This article is an excerpt from the reportThe Right Stuff — Managing Inventory to Enable Agility for Manufacturing and Distribution Companies. A copy of the full report can bedownloaded here.
In Part Three of this series, we looked at inventory management strategies to achieve higher service levels and lower inventory levels simultaneously. Here in the fourth and final installment of the series, we look at how small businesses can acquire sophisticated inventory management capabilities.
Big-Business Inventory Capabilities for Small Businesses
Small Businesses Can Have Sophisticated Systems and Processes
Sophisticated high-value inventory capabilities are not just for big businesses. In fact, modern inventory management systems can be intuitive, not requiring too much specialized expertise. A small business can access and implement sophisticated inventory management strategies and processes by adopting the right combination of partners, systems, processes, metrics, and training. With modern cloud-based offerings, it is possible for a small business to have systems and processes for managing inventory that are as sophisticated as many of their much larger competitors.
Integrated Inventory Control Within the Enterprise
Typically, a variety of systems within a company handle inventory as it traverses their supply chain and the organization. Within the enterprise, these may include finance/core ERP, demand management/forecasting, production/manufacturing systems (MES), procurement, order management and fulfillment, transportation management (TMS), warehouse management (WMS), and other systems. A small business may only have a subset of these as formal software systems, with other functions being handled manually. There may be dedicated modules (or spreadsheets) for inventory management and/or inventory optimization, as well as specialized modules such as spare parts inventory optimization and VMI (vendor managed inventory) functionality. If these systems and data sources are well-integrated, then the handoffs between these systems can provide double-checking and reconciling to ensure ongoing inventory accuracy. Often that is not the case.
Integrating multiple systems and data sources (e.g. spreadsheets) together is feasible, but brittle, and the integrations are expensive to build and maintain. Whenever one of them changes, the intersystem integration might break, causing interruptions to the business. Often a better approach is to use a solution that includes all of these different systems together sharing a single common database.1 That way many of the handoffs between systems can be done automatically with no latency, maintaining consistency via the shared data.
Another advantage of a single unified system is providing broader access to inventory data. Inventory numbers are not as useful if they are inaccessible across the organization — tucked away in someone’s spreadsheet or in an accounting system only available to a handful of people.
Beyond the Four Walls – chieving Upstream and Downstream Inventory Visibility
Beyond the organization, automation can be quite helpful or in some cases is a strict requirement. For example, some customers (e.g. large retailers) require EDI or AS2 capabilities. The customer may provide a portal for suppliers to enter shipment information and send an ASN indicating exactly what items and quantities are in each shipment. When a shipment is received, the receiving system of the WMS at the warehouse can check if the quantities being received match what the supplier said they shipped. If not, the discrepancy can be reconciled immediately (before the driver leaves) or in short order, rather than showing up as a dispute to be dealt with months later. EDI can be valuable not just to meet key customers’ requirements, but for improving the operation of the business. EDI is a powerful tool for providing accurate data across the supply chain and integrating that data directly into the business’ systems.
Visibility into inventory outside of the company can be done in a number of different ways, including:
- EDI — EDI can provide POs (EDI 850) for orders, ASNs (EDI 856) to communicate what has been shipped, Inventory Inquiry/Advice (EDI 846) with updates to on-hand inventory at various holding locations, including status (on hand, committed, on order, etc.), forecasts (e.g. EDI 830 planning schedule with release), shipping schedules, and other useful information about inventory in transit or at rest. EDI can be challenging for a smaller company to implement, especially without the right partner and solution. For this reason, not all suppliers or customers will necessarily have EDI. In those cases, an alternate approach, such as a portal, is needed to serve the remaining non-EDI trading partners. EDI systems are often run in batch mode, which causes delays in receiving the information.
- Supplier and Customer Portals — Portals provide a way for suppliers or customers who do not have EDI capabilities to update inventory, production, and order status. This requires some training and communications so that the trading partners use the system consistently, properly, and in a timely manner.
- External Inventory Locations/Accounts — Some ERP systems allow supplier or customer stocking locations to be set up within the solution, so those locations look like another DC or plant, but with the inventory in those locations not being owned by the company. Personnel at the supplier or customer can then be given an account within the ERP system to update their inventory information.2 The account may provide additional functionality to the supplier or customer as well. If the trading partner actively uses the system to run a part of their operations, the data are more likely to be timely and accurate.
- API Integration — Trading partners may provide inventory data via an API in the ERP system.3
- Supplier or Channel Network — Trading partner networks4 can be used to connect with and communicate with suppliers and channel partners.
What to Look for in a Solution
Here are some things to look for in a solution, to enable businesses of any size to realize advanced inventory management processes and capabilities:
- Replenishment algorithms, optimization, and auto-execution — Within production, warehouse, and inventory management functions, look for flexible and extensible replenishment algorithms, as well as the ability to automate replenishment orders. This should include not only the ability to set min./max. levels based on forecasted demand, but also incorporate shipping costs, carrying costs, economic order size, expiration dates (for perishable items), and grouping of inventory by velocity and other dimensions that impact replenishment choices. Manually maintaining all of these parameters is labor-intensive and time-consuming, so the ability for the system to automatically optimize can be valuable. Automatic generation of replenishment orders keeps things running and lets planners focus on higher value tasks.
- Demand-supply alignment — The core of managing inventory is aligning supply and demand. This is done using demand management tools (e.g. forecasting, demand-sensing, demand-shaping, channel management, order management), supply management tools (e.g. PO logistics management, supplier portal and collaboration tools, supply chain risk), and demand-supply balancing tools (e.g. S&OP/IBP,5 demand shaping, agile execution tools). Continually monitoring supply and demand execution vs. plan is critical to enabling the supply and demand sides to work together and continually make smart adjustments.
- Single database for inventory — Because so many different functions are involved in managing inventory, it is highly preferred that they share a single database for tracking inventory across all of the functions and systems. The alternative is to use integration tools between systems, which is expensive to maintain, prone to problems when one system changes, and can introduce latency into processes. Unintegrated systems are even worse, as they require changes to the data from one system to be manually entered into the other, which consumes labor and time, and introduces more latency and data entry errors.
- Industry-specific blueprints — These are implementation templates, focused for a specific industry or micro-vertical, incorporating sector-specific best practices and processes. We discuss these in more detail in Industry-specific ‘Successful Practice Blueprints’ Accelerate Implementation. Industry-specific blueprints not only accelerate implementation, but also help a company adopt ‘success-yielding’ practices and processes.
- Simple, future-proof customizability and extensibility — The ability to easily plug in company-specific algorithms and customize the system, in a way that is guaranteed to smoothly deal with upgrades, is critical to help businesses stay agile and create a system to meet their unique needs.
- Rich network of well-integrated partner applications — No single solution provider can deliver everything a business needs as it evolves and grows. Best-of-breed solutions will be required. Finding a solution provider that has a large and functionally rich network of partner solutions pre-integrated into the core platform is valuable. It is prudent to see what advanced inventory-related functionality a solution providers’ partners provide — such as advanced demand management, channel management, inventory optimization, logistics (TMS and WMS), S&OP, supply chain risk management, and so forth.
- Scalability — Some systems scale better than others as a system grows. This is not just about system performance, but also scaling new functionality and evolvability. NetSuite’s cloud ERP platform is one of the best examples, used by companies ranging from startups with fewer than ten people all the way up to multi-billion-dollar organizations,6 all using the same adaptable platform. In fact, NetSuite meets virtually all of the requirements described above.
Inventory Management is Vital for Manufacturers and Distributors
Now more than ever, good inventory management, with accurate inventory data, is a core element of success for manufacturers and wholesale distributors. Having the right products, in the right place, at the right time, in the right quantities — and doing so at a low cost — drives profitability, cash flow, customer loyalty, and success for a company. This can be a difficult balancing act, especially when demand is volatile and supply disruptions occur. It can be achieved with the right inventory strategy, process disciplines, risk management, and capable systems in place. Excellence in inventory management, with the right systems, is key to enabling business to survive in challenging times and thrive in the market during good times.
1 A good example of this kind of integrated system for emerging companies is Oracle NetSuite which provides ERP, Procurement, MES/Production Management, Quality Management, WMS, Inventory Management, Supply Chain Management, Case Management, and much more, all running on a single integrated database. — Return to article text above
2 For example, some NetSuite users create locations for their supplier or channel partner’s sites and reflect inventory at those sites at zero cost, until title is transferred. The trading partner’s employees are given user accounts with access restricted to the inventory and sites they control. — Return to article text above
3 NetSuite enables this kind of approach, with relatively simple customization capabilities. — Return to article text above
4 While these can be EDI messaging networks, the more useful networks provide rich inter-enterprise functionality beyond messaging. — Return to article text above
5 S&OP = Sales & Operations Planning, IBP = Integrated Business Planning — Return to article text above
6 For more on NetSuite’s ability to grow with a company, see Enabling Growth: More Than Just a Tagline for NetSuite — Return to article text above
To view other articles from this issue of the brief, click here.