How Does ERP Help in Inventory Management?

Jalene Ippolito May 12, 2016

Managing inventory is a delicate balancing act. You need to have enough of the right product to meet customer demand. But you also want to minimize your inventory investment and the overhead expenses that come with higher stock levels. In comparison to their larger competitors, small to mid-size distributors tend to feel this pain more strongly. Why? They don’t have the right systems in place to support their growth.

The distributors we work with are typically living one of two scenarios:

  1. They’re using spreadsheets to manage their inventory. It’s common to start out this way when you only have a few SKUs to manage. But as they expand their product list, the spreadsheets become more complex. They take more to build and maintain. And the error rate is high – between 20% and 40%. When inventory is the lifeblood of the business, that’s a big risk to take.

  2. They’re using an inventory management system of some sort, but they’ve outgrown it. Their transaction volume is large enough that it’s slowing down system performance. And they want to leverage more sophisticated inventory planning tools to optimize their inventory.

If you fit into the first scenario – using spreadsheets for inventory management – you might think a stand-alone inventory management system is the next logical step. If you’re already running some form of inventory software, you might look at upgrading to a more robust version that can support higher transaction volumes. In either case, you’ll likely realize the benefits of an inventory management system that we dig into below. But, as you’re reading, think beyond the next two to three years. Where do you want your business to be in five or 10 years? If you plan on growing the business, you’ll see how investing in an ERP system designed for inventory management will deliver these benefits, plus so much more.

1. Increase efficiency and productivity

A good inventory management system will streamline your entire order-to-cash process. With the ability to manage orders from multiple channels in one system, you get real-time updates to stock counts. Instead of manually updating inventory counts in a spreadsheet, the system does this work automatically. As you become less reliant on manual processes, you’ll find your inventory data is more accurate and your staff will have more time to dedicate to higher value work.

What’s the added advantage of ERP?

You’ll get all these same benefits with an ERP system. But you’ll also get more advanced inventory planning tools to help you identify trends and predict demand. This can reduce your inventory planning time by 60–80%. And because an ERP solution encompasses your entire business, not just inventory management, you could see productivity gains of 5–10% across the entire organization. Those are results you simply won’t see with a basic inventory management system.

2. Control inventory costs to maximize profit

An inventory management system is the key to lowering your inventory investment. It will help you optimize your product mix, so you’re spending money on the right products at the right time. You can more easily identify seasonal trends and adjust your items and quantities accordingly, rather than carrying the cost on out-of-season product. A good inventory system will also give you insight into which products aren’t selling, so you can shift your inventory spend to faster moving items.

What’s the added advantage of ERP?

Where an inventory management system will give you visibility into your inventory, a complete ERP solution gives you visibility across the entire business. This opens up more opportunities to reduce your costs and improve your cash flow. Our customers have seen reductions up to 20% on their inventory carrying costs!

Managing supplier relationships is an important strategy to control your inventory costs. But it’s one that’s often overlooked for one simple reason – it’s tough to negotiate effectively when you lack access to the right information. This is where an ERP system offers a strong advantage. You have a complete view of your inventory information, purchase history and terms for each supplier. But you also have a built-in CRM that allows you to track your interactions and manage your supplier relationships to get the best results.

3. Optimize inventory levels

Having an accurate inventory count is arguably one of the most important aspects of a distribution business. If your counts are off, you’ll have more frequent backorders and risk your customers buying somewhere else. In fact, 1 out of 3 businesses miss shipment deadlines because they’ve sold items that they don’t have in stock. An inventory management system will help you avoid this situation, by automating your processes and reducing the opportunity for human error.

What’s the added advantage of ERP?

Beyond just setting reorder points and monitoring stock levels, an ERP system uses sophisticated forecasting to help you optimize your inventory at a level you won’t achieve with basic inventory planning tools. Companies that run ERP can reduce backorders up to 22% and reduce expedited shipments by 35%.

Free Guide: 4 Ways to Boost Inventory Efficiency

4. Improve customer satisfaction rates

The operational benefits you realize with an inventory management system have a direct impact on customer satisfaction. Reducing backorders and making the order-to-cash process more efficient are two big items that will make your customers happier and keep them coming back

What’s the added advantage of ERP?

An inventory management system will go a long way to improving your processes, which has a ripple effect to your customers. But when your entire business is managed in one system, the opportunities for improvement increase. Most often, the biggest gaps happen when there’s a hand-off of information between teams – as your sales team submits an order to be processed, and then that flows to accounting. With an ERP system, you have much better visibility to identify and fix these process gaps. Our customer, Construction Fasteners and Tools, has seen this in action – SAP Business One has helped them improve their customer experience by making their transactions faster and more streamlined.

As we discussed with vendor relationships, an ERP system allows you to manage relationships with your customers much more effectively. Data from all key areas of the business are in one system, so you get the full picture of your customers – outstanding orders, past due invoices, flags for major issues, etc. This is all valuable information that your team can use when interacting with customers.

Take inventory management to the next level with an upgrade to ERP

Ultimately, the right inventory management software will depend on your business needs – now and in the future. A basic inventory system may make sense for your business, but keep in mind that it forces you to rely on many other applications to run the other parts of your business (accounting, CRM, payroll and the like). Even if some of these tools are integrated, your system can become overly complex in a hurry.

If setting a foundation for growth is more your speed, an ERP solution is worth investigating. We've helped many North American distribution companies streamline operations and fuel growth. And we can help you do the same by guiding you through the process – right from evaluation, through implementation and beyond.

Book an ERP Consult with ProjectLine

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