How to Control and Reduce Inventory Holding Costs with ERP?

Overview

Inventory is expensive. It is expensive to buy, expensive to hold, expensive to produce and when in excess, expensive to write off. However, holding a safe amount of stock is necessary for the manufacturer so that acceptable lead times can be committed to the customers. In accordance to the principle of demand and supply, the raw material stock needs to correspond to the scale of production and the finished good inventory should be in tandem with projected sales.

Inventory managers strive to achieve a balance between availability and cost in order to fulfill the demand while also saving the inventory asset from turning into a liability that is eventually written off. Depending on the industry and business size, the inventory holding costs comprise 20% to 30% of the total inventory value and will vary based on the number of items a business sells, its inventory turnover ratio, the location of its warehouse and its storage requirements.

Holding costs make up around one quarter of a company’s total inventory cost and can therefore affect a business’ overall financial health. With too much money tied up in inventory, the company could miss out on a promising investment or growth opportunity. To minimize inventory holding costs, manufacturers need to keep less inventory on hand, increase inventory turn & invest in an effective ERP system . But before discussing the role of ERP, let’s discuss the definition and components of inventory holding costs.

Components of inventory holding costs

Inventory holding costs or inventory carrying costs are the total expenses of holding materials in the warehouse before they are utilized for production or sold as finished goods. These costs are typically expressed as a percentage of the total value of inventory. Calculating and minimizing holding costs can help a company reclaim any money that is tied up in inventory and increase profits. Additionally, they indicate the amounts needed to

be sold and bought for maintaining appropriate inventory levels.

Listed below are the major components of inventory holding costs:

• Capital Costs –?This is the largest component of holding costs. It denotes the cost of purchasing the inventory, along with the interest accrued and taxes paid.
• Storage Costs – Costs incurred to transport and store goods in a warehouse. These costs include warehouse rental, insurance, shipping & logistics cost, and security.
• Service Costs –?Costs pertaining to maintenance and servicing of the goods in warehouse. Also includes cost of ERP software, annual maintenance, relevant hardware, taxes, and insurance.
• Risk Costs –?Owing to unsold inventory due to goods damage, expiration, obsolescence, theft, or loss of value over a period of time.
• Opportunity Costs – The costs of any business opportunity or growth prospect being lost because of the excess funds tied up in inventory.

Controlling inventory holding costs with ERP

When profit margins are tight, minimizing your carrying costs can have a significant impact on overall profitability. ERPs can give organizations a structured method of accounting for all incoming and outgoing inventory within their facilities. Organizations may save costs associated with manual inventory counts, administrative errors and reductions in inventory stock-outs. Below are the ways in which ERP can help manufacturers control and reduce inventory holding costs:

• Optimizing Re-Order Points –?Manufacturers can easily set Re-order Points (ROP) for materials that they procure in the ERP software. ERP also offers the functionality to set ROPs based on consumption trends, customer demand forecast and existing/upcoming orders. ERP comes with the additional functionality to trigger purchase orders automatically when the stock reaches a preset level of replenishment. This prevents disruption in regular operations and ensures on-time delivery to customers.

• Demand Planning – Accurate inventory demand forecasting enables a company to hold the right amount of stock, without over or under-stocking, for optimum inventory control.?ERP can pull the existing orders and requirements?data to accurately predict future demand for products, helping organizations plan inventory procurement and storage. Manufacturers can calculate their sales velocity with ERP, which provides accurate data on number of leads, average deal value, conversion rate and cycle length. Thus, enabling strategic insights into important KPIs.

• Warehouse Management – Manufacturing enterprises can reduce inventory holding costs by streamlining stock administration and increasing its efficiency. With ERPs warehouse management features, they can track the shelf life of each material, allocate storage bins based on categories (item types) & other classifications, instantly record material details on arrival and conduct inventory counting using cycle count or full inventory methods. ERPs can also assist with warehouse design efficiency to optimally utilize supporting resources.

• Supply chain visibility –?ERP offers end-to-end visibility into the supply chain of the manufacturing business. Bar-code and RFID technology enabled ERPs enable manufacturers to track the movement of goods across the supply chain. The current location of every last item in inventory is known to the manufacturer at all times, so manufacturers can adjust purchase orders, sales strategies, warehouse layouts and more to address problems early on, before costs pile up. This will also establish consistent receiving, put-away and fulfillment processes.

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• Enhanced Reporting?–?The reporting tools within an ERP solution are invaluable. For example, a business can view its inventory turn or sales numbers for a product category or specific SKU over any period of time. It can monitor the money lost to depreciation or spent on taxes and insurance in a quarter or year. With all this data on hand, leaders can afford to become very selective about the products, and the quantities, they keep in their stores and warehouses. This information also helps finance and operations managers build more accurate inventory forecasts.

Although the coronavirus pandemic has laid bare the risks of a just-in-time inventory strategy, companies still often hold too much stock. ERPs can evaluate each SKU to determine their important and then help decide the appropriate quantity to keep on hand. If you are looking for a complete ERP solution with dedicated inventory management capabilities to reduce your inventory carrying costs, you should implement BatchMaster ERP . If you wish to schedule a demo, please click here .