Before getting into details about ERP inventory management we have to understand what is inventory management and why do we need it?
The fact or process of ensuring that appropriate amounts of stock are maintained by a business, so as to be able to meet customer demand without delay while keeping the costs associated with holding stock to a minimum. This also kind of explains why it is necessary don’t it. If you don’t ensure that appropriate amount of stocks are maintained it will lead to delay in getting the product to the customer endangering the organization future image. So we know now why proper inventory control is necessary.
Methods of Inventory management:
There are many methods that can be used for inventory control, commonly used methods are:-
(I.) ABC analysis – ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls.
When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes
(a) “A class” inventory will typically contain items that account for 80% of total value, or 20% of total items.
(b) “B class” inventory will have around 15% of total value, or 30% of total items.
(c) “C class” inventory will account for the remaining 5%, or 50% of total items.
(II.) VED Classification: In this inventory management system inventories are classified on the basis of their unit value, criticality of inventories is the basis for vital, essential and desirable categorization.
(III) FSN Classification: FSN stands for fast moving, slow moving and non-moving. Here, classification is based on the pattern of issues from stores and is useful in controlling obsolescence.
To carry out an FSN analysis, the date of receipt or the last date of issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction. The items are usually grouped in periods of 12 months.
(IV) SOS Analysis: ‘S’ stands for Seasonal items and ‘OS’ stands for off-seasonal items. It may be advantageous to buy seasonal items at low prices and keep inventory or buy at high price during off seasons. Based on the fluctuation in prices and availability, suitable decision has to be taken regarding how much to purchase and at what prices.
(V) XYZ Analysis: XYZ analysis is calculated by dividing an item’s current stock value by the total stock value of the stores. The items are first sorted on descending order of their current stock value. The values are then accumulated till values reach say 60% of the total stock value, these items are grouped as ‘X’. Similarly, other items are grouped as ‘Y’ and ‘Z’ items based on their accumulated value reaching another 30% & 10% respectively. The XYZ analysis gives an immediate view of which items are expensive to hold. Through this analysis, firm can reduce its money locked up by keeping as little as possible of these expensive items.
(VI) EOQ model: EOQ stands for economic order quantity. The economic order quantity is the optimum quantity of goods to be purchased at one time in order to minimize the annual total costs of ordering and carrying or holding items in inventory.EOQ is also referred to as the optimum lot size.
The formula to calculate the economic order quantity is the square root of [(2 times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost per unit to carry an item in inventory)].
ERP Inventory control
So now we know what Inventory control is and the methods of inventory control but what we don’t know yet is what ERP can do to improve inventory control. ERP can be useful in inventory control by following ways:-
1. ERP Inventory management system facilitates processes of maintaining the appropriate level of stock in a warehouse. As they say, business is all about information. If you have the correct information when needed it can maximize profit while minimize wastage. Proper level of stocks in the warehouse can be found out by the requirement of these stocks in various departments which can be achieved from ERP.
2. ERP inventory management module covers all stock related functions of an organization. Stock management and valuation activities, which form the backbone of any organization generally, take a lot of time and resources. This can be acquired from ERP saving a lot of time. ERP can also handle all the store activities of issues, dispatches, receipts and quality control.
3. ERP can classify various items avoiding any kind of confusion. Online status of item which is a must requirement nowadays can be achieved from ERP . It will also give quantity in terms of on- hand, on-hand, available, reserved, ordered, to order, rejected, defective and rework able quantities.
4. Maintenance of number of warehouses at once could be quite troublesome as a continuous flow of data is required. ERP can easily handle that which will avoid any wastage or unnecessary procurement.
5. ERP can handle material requisition from different sources, Valuation of stock (LIFO/FIFO/weighted), handling of low value items and stock transfer with receipt from other warehouses.
So will ERP inventory management and procurement increase the profit of the organization?
If the answer you are looking for is “yes, definitely, company’s profit will skyrocket after ERP implementation” then sorry to disappoint you but I am not going to say that. What ERP does is increase the chances of that happening. It will cut down any unnecessary buy or any delay due to inventory mishap so it will save money for the company. So in a way it will increase profit but overall profit depends on how popular the product is in the market.