During an ERP selection you will often find yourself staring blankly at a list of features on vendor websites and comparison engines. The “broad stroke” terms used for these features often leave a lot of room for guesswork. One such feature, inventory management, offers much more functionality than may be apparent on first glance.
1. On hand
On hand inventory is the total number of any parts or SKU that are in our ERP system. This quantity could be within our four walls as well as external material we own such as at a customer site on consignment. It also includes material owned by a supplier available for our use, where the title will transfer when we take it from consignment.
Our ERP inventory module should be able to subtract most inventory on hand from any demand to calculate the quantity we need to buy or make to supply the demand. We can store inventory we are saving from that demand in non-nettable locations.
Inventory is more than physical quantity, it also is an asset valued in dollars and cents. ERP inventory modules can use a variety of accounting techniques for valuation depending on our practices and local accounting principles.
We often look at strata in inventory. Finished goods are an SKU ready to sell immediately. WIP or work in progress is a SKU that has had some conversion work applied but needs more work before it is ready to sell. WIP inventory has both material and labor cost included as well as some overhead burden. Raw materials include a SKU that has been purchased but no work to convert it into a sold product has been applied yet. Cost of RM inventory could be as simple as the amount on our purchase order. ERP can create and manage these inventory categories giving your staff more time to analyse and act on any discrepancies identified by categorization.
We buy and manufacture inventory to satisfy a demand. That demand is often a best-estimate forecast. Customers also cancel or delay orders. When demand for a SKU is gone or pushed out beyond the time we could buy another, that inventory is considered surplus. If demand is gone, ERP can manage the process of repurposing or offloading that surplus through valuation and sales tools.
Inventory is not necessarily owned by us. ERP inventory modules track the on hand quantity of a SKU owned by a supplier without adding the value to our inventory amount. This is known as VMI or vendor managed inventory. We might also have VMI material at our customer site where we own it but it is not on hand under our control.
Inventory turnover for any subset or overall category can be quickly measured by dividing on-hand inventory by past cost of sales or expected usage. Inventory, like any asset, is only valuable when it is used. Some of the best-run businesses have high turnover rates but using their ERP system, they can mitigate risk and pre-empt negative patterns in turnover.
Inventory is the core of many businesses and is at the core of many ERP systems as well. Make sure you have a clear understanding of the features available on the market and how they match up to your inventory requirements.
This informative and wonderful article is written by Tom Miller
Tom completed implementations of Epicor, SAP, QAD, and Micro MRP. He works as a logistics and supply chain manager and he always looks for processes to improve. He lives near San Francisco Bay in California and can be found on the water in his kayak or on the road riding his motorcycle.