Inventory Management Function Descriptions

When an organization is trying to implement a systematized inventory management process or trying to improve the one that is already in place, the real life tactical question arises as to what the functions of this process should be and who should do what on a day-to-day basis. The following list offers one way to break the process up into functional areas of responsibility which should have all or some reporting responsibility to the one responsible for the material management of the organization. Depending on the total value of inventory, the importance of inventory management and the size of the organization, these roles may be satisfied by either clerical or managerial staff, but the importance of the function needs to be paramount to upper management.

Inventory Quantity Management
(typically reports directly to Material Management)

• Maintain the location master data within the ERP system
• Verify the item master data within the ERP system
• Verify system BOMs and shop floor backflushing transactions
• Perform/Monitor all inventory transaction processing: Issues and Receipts
• Assure valid inventory quantities throughout the system for all inventory items and locations (the goal should be 99+% accuracy)
• Develop and conduct a cycle counting program
• Integrate with Engineering, Inventory Valuation Management, Purchasing and Operations

Inventory Valuation Management
(typically reports directly to Accounting)

• Perform standard item cost and cost roll-up maintenance
• Track and validate last cost and average cost updates
• Continually assure valid inventory values throughout the system for all inventory items
• Analyze cost variances and periodically update the standard costs
• Integrate with Inventory Quantity Management, Purchasing, Engineering and Operations

Purchasing/Vendor Management
(typically reports directly to Material Management)

• Review and maintain open purchase orders for required adjustments
• Create and maintain new purchase orders per material requirements
• Create and maintain new purchase orders per outside service requirements
• Assure the need for material before purchase orders are created
• Maintain relationships with venders and work to improve the integration with each
• Integrate with Inventory Quantity Management, Inventory Valuation Management, Engineering and Operations
• Integrate with Master Planning to determine purchased part requirements

What other functions wold you include?

Total Success by using Both Lean and ERP

There are those who feel that if Lean tools and concepts are implemented, there is no need for ERP tools and vice versa, but in fact, the two need to be used together in order for an organization to get the most out of each. Aberdeen Research recently released an article titled “… Reducing Waste in the Supply Chain”. This is an interesting combination of terms since “Reducing Waste” is typically associated with Lean tools and concepts and “Supply Chain” is often times embroiled in non-lean ERP tools and concepts. The truth is that BOTH sets of tools and concepts need to be used and integrated in order for the organization to go from “Doing Lean” to “Being Lean”.

In the study that is the basis for the Aberdeen article, Best-in-Class companies were achieving:

• 96% Perfect Order Delivery
• 3% decrease in Inventory Carrying Costs
• 2% decrease in Inventory Write-off
• 4% decrease in Customer Lead Times
• 4% decrease in Manufacturing Cycle Times

Unfortunately for the lazy reader, Aberdeen saved the best part for the end where they discuss actions to combine the two schools of thought. Some of the ideas they present include:

Develop standardized information flows from the supply chain managers to the operation managers. The Sales and Operations Planning (S&OP) functions should be connected to the tactical execution functions via regular, collaborative meetings so that customer demand requirements and company supply capabilities are discussed and matched.

Establish bi-directional information flow between the supply chain and manufacturing functions. There is a need to compare monthly and weekly plans from S&OP activities to the weekly schedules and daily results of the execution activities. With this connection, the needs of the customer can be translated to what the plant needs to do (i.e. takt time) which leads to an execution plan to achieve what needs to be done.

Determine appropriate inventory buffers throughout the supply chain. Instead of keeping excessive WIP inventory, it is likely more effective and cheaper to keep finished goods to meet changes in demand patterns. Where keeping finished goods is not practical, such as with an engineer-to-order product, working to a planned inventory of semi-finished components may be a viable alternative.

Incorporate demand and production variability, inventory levels and supplier lead times as part of the level plan creation. In Lean, the goal is to eliminate all of this variability, but in many cases, this is not possible. ERP is a process of managing these variables. Using the two together can provide a compromise that satisfies the requirements of the specific business.

Develop Lean and ERP techniques that support pull concepts for both internal operations and suppliers. By combining Lean visual concepts of Kanban and other pull concepts with ERP software solutions that support non-visual processes such as time-phased predictions and advanced warning/alert tools, those who live in the hour-to-hour mode of operating will not be bogged down with the functions of “the system” and those who must manage the variabilities external to the execution processes will be connected to what is really happening.

Many times the supply process is longer than the delivery lead time demanded by the customer, so the key is to manage the process such that a minimal investment is made while still being able to manage the variations that exist and are uncontrollable. Lean can be used to manage the tactical processes that result in reduced waste, reduced work-in-process inventory investment and improved flexibility. ERP can be used to manage the longer term variables that are not controllable by Lean techniques. The integration of the two is what allows the organization to be successful.

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Effective Inventory Management Leads to Business Success

Aberdeen Research benchmarked the people, processes, technologies and metrics associated with inventory management and determined that Best-In-Class companies are able to continuously manage their inventory throughout their supply chain to improve customer service levels, forecast accuracies and perfect order metrics. They defined Best-In-Class as companies that had:

• 97% Average Customer Service
• 15 days Average Cash Conversion Cycle
• 95% Perfect Order Performance
• 87% Average Forecast Accuracy at the Product Family Level

These companies are able to continuously manage their inventory throughout their supply chain to improve what they deliver to the customer, which encompasses more than the specific product or service that they deliver. Other aspects of what is delivered that don’t show as specific items on the invoice, but are improved with effective inventory management, include total order lead time, product quality, ease of doing business and the ability to deliver changes to the product or service without having to go through major business changes.

Regarding inventory management, successful companies follow the principles of Closed Loop Inventory Management which include the ability to:

• Determine safety stock targets for inventory at critical nodes in the supply chain.
• Replenish inventory into distribution buffers based on customer demand.
• View end-to-end inventory while providing available to promise inventory.
• Respond quickly to market events while executing the inventory requirements.
• Segment inventory based on customer service requirements.

Although most involved with business management will admit that the above impacts on delivering to the customer are reason enough to make inventory management improvements a priority, there are also internal benefits to the organization from becoming Best-in-Class that should be mentioned:

• Best-in–class companies are 10 times more likely to have reduced their inventory carrying costs year after year.
• Best-in–class companies are 7 times more likely to have reduced their warehouse labor costs year after year.
• Best-in–class companies are 63% more likely to practice centralized transportation planning.

Whether it is via the successful pursuit of Lean Enterprise Performance or effective implementation of ERP or Supply Chain principles, improving the performance of inventory management will improve the organization’s total customer delivery performance.

Hello?! The Operation is Talking to You!

In these economically challenging times, organizations of all industries are finding that they need to control critical issues in order to survive, much less remain competitive in the marketplace. Issues such as cost control, capacity and resource utilization and reacting to demand changes become areas of concern that get executives’ attention as areas that must be mastered. An all-to-often approach to getting at these issues is for the strategists of the organization to meet, develop priorities for improvement and then mandate the “Must Do” statements to everyone in the organization that include carte blanche directives for efficiency improvements, spending reductions, and labor reductions. However, by tuning in to the operation itself, issues that can have an impact can be identified and corrected, usually in a short time and with a quick return. Activities that can have an impact in this regard include:

• Get real-time (or at least very timely) feedback from the operation as to progress of work being performed.
• Implement scheduling and control techniques the provide directions as to what to work on next on a daily or hourly basis.
• Utilize alerts, visual and/or computer, to quickly identify real time issues that need to be fixed before further work is performed.
• Concentrate on customer facing issues throughout the operation, such as lead time reduction, on-time delivery, and end-item quality.
• Reduce the inventory investment by concentrating on the reasons for having the inventory. Like lowering the level of water in the stream, more rocks will appear.
• Create improvement teams consisting of those most directly involved with the operation to identify and implement quick hitting improvements.

In order to make these tactical practices effective and pervasive throughout the organization, management needs to adopt strategies that support this collaborative and synchronized approach. By having executives focus on the operation and looking beyond simple efficiencies in the work place, organizations can improve their overall performance. Aberdeen Research has identified several actions that organizations can implement to achieve Best-in-Class performance which include:

• Improve collaboration across all functional boundaries, such as Engineering, Operations, Customer Service, and Purchasing.
• Create visibility across of the operation throughout the entire enterprise, including the executive level.
• Synchronize the output of operations to match the changes in demand.
• Dynamically update business practices as best practices are developed.
• Create a scorecard that normalizes performance across all areas of the organization.
• Engage the system integrators at the executive level.
• Automate the work flow to manage non-conformance events across the enterprise.

By achieving Best-in-Class performance, Aberdeen has identified results that will improve customer performance, improve capacity utilization and translate directly to the bottom line:

• 97% On-time and Complete Delivery to the Customer
• 92% Overall Equipment Effectiveness (OEE) accounting for variability, performance and quality
• 99% Operation Compliance as measured by in-compliance output vs. total output

It should also be noted that when these operational issues are managed effectively, an improvement in cash flow and profitability can be expected.

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A Roadmap to Lean: Transform the Information System

In order for an organization to transform from its current state of operation to one of a Lean Enterprise Organization, a two phase approach – Planning and Implementation - can be utilized. The third step in the Implementation phase is to transform the information system within the organization. In this step, we want to:

• Define What Implications the Lean Objectives Have on the Information Systems
• Document As/Is – To/Be Information Flows
• Identify Visual Methods that can be Used in Lieu of the Information System
• Determine Which Systems Need to Change to Support Non-Visual Requirements
• Create a Plan for Making the Changes Necessary to the Information System
• Monitor Cut-over and Provide Support

Sometimes, when an organization is implementing changes to their information system, such as implementing an ERP system, Lean principles can be applied. Sometimes, when implementing Lean, limitations are reached since the information system needs to be changed. Either way, addressing the needs of the information system early in the process will reduce the roadblocks that arise during the effort. With the main premise behind Lean being to eliminate waste and support value added activities, the information system needs to be revised so that it is not causing wasteful activities in and of itself. When evaluating the information that is being collected within the system, it is important to ask “How am I actually going to use this information and what value does it provide?” If good answers do not come of this evaluation, it is likely that there is no need to have it in the system so revisions should be made to eliminate it. In this step of transforming the information system, key deliverables are:

• Definition of “Must-Have” vs. “Nice-to-Have” Information
• A Plan of Action to Eliminate/Replace Non-Essential Information
• Written Procedures and User Training Documentation
• Training of Users for Visual and Non-visual Techniques
• Specification, Coding and Testing of Software Changes
• Tracking of Open Issues for both System and Procedural Issues
• Updated Performance Measurements

There are some who think that if Lean is implemented, there is no need for an information system to be used, however, most experts who understand the whole business process will agree that the two go together to support the whole business and must be integrated in order for the organization to be successful in its Lean efforts. However, this step of transforming the information system will often times include the need to change how one thinks of the business process requirements altogether, but then that is the whole purpose behind the effort of Going Lean. The next stop in this roadmap is Integrating the Supply Chain.

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Using ERP to Achieve Best-in-Class

The current world of increasing energy and material costs and the drive to become “Lean” and stay competitive create unique requirements for special features in Enterprise Resource Planning (ERP) in order for the ERP system to be used in a Best-in-Class performance. In a recent survey, Aberdeen research has found that companies considered as Best-in-Class had performance results that include:

• 16% reduction in manufacturing operating costs
• 20% reduction in administrative costs
• 20% improvement in order cycle times
• 94% complete and on-time shipments
• 90% manufacturing schedule compliance
• 90% overall yield

As previously noted in these messages, the top four pressures impacting the ERP system and its use are:

• Must reduce costs
• Must improve customer response times
• Must be easier to do business with
• Need to manage growth expectations

Actions that companies can take to achieve Best-in-Class performance using their ERP system include:

• Use business process analysis techniques to fully understand the needs of the business and how the ERP system can satisfy these needs
• Use continuous improvement teams to fully utilize the capabilities of the ERP system
• Take steps to reduce the dependence on spreadsheets and manual processes to satisfy industry specific requirements
• Make integration of enterprise applications a priority
• Connect the plant floor applications to the ERP system to increase visibility and controlImplement event management to monitor transactions and conditions as they occur

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How to Fail at Implementing an ERP System

Implementing an ERP system is a daunting task for the entire organization and will be a major cost item for the year. Whether you are implementing a whole new system or re-implementing parts of an existing system, there are many ways to fail in the effort. Although there are numerous details that must be attended to, any of which can derail the effort, some of the major ways to fail include:

Don’t fully understand your requirements prior to making the selection of an ERP system. Without a detailed list of required features and functions, the system being considered cannot be properly evaluated and any request-for-quote from a vendor will only be a best guess as to what it needs to do and how it meets the needs of the company.

Don’t pay attention to the business processes of the entire organization. Not understanding and documenting the business processes will mean that no improvements to the way business is done will be explored so that requirements that help these changes are also not known. Without this understanding, assumptions will be made that may or may not be right.

Choose a system because it was successfully used by someone else. Every company has its own set of requirements and to select a system based on the fact that a friend, colleague or another company in the industry has been successful does not mean that you will be successful.

Choose a system because of how it looks. Although the user interface to the system is important, it is more important that the system does what you need it to do. Also, seeing the system simply via a demo conducted by the vendor can mask issues you may struggle with when you go to use it yourself.

Don’t educate and train those who will be using the system. Without training, users will not know how to do what they need to do and without education, they will not understand why they are having to do this. Training also needs to include plenty of practice time with real transactions so that the go-live experience delivers fewer surprises.

Don’t accept (or manage) the fact that major organizational change is about to occur. Either change WILL occur or the new system will simply replicate the sins of the old. Much of the change comes from the fact that the business processes need to change and these changes need to be addressed and managed proactively.

Overload those involved with project activities while expecting them to perform all of their regular job duties. If both project work and regular job activities cannot be done, the project activities will be sacrificed.

Implement a system without thorough testing of the software AND business processes. Many users assume the software will work as advertised (not an unreasonable expectation) but it often times has problems you would not expect. More importantly, testing the way the business will be run using this tool must be done to be sure that the business can continue once the system is implemented.

Implement everything all at once without considering a modular approach. So much is at stake with the “Big Bang” approach that any slip in the implementation can be disastrous. May of the problems will not become evident until later when accounting and finance try to piece together all that has happened through the new system. This all-or-nothing approach typically “bets the company” on being successful.

Attempt implementation without the assistance of an unbiased expert who has done it before. Without the knowledge of experience or a proven methodology, many points will be missed and mistakes will be made that could easily be avoided. Using only the software vendor is risky too since their goal will be to make your company work in the software rather than make the software work in your company.

It is most important that you get this implementation right. It is your system and you need to live with the results. You need to understand the current requirements, the business processes and what needs to change and what you want from the business in the future. If you are unsure of how to proceed successfully on your own with experts from within, be sure to contact an experienced consultant that is not tied to any software solution or system. Implementing an ERP system is a very costly proposition but it is even more costly the second or third time around.

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Cost Control Becomes the Number One Pressure

Cost control has been cited by Aberdeen Research as the number one pressure impacting the ERP strategy within a manufacturing company. This phenomenon is particularly prevalent in process industries where cost control has gained a renewed focus in these economically hard times. As a result of their recent survey, the top four pressures were listed by Abredeen as:

• Must reduce costs
• Must improve customer response times
• Must be easier to do business with
• Need to manage growth expectations

With the emergence of cost control as the number one business driver this year (number two last year), the following were listed as the top cost issues:

• Rising costs of raw materials
• Rising energy costs’ impact on manufacturing operations
• Rising energy costs’ impact on in/out bound transportation
• Impact of poor quality
• Proliferation of changeover costs

ERP systems are able to assist the organization in managing these costs with the integration and data availability that are inherent in most systems today. By properly aligning business processes and ERP functionality, manufacturers should be able to gain control of most of their significant costs. Along with the standard features of an ERP system, there are special enablers that exist in many systems that can prove to be very useful:

• Advanced Planning and Scheduling
• Inventory Optimization
• Material Change Management
• Event Management (triggers and alerts)
• Manufacturing Execution System (MES)
• Enterprise Asset Management
• Specialized Inventory Management features: Lot Traceability, Shelf Life Management, Actual Costing, Co and By-Products, Compliance Reporting

Peak Enterprise Solutions is able to help clients redesign their business processes and utilize the tools of the ERP system to allow them to increase the value of their business.

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ERP Helps Enable a Successful Business

Rising costs and a troubled economy have caused cost reduction to be the top business driver behind most technology initiatives today. In their report “2008 ERP in Manufacturing”, Aberdeen Research found that the pressure to reduce costs has surpassed both growth and customer service as the main business driver of ERP strategies. Not only are production costs rising, but the cost of quality, the cost of transportation and the cost of energy are becoming more and more challenging to the bottom line.

An ERP system that is properly matched to the needs of the company and utilized as an overall part of the business processes is able to serve as a business enabler to provide the visibility needed to control costs and enhance customer service. It does so by providing a framework for standardized business processes utilizing best practice concepts and allows coordination between different business functions. Some of the key benefits of a successfully utilized ERP system include:

• Better visibility to business processes across multiple functions and departments
• Improved customer responsiveness
• Reduction of inventory and improved inventory accuracy
• Reductions of administrative and manufacturing operational costs
• Improved manufacturing schedule compliance and complete on-time delivery
• Reduced customer lead time and improved quality performance.

Metrics to be used to measure success in an ERP environment include:

• Inventory Days Supply – number of days inventory based on projected usage.
• Manufacturing Schedule Compliance – percentage of work that is completed on time per the manufacturing schedule
• Complete and On-time Shipments – orders shipped complete and on-time per the customer’s requested date
• Order Cycle Times – various cycle times can be measured, but the customer order date to the delivery date cycle measures the time from a customer point of view
• The Bottom Line – The most important measure! As cost performance improves, so will the bottom line.

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Best-in-Class Success via ERP

Pressures to reduce costs outweigh all other business drivers regarding Enterprise Resource Planning (ERP) systems. While ERP is generally viewed as required, it can also be key to streamlining the business processes. Aberdeen Research has surveyed over 1200 manufacturing companies and found that while ERP implementation generally produced a reduction on costs and improvements in scheduling across the entire organization, Best-in-Class companies had better results:

• 20% reduction in levels of inventory with 97% accuracy
• 95% manufacturing schedule compliance
• 97% on-time and complete shipments
• An average of 3.3 days to close a month

This survey showed that Best-in-Class companies:

• Implemented 30% more ERP functionality
• Implementation is 33% more likely to be owned by line-of-business executives
• Standardized enterprise wide procedures for all business processes

In order to achieve Best-in-Class, companies need to:

• Assign ownership of ERP success to line-of-business executives
• Broaden the use of the ERP system to include all of the functionality available
• Standardize common practices and ERP implementation

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