actually, Magic Why manufacturers hate inventory management?
actually, Magic Why manufacturers hate inventory management?
discover | Tuesday - 12 / 03 / 2024 - 12:48 am
The short answer: Because the inventory management costs them a lot of money. Buying inventory is expensive, storing it is expensive, producing it is expensive, and even disposing of it is expensive!
On the other hand, industrialists realize that they need to keep a sufficient amount of inventory in order to meet customer delivery schedules. Also, according to the principle of supply and demand, the inventory of raw materials must match the volume of production, and the inventory of finished goods must match the expected sales. This brings us back to the story of our friend (Samir)… Do you remember him?
Inventory management 🤴🏻 Samir story
30%? That’s a lot, man !
After two years of working in dropshipping, Samir was able to establish his own factory. While he thought he would save thousands by doing so, he discovered that inventory holding costs amount to 20%~30% of the total inventory value.
So, he entered our company headquarter looking for advice: how can he catch the warehouse supervisor “red-handed”?
I’m sure he’s stealing from me, or falsifying reports… I don’t know exactly.. but I realize that he’s missing out on a promising investment or growth opportunity for my factory because of the large amount of money tied up in inventory.
To defend the poor guy, we decided to ask the following core question:
Do you know the costs included under the item (inventory holding)?… We felt that the question embarrassed him, so we took the initiative to answer:
- Capital costs: These make up the lion’s share of inventory holding costs. They include the cost of purchasing inventory, as well as interest payable and taxes paid.
- Storage costs: Everything related to the transportation and storage of goods in warehouses; warehouse rent, insurance, shipping costs, logistics and security costs.
- Service costs: Costs related to the maintenance and servicing of goods in the warehouse. Also includes the cost of Enterprise Resource Planning (ERP) software, annual maintenance, related equipment, taxes, and insurance.
- Risk/loss costs: Due to unsold inventory resulted by damage to goods, expiration, obsolescence, theft, or loss of value (due to inflation, for example)
- Alternative opportunity cost: The cost of any business opportunity or growth potential that is lost due to excess capital tied up in inventory. And here, (Samir) shouted out.. I found it! I found it! This is it: alternative opportunity cost
In addition to, none of us had ever studied law and probably this why it was difficult for us to convince Samir of the innocence of his warehouse supervisor. So, we decided to try another approach [within our field of expertise]: convincing Samir of the capabilities of ERP systems in controlling inventory holding costs.
“There is no point in crying over spilled milk”.
It was clear to everyone that the reason for Samir’s frustration was the narrow profit margins; the opposite of what he expected when he gave up drop shipping. “Samir, what do you think if we reduce the overall storage costs? This will help increase overall profitability, isn’t that what you want?” Samir nodded, and here we began to explain how Enterprise Resource Planning (ERP) systems can give his emerging manufacturing plant an organized way to account for all incoming and outgoing inventory, in addition to saving costs associated with manual inventory counting, administrative errors, and reducing stockout rates.
How ERP systems minimize inventory holding costs down to the minimum limit: 🤴🏻
◾ Optimizing Reorder Points:
ERP systems allow industrialists to set reorder points (ROP) for the materials they purchase with absolute ease.
ERP also provides the functionality to set ROPs based on consumption rates, customer demand forecasts, and current/upcoming orders.
For example, the Logix ERP system offers the feature of automatically trigger purchase orders when the inventory reaches a predefined reorder level. This protects you from stockouts and ensures on-time delivery.
◾ Demand Planning:
In order to achieve optimal inventory control, accurate forecasting of inventory demand allows for the holding of the appropriate quantity (without overstock or understock).
An Enterprise Resource Planning (ERP) system can collect data on current orders and requirements in order to accurately predict future demand for products, which helps manufacturing companies plan for the purchase and storage of raw materials. Using an ERP system, manufacturers can calculate sales velocity, which provides accurate data on the number of expected customers, average deal value, conversion rate, and cycle length. This enables strategic insights into key performance indicators (KPIs).
◾ Warehouse Management:
Industrial facilities (or organizations) can reduce inventory holding costs by simplifying inventory management and increasing its efficiency.
By using the Warehouse Management features within the Logix ERP system, you can:
- Track the shelf life of each item.
- Classify storage bins based on categories (item types) and other classifications.
- Record item details immediately upon arrival and conduct inventory counting using cycle counting or full inventory methods.
The Logix ERP system can also help in the efficient design of warehouses to make optimal use of supporting resources.
◾ Supply Chain Transparency:
Enterprise resource planning (ERP) provides a comprehensive view of an industrial organization’s supply chain. Barcode and RFID technology enable manufacturers’ ERP systems to track the movement of goods throughout the supply chain. By knowing the current location of “last items” in inventory within 24 hours, manufacturers can adjust purchase orders, sales strategies, and warehouse layouts to address problems early, before costs accumulate. This will also lead to the creation of consistent processes for receiving, storing, and fulfilling orders.
◾ Enhanced Reports:
We can proudly say that the reporting tools in the Logix ERP system are invaluable. For example, an establishment can view inventory turnover or sales figures for a specific product category or SKU over any time period.
You can also track money lost due to depreciation or spending on taxes and insurance. With all this data available, Samir and others can be very selective about the products and quantities they keep in their stores and warehouses alike.
This information also helps financial managers make more accurate inventory forecasts.
◾ Even professionals make mistakes!
Some may think that Samir’s lack of experience in the manufacturing world is the main reason for his wrong decisions. However, even though the COVID-19 pandemic has revealed the risks of the just-in-time inventory strategy, large manufacturing companies still make the same mistake: they keep a large amount of inventory! Enterprise resource planning (ERP) systems can assess each SKU to determine its importance and then help determine the appropriate amount to keep. If you are looking for an integrated ERP system with dedicated capabilities for inventory management and cost reduction, we are – as usual – ready to serve you.
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