffers the stock and helps in compensating the inaccurate market forecasts.
Safety Stock Inventory = (Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales x Average Lead Time in Days)
Dropshipping is in the supply chain management system where the merchant doesn’t own the goods nor stocked. Once the merchant receives an order for the goods, the supplier receives the requirement. The supplier ships them to the customer on behalf of the merchant. This type does not require inventory; instead, the order fulfillment cost is low. This type’s risk is not much, and the startup cost is low.
It is a business deal between the consignor (vendor) and the consignee (retailer). The consignor delivers the items to the consignee without the advance payment. The consignee pays the amount only after selling the items. It is a win-win situation for both. It improves the cash flow and improves the partnership between them.
FSN stands for Fast, Slow, and Non-moving inventory items. Not all the items required for production are needed frequently. This method classifies the inventory into, Fast-moving inventory, Slow-moving inventory, and Non-moving inventory. It allows you to order the required amount of inventory items based on the utilization.
Reorder Point Formula
This formula identifies the right time to order the inventory item.
More on reorder point.
Batch Tracking is known as a lot-tracking-process. It efficiently tracks the goods using batch numbers along with other details.
Perpetual Inventory Management
It is also known as a continuous inventory system. This inventory system tracks the sold and stocked items in real-time.
It helps the multiple departments to track the items. For the perpetual inventory management method, cloud-based ERP systems are popular.
Lean Manufacturing System
It is known as lean production. It is a system to maximize product value and minimize waste.
It is a Toyota Production System developed to eliminate 3 types of deviations. These deviations lead to the inefficient allocation of resources. These 3 types of deviations are Muda (waste), Mura (unevenness, and Muri (overburden).
Using the lean manufacturing system, companies adhered to 5 principles. These are,
- Value Stream
The organizations integrate the “lean manufacturing techniques” with these. This combination has been observed to produce the best quality products.
Sigma and Lean Six Sigma
This is a data-driven process. The product defects are reduced to 3.4 defective parts per million. This method enables us to deliver a perfect product to the customers.
Statistical models are used to study the data of the given industry. These models help to improve the performance of the process until they achieve the 6 sigma level.
There are two different ways to implement the 6 sigma model.
- DMAIC: The 5 step process is called DMAIC. It stands for Define, Measure, Analysis, Improve, and Control. This method is used for improving the established process.
- DMADV: This is mainly used to develop a new process. DMADV stands for Define, Measure, Analyze, Design, and Verify.
Lean Six Sigma is the fusion of Lean manufacturing and Six Sigma.
It predicts what the customers may buy, the quantity, and the time. The prediction depends upon the previous experience, guess, or previous sales data. Demand forecasting assists in the decision-making process during the critical stage.
Case Study of Optimizing Warehouse
A case study published by Infosys on the Fortune 100 telecommunications OEM is a good example. The company is known for its mobile phone and service of wireless network solutions. It faced challenges with its existing WMS (Warehouse Management System). The warehouse could not scale on volumes of mobile phones. At times it failed to deliver during accelerated customer response.
The client had Distribution Center (DC) in Europe catering to the EMEA region as the customer upgrades to the single-most converged device. The distribution efficiency of this center decreased.
This existing ERP system lacked integration with its AMHE (Automated Material Handling Equipment). As the WMS was custom-built, it was rigid to handle the changes. To extract and consolidate the data, the warehouse requires several tools. Using these tools resulted in reduced supply chain inventory visibility. The required shop floor processes were not streamlined. This resulted in the idling of the assembly line. This was one of the main reasons to reduce the efficiency of DC as it was not rolling out the products at peak time.
Re-engineering of DC leads to streamlining the required shop floor process. The AMHE was integrated with the ERP system. This offered a real-time consolidated view of the warehouse. The integration improved to optimize the DC cost and aided the decision-making process. It also managed unexpected issues such as systematic manner by reducing manual intervention.
ERP Inventory Module
ERP Inventory module facilitates processes of maintaining the appropriate level of stock. Stock in the warehouse of the company.
The activities of inventory control involve,
- Identifying inventory requirements.
- Setting targets.
- Providing replenishment techniques and options.
- Monitoring item usages.
- Reconciling the inventory balances.
- Reporting inventory status.
The inventory control module integrates with sales, purchase, and finance modules. This allows ERP systems to generate vigilant executive-level reports.
- Online status of item quantity. Quantity in terms of on-hand, available, reserved, ordered, to order. This also includes rejected, defective, re-workable quantities.
- Complete excise functionality and generation of excise registers.
- Many levels of classification of items.
- Quality control based on QC parameters.
- Handling material rejections.
- Rejected material dispatch to subcontractors.
- Linking of GRN to PO and Invoice.
- Gate pass that is returnable or non-returnable.
- Cenvat claims for capital goods.
- The analysis helps in maintaining optimum stock levels.
- Physical verification of stock.
- Reallocation of re-workable stock.
- Many warehouses, branches, and regional offices.
- Stock transfer, receipts from other warehouses.
- Excisable items, definition, and chapter allocation.
- Multiple units of measurement.
- Alternate items for production planning.
- Handling of non-stock low-value items like stationery.
- Lot wise tracking of inventory at shop floor and main stores.
- Stock Valuation, LIFO, FIFO, and weighted average.
- Material requisition from different requirement areas
- Purchasing and subcontracting
- Receiving material against sales order processing, material requirement, subcontracting, gate pass, and production requisition.
- Landed rate of items.
- Consolidation of all warehouses.
- Consolidation at any level of the company hierarchy.
ERP inventory module covers all stock related functions of an organization. Stock management and valuation activities. That forms the backbone of any organization generally, takes a lot of time and resources.
It handles all the store activities of issues, dispatches, receipts, and quality control. The lot wise stock of each item is maintained. Various MIS are provided for tracking stock movement.
Cloud-Based Inventory Management
A cloud-based ERP system utilizes the power of accessing the cloud space from any device. Multiple inventories located at various locations are manageable from a single location. Supply chain industries use this. Using Cloud-based type of inventory management system, you can
- Track each step and process of your inventory and warehouse.
- Can see the stocks of multiple warehouses and its location
- Reduces the risk of been stock-out, as it locates the items across the various warehouses.
- Tracing the items using its batch number, serial number, and prices given by suppliers is easy.
- It creates inventory valuations of items. It uses the replacement cost, accounting cost, special cost, and average cost.
- Identifies the unused stock and frequently used or sold stock in each warehouse. This analysis helps the suppliers to know the frequently sold goods in a particular area.
- Optimizes the cost along with the constant supply of the gods.
- Reduced the loose and can identify the expired goods.
Unleashing the Power of IoT and Blockchain in ERP System
Current ERP systems are ineffective in tracking real-time data automatically. Though the systems store data in them, it requires a human invention for entering the data. Humans are prone to errors, and so the current ERP systems are not 100% reliable.
By integrating the ERP system with IoT and Blockchain digital networking technology, one gets quick, authenticated, and automatically scanned details of the goods in real-time.
IoT increases real-time visibility to ERP systems. IoT uses smart sensors with connected devices to collect the data. Blockchain enables us to secure the data flow between the ERP systems.
An efficient and optimized inventory system can reduce the cost of the inventory. The ERP inventory management system manages the details of individual items. Inventory management techniques are useful in reducing the cost of inventory. These techniques are also useful in managing risks and forecasting demand.
ERP system’s entire process can be automated and secured by integrating it with IoT and Blockchain.