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How ERP Systems Improve Inventory Cost Management

How ERP Systems Improve Inventory Cost Management

How ERP Systems Improve Inventory Cost Management


ERP systems, or Enterprise Resource Planning, are designed to help a business manage all business operations from a single point or location- one of those factors being inventory cost management, or simply put as stock control. An ERP system can help businesses to streamline their inventory holding costs by providing a clear overview of records and data, and how they connect to every business function, across the whole company. Inventory management involves the ordering, storing, and shipping of a company’s stock or products. Inventory Management has as its core goal, to reduce holding costs and provide accurate and timely updates and alerts when to re-order, re-stock or manufacture goods. Mismanagement of inventory holding can result in either lost sales due to out of stock issues or tying up excessive cashflow- or even worse writing it off- because of excessive, bad, or dead stock holding. Inventory or stock-holding, ultimately, is an expense. It is an expense a powerful ERP system is designed to reduce.

What is Inventory Cost Management?

Inventory cost management sounds as simple as keeping enough, but not too much, stock on hand, but it can be far more complex in practice. Inventory represents somewhere between 30% and 50% of a business’s operating assets, a figure not to be overlooked. Various company functions have different views on stock, with sales often favouring optimistically higher inventory levels, warehousing preferring lower levels for practical manoeuvring, purchasing wanting to take advantage of bulk discounts- and management not wishing to tie up valuable cash flow in stock. When combined with the changing waves of supply and market demand, inventory cost management becomes a tricky process.

How can ERP systems help streamline Inventory Cost Management?

An ERP system helps inventory management by taking information from all aspects of your business to best inform you of what stock to hold, when, and how much. It does this by gathering real-time and historical data, to create an accurate assessment of productive, margin enhancing stock versus slow-moving, margin depleting stock. It uses current and historical data to predict future stock needs and optimum levels. Specific areas of benefit are:

Reducing Excess Inventory

Too much inventory reduces liquidity and increases overheads, but forecasting too conservatively can lead to inventory shortages. Seasonal products add another layer of complexity to inventory cost management. If a company is uncertain how much inventory it has or how quickly it is selling through it, stockpiling large amounts of inventory may seem like a good idea, but it is costly. An ERP system can analyse historical sales data and past seasonal trends to set realistic safety margins.

Avoiding Dead Stock

ERP systems work by creating trackable records through assigning SKUs numbers, expiry dates, units of measure, serial numbers, lot numbers, and attributes. These enable an ERP system to keep an eye on expiring and slow-moving items. ERP Inventory Cost Management works by keeping tabs on the stock that is sluggish or about to expire and historically unprofitable items. A strong ERP system will alert timeously about stock expiry so that loss-limiting action can quickly be taken. It will also alert to slow-moving costly inventory items, allowing a business to keep stock levels as low as possible on those particular lines.

System Cost Savings

Efficiency translates into cost savings Rather than paying for different systems or processes to handle various parts of the business, inventory cost management being one of them, an ERP system handles many changing parts of the process simultaneously, reducing overall staff workload (and costs) and minimizing system expenses. But it goes further than that. Time-saving, decreased double handling, automation of daily tasks- leads to increased production and more accurate output, which allows for better business planning.

Warehousing Efficiency

ERP systems can streamline warehousing and storage aspects of the business by adding key attributes to products that provide information on the location of items within the warehouse, storage requirements, sales rates as well as instructions such as special handling needs.

Customer Service Level improvement

More obviously ERP systems help inventory management in terms of preventing excess stock holding, but equally, they are just as powerful in avoiding out of stocks (OOS). By assessing fast-moving and seasonal surges in demand, a business is better able to deliver to the customer as and when required, avoid lost sales or disgruntled customers due to out of stocks. Historical tracking of stock items by buyer also helps identify top-tier customers per product line, which assists in demand planning as well as relationship building. For longer lead-time stock items an ERP system can keep tabs on the available and inbound stock to ensure customers receive up-to-date and accurate information on availability.

Supply Chain Transparency

Increasingly businesses are using third-party logistics providers (often referred to as 3PLs, TPL or shipping providers) and outsourcing their logistics, warehousing and shipping needs. An ERP system linked into inventory cost management can enable you to link into your external trade partners – and communicate stock, ordering and shipping information seamlessly, efficiently and in real-time with your logistic suppliers.

Enable Business Expansion

As your business grows, streamlining and automating processes becomes more critical and an essential factor in allowing your business to grow without costs escalating excessively. An ERP system that handles areas like inventory cost management as part of a wider integrated business function matrix is an invaluable tool in controlling your business as it expands.

ERP systems have a powerful role to play in any business that is subject to the demands of complex inventory management.