Inventory Accuracy

When I speak to clients and prospects in the distribution sector, and ask about their inventory problems, the most common response is the lack of inventory accuracy. Most often this means the quantity of inventory on the warehouse floor does not match the records in the ERP or other system.  Obviously this is very critical functionality that an ERP system can provide but the functionality requirements should not end here.

Other critical inventory accuracy functionality  that should be expected from your ERP software are:

Inventory Value

1. Obsolescence : What is the value of obsolete inventory? This reporting assists with the determination of how well an organization manages its inventory and how accurate the existing demand forecasts are. Perhaps product quality is poor. An ERP system should help make this type of assessment.
2. Margin Analysis: What price are products being sold for and how much profit is made per sale, per item, per customer? Critical information in terms of evaluating sales teams and inventory.
3. Value: What is the value of inventory at any point in time. How much of the companies resources are currently tied up in inventory?
4. Landed Cost:  The true cost of any product in inventory includes the cost of the product plus other items like shipping, brokerage, duty and freight.  These costs should be allocated and calcualted automatically when receiving inventory.

Customer Service

1. Inventory Turns : The ratio between the annual cost of sales and average inventory value. Generally, the higher this number the better. This usually indicates the company has strong cash flow and minimal inventory obsolescence or shrinkage.
2. Customer Shipment Date Tracking:  Customer satisfaction is the key to any company’s success and ensuring you meet the customers required shipping dates ensure this. An ERP system should allow the tracking of shipment dates made and missed and should include a way to remind the shipping department that an order is due for shipment.
3. Shipment Return Tracking: What products are being returned and which customers return products and how often? Are returns due to shipping or pricing errors? This information is critical in terms of customer relationship management as well as shipping and purchasing management.
4. Fill Rate for the Initial Shipments: Relates to item two, but what is measured is the company’s ability to fulfill shipments with the inventory on hand with out back orders.  It is also important at this point to measure the shipment met all other quality criteria the customer has.
5. Top Customers: Who are they? What  items are  they buying? Are they making repeat purchases? How often are they buying? This reporting can provide extremely valuable information to the sales and marketing departments.

Vendor Performance

1. Supplier Shipment Dates/Fill Rates/Shipment Returns: See 2, 3, and 4 in the customer service section  but now the reporting is evaluating suppliers and their ability to meet the company’s purchasing expectations.
2. PO/Invoice Cost: Is the cost per the invoice from your supplier the same as the cost of the original purchase order. If there are differences a company should be able to make that analysis to allow follow ups with the supplier for explanation.

If an ERP System does not provide this fundamental information it is not providing appropriate value and may need to be evaluated….

This is my two cents — Let me know what other other critical inventory functionality is required to manage a successful business.