News

Industrial Distribution, February 2008

Investing in a state-of-the-art ERP system gives you the finest tools available to reach several important goals: streamlining operations, more effectively serving customers and growing profits.

One way a new system helps achieve these goals is automating purchasing, which can help increase inventory turns and improve service levels. But without the basic procedures to give accurate inventory counts, even the most advanced ERP purchase won't take you any closer to achieving these objectives. In effect, you'll be preventing yourself from realizing the greatest potential return on your investment.

Most distributors looking to automate purchasing are very conscientious about learning the details of their new system. Once they understand the calculations, they automate their purchasing and everything goes smoothly-at first. Then it happens: The warehouse goes to pull an order, only to find the item is out of stock and there are none on order.

The problem here is not the system-the system is given information and performs mathematical calculations. In the scenario above, there should be 100 pieces in stock. But a system is only as good as the information it's given.

Think of how you purchase gas for your car. You have an order point (OP) and order quantity (OQ)-for some, it's, "Fill it up when it hits 1/4 tank;" for others, it might be, "Put in $30 worth when it hits 1/8 of a tank."

Whatever your OP/OQ "settings," you are relying on an accurate measure of the quantity on hand; that is, a reliable gas gauge. If the gauge is not accurate, what good is it? On-hand counts are the "gas gauge" of your business.

In the case above, the system indicates that OP/OQ looks fine: It is set to reorder at 75 to maintain a stocking level of 100. But when the purchasing department examines the problem, the cause becomes clear: The computer "sez we got" 100 in stock, though there are no items on the shelves or re-ordered.

All the fancy calculations go up in smoke when inventory accuracy is out of whack. This can be caused by a number of problems, but they all fall into two categories: Poor physical inventory control or bogus information being entered into the system.

Here are some signs that poor inventory control has become part of your day-to-day operations:

• "The computer sez we got..." If this phrase regularly rolls off the tongue of your staff, it's a strong indication that they have little faith in the the system's accuracy.
• "Has anyone seen...?" Order pickers wandering the warehouse, gazing at the shelves and asking this question is another sign of problems with your inventory count.
• Oversized, overflowing customer return area. Inventory should be processed through the return area, not stocked there until someone takes the initiative to clean it up.
• Frequent adjustments for missing stock at shipping time. If it has become part of your normal process to make adjustments for missing inventory when shipping, you have problems with inventory counts.
• Non-warehouse personnel pulling stock. Management or salespeople pulling product from the warehouse shelves is another red flag indicating a problem.

If your business displays any of these symptoms, you need to address them. Start by implementing procedures to get proper physical control of your inventory. This must be a core competency if you hope to maximize the return on your ERP investment.

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