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Inventory Management Getting Inventory Control Under Control

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Next to financials, inventory is probably the most salient metric to measure in any stock based business. It can also be one of the hardest as measuring and forecasting both inventory at rest and inventory in motion is a complex undertaking.

Enterprise Resource Planning (ERP) software solutions are designed to help you get inventory under control so you know what you've got and where it is. A good ERP system will also help you decrease physical inventory, reduce costs, improve production time and aid customer service.

If you can get your inventory under control, that is.

There are several reasons why inventory is harder to master than your financial data. Unlike financials, which are highly structured and have a history of shared best practices, inventory management is much more diverse. Nearly every company manages inventory differently and there is far less standardization. While schools and universities teach the basics of financial information and bookkeeping, inventory control is an advanced study usually developed from on the job training.

One thing inventory and financials have in common is that they are constantly changing. Minute by minute and hour by hour, your numbers and your inventory are changing. They are fluid parts of your business and to be operationally successful you have to get them both under control.

A complicating factor with inventory is that most businesses have slack standards for what constitutes "accurate inventory". Simply put, they have a reasonable but not exact understanding of how much stuff they actually have on hand and where it is. The ERP system displays precise numbers representing inventory quantities. But when you compare those numbers to what is actually available, you're going to find discrepancies.

One simple test of how far off your inventory numbers are is this. Pull a report of all items listed as having negative quantities in stock. Assuming your inventory system allows negative quantities (some don't) you may be astonished at how many parts are listed as being stocked in negative numbers.

Of course there's no such thing as a negative quantity in stock. Those negative items represent a failure of inventory control. The more of them you have the worse the state of your inventory.

Because ERP software quantifies things very closely and rigidly standardizes practices, it tends to make problems like poor inventory control stand out. This is a headache when you're implementing ERP software, but it provides a great opportunity as well. The more closely you control inventory, the more money you can save by eliminating unnecessary and duplicate inventory, the more accurately you can schedule production in a manufacturing business and the better you can serve your customers.

Taken broadly, there are two major components to better inventory control: 1) Plug Leaks and 2) Get An Accurate Count. Unfortunately neither of these is as easy to do as they sound. Like a lot of things in ERP implementation, each requires determination, a clear vision and navigating various technical and human obstacles. In fact, you’re likely to find that getting your inventory under control is a major, unexpected, effort in an ERP implementation.

The reason you get negative quantities in your inventory is that the item in question wasn't properly accounted for. There are a number of ways this can happen, but at the bottom of most of them is a simple fact: People want to do their jobs. In fact most of your employees are so dedicated to doing their jobs that if the system gets in the way, they will work around it. If they have trouble getting the parts they need, they’re likely to go snag them out of the stockroom themselves, or grab what they need out of the receiving area, or whatever. This throws your inventory out of whack. The items may have been properly checked into stock, or receiving, or whatever, but they weren't properly checked out.

Inaccurate inventories tend to snowball. As employees learn they can’t trust the inventory system, they become suspicious of it and go around it more. In production type environments they also start squirreling away emergency stashes of material that is particularly likely to run out so they’ll have enough for their own uses. It doesn't take much of this behavior before your inventory numbers become a real problem.

To fix this, you need to find and plug the leaks. It's not enough to know that the inventory numbers are off, you've got to find out why they're off and prevent it from happening again. For example, your stockroom should be physically separate (enclosed by link fencing on the factory floor or otherwise delineated) and access should be strictly controlled. No one should be allowed in other than authorized staff.

The stockroom employees should have a well-defined set of procedures for checking material in and out of the stockroom, complete with alternate procedures to handle exception conditions and they should be trained to use them.

All this should be made as easy as possible for everyone. Bar codes are pretty much a necessity for controlling stock going in and coming out. The procedures should be designed to be as easy and automatic as possible.

Of course situations like expediting items should be provided for, along with the appropriate record keeping. Expediting should always be watched closely because it indicates a potential problem with your system – something that should be understood and corrected.

Finally of course you need to do a comprehensive inventory count as part of the ERP implementation. This is the point where you want to have the inventory as accurate as possible.

When the ERP system is up and running you should do regular audits of control groups of items in inventory. Categorize inventory by value (i.e. A/B/C analysis) for periodic traceability or select a group of 10 or 20 items and physically count them to see how they compare with the inventory records. If discrepancies show up you may need to do additional physical inventory. More importantly, you should find out why the numbers don't match with the quantities.

Inventory management isn't a one-time process, or even something you do once a year during the physical audit. You have to stay on top of it constantly to get the full benefits of ERP systems and performance. End

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Inventory management isn't a one-time process, or even something you do once a year during the physical audit. You have to stay on top of it constantly to get the full benefits of ERP systems and performance.



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