Inventory Management: Complete you Pre-Work before hitting ERP Deployment

In the short history of ERP, it is seen more than a handful times that an ERP Project that was supposed to bring large benefits to the organization after Go-Live, does exactly the opposite. Without doubt, ERP is one of the most powerful IT tools that have the potential to take an organization to the next level of maturity in supply chain, manufacturing, financials etc. but it demands an equally intensive pre-work before you take a dig at deploying it. The intent of this paper is to look at the major issues or areas that need to be fixed or fine tuned before this exercise starts and also provide a recommended approach for a successful solution implementation.

Since the space where ERP operates is quite large so without focusing on one single area, doing justice to the whole approach will be difficult. So, this paper will talk more about the Inventory optimization function that is one of the key performance indicators of all ERP or SCM projects and it greatly impacts the bottom-line of the organizations.

One of those rare enigmas that a supply chain expert is still trying to resolve is that how to have correct inventory in the warehouse so that the stock-outs are zero, on-time delivery is 100% and yet there is no over stocking or obsolescence. Every manufacturer has more inventory than needed. Experience shows that inventory excesses are at least 20 to 40% and sometimes much more. Any inventory that does not support a very specific strategic objective is excess.

There are multiple questions that bother the Inventory Planners and some of them are:

• Where to stock inventory – at the finished goods level or raw material level?
• How to address demand volatility?
• How to balance supplier lead times with cost & quality of item procurement?
• How frequently one should revise the inventory targets?
• Are bulk purchases at low cost really beneficial as they increase inventory?

The most obvious way to answer these questions are to look for expert opinions and even further is to deploy a world class ERP system that comes with embedded Best in Class processes and techniques that help in coming out with a tailor made solution for them. But the roadblock, that is seen more often than not these days is, though both the above enjoy a decent level of success with the organizations which have minimum niche solution areas or processes but they do not enjoy the same level of success with the rest. Failed ERP deployments are not new to the Industry and though there are softer issues like change management, training and acquisitions that cause the failures but also there are more technical issues that if fixed before, can facilitate successful ERPization of the organizations.

Not long ago, we saw an example of an organization going full swing for a global ERP deployment, spent huge sum on the exercise only to find sales going down, confusion amongst suppliers, on-time delivery metrics nose diving and host of other issues cropping up. Obviously, the blame had to be on the product and implementation partner as the organization was faring better before this. There are numerous other examples in the short history of this technological wonder platform, that makes us think what are those issues or challenges that we should address to make our this high IT spend project a success. Let us see some of the challenges and my insights in the field of Inventory optimization:

• Forecasting: This is one single biggest factor that impacts the inventory position in an organization and is one of the most complex activities. It is highly important to have a proper forecasting process that not only captures the granular elements like recording past history, events, competitive data, pricing trends, new models etc. but also measure it’s accuracy, compares it with actual consumption and provides information on comparison of its accuracy vis-à-vis on-time delivery, stock outs and stock ageing. Let us take 2 cases to check the importance of forecasting for inventory optimization:
• Trading off high inventories for good order quality—Compared to its peer companies, Company A has high inventories, long cash-to-cash cycle time, good order quality and low Forecast Accuracy. So what’s happening? Low Forecast Accuracy indicates that Company A has poor visibility into demand. But the company still wants to be able to give its customers what they want when they want it. So what does it do? It makes extra finished goods, keeping an inventory buffer to avoid stock outs. High inventories in turn drive a longer end-to-end cash cycle time and at the same time enable 100% Order Fulfillment. Company A is willing to pay the price of high inventory holding costs so it can maintain good customer responsiveness levels

• Sacrificing customer responsiveness for low costs—Company B, on the other hand, has low inventories, short cash-to-cash cycle time, poor order quality, and low Forecast Accuracy. This company is clearly more focused on maintaining margins than on customer responsiveness. It, too, has low Forecast Accuracy, but it’s keeping inventories lean and cash cycle times short. The result: high stock outs leading to poor 100% Order Fulfillment. The tradeoff: It’s sacrificing customer responsiveness for a strong cost structure
• So, it is evident that Forecast Accuracy is impacting inventory, cash cycle time and 100% Order Fulfillment in a big way and ERP can help improving the accuracy by adopting scientific techniques but it will not tell you to bring discipline in field workforce to follow a process and to track important metrics for reaching the targeted inventory optimization. This needs to be fixed before and it is mandatory for us to give due importance to this area, know your metrics and adopt few best practices so that we are all set to move to ERP for mapping those and improving those in automation, integration and standardization across the organization
• Supplier collaboration: Every organization wants to know what the supplier can do for them and if you ask for vice-versa, I am sure we will not see much faces with the affirmative. We need to remember that the word collaboration is a 2 way communication and contribution. If we want the supplier to give the supplies as per accurate requirement of lead time, cost and quality – it is in our benefit to look at their issues also. Let them have a say in our supply plan and logistics management.
• Collaborate with suppliers to work in a partnership mode so that they have visibility to your production plans and inventory levels and accordingly come closer to replenish the stock in time The sooner we start doing that and build a stable supplier collaboration process with SMART goals, the faster we will be ready to take advantage of the coming ERP which has the technology to share your information with suppliers
• LEANergize the manufacturing processes: It has not happened fewer times that an organization depended on the ERP product to standardize their fatty manufacturing processes that allowed all modes of production with multiple end stock criteria from ‘Make to Stock’ to ‘Make to Order’ to ‘Demand Driven Supply Chain’. We need to appreciate the fact that while the product vendors try to build templates for all kind of industries in the product but it is not possible to capture all micro dynamics of all businesses that has the power to improve the business drivers across the board. It is highly advisable to make guideline decisions beforehand to go for which production and stocking mode and if multiple modes, then the ratio needs to be agreed. This will drive the fact that whether the organization needs to stock inventory in raw form or finished goods form and in which ratio. It will come to fore that whether non stop production (or capacity utilization) is more important or reducing FG inventory. It will also drive the bulk purchases of raw material and hence help in fixing sourcing metrics. All these metrics will help you in better usage of ERP
• Inventory visibility and obsolescence: Another area that needs our focus as pre-work of ERP deployment is to improve end to end visibility of inventory flow and track item obsolescence. In-fact, Last year has seen this emerge as one of the major challenges for managements as this drives the overall metrics of inventory optimization in a big way. Whereas visibility will facilitate us not only selecting the best warehouse for shipping an item but will also provide us a view of incoming supply and promised demand fulfillment which in turn will impact the period for which the inventory stays in our warehouses – every organization wants this period as the lowest as this unlocks working capital. It is seen that obsolescence is an impact of visibility but it is compounded in absence of a rugged process. For example if the customer service executive takes the spare parts inventory with him to replace at customers end and then do not report back on what has been consumed and what not, then it is highly likely that this inventory (which in most cases is a low shelf life inventory) goes obsolete only to be scrapped after some time. Also, a process around actions required whenever a new configuration comes and old parts are required just for service, will make sure that when the ERP is deployed, we have a mechanism around which we will weave the ERP solution for best benefits
• Key Performance Indicators Measurement & Targets: It boils down to your marks in the exam on how good you were in preparing for it the whole year. Lot of organizations deploy ERP to say reduce inventory and they achieve it after going live but only after some time they realize that their service levels have gone down considerably, the customers have started complaining on the delay in shipments and stock outs of one or other items became frequent. This induces panicky measures in terms of issuing emergency purchase orders overlooking supply chain planning engine recommendations and inventory goes out of control. In-fact, this was a major reason for a large organization few years ago for a failed implementation. It is imperative to plan the KPIs of the respective area in terms where we are and where do we want to reach in an agreed timeframe so that targets are crystal clear
• Data Accuracy: As they say, IT systems follow the golden rule of “GIGO – Garbage in Garbage Out”. ERP system will not be able to make the required impact to Inventory Optimization objectives if data like bills of material, supplier lead times, safety stocks, minimum order quantities etc. are not correct. We need to make sure that the data from legacy systems is either clean or we have a plan to clean it before sending it to ERP. Many a times, the data quality drives the process and usage of ERP – For example if you do not have the correct lead times and bills of material, you will not be able to get an optimized result from ERP planning engine and inventory once again will go haywire

Though the above list is not exhaustive but represents a large part of the challenges that are faced by organizations to reach their inventory optimization targets after ERP deployment. The message that is coming out of this paper is that though ERP deployments are one of the better ways to standardize and integrate your inventory management processes across the organization, it is imperative to ensure that the environment in the company is conducive to its implementation by doing the pre-work related to it.

Now it is upto us what do we call this pre-work as – LEANergize or BPR but the fact is that in these testing times when cost reduction and saving is the top mantra for all CEOs, CIOs or CFOs, it becomes imperative for us to go the best possible route. Before closing this paper, let me highlight a unique case of a large manufacturing company that was moving from a not so great ERP to a market leader ERP for 2 of their different businesses. While one of the businesses followed the above route and did complete overhauling of the processes before moving to the other ERP but the other business (recently acquired business) had a perception that they already have an optimized environment and straightaway went ahead with ERP deployment. The first business went Live smoothly and is reaping the benefits today but the second one still perform forecasting for a high number of components in excel sheets – so what did they get? Obviously an under used ERP and un-optimized inventory.