In this article, let's explore with Sota Solutions how ERP helps businesses manage inventory effectively.
1. What is inventory management?
Inventory management is a process that includes monitoring, controlling, and adjusting the quantity of goods and raw materials available in the warehouse. The main goal of inventory management is to ensure that there is always enough stock to meet production and sales demands, while also minimizing storage costs and waste.
2. Why is inventory management important?
Effective inventory management is one of the core factors determining the success of a business. It not only affects cash flow but also directly impacts customer satisfaction and the competitiveness of the business. Here are the reasons explaining why inventory management is important:
2.1 Cost Reduction
Inventory accounts for a large portion of a company's working capital. Poor management will cause capital to be "stuck" in the warehouse, affecting the ability to invest in other activities. For example, excessive inventory will lead to higher costs for warehouse rental, insurance, and labor, or inventory that is held for too long may become damaged or outdated, resulting in financial losses. Therefore, good inventory management helps businesses minimize the unnecessary costs mentioned above.
2.2 Optimizing cash flow
Good inventory management helps businesses control cash flow, avoiding situations of capital shortage or surplus. Businesses will know how much capital to allocate for warehouse investments, calculate product investment amounts to avoid excessive surplus, and optimize other related costs.Capital is used more efficiently when inventory is tightly managed.
2.3 Meeting customer demand
Good inventory management helps ensure that there is always enough merchandise to serve customers, preventing the loss of customers. Customers will be more satisfied when they receive the product on time and as requested. From there, it helps the business gain a competitive advantage.
2.4 Improving production efficiency
The lack of raw materials or excess raw materials... is one of the issues that disrupt the production process. Good inventory management helps avoid these situations. By relying on inventory data, businesses can plan production appropriately, avoiding the situation of producing too much or too little.
2.5 Improve business decisions
The inventory management system provides accurate data on quantity and type of goods, helping businesses make more informed decisions. Thanks to accurate data, businesses can quickly adjust production and operations to adapt to market changes.
In summary, effective inventory management is a crucial factor that helps businesses operate stably, achieve sustainable growth, and enhance their competitiveness in the market.
3. Key indicators in inventory management
Effective inventory management requires businesses to monitor and evaluate several key metrics. Here are the three most basic and common indicators:
3.1 Average inventory
It is the average value of inventory over a certain period (usually one year). This index indicates the average level of goods that the business is holding over a period. An excessively high average inventory can lead to increased storage costs, while an excessively low average inventory can cause stock shortages.
3.2 Inventory turnover
The average number of times a business sells and replaces its entire inventory within a certain period. This index indicates the efficiency of inventory usage. A high inventory turnover indicates that the business is managing its inventory effectively, with goods being sold quickly and less likely to become stagnant.
3.3 Optimal inventory level
It is the ideal inventory level that a business needs to maintain to meet customer demand without causing waste. To determine the optimal inventory level, businesses can use forecasting models, ABC analysis, or specialized inventory management software. Influencing factors: customer demand, supplier delivery time, inventory holding costs, stockout costs, demand variability
These indicators help businesses evaluate the effectiveness of the inventory management process, thereby proposing improvement measures. Based on these indicators, businesses can plan production, inventory procurement, and warehouse management more effectively. Thanks to these indicators, businesses can make investment decisions in warehouse management systems, software, or new technologies to improve operational efficiency.
Besides the three above indicators, there are many other important indicators in inventory management such as:
- Inventory turnover ratio: Indicates the percentage of inventory compared to revenue.
- Number of days to sell inventory: Indicates the average number of days to sell a certain amount of inventory.
- Stockout rate: Indicates the percentage of orders that cannot be fulfilled due to stock shortages.
- Warehouse costs: Includes storage rental, insurance, labor, shrinkage…
Regularly monitoring and analyzing these metrics will help businesses make accurate and effective decisions in inventory management.
4. Common issues in inventory management
Inventory management has many issues that can arise due to various reasons:
4.1 Excessive or insufficient inventory
The cause of this issue is inaccurate forecasting, which can be too high, leading to excess inventory, or too low, causing stock shortages. Additionally, slow and inaccurate order processing leads to uneven inventory levels, large quantity orders, or order cycles that are too short or too long, which also causes inventory issues. The consequences lead to high warehousing costs (storage costs, insurance, etc.), capital being tied up, and goods becoming obsolete or damaged.
4.2 Damaged, outdated goods
The main cause of this issue is poor storage conditions (inappropriate temperature, humidity, inadequate storage space...) or damage during transportation from the supplier to the warehouse. The consequences lead to damaged goods, outdated items that cannot be sold, causing financial losses and affecting the company's reputation.
4.3 Difficulties in tracking and controlling inventory
The main reason is the lack of a management system, the use of manual management methods, and the failure to update data in a timely manner while the volume of goods is large, with many warehouses in different locations, leading to difficulties in tracking each product. The consequences lead to inaccurate inventory data, stock shortages or excesses, and loss of goods,... causing difficulties in decision-making.
5. Managing inventory using traditional methods
Managing inventory using traditional methods, that is, using ledgers, spreadsheets, and manual methods, often encounters many difficulties and limitations:
5.1 Lack of accuracy and updates
Using manual recording methods can easily lead to errors such as incorrect data, confusion of goods, causing losses and waste, resulting in delayed inventory updates, inaccurate information, and difficulties in decision-making.
5.2 Time and effort wasted
Manual tasks such as manual inventory, manual data entry, and manual report processing will cause employees to waste time and effort, especially in companies with large scales and diverse products. In addition, analyzing data and entering data into spreadsheets or simple management software also takes a lot of time and is prone to errors.
5.3 Difficulties in forecasting
Manual inventory management easily leads to a lack of detailed data on sales history and market trends, making forecasting more challenging. Demand forecasting often relies on personal experience, making it difficult to provide accurate and scientific predictions.
5.4 Difficulties to control and link data from different departments
Determining the optimal inventory level is very difficult without supporting tools. When goods are lost or damaged, manual management or simple calculation tools will find it very difficult to determine this loss. Additionally, how can we avoid confusion and errors with overlapping information between departments, especially in accounting and sales? This is truly a difficult problem when businesses do not use effective management tools, which can easily lead to overlapping and inconsistent information between departments, making it challenging to manage the business.
To overcome these limitations and enhance inventory management efficiency, businesses should switch to using warehouse management software or ERP systems. These software programs provide automation features, helping businesses manage inventory more accurately, quickly, and efficiently.
6. ERP system - the optimal solution for inventory management
As mentioned in the previous section, managing inventory using traditional methods encounters many difficulties. The ERP system, with its superior features, has become an indispensable tool for businesses to solve these problems.
First, we need to understand, what is ERP?
ERP (Enterprise Resource Planning), also known as an enterprise resource planning system, is an integrated software that manages all core activities of a business. From financial management, human resources, production, to sales, purchasing, and warehousing... ERP can manage everything in a unified manner, creating a single information system for the entire enterprise.
ERP has outstanding advantages in inventory management, specifically:
6.1 Process Automation
The ERP system automatically records warehouse inbound and outbound activities, updates inventory levels in real-time, conducts periodic or ad-hoc inventory audits, closely monitors shipments, expiration dates of each product, ensures product quality... and automatically alerts when goods are about to expire, inventory is low or too high. With this superiority, ERP easily generates detailed reports on inventory status, forecasts product demand based on historical data, helping businesses plan production and procurement efficiently. From there, it helps businesses analyze the consumption trends of each product, making appropriate business decisions.
6.2 Integration with other systems
It cannot be denied that ERP is an effective system for integrating departments. When data is shared across departments accurately, specifically, and regularly updated. This makes the inventory management process easier than ever. Specifically:
- Accounting: ERP integrates with the accounting system, helping to automate tasks related to inventory such as product cost and inventory value.
- Sales: ERP connects with the sales system, helping to update inventory levels after each sales transaction.
- Production: ERP connects with the production system, helping to plan production based on customer demand and the current inventory levels.
6.3 Supply chain optimization
ERP can help businesses manage warehouses in different locations, manage goods with various characteristics such as size, weight, color, production batch...This makes it easier for businesses to distribute goods. In addition, the ERP system has features that integrate barcodes and RFID. The use of barcodes and RFID helps automate the warehousing process, inventory management, increases accuracy, and reduces errors.
In addition, the system helps manage supplier information, track transaction history, and evaluate suppliers.
7. Benefits of using ERP in inventory management
The implementation of the ERP system in inventory management brings significant benefits, especially in increasing production efficiency. Here are the specific benefits:
7.1 Time-saving
Using ERP in inventory management saves a significant amount of time thanks to its ability to automate processes. Instead of spending a lot of time on manual data entry and inventory checks, ERP performs these tasks automatically, quickly, and accurately. For example, when goods are received in the warehouse, employees only need to scan the barcode, and the system will automatically update the inventory quantity in the database. Similarly, when goods are shipped, the system will automatically deduct the quantity of items sold. Thanks to that, employees can focus on more value-added tasks such as data analysis and production planning instead of spending too much time on manual, repetitive tasks.
Additionally, ERP also helps save time thanks to its ability to quickly retrieve information. With just a few clicks, users can easily search for information about a specific product, check inventory levels, transaction history, or related reports. This helps reduce the time spent searching for information and supports a quicker decision-making process.
7.2 Enhance accuracy and transparency
ERP plays an important role in enhancing accuracy and transparency in inventory management. This system operates as a unified data center, continuously updating all information about quantities, types of goods, storage locations, and inbound and outbound activities. Thanks to this, businesses can accurately track inventory levels, manage a diverse range of goods, provide detailed reports, and connect with other systems such as accounting, sales, and production, ensuring data consistency and accuracy.
Thanks to these features, ERP helps businesses enhance accuracy and transparency in inventory management, thereby optimizing business operations and improving production efficiency.
7.3 Effective Material Management
ERP helps automate the inventory management processes, accurately track stock levels, and thereby forecast material demand effectively. Thanks to this, businesses can minimize the situation of material shortages or surpluses, optimize warehousing costs, and ensure continuous production, timely meeting customer demands. Additionally, ERP also helps manage the quality of raw materials, track expiration dates, and ensure that raw materials always meet production standards.
7.4 Profit optimization
By automating processes, providing accurate and timely data, and supporting data-driven decision-making, ERP helps businesses tightly control inventory and reduce costs. Businesses can focus their resources on core activities, enhance their competitive capacity, and achieve sustainable growth objectives. Specifically:
Reduce storage costs, damaged goods, obsolete goods, out of stock costs and transportation costs.
Automate processes, reduce time and manpower, help businesses operate more efficiently.
7.5 Improve business decisions
Based on sales history, market trends, and other influencing factors, ERP can accurately forecast product demand, helping businesses plan production and inventory procurement appropriately, avoiding situations of overstocking or understocking. Additionally, ERP helps businesses tightly manage the supply chain, from selecting suppliers to distributing goods.
Based on this data, all inventory-related decisions are made based on actual figures, helping to minimize risks and increase the likelihood of success. For example, when deciding to introduce a new product, businesses can rely on data about market demand, competitive capability, and costs to make accurate decisions.
8. Sota Solutions - provider of ERP software for efficient inventory management
With many years of experience in developing ERP business management solutions, Sota Solutions continuously improves technology and updates the most modern features to meet the diverse needs of customers.
Sota ERP's dedicated inventory module to manage your warehouse smartly and efficiently. Sota ERP warehouse and inventory management provides you with official control over product storage and movement activities, ensuring reliability in your control operations.
The team of experts at Sota Solutions is committed to accompanying businesses throughout the implementation and support process, from solution consulting, deployment to training and maintenance.
9. Conclusion
In summary, the ERP system is a powerful tool that helps businesses manage inventory efficiently, thereby enhancing competitiveness and optimizing profits. Choosing and implementing a suitable ERP system is an important decision that requires thorough research. However, the benefits that ERP brings will certainly be worth the investment for the business. If your business is looking for a comprehensive solution for inventory management in particular, and production in general, please contact us for the most effective production management solutions!