Prevent Overstocking or Understocking with ERP Software
Inventory or Stock is the most significant asset of a manufacturing company that directly impacts the productivity and profitability of a company. How much Inventory to order? When to Order? How to avoid a situation of Overstocking or Understocking is the most challenging aspect every manufacturing company faces. Let us now discuss in detail the impact of, and how to prevent Overstocking or Understocking.
What is Overstocking or Understocking / Overstock or Stock out?
Simply put, when a company ends up with more goods & supplies than required, it is Overstocking. Also called a stock surplus, overstock, excess stock, excess inventory. On the other hand, when a company runs out of goods & supplies, it is referred to as understocking or stock out.
Overstocking/understocking or excess stock/stock out is a harmful situation for a manufacturing company. Hence, ordering the right amount of inventory, storing the inventory suitably and making appropriate use in the production process is important to avoid excess stock or stock-out
What are the risks of Overstocking or Understocking?
Dangers of UnderStocking are:
1. Delays Production: If the smallest item is out of stock, the production can come to a standstill, delay the entire production cycle and sometimes, even end-customer deliveries.
2. Lose Negotiation Edge: Emergency Purchases force the company to accept the product prices, shipping cost, administrative costs prevailing at that point of time. You lose the opportunity to negotiate for prices if you buy early and in bulk quantities.
3. Idle Hours: Workforce & Resources will remain idle till the time the item is sourced from outside to resume production. The company has to incur expenses for idle time.
4. Customer Dissatisfaction: Customers are bound to be dissatisfied if deliveries are delayed. There are chances, that you may lose the customer permanently.
Dangers of Overstocking are:
1. Inventory Storage & Carrying Costs: A significant amount of cost is incurred to ensure storage & maintenance of excess inventory. It includes expenses relating to warehousing, utilities, maintenance, insurance, security, etc.
2. Inventory Loss: Sometimes surplus stock is lost forever, either due to damage, expiry, pilferage, or obsolescence. At times, companies have to incur additional expenses to ensure proper disposal of this damage/lost inventory.
3. Reduces Working Capital: Money that would otherwise have been available for daily operations gets locked up in excess inventory and slowly starts affecting the working capital of an organization.
What are the causes of Overstocking or Understocking?
1. Lack of real-time accurate inventory information
2. Absence of Standard Material requirement planning procedures
3. Inventory Classification & Control Practices not followed in the organization
4. Inaccurate or Inadequate production planning
5. Error in sales forecasting
6. Poor Relationships with Suppliers
How does ERP Software help prevent Overstocking or Understocking?
1. Accurate Inventory Information
2. Implement Standard Inventory Management Practices
ERP Software enables implementing standard inventory management practices such as inventory classification, inventory valuation & inventory control methods across the company. With ERP Software you can:
- Specify rules and implement discipline for optimum inventory.
- Define Lead Time, Reorder Points, Safety Stock of inventory.
- Set up alerts & notifications for approvals & authorizations of purchase of inventory.
3. Accurate Demand Planning & Forecasting
ERP Production Planning module enables companies to accurately forecast demand based on orders or historical data and craft the Production Plans accurately. This will enable you to map your inventory requirements and purchase according to the requirements. Whether you want to order small quantities during the off-season or stock up on larger quantities for seasonal demands.
4. Good Procurement Practices
When you have reliable information about Production Plans & Material Requirements:
- You can aggregate demands across locations, & departments.
- You can place bulk orders with staggered delivery dates.
- You can plan logistics well in advance in order to ensure timely deliveries.
- You can find local suppliers who can provide good quality materials
Building Good Supplier Relationships can play a significant role in ensuring optimum inventory as they will provide best deals & timely deliveries
5. Monitor Inventory Reports & KPIs
Every company must clearly define & monitor their Inventory Reports & KPIs to avoid overstocking or understocking. Keep an eye on KPIs such as Inventory Turnover ratio Inventory Carrying Costs, Average Inventory, Inventory Ageing Analysis, Waste, ABC Analysis, XYZ Analysis.
Every manufacturing company should invest in a good ERP Software for achieving real-time visibility into inventory across multiple locations. ERP Software enables implementing Material Requirement Planning (MRP) methods and defining inventory requirements accurately. This ensures that a company can reorder at the right time in the right quantities and avoid situations of overstocking or understocking
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