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Is Inventory Management System Worth the Investment?

Author Zilvinas Lapacinskas  Zilvinas
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– The average reading time for this post is 4 minutes –

As inventory management software system developers, we quite often receive one and the same question from our potential clients: “How much will our company’s bottom line profit increase after implementing your software system?” The first answer that strikes my mind is: “As much as your health would improve by taking antibiotic pills.” Let’s find out why in more details in this article.

Using the same analogy with medicine, we should say that taking pills while you are absolutely healthy is a waste of time, money and health itself. So if your company manages inventory 100% in a “just-in-time” way, providing 100% service level for your customers, there is no space for inventory optimization at all. In such a case we can only wish you all the best before good-bye, as the physician wishes an absolutely healthy patient.

Stock-outs and overstocks are the usual symptoms indicating there is a possibility to increase bottom-line profit by optimizing inventory. Stock-outs lead to a poor service level, resulting in lost sales possibilities by creating the image of an unreliable supplier, resulting in long-term losses. Overstock consumes a company’s resources such as warehouse space and working capital, and also increases operating costs. Therefore curing the disease that delivers such symptoms leads to significant profit increase on the bottom line. Can inventory management system be that “magic pill” to cure your inventory disease?

Let’s divide the value creation process into 4 stages for a more accurate diagnosis:

zilvin

In this chart, the most important statement is that malfunctioning in any of these stages delivers the same outcomes: stock-outs and overstock. Here are some examples:

Cause Result Explanation
Marketing:
Wrongly chosen products Overstock The problem appears when new products are added to the assortment, or if previously added products do not meet market needs, or if sales forecast for the start of the product life was too optimistic.
Products in wrong places Overstock New products are located in the central warehouse but are not moved closer to the place of purchase.
Unsuccessful sales campaign Overstock A sales campaign does not deliver the desired increase in sales while all forecasted stock quantities for the campaign have already been purchased.
Spontaneous sales campaigns, not synchronized with purchases Stock-outs Sometimes competition requires fast reactions and organizing non-planned sales campaigns. Still, depending on the supply conditions, it takes time to supply additional inventory in order to satisfy the demand for increased sales.
Sourcing:
Unreliable vendors Stock-outs A common cause for stock-outs, especially if a company tries to keep its inventory to a minimum. In this case, the service level is highly dependable on timely delivery. The more you work according to a just-in-time approach, the more important it is for you to have reliable vendors. This explains why companies that work according to a just-in-time approach, such as car production companies, include fines in their contracts with vendors for missed supply terms.
Too large supply batches Overstock We consider restrictions on the supply batch size as harmful if they are bigger than EOQ (Economical order quantity – please check our blog record on this here). The higher the supply batch is above EOQ, the larger excess inventory the company needs to keep in stock in order to satisfy the requirement of the batch size.
Too long lead times Stock-outs and Overstock

A longer lead time means a longer planning horizon (time which it takes for us to look into the future when planning inventories); a longer planning horizon means more uncertainty and thus more mistakes.

As long lead times do not allow for fast replenishment of the inventory in case of unexpected sales, there is a greater chance of running out of stock.

Inventory management:
Inaccurate calculations Stock-outs and Overstock Inaccurate calculations depend on the overall quality of your inventory management system, irrespective of whether it is a human-based process or automated software. Mistakes may occur because of an incorrectly set business process, chosen approach, algorithm, setup or insufficient data quality.
Missed re-ordering moment Stock-outs Here we refer to the quality of your re-ordering process: even the most accurate calculations will not help if orders remain unsent or are sent too late.
Sales:
Some products are not offered to the customers Overstock Some items are overstocked or slow moving not because of their pricing or incorrect quantities, but simply because they are missing on the shelves, or not in the warehouse. You get the same effect when an item is set as inactive in the e-commerce setup (e-shop case), or not published in the item catalogue or pricelist (wholesaler case).
Temporary focus on one product is not synchronized with purchases Stock-outs Sometimes competition requires pushing some products in order to overtake a competitor’s offer. But depending on supply conditions, it can take time to supply additional inventory to satisfy increased demand. In this case stock-outs may appear.

 

Depending on the situation that caused the stock-outs or overstock, different approaches are required. In real life, it is more likely that inventory problems are related to different items and they appear in different stages, making solving the inventory management issues even more complicated.

 

 

Inventory management software solves issues caused by malfunctions in the Inventory Management stage; therefore if the majority of your problems appear in this stage, the best solution is to implement a modern inventory management system. In addition, efficient inventory management software systems will provide you with additional valuable information while diagnosing the root causes of overstock and stock-outs. This enables you to clarify processes in other stages and manage them better. For example, by reading SKU charts it is easy to find out when your vendor missed a delivery date (sourcing issue) or when an item was out of supply while still in stock (sales management issue).

Summarizing the above, it is reasonable to implement an inventory management software system if most of the problems you have are in the Inventory Management stage or if it is hard to determine at which stage in the process of creating business value suffers the most. At the same time, we emphasize that in order to maximize inventory management effect, you should do more than simply trust your inventory management software and eliminate issues in the Inventory Management stage; additional efforts are needed to solve existing issues in other stages as well.

 

SOFT4, as a provider of software solution for efficient inventory management, is constantly releasing blog articles about how to meet and cope with the trends, tendencies, and challenges, and give suggestions as to how to react to the changing environment in order to stay competitive.

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