Effective Inventory Management with an ERP Manufacturing System

Using an ERP Manufacturing System without managing your inventory effectively is like an orchestra playing without a conductor. How? It’s because the whole point of an ERP system is to pull inventory in and convert it to selling goods. Everyone has to play their part. Without effective inventory management, the whole performance is uncoordinated, frustrating for all involved – and that includes your customers.

Those involved include sales and marketing (they bring in the orders), suppliers for raw materials and components, the production team (and machinery), warehousing and logistics to store and ship, and finally, the accounting department to track it all, from goods received but not invoiced to invoiced sales and cash collection – but let’s not forget the value-add and work in progress evaluation.

One more thing – you need the people to make it happen, which is where HR comes in – whether for permanent staff or for temporary workers to handle a peak in orders.

It’s All Automated You Think…

Fine you say, an ERP manufacturing system handles all that, automatically – or nearly so. What’s special about Inventory Management? The ERP tells us what is in stock, what we need to order, what we draw from stores or bulk tanks and what comes out at the end of the manufacturing process.

…Until the Inventory Count is Wrong

The inventory ‘number’ can be wrong in so many places and for so many reasons, most of which depend on how granular your ERP system is, and on the rigour of your processes. If your physical inventory management is below par, then the ERP software will magnify the problems – and quickly. For example, you find that the system is placing orders for components and materials that in fact, you do not need, and that there are stock-outs on other components at the same time.

The knock-on of poor inventory management is considerable, and its impact is felt right across the company.

Here is just a sample of the kind of things that can go wrong with inventory management at the various stages of manufacturing, and why it is critical in the use of an ERP manufacturing system.

Purchase Orders

• Because the ERP system suggests a purchase order, it is taken at face value. The purchasing team should be sanity checking suggested purchase orders against consumption reports and production requirements forecast before pushing the ‘send’ key on the order.

Goods Receiving

• Incoming materials and product which do not meet specification are not put into Quarantine (a separate physical area and a specific location in the ERP).
• The receiving stores’ clerk matches the delivery note against the order without a formal physical count or sample check (say for bulk boxed components).
• Bulk delivery ‘put-away’. This is a common issue for those who receive multiple containers of components after a ship docks and the receiving team can be overwhelmed. The unpacking process can take a long time, especially for distributors with hundreds of product lines arriving at once. Does the sourcing lead time allow for unpacking? This time can vary considerably – it could take 24 hours to get to the items right at the back. With a suitable ERP system, such issues can be managed effectively.

Stores Control

• Stores staff has to print and label bins correctly, and see that the correct components are in the correct bins. Errors here can lead to time-consuming stock shortage investigations and delayed production.
• Free issue materials – for example, safety gloves or goggles – can cause a production hold up if there is no stock on hand. Because they are free issues does not mean that they are not important.
• Return Material Authorization (commonly called RMAs). When goods are returned to stores, there needs to be a reason code (e.g. faulty or over quantity) which governs where in the system the return is to be recorded. Should it be quarantined for checking, put in a ‘return to supplier’ location or put back into regular stock?
• Finished goods packaging planning and control is a vital area, and getting this right is essential. It is nor unknown for finished goods to be piling up in a temporary holding area while the latest packaging or barcode labels are awaited. This puts additional pressure on space and if the finished goods are perishable then expensive stock write-offs can result.
• Shrinkage is a euphemism for theft. It refers to the loss of products in inventories – causes may include internal or external theft, deterioration, damaged goods, expired goods in case of perishables, and/or administrative errors. Regardless of shrinkage’s cause, the consequences can be severe for under-delivered customers.
• Inter-warehouse transfers. These have to be carefully managed and if the movement time is anything more than a few hours then it pays to have a ‘Stock in Transfer’ warehouse location, which is unavailable to production – obviously physically, but also on the ERP system.

So, how can you be sure that what the ERP says is in stock is actually in the location specified and that the quantity is correct? This is usually done with a stock-take procedure and best operated on a rolling basis so that a number of lines are checked every day. A comprehensive ERP system will be able to produce daily stocktaking sheets and interface with portable bar code readers for the rapid stock taking.

For bulk materials, there may be metering systems and flow gauges which may even be directly connected to the ERP. It is important to ensure that these meters and gauges are checked and calibrated regularly.

Data Collection

• Shop floor data collection (‘SFDC’) – many manufacturing companies use batch completion sheets which record completions at various stages of the production process. Some use automated counters or meters. If there is a problem say with a faulty component batch then this information needs to be input to the ERP system so that appropriate re-ordering and component suspension can be triggered.

Product Data Maintenance

• During new product set up, there is no ‘4 eyes process’ – entered data is not checked by a second person. Chaos can result from incorrect lead times, reorder quantities, bill of materials set-up – to name just a few common errors. Selling price errors are commonplace, and for high volume online sales, this can be a disaster.
• Other issues include poor management of parts update – for example when a component becomes obsolete and a new version is set up. It is easy to overlook the extra step of changing the dependent BOM. This is where a ‘Used In’ report is handy or functionality in the ERP which on command will update all dependent BOMs – but when should it happen? The best systems will have BOM effective dates, but there is still a physical process to be managed and a manual intervention may be necessary when a part-batch of expensive components is to become obsolete.

Shipping, Undelivered Items and Proof of Delivery

• When goods are shipped and the proofs of delivery are paper-based and take a few days to be processed on the ERP system, there is scope for shrinkage and other problems. Modern ERP systems linked to electronic POD terminals are reducing problems in this area.

How do You Fix all these Problems?

You can see that even with the best ERP manufacturing system, there are many problems which arise from poor process design. To fix them you have to start somewhere, and the usual place is with formal Quality Assurance Management and Continuous Improvement.

This can be operated in several ways, including a formal Quality department or less formal Quality Circles – depending on the size, complexity and culture of your business.

It helps to have a summary report of the problems you are experiencing, their knock-on effect and impact on sales. That at least will give you an idea of where the priorities lie.

One final point is that Continuous Improvement means that when you think you have fixed everything, you look at each process in detail, again, and try to make it better.

Company-wide Impact

We have talked about many of the problems that can occur in inventory management. It is vital to get it right because the outcomes of ineffective stock control can be very serious:

• Sales staff have no confidence in ‘available to sell’ figures. They miss sales targets and bonuses and move elsewhere.
• Customers return un-ordered and mislabeled goods. Worse still, they do not receive the goods that they ordered. Shipping costs add up.
• Finance staff spends considerable time trying to resolve invoicing issues. Goodwill credits go up and cash collection slips.
• Production floor staff and machinery stands idle due to component stock-outs.
• Company morale is low and profitability is below expectations.

Conclusion

We can see from all the potential problems that an integrated ERP system is essential. This avoids having to enter the same data in several places (for example a product description) which can lead to numerous input errors. Ideally, any data item should reside in one place only. That is a key attribute of effective ERP software.

However, implementing an effective ERP manufacturing system is not only about the ERP software, it’s also about your implementation partner. The best partners will have highly experienced consultants who will advise you how to avoid many of the issues which are outlined above.

The great thing is that if you implement your processes properly, then a good ERP system will transform your company, give your staff confidence in the data and systems, and most importantly, create a quantum improvement in customer service levels and your company’s profitability.