Month: September 2022

Procurement is a critical activity for any business that deals in products – more so for a manufacturing company.

How you utilize finances to acquire raw materials, accessories, and finished goods required by the business to operate, and what price you pay, all fall in the ambit of procurement.

Procurement impacts nearly 70% of your business revenue directly, which means it is very closely linked to the financial operations of your business.

It is essential, therefore, that:

• The procurement process is made efficient
• Cost-saving opportunities are identified as an ongoing process
• Strong and long-term relationships are built with vendors
• Supply data is properly tracked for future reference

One data point that you must have a good understanding of is the goods coming into your organization, and the Goods Received Note is useful for this purpose.

It is an important document and plays a huge role in Accounts Payables.

It can help businesses eliminate confusion in the future.

ALSO READ: What is Delivery Performance and How Can it be Improved?

What is Goods Received Note (GRN)?

A Goods received note is a document that recognizes the delivery of goods by a supplier to their customer.

It is basically a record of goods received by the buyer.

It helps the buyer verify that the goods received are as they were ordered.

The Store staff receives the goods and compares them against the Purchase Order to determine if the order sent is correct.

They also physically examine the goods to check that they are in good condition.

Once the department is convinced that the goods received are as ordered and in good condition, they issue the Goods Received Note.

ALSO READ: A Guide to Avoiding Understocking and Overstocking

In case there is a mismatch with the specifications or number of the products or they arrive in a damaged condition, the buyer may reject the consignment.

A GRN is only issued against goods that are accepted; in case they are rejected, the company will create a new purchase order, and send that to the vendor.

The Store department is tasked with the responsibility of issuing the GRN, which is prepared in multiple copies.

While one is retained by the Store, copies are sent to the Procurement and Accounts departments, and one copy is sent to the supplier.

Uses of Goods Received Note

Let’s now look at the importance of goods received note.

A GRN is goods delivery confirmation tool for buyer and seller and is applicable in several cases.

As both parties retain this document, it can serve as a mediation tool in case there is a dispute in the near future.

ALSO READ: Why Safety Stock is Important?

1. Validating Quality and Quantity of Supplies

The supplier delivers goods on the assumption that the products delivered are as per specifications of the purchase order, and up to the quality standards demanded.

However, the customer will want to check for himself before accepting the supplier’s word.

Therefore, once the goods are received, the Store employees will check the purchase order to determine if the quantity and quality of goods is as specified.

Once they are satisfied everything is in order, they issue the GRN to the supplier and other departments to confirm that the quantity and quality delivered are as per the specifications demanded.

This way, the customer cannot claim at a later date that there was something wrong with the order.

ALSO READ: A Detailed Guide To Stock Keeping Unit (SKU)

2. Quality Control and Issue Management

Supposing that the procurement department or Stores realize that there is some problem with the products at a later date, but they had not pointed it out at the time of receiving the goods.

They may want to convey this to the supplier, but a look at the GRN will show that the goods were in working order.

Now it is up to the supplier; if he wants to, as a show of good faith, he may replace the goods.

Though he would be well within his rights to refuse.

3. Validation of Invoices during Three-way Matching

Three-way matching is very useful when you want to minimize fraud in billing, regardless of the size of your organization.

In this method, the goods received notes supply request notes, and invoices from suppliers are compared.

Together, these documents can help in confirming that:

• Supply request note shows the quantity and quality of products requested by the customer
• Goods received note shows that the supplies were delivered as per the specifications of the customer
• Supplier invoice shows the price and quantity of goods delivered to the customer as had been agreed upon.

This method helps in detecting anomalies and identifying fraud in invoicing.

ALSO READ: Credit Note Vs Debit Note

4. Managing Inventory and Updating Stock Levels

A GRN is a document which confirms that a company has received and accepted the goods they requested as per the specifications in the purchase order.

This has to now reflect in the warehouse data too, as new goods have come in.

A GRN, therefore, is useful in inventory management and to update warehouse stock data as new supplies come in.

5. Helps in Accounting

Goods received notes can help accountants to validate inventory balances, and make the requisite purchase entries to bring the stock ledger up to date.

It also helps to track and manage the account’s payables.

They can also subtract the rejected or non-received items, and calculate the amount due to the vendors.

Goods Received Note Format

A typical good received note contains the following fields so that complete delivery information can be depicted:

• Supplier’s name and address
• Delivery date and time
• Products received details like name, quantity, description, price, etc.

The GRN is signed by the Store manager of the company receiving the goods, as well as by a representative of the vendor if the vendor is not available.

ALSO READ: Demand Forecasting and Its Importance

What is the Process of Issuing a GRN?

Goods received note helps to make the procurement process more efficient in the delivery stage.

• The purchasing company receives the invoices
• The goods are unloaded at the company warehouse under the supervision
• The goods are physically verified to ensure that quantity and quality is as per specifications. Random pieces may be selected for quality testing
• In case there is a shortfall or the quality is not up to the standard, the supplier is informed
• On verifying that the goods received are as per the quantity and quality requested, the Store manager issues the GRN and signs it, issuing to the relevant departments and to the vendor.

The Accounts department updates the store ledger account on receiving the goods received note.

A GRN is solid proof of the goods being received by the customer.

It is helpful in maintaining inventory records, and helps to make sure that a sufficient quantity of goods is available for production or sale.

ALSO READ: A Detailed Guide to Stock Status

The Benefits of Goods Received Note

Now that we know what goods received note means, let us take a look at the benefits provided by this document.

A GRN shows the date and time that you took delivery of the goods, as well as the full address of the place from where the goods were loaded for delivery.

A properly created GRN will help your company in different ways – however, do bear in mind that it’s not a substitute for an invoice.

1. It Helps to Avoid Legal Issues

This note mentions all the important information related to a specific consignment of the goods, which forms the basis for calculating the dues owed to a vendor.

This can help you avoid legal issues in the future.

This makes it critical to track and store the document for the future.

ALSO READ: What is Capacity Requirement Planning?

2. Acts as Internal Proof of Goods Received

A GRN is issued to relevant staff members once goods or services are taken delivery of, and hence forms an internal proof of receipt.

In fact, the GRN process is also necessary when you have to make statutory reports to the Customs and Excise departments.

They hence help in maintaining compliance with such regulations.

A goods received note usually has a commodity code and an inclusion indicator.

3. Show the Supplier Details

A GRN is an official and legal document that verifies that an order has been received, which is issued by the purchasing company after confirming that the goods have been received as per specifications.

It is accepted in a court of law as proof of delivery.

The goods received note mentions the supplier’s name, address, and contact details, so that there is no ambiguity regarding this.

It shows the date the goods are received, along with the type of products delivered and all the relevant details.

ALSO READ: Make to Order vs Make to Stock

4. Helps the Accounting Process

As we saw earlier, goods received note helps accountants in reconciliation of purchase and inventory ledgers and to verify the inventory balance.

It helps them keep track of the accounts payable.

5. They Help in Monitoring Stocks

This document is a record of goods physically moving into the company’s warehouse; warehouse managers are better able to plan and track the inventory of the ordered or produced materials.

It thus serves as an important inventory management document.

ALSO READ: Reasons to Move PLM to the Cloud

Common Problems with GRN Processing

As in everything else, there are some hiccups associated with the processing of Goods Received Notes:

• Paperwork tends to get lost or misplaced, making it difficult to compare it against the original purchase order
• Time-consuming process, ties up staff in administrative tasks
• When damaged or incorrect goods are received, disputing them becomes problematic
• Costs incurred due to receipt of damaged goods, wrong quantity, incorrect prices, or duplicate orders
• Issues with managing vendors and supply chain problems, like the effect of repeat orders caused by invoicing problems and approval for payment
• Necessitating effective and timely communication with vendors regarding problems with the delivery
• Matching stocks received against several purchase orders for different departments
• Time and effort spent in responding to queries from vendors seeking payments

ALSO READ: Difference Between Procurement And Purchasing

With a robust ERP solution like Tranquil, you can automate all these processes thanks to its feature-packed inventory management module. Now you can free your employees from these time-consuming and cumbersome administrative tasks, and divert them to more productive tasks. The automated document management feature will also ensure that the process is completed quickly and without errors. If you are unsure about how Tranquil ERP can benefit your business, do schedule a demo with us. We will walk you through the solution and explain the working. Our executives will be happy to answer any queries you may have for us.

 

Inventory management is a critical function of any business and has to be executed efficiently for business success and growth.

The larger the business, the more complex it becomes, and the more attention it demands.

Uncertain demand predictions and rapidly shifting costs add to the problems.

A possible solution to this situation could be vendor managed inventory or VMI.

ALSO READ: Important ERP Modules and Functions

What is VMI?

Under the vendor managed inventory approach, a company outsources the maintenance of their stock levels to their vendor.

This means no more guesswork and forecasting required, and time in hand to focus on other business functions.

VMI can help businesses streamline every phase in the supply chain and boost financial performance.

It forges close ties between businesses and vendors, as putting a third party in charge of your inventory includes having great trust.

ALSO READ: Influence and Importance of ERP System in Different Industries

Benefits of VMI

Everyone involved in the supply chain can enjoy certain benefits under this system.

Let’s see in detail:

VMI Benefits to the Customer

The last element of any supply chain is the customer – who can be a business too – who is the product user.

They don’t control the supply chain but are critical because the chain can fail if the customer doesn’t buy the product.

Let’s see the benefits customers get:

1. Enhanced Customer Experience

With the right inventory level at all times, you can fulfil customer orders every time, which makes their purchasing experience much better.

Positive experiences turn customers into your brand advocates and can get you more business.

ALSO READ: ERP Software to Enhance your Purchase Management

2. Transparency

Today’s discerning customer is interested in knowing where their product comes from and how it was made – which is why the fair market, sustainable, and organic products are in demand.

This shift is pretty recent, and retailers may be unable to answer these questions.

With a vendor managed inventory, they have more transparency regarding the origin of their products

VMI Benefits to the Retailer/Distributor

1. Never Face Stockout

Retailers have to always balance their act – excess inventory means more holding costs, too less and they lose sales.

The vendor often has better visibility into the retailer’s stock and can make small deliveries so that you don’t get stocked out.

This means you rarely miss sales.

ALSO READ: Guide on ERP in Production Planning

2. Streamlined Processes and Reduced Costs

Excessive inventory can tie up funds and space in your warehouse, while less stock means the risk of losing sales.

In a vendor managed inventory system, purchase orders can be auto-generated, avoiding manual errors in data entry.

Also, the supplier has substantial efficiency as more precise and updated data is used for processing orders, which helps retailers to:

• Decrease the general number of orders
• Reduce the number of expensive urgent orders
• Eliminating returns due to replacing products

3. Higher Inventory Turnover

As the vendor is ready to push small deliveries, the retailer need not stock a lot of products to meet consumer demand.

Reduced inventory cost means a better inventory turnover ratio.

This also leaves more money in the hands of the business, and this can be invested in activities like research, marketing, purchasing new equipment, hiring more employees, etc.

With the vendor delivering inventory based on actual demand in real-time, they share the inventory risk with the buyer, who has almost the exact stock levels that they can sell.

4. Improved Sales Figures

The VMI process can give suppliers a greater understanding of actual consumer demand.

This means they are better placed to respond to the present conditions and future plans of consumers and can improve the service it provides to customers – resulting in increased sales.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

VMI Benefits to the Manufacturer

1. Better Forecasting Ability

The manufacturer may find it tough to predict how much to produce; of course, it depends on the likely quantity their customers will buy.

But this information can be hard to come by when there are retailers and distributors between producer and buyer.

However, in a VMI solution, the whole supply chain is connected, and the producer has direct visibility into the sales statistics of the retailer.

This helps them make accurate predictions, and are prepared to meet retailers’ demands when they need it.

ALSO READ: What is Negative Inventory?

2. Precise Ordering and Fulfilment

Order fulfilment is critical for manufacturers.

They have to manufacture the right product, send the right product, and make the right quantity – else they could lose a lot of money.

As VMI digitizes and streamlines the processes, it can help eliminate the errors of ordering and fulfilment that occur in conventional supply chains.

Common VMI Benefits

There are certain benefits which are commonly shared by all the elements in the supply chain.

1. More Stability

A problem with a single link in the supply chain can affect several others.

If a company has to produce goods for a single customer to fulfil their emergency demand, their other customers will face delays.

In a VMI supply chain, everything is linked and the risk of huge disruptions is greatly reduced.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

2. Better Alignment of Inventory and Customer Demand

This is the single biggest of vendor managed inventory benefits.

With the supplier in charge of product replenishment, they can adjust inventories according to consumer demand.

The entire supply chain responsiveness to factors like innovations, special promotions, and seasonal changes can be significantly improved.

Suppliers can coordinate lead times of producers as the demand variability effects can be handled better.

On the other hand, suppliers only need to stock minimal inventory – no stockouts or high costs.

ALSO READ: Ways to Improve the Procurement Process?

Disadvantages of Vendor Managed Inventory

• You have to let go of your control over your inventory to an outsider which may be uncomfortable, and create security issues
• Partnering with a vendor for VMI could create problems in your supply chain if you are unhappy with their service
• This is not an ideal option for businesses who have the expertise in handling demand fluctuations for your products. While the supplier will factor in your insights, it may not always reflect market shifts

These are the most commonly experienced vendor managed inventory advantages and disadvantages.

You need to weigh these, and also look at how it differs from the conventional method.

Is Vendor Managed Inventory Right for You?

The main aim of the VMI approach is to ensure that the distributor or retailer only stocks what they can sell.

Remember, for this to work, the vendor and retailer must have excellent communication between them.

Of course, the availability of VMI software today makes it easier than earlier.

While it is an effective strategy for a number of businesses, it is not necessarily the best thing for everyone.

ALSO READ: Tips For Efficient Stocktaking

Take a look at the following factors and then decide:

Product Type

Are your products perishable or long-lasting?

Do you have a wide product mix or a handful of major sellers only?

If your inventory process is complicated, you might be better off with some help in that regard.

Demand

Think if your customers keep changing preferences or if you face seasonal demand.

Understanding market fluctuations is not as simple as it seems.

In some instances, the business owners may be the best judges; in others, the vendors may be seasoned veterans who are able to figure out more accurately what the business needs.

ALSO READ: Detailed Guide to Batch Tracking

Your Inventory Management History

If you have managed your inventory yourself till now, how often have you had to face stockouts and lost sales?

How much of an impact did it make in monetary terms?

How much dead stock have you ended up with, and how much slow-moving inventory?

How much did it cost to store, insure, handle and secure those goods?

If such incidents have happened once too often, it means your track record isn’t too great.

You could try outsourcing it for better results.

Vendor Reputation

For your VMI solution to be successful, the vendor also has to be good. It is imperative to know your vendor’s reputation and background.

Check if others in the industry have used their services, and get their feedback.

Have a detailed discussion with the vendor to evaluate if he is a good fit for your business.

Check if there is a single point of contact who you can approach.

Vendor managed inventory is an economical method of inventory handling, and you can certainly gain a lot if you find that it will be a viable solution for you after weighing all the factors mentioned above.

ALSO READ: HCM vs HRM

Implementing a Vendor-Managed Inventory Strategy

Supposing you have decided to go ahead with this strategy, here are the steps you need to take:

1. Calculate the ROI

See if you can define the business value of the VMI.

Like, if you decrease your inventory by x percentage, what would be the effect on your business?

If you never got stocked out, what would be the increase in sales?

Answering such questions will help you calculate the returns you can get on your VMI investment.

ALSO READ: Detailed Guide on ROI on ERP Implementation 

2. Communicate with Your Vendors

You need to communicate and collaborate with vendors; improve your relationship with them so that you are clear about each other’s requirements.

3. Get the Right Technology

Last, you need the ideal technology.

Though conventional VMI solutions based on EDI tech have been around for a while, modern solutions like are more user-friendly, feature-packed, and robust.

Getting the Most from Vendor-Managed Inventory

Implementing a VMI process can be quite a disruptive change for everyone involved.

There are several tactics you can employ to make sure you get the maximum benefits from this system.

ALSO READ: What is Business Process Improvement (BPI)?

Here are some tips to remember:

Develop a Good Data-sharing Process

It’s essential for customers and suppliers to be on the same page for the VMI to be successful – and tight data integration is critical here.

Typically, vendors deploy their own inventory management solution at their supplier’s location so that they can directly monitor the inventory status, and analyse the data collected to enhance responsiveness while helping customers to identify areas of cost-cutting.

The customer can share historical sales data and demand forecasts to simplify the process and increase efficiency.

Both parties can deploy compatible systems and have stringent protocols for protecting customer data.

Establish Clear Goals

Both parties must define their goals clearly, and each has to understand the other side.

Goals must be realistic, and the parties need to understand that a few hiccups in the initial stages are natural.

ALSO READ: Product Bundling in Inventory Management

Get your Team on Board

With VMI, your employees are freed from managing inventory, but they should not be completely kept away from the process.

It’s a good practice to have a trained team, dedicated to support the process.

They can monitor performance, identify areas of improvement, and check for any missing links that need to be fixed.

ALSO READ: What is Batch Picking? 

At Tranquil, our ERP solution comes with a robust inventory management module which helps you manage inventory efficiently and cost-effectively. It is flexible and scalable, and secure too. Book a demo to see how Tranquil can help your business. Our team will explain everything, and answer any query you have.

 

 

Simply put, delivery performance is nothing other than a measure of how well an organization is able to deliver products and services compared to customer expectancy.

It is an important element in supply chain management as it displays the capability of the organization to meet customer demands.

Delivery performance measures how well a business can deliver goods within deadlines, with the use of planned resources, and not incurring additional costs.

There are two types of Delivery Performance:

• Operational – which measures the effectiveness of the company in producing and supplying products and services as per expectations
• Strategic – which examines long-term plans and checks if they are aligned with organizational objectives.

ALSO READ: Ways to Improve the Procurement Process

Delivery Performance KPIs

The delivery performance KPIs are more concerned with operational factors like stock-outs, lead time, fulfilment rates, and more.

But it is also necessary to measure strategic factors like market share, customer satisfaction, and brand equity.

Factors that Impact Delivery Performance

Supplier Delivery Performance

Vendors must deliver the ordered items in the expected quantity and quality; only then can the company have a hassle-free production process or ship customer orders in time (for retailers).

Manufacturers must plan and monitor better and improve efficiency across departments to ensure they deliver on time.

Manufacturing Schedules

How well the organization schedules and segments its production activities determines if they can carry on uninterrupted production.

ALSO READ: Key Steps for Successful Demand Planning 

Inventory Management

Inventory has to be managed efficiently without which production, and subsequently, deliveries can get delayed.

Transportation Requirements

This helps in determining how often the logistics were accurate and what remedial actions can be taken to avoid mistakes in the future.

Why Is It Important to Measure Delivery Performance?

It is important that delivery performance improves, to gain a competitive advantage.

As with everything else, to improve, you first need to measure current performance.

Here, the main factors are delivery logistics metrics.

Measuring these KPIs will tell you how you stand.

ALSO READ: Guide on ROI on ERP Implementation

Regular tracking gives you insights into what you’re doing right and what is wrong.

This helps you to discover flaws in performance and process inefficiencies, along with improvement opportunities – and this can help you become more efficient and productive.

When you optimize your supply chains, you can lower your delivery costs by up to 20%.

It can also help in:

• Continuous delivery of operational excellence
• Enhancing customer satisfaction
• Business growth

Delivery Performance Metrics

If you are looking at improving delivery performance, you need to set and measure KPIs.

There are numerous metrics that organizations use, but you need to choose the ones that are apt for you.

We present here the most commonly measured metrics.

ALSO READ: Common Inventory problems and Solutions

1. Number of Completed Deliveries

This is the total product deliveries made annually, quarterly, or monthly.

This is among the important KPIs that are used to calculate other metrics as it is the basic value that helps to evaluate how effective your delivery performance was in general.

By categorizing this number into various categories like locations, product types, and so on, it can help in optimizing other metrics; it can also be used to determine the growth potential by calculating the average number of deliveries.

2. Order Accuracy

The percentage of accurate orders vis-à-vis the total number of orders is represented in this metric.

It helps id identifying errors in the delivery process, like returns, failed deliveries, damaged products, etc.

It’s a bit tricky to calculate as errors can happen anywhere in the fulfilment cycle.

Asking for report submissions at every step via advanced delivery solutions, which makes it easier.

ALSO READ: ERP software in Warehouse & Fixed Asset Management

3. On-Time Delivery

This metric tracks the number of deliveries made within the promised date.

This is a critical metric as it can improve customer experience, retention, and subsequently, your relationship with them.

Delays can happen due to supplier delays, inventory problems, mistakes in orders, wrong forecasting, delivery schedule problems, and so on.

Identifying late deliveries and the causes can help in devising solutions.

4. Average Service Time

How long does it take on average to complete a delivery?

This could be by day, month, quarter, or year.

It helps you see how efficient your planned delivery routes are, and how effective your supply chain is.

When you know the average delivery time, you can inform the customers likewise, and it will impact their experience positively.

You can also decrease the number of returns while improving the accuracy of order pickups.

You can also identify areas for improvement and optimization by comparing average delivery time per day against average delivery time per month and so on.

ALSO READ: What is P2P (Procure to Pay) Process?

5. Average Cost of Delivery

Specific parameters like distance, product type, and vehicle are used to calculate the average delivery cost.

Total up the cost of the fuel, driver’s wages the vehicle, and other costs, and divide it by the total distance, and you have the average delivery cost based on distance.

If you divide the total cost by number of deliveries, you get the average delivery cost based on the product.

This metric can help in making operational changes that decrease the cost without impacting performance.

Examples of changes – route optimization systems, fuel-efficient vehicles, etc.

ALSO READ: Route and Van Sales – Challenges and Opportunities

6. Transit Time to Distance

This metric calculates the time spent by drivers and couriers in transporting the products from pickup to delivery.

It compares the distance travelled by the package with the time taken for it to travel the distance.

This KPI helps you see how quick and efficient your delivery routes are, and to take the actions to improve your accuracy rate while reducing returns.

Knowing the average transit time allows you to mention accurate ETAs to customers.

ALSO READ: Inventory Reduction Strategies 

7. Vehicle Capacity Utilization

Dividing the available capacity of the vehicle used for deliveries by the total capacity gives you the amount of unused space in the vehicle.

This will help you to route and schedule vehicles more effectively, increasing the profitability of your delivery operations.

If the utilization is high, it’s a good thing, but if the availability or unused space is high, it means the process is inefficient and needs to be changes.

You could revamp the loading, or merge routes. If there is 0 availability, you may need more vehicles.

How Can You Achieve On-time Delivery?

Delayed deliveries lead to not just poor delivery performance but unhappy customers too.

If you are trying to improve delivery performance, you need to:

• Study the causes for late deliveries
• Carry out remedial actions and focus on executing them to prevent delays
• Make a plan and execute it for corrective action
• Check results and update it suitably

ALSO READ: Why is Cycle Stock Important for Your Business?

Let’s look at the steps to improve timely deliveries in detail:

1. Prioritize

Prioritize orders according to customers or stops that have to be served earlier. Doing this tells the algorithm how to optimize the route.

Else, orders may get delayed if you find yourself short of resources.

You can specify a high or low priority, and set ‘delivery by’ dates so that the day’s priorities are scheduled.

2. Keep your Promise

Customers today are discerning, and demand the best service – like receiving their purchases in the time window they were promised.

Your reputation will take a hit if you continuously fail in meeting this demand.

With Tranquil Cloud ERP orders are allocated to the correct resource and at the appropriate time, helping you improve your reliability and accuracy.

Giving your customers time windows in route plans helps keep customers happy as you can easily meet those commitments.

3. Ask for Drivers’ Input

Your drivers’ feedback can help in optimizing and improving your routes by:

• Pinpointing peak times and traffic jams
• Identifying customers who take up more time during stops
• Diverting drivers to areas they are familiar with to make the runs quicker
• Checking for starting or ending location requests; these can be built into the plan

ALSO READ: Understocking vs Overstocking

4. Minimize Wasted Space and Time

Helps you make the necessary route adjustments so that you can minimize the unutilized vehicle capacity and optimize delivery schedules.

It will also help you save time.

With this you can improve your delivery performance and increase customer satisfaction.

5. Minimize Chances of Error

By implementing route optimization software, you can focus on core tasks and avoid mistakes.

This is how you can achieve it:

• Enable your field team to access the data related to delivery proof, driver location check-ins, and completed stops on read-only basis.
• Configure for holidays, vehicle maintenance days, and other exceptions, so that you don’t plan deliveries for those days

By defining rules in the route manager, everything will go like clockwork.

ALSO READ: What is Inventory Control System?

6. Minimize Paperwork and Guesswork

Can help you stay connected with your drivers and office employees, and give you visibility into on-road updates without having to call them up or guess their progress.

You can get updates on GPS locations, live ETAs, completed deliveries, etc.

Here are certain other matters you need to remember:

• Improve your forecasting
• Create accurate purchase orders
• Manage inventory efficiently
• Maintain realistic SOPs
• Minimize errors in production, picking, and packing
• Keep proper records of shipping
• Set achievable deadlines
• Provide customers with an online order tracking facility

What are the Benefits of Measuring Delivery Performance?

1. Reduce Transportation Costs

The main component in logistics expenses is transport, and it’s impacted by factors like urgency, distance, delivery location, accuracy, and vehicle capacity.

By measuring delivery performance metrics, you can take decisions that help you optimize routes, vehicle capacity utilization, fuel consumption, distribution networks, maintain your vehicles better, and speed up delivery – and eventually, reduce transportation cost.

ALSO READ: Benefits Of ERP Software For Logistics Industry 

2. Increase Delivery Speed

Delivering your customer’s purchases as quickly as possible is critical when it comes to customer satisfaction.

You can learn about your fleet’s productivity by measuring the metrics and analysing different types of data.

You can then take informed decisions to improve delivery times.

3. Improve Customer Experience

Quicker deliveries lead to happier customers; in fact, the customer of today is willing to pay more for an enhanced shopping experience.

Tracking metrics that impact customer satisfaction, like on-time delivery, average delivery time, accuracy, etc will help improve customer service significantly.

It will help you retain customers and gain new ones, boosting revenues.

ALSO READ: What is Storage Cost of Inventory?

4. Plan Better Schedules and Routes

Tracking metrics on route management like cost, safety, compliance, planned vs actual performance, etc can help you in optimizing delivery routes and schedules.

Take feedback from lower-level executives, logistics teams, drivers and dispatchers to maximize route performance in the future.

5. Scale Operations Easily

This is critical in today’s competitive market; companies are always coming up with more convenient and quicker delivery options.

By analysing important metrics, you can maintain an edge over your competitors.

Order accuracy, average delivery time, on-time delivery, and so on can be analysed for effectively scaling operations and growing your business.

ALSO READ: Guide on Storage Cost of Inventory

6. Agile Delivery

Having an agile delivery operation allows businesses to adapt to dynamic situations and be more efficient.

To implement agility, you need KPI data; this will help you enhance performance, increase delivery speed and plan deliveries on the fly.

7. Continuous Improvement

Using metrics is an efficient method of measuring the overall organizational success and to identify areas of improvement.

Continuous improvement is the only way a business can succeed in a highly competitive environment.

And it is a key metric that will help in understanding the actions required to attain those goals.

ALSO READ: Complete Guide to Cash Flow Analysis

Tranquil Cloud ERP software solution is a comprehensive business solution that will help you optimize your inventory, sales, and deliveries, among other things. Schedule a demo at your convenience to see for yourself how our software can help your business.

 

Inventory is the most important and valuable asset.

Any business (apart from a service company) needs to purchase, store, consume in production, and sell inventory; this includes managing raw materials, accessories, parts, and finished goods.

They also have to process and store inventory.

It is the single most important business function for an organization.

Managing inventory efficiently is even more critical for manufacturing companies as they have to track and manage the inventories from raw materials to finished goods.

Inventory management attempts to streamline inventory so that there is neither excess nor shortage of inventory.

ALSO READ: What is Assemble to Order Process?

Why is Efficient Inventory Management Important for a Business?

Inventory is at the core of the business for any company that manufactures or sells goods, and getting caught short of goods can hamper the business as it means pausing production or turning away customers.

On the other hand, having too much inventory can lead to heavy expenses.

Arranging warehousing, paying insurance, utility bills, and labour for handling; some types of inventories may need special arrangements like refrigeration, temperature control, or security.

Depending on your region, you may also incur taxes on unsold inventory.

What’s more, you also run this risk of inventory getting damaged or spoilt, and it could get stolen too.

If it remains unsold for a long time, it may go out of fashion or be rendered unsaleable because of the appearance of new and improved products in the market.

This is why it is imperative that businesses manage their inventory properly.

ALSO READ: Common Inventory Management Mistakes to Avoid

There are several factors to be kept in mind: when to restock inventory items, what quantities to order, how much to produce, what is a good price to pay for the stock, when to sell, what price to sell, and so on.

While these may sound like simple matters at first, they are not that simple, and things can become very complicated and confusing.

The norm for small businesses is to manually track inventory and calculate the reorder levels and reorder quantities using excel sheet formulas and a lot of guesswork.

In any case, it may not be the best thing to do.

ALSO READ: Why is Cycle Stock Important for Your Business?

A large company simply cannot afford to rely on manual entries, counting, and spreadsheets.

Only a reliable ERP solution like Tranquil with a robust inventory management module can ensure effective inventory management when there are multiple products, hundreds of inventory items, and thousands of transactions.

There are several strategies, formulae, and techniques that different companies follow when it comes to inventory management.

Take a look at what they are:

• Materials Requirement Planning method
• Just in Time Inventory Management
• ABC Analysis
• Economic Order Quantity or EOQ method
• Perpetual Inventory System
• Periodic Inventory system
• Safety Stock Maintenance

These are the most popular and common techniques.

There are also other methods used by some companies like drop-shopping and cross-docking, backordering, and consignment.

Order up to level is a formula that will help you efficiently manage your inventory – and without hassles.

You can rest assured about your inventory levels once you apply this formula.

It is in two parts.

ALSO READ: What is Negative Inventory and How Can you Prevent it?

What is Order Up to Level and How Do You Calculate it?

Under this method, there is an intermittent review of stock levels, and a specific quantity of that each inventory item is purchased so that inventory levels can go back to the target levels.

This strategy is concerned with placing orders so that the inventory item is brought back to the optimal level – basically, it ensures that you have adequate inventory, but just enough.

It eliminates the possibility of excess stocking.

Having too much inventory can be expensive for a business, as we saw earlier.

Order lesser than what you need, and you are highly likely to run out of raw materials in the middle of production, causing you to pause production.

This means a cascading effect of delays, right up to delivery.

Or, if you’re selling goods, it means turning away customers and disappointing them.

ALSO READ: Physical Stock Verification and Its Advantages

Order Up to Level

The order up to level is put into action when the inventory level reaches the reorder point or has gone below it.

By taking stock of your inventory items at regular intervals, you will be able to maintain the order up to level.

The Formula for Order up to level

The simplest formula for calculating the order up to level is as follows:

Target level – reorder point = order up to level (quantity)

We can calculate the reorder points in two different ways:

Reorder point = basic stock + safety stock + (sales per day in units * number of days taken for delivery)

This of course assumes that the business maintains basic stock and buffer stock.

Supposing it doesn’t maintain basic and buffer stocks, the formula would not have the first part.

The formula would be:

Reorder point = sales per day in units * number of days taken for delivery.

Therefore, the order up to level formula would be:

Quantity of Order up to level = Target level – (basic stock + safety stock + (sales per day in units * the number of days taken for delivery )) – For companies that maintain basic and buffer stocks.

And,

Quantity of order up to level = Target level – (sales per day in units * number of days taken for delivery)

Today, there are numerous ERP software systems for supply chain management that have state-of-the-art modules for inventory management, which simplify and streamline these activities.

Many ERP solutions have supply chain management modules and inventory management modules separately as well.

In these systems, you can configure the software to notify you when the stock reaches the reorder point so that you may be able to eliminate the periodic review process.

ALSO READ: Benefits of Stock Status

Order Up to Level vs. Reorder Point

Both these – reorder point or level, and order up to level, are policies of inventory control.

There are a few differences between them.

Let’s take a look:

Stock Review

Companies following reorder point or reorder level strategy review stock continuously, but companies that follow order up to level review inventory levels only periodically.

ALSO READ: Understocking and Overstocking in inventory

Order Quantity

Under the order up to level method, the quantity of the order differs depending on the requirements.

Under reorder level method, the quantity of the order is fixed.

Time of Placing Orders

When you follow the reorder point approach, you place orders for the inventory as soon as the stock reaches the reorder level – even if the last order was placed just a few days ago.

However, there is a fixed interval of time between orders in the order up to level approach.

ALSO READ: Importance of Stock Keeping Unit

Difference between Order up to Level and Reorder Quantity

Target Level

Reorder quantity refers to the quantity of the inventory item that needs to be ordered to reach the target level, while the order up to level conveys the inventory level at which point the new order has to be placed to ensure that the stock level reaches the target level.

Purpose

Reorder quantity focuses on the quantity or number of items to be ordered, whereas order up to level focuses on when the order should be placed.

ALSO READ: What is Stock Adjustment and Stock Transfer?

The Factor that Affects Each

The reorder quantity will be impacted by the shipping costs, discounts, and lead time.

But order up to level is mainly concerned with the lead time, or the time taken by the supplier to deliver the stock.

Variations

Reorder quantity is likely to differ every time you order, but order up to level is likely to be more or less fixed, with barely any change.

ALSO READ: Why Is Inventory Reduction Important?

How is Reorder Level Calculated?

The reorder level can be calculated by multiplying the lead time in days with the average demand in numbers and adding safety stock (if the company maintains safety stocks.

This last step can be avoided by those who don’t maintain it)

Safety stock = (Lead time * Average demand) = reorder level.

Conclusion

Most businesses do a lot of guesswork when it comes to inventory management; they may manually try to forecast the demand based on just the previous year’s figures and base their inventory decisions of purchase, production quantities, and so on, on solely that.

This can turn out to be quite disastrous.

The business environment is very different today, as the competition is intense, and most companies have adopted tech in a huge way.

ALSO READ: What Is an Inventory Control System?

Technology helps them track historical data over the past few years, and can also factor in current trends, consumer behaviour, and economic factors to deliver demand forecasts that are far more reliable.

You can also save time, effort, and money, and get data in real time, with a bird’s eye view of your organizational processes and data.

With a cloud-based ERP like Tranquil, you can also be assured about the safety of your sensitive data as the storage is remote and well protected.

If you are still relying on legacy systems and siloed information, you could be missing out on business opportunities and incurring expenses that can be easily avoided.

ALSO READ: What Is Cloud Data Protection?

Tranquil Cloud ERP can help you automate data entry and other time-consuming and monotonous processes, streamlining your organization. Do schedule a demo of our software at a date and time of your convenience, and we will explain how it all works. Our team will be more than happy to resolve all your queries.

 

Businesses today have to be flexible and agile so that they can respond to fluctuating customer demands quickly and with less inventory.

Stockpiling inventory is not the smart way to do business, as it ties up too much money, increased lead times, and leads to opportunity costs.

Money invested too heavily in inventory means less working capital your business has to spend for marketing efforts, innovation, modernization, paying off loans, expansion, and so on.

Ergo, inventory reduction should be a top priority for inventory managers.

ALSO READ: Inventory Management Problems and Solutions

What Does High Inventory Indicate?

Often, there is so much excess inventory that a lot of it becomes obsolete and can’t be sold.

It can also indicate systemic, deep-rooted, pan-organization problems that can cost the business a lot.

Poor systems and processes can lead to improper demand forecasts, inadequate specifications for orders, poor quality, haphazard production schedules, lengthy cycle times, improper KPIs, and so on – and these can have ripple effects.

ALSO READ: Importance of ROP

For example, long lead times usually necessitate long-range forecasting, which is in itself not accurate; this means actual demand is not what was predicted, meaning unsold inventory, and so on.

The cycle gets repeated, impacting cash flow, customer service, and profitability.

Why is Inventory Reduction Important?

We can think of three main reasons – it helps prevent inventory shrinkage, minimizes carrying costs, and maximizes fill rate.

Every business should aim to transfer inventory to customers as quickly as possible before they get obsolete, spoilt, or stolen.

When you reduce inventory levels, it shows that you have implemented warehousing procedures effectively and can predict demand properly; this leads to a high fill rate and optimal inventory.

ALSO READ:  Guide on ROI on ERP Implementation

Benefits of Inventory Reduction

When you reduce inventory levels, your business can enjoy several advantages:

1. Materials Cost

When you don’t spend a huge sum on purchasing inventory, you can use that money for activities like marketing, research, expansion, and so on.

You also have lower costs related to shipping, insurance, utilities, taxes, and labour.

There will be no cause to worry about loss, spoilage, and theft as the inventory will be moved quickly.

Managers can ensure that only minimal funds are invested in goods that sell slowly and that you avoid dead stock.

By ordering frequently, you can also compare prices and get discounts on seasonal clearance, etc.

In case you want a business loan, showing lower administrative and business expenses demonstrates good management skills to creditors, increasing your chances of getting a loan.

ALSO READ: Different Ways to Improve the Procurement Process

2. Set Competitive Prices

If you have intense competition, you can divert the funds saved from inventory reduction to pricing your products competitively so that you can sell more.

You can tap into new markets and expand your business, positioning yourself as a market leader in your region or industry.

3. Increased Profitability

By reducing expenses from low inventory, you can increase profitability; this money can be ploughed back into your business to expand it, or you can simply enjoy the increased income.

ALSO READ:  Advantages of Batch Picking 

Lean Manufacturing and Inventory Reduction

The fundamental idea of lean manufacturing methods is driving supply and production from actual customer demand, which means having zero inventory.

This is not always possible, so then you try to achieve minimal inventory.

Supposing you have a constant demand, your vendors can deliver supplies that are adequate for production for just that day.

Materials are taken to the production floor straight from the loading dock, and finished goods straight to the shipping department, where they are shipped out the same day.

But we know that in reality, this is not possible – variation is bound to happen, as many external factors also impact demand.

You will need to balance the advantages of reducing inventory with the risks of inadequate inventory and handle the variability.

ALSO READ: What is Cross Docking? 

Ways To Reduce Inventory

Most managers agree that it is essential to have lean inventory to prevent funds being tied up in unprofitable heads.

However, most of them are unsure about the causes of excess inventory and hold preconceived notions regarding inventory management.

Let’s take a look at a few inventory reduction strategies:

1. Inventory Control May not be the Culprit

The absence of proper control does cause excess stocking, but the underlying reason is often the desire of management to avoid material shortage at all costs; they are not particularly alarmed by high inventory levels.

Ergo, you need to make those in charge aware of the need to reduce inventory.

The desire to hold more stock than necessary is also often due to inefficient cross-functional business processes.

So, what you need to do, is identify the root cause and fix that, so that you won’t need buffer stocks, and can reduce inventory.

Without rooting out the cause, reducing inventory may compound the underlying problem.

ALSO READ: Strategies with Inventory Batch Tracking

2. Obsolete Stock and Multiple SKUs

Obsolete stock is inventory that has little market value currently because it is out of vogue or has been made redundant due to innovations and improved products.

Management may be reluctant to write it off and suffer a minor loss but they don’t realize that the obsolete stock takes up space and doesn’t earn anything.

That space could be used to stock fast-selling inventory, which will improve cash flow and profitability.

You could try and sell it off at a nominal price and get back some of your investment.

If you have multiple SKUs for the same product, it means excess stock.

ALSO READ: What is Stock Adjustment and Stock Transfer?

Let’s suppose you custom make the same product for a few customers; this could result in multiple SKUs for essentially the same product, with a different SKU for each customer.

What you could do instead is customize the product only prior to shipping – giving you a single SKU for that product.

Simpler inventory management, and lower inventory!

You could also have a situation where a product is available in packs of 4, 6, 10, and 15 – triple A battery cells, for example.

Your market research tells you that the 4 and 10 packs are much more popular; so, you eliminate the rest.

This way you can trim your inventory significantly.

Getting rid of obsolete stock and minimizing SKUs frees up funds and warehouse spaces – now get your profit-earning products there.

ALSO READ: ABC Analysis in Inventory Management

3. Improve Supply Chain Management

Reducing lead times significantly can mean no requirement for buffer stock; it can also help you provide better customer service and improve product quality.

When you re-engineer and streamline your supply chain, you can free up funds, reduce cycle times, lower expenses, improve profitability, and reduce time to market in addition to reducing inventory.

It is important to work on reducing the order-to-delivery cycle to enhance overall efficiency in your business.

This can be achieved by improving communication with vendors and customers and leveraging technology.

The right tools can help you set alerts to place orders and notify your vendors regarding delivery dates.

Having a good rapport with a few suppliers will help you get better service like quicker deliveries, reduced rates, better product quality, etc.

ALSO READ: How Can you Track UOM?

4. Schedule Production Properly

When you don’t schedule your production properly, it can have a cascading effect, like imbalances in product flow, and decreased throughput.

In turn, this leads to high inventory, inconsistent output, poor customer service, long cycle times, and the like.

5. Use Effective KPIs to Measure Performance

Unfortunately, quite a few manufacturers reward activities that lead to excessive inventory.

Let us take this example: measuring utilization, standard hours produced, and efficiency in production – mainly to absorb overheads, could lead to producing parts that become part of your inventory even when there isn’t a proper reason for doing this.

ALSO READ: What is Storage Cost of Inventory?

When you measure the sales function properly, and hence operate on the absolute booking amounts without keeping in mind the timing or product mix, you get an excess word in progress inventory, or finished goods inventory, while your customer service suffers.

6. Utilize “pull” Based Demand

Often, manufacturers work on unreliable long-range forecasts and use this data to determine the stocking levels of raw materials and finished products.

Thanks to these inaccurate figures, business performance overall is impacted negatively.

Companies that depend on the ‘push’ system of inventory management are more likely to stock high levels of products or materials.

If you choose the ‘pull’ system of inventory management, you will be able to divert more working capital towards more essential activities.

When your production process is efficient, the products will be manufactured quickly enough to prevent them from becoming a liability.

Your efficient management of the supply chain is what matters here.

ALSO READ: Understocking vs Overstocking in inventory

7. Visual Communication

To have a lean warehouse, it is imperative that you are efficient.

One way to achieve this is through visual communication: mark SKUs prominently on bins and shelves, mark aisles, traffic lanes, and so on, so that there is no confusion for anyone working in the warehouse.

Use magnetic labels and signs so that they can be changed easily if you need to make adjustments frequently to your product mix.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

To mark things like the floors and shelves, make sure that you use durable and tough permanent labels which don’t fade quickly; this can waste employees’ time in trying to figure out what goes where.

If you have inventory items that have to be refrigerated or frozen, or stored outdoors, make sure you have labels that can withstand extreme temperatures and outdoor weather conditions.

8. Develop Flexible Manufacturing

If your production schedules are long, it goes without saying that you may need higher production levels even if demand is low. When the manufacturing schedule is not flexible, high production levels are maintained to absorb the overheads.

While this may look good on paper, it leads to more expenses and inefficiencies – they are just covered in inventory.

It is imperative to be flexible in your manufacturing and operations to improve responsiveness to customer demands and minimize inventory.

ALSO READ: Physical Stock Verification and Its Advantages

Final Thoughts

Today’s customer is not always about the lowest price but getting value out of a product – good quality, quick delivery, exemplary service, and then eventually, a fair price. If a business is not able to keep up with these expectations, they stand to lose customers and business.

Tranquil Cloud ERP has a robust inventory management module that can help you efficiently manage your inventory, in addition to many other things. Find out how – schedule a demo at your convenience, and see for yourself how it works.

 

How much product to stock?

This question can give businesses (whether street sellers or multinational corporations) a huge headache.

Stock too less, and you have disappointed customers going away; stock too much, and you have rotting produce or out-of-fashion clothes.

Poor inventory management can cost businesses tens of thousands of dollars annually.

This problem has existed since the early days of markets in town squares and exists even in today’s environment of multi-location stores and E-commerce.

Marketers and supply chain teams would definitely wish that they had a magic wand that will fill their shelves and warehouses with the perfect inventory stocks.

What Do Understocking and Overstocking Mean?

Overstocking inventory is also known as excess stock, inventory surplus, or excess inventory, and it simply means having too much stock that you are unable to sell.

This can happen due to several reasons like ordering too much stock, sudden dips in demand due to external factors, the general state of the economy, competition, and so on.

Understocking happens when a business has inadequate stocks to fulfil customer demands.

ALSO READ: What is Demand Forecasting? 

What Causes Overstocking and Understocking?

Inventory problems are caused either by mistakes made by the business or due to factors beyond their control.

When companies are unable to implement efficient procedures and control inventory, it can result in overstocking or understocking.

The most common reasons:

1. Erroneous Data

Returns and inventory shrinkage due to damage or theft can affect your inventory; when you don’t have accurate records, you may think you have a lesser or more quantity of specific products than what you have or need.

It’s also important to be able to predict when your products will be in higher demand.

When you have precise data, you can discover trends and forecast demands more effectively, and know the ideal quantity to order.

ALSO READ: Importance of Stock Keeping Unit

2. Mismanaging Technology, Employees, and Processes

Without employees capable of selling your product well, having full shelves won’t help you – you may lose sales and be left with inventory that remains unsold.

This is a frustrating situation.

Let’s say your employees are well-trained and efficient at their jobs – but you don’t have proper processes, and hence are unable to get reliable results from them.

Well-implemented procedures ensure that each employee knows what is expected of them, and there is no confusion about their responsibilities or roles.

The third thing is having the right tech, and knowing to use it correctly; only then will managers be able to interpret data to take informed inventory decisions.

ERP software like Tranquil can help staff and managers to study trends and draw up plans for the future.

It integrates seamlessly with other business software you have, making it user-friendly and intuitive.

ALSO READ: Why is Cycle Stock Important for Your Business?

3. Paucity of Funds

Understocking can happen because a business lacks the finances to purchase the required inventory.

If so, you have to free some funds to remedy this situation.

Fast-selling items should especially be available whenever customers want; else it could hit your profitability badly.

4. Timing it Wrong

It’s not just how much to reorder, but when to reorder that is important.

You need to be proactive and calculate how long the new shipment takes to reach you from the vendor.

This will depend on how far your vendor is, the regulations and formalities in other countries, and so on.

You must be able to order at the right time so that new stocks arrive just as or before your existing inventory gets sold out.

Tranquil has a robust inventory management module that helps you factor in supplier lead times to determine optimal reorder points.

ALSO READ: Tips For Efficient Stocktaking 

5. Improper Communication

Miscommunication or infrequent communication with vendors could mean orders that are delayed or even missed – translating into lost sales.

You must have written communication so that everything is on record, and deadlines are clearly mentioned.

This way they will be remembered and met.

By maintaining good relationships with vendors, you can also get them to cooperate when you need rush orders in case you have sudden spikes in demand.

ALSO READ: Detailed Guide on Stock Status

Understocking Risks

When you have insufficient stocks, you make your business vulnerable to several risks like the following:

Loss of Customers

When customers have to be sent back as due to a lack of products in stock, it can make them unhappy.

They will buy from your competitor, and may not return; which means you lose a customer for good.

They may lose their trust in your business and even do negative publicity.

ALSO READ:  What is Zero Inventory?

Paying More

When you make rush purchases, especially with vendors nearby because you’re running out of stock, you may have to pay more than what you normally do.

You also pay more when you buy small quantities as discounts are offered by vendors on bulk purchases.

Higher Shipping Costs

Ordering small batches of products very frequently means you keep incurring shipping, handling, and processing costs.

This can be avoided by ordering the appropriate quantities at the outset.

Danger of Overstocking

Having too much stock also has its fair share of problems, like:

Excessive Carrying and Opportunity Costs

When you stock a lot of inventory, you incur multiple expenses like warehousing, labor, insurance, security, utilities, and taxes.

There are some products that require additional security, or temperature control, which means more expense.

You can recover these costs only when the products get sold – otherwise, it is a dead investment.

Moreover, when you tie up funds in inventory, it leaves you with less working capital to use for other purposes like marketing, R&D, and even from stocking inventory that sells faster or is more profitable even if it sells in lesser quantities.

ALSO READ: Complete Guide on Economic Order Quantity (EOQ)

Inventory Shrinkage and Obsolescence

Perishable items are subject to degradation and spoilage when stored beyond a specific time.

Certain items can shrink, and others can get stolen or damaged.

Clothes, accessories, footwear and the like can go out of fashion; medicines and cosmetics have expiry dates; electronics and appliances can become obsolete because of innovations.

Remember film roll cameras that became obsolete almost overnight?

That also meant the obsolescence of film-developing equipment.

The value of such products can come down to near zero if not sold quickly.

ALSO READ: Why Safety Stock is Important?

Minimizing Inventory Understocks and Overstocks

Efficient inventory management means holding optimal inventory with little excess stocking and eliminating stockouts.

Here is what you can do to achieve that:

1. Get Rid of Slow-moving Inventory

Deadstock or obsolete inventory is a nightmare for any business; when you have huge quantities of products that nobody wants to buy, you may stand to lose a major portion of the funds spent on acquiring them.

By studying historical sales data and interpreting current trends, you will be able to understand when certain products may become obsolete; this will help you plan ways to sell off those products quickly and avoid dead stock.

You can offer discounts to sell them quickly; this may reduce your profits but it’s a better option than being stuck with goods you can’t sell; the revenue generated can be used to purchase stocks of popular and profitable products.

2. Shorter Lead Times

You must have a vendor who can supply products to you as fast as you want them – especially for products with high demand.

It is important that you calculate the lead time of different vendors so that you know who can ship your purchase to you the quickest.

When you get your supplies quickly, you can avoid getting stocked out, and meet consumer demands.

ALSO READ: What is UOM in Inventory?

3. Centralize Data

Having all your data in one place is a good place to start when you want to eliminate understocking.

Siloed information and disparate information systems create confusion, data redundancy, and inefficiencies.

With a reliable ERP like Tranquil, you can have data from multiple departments in a centralized dashboard.

At a glance, you can get information from sales, marketing, inventory, shipping, finance, and everything else.

This is even more necessary for businesses with multiple warehouses and store locations.

Your employees will be able to access data from every department, keeping them all on the same page, and enabling them to take timely, data-driven decisions.

This can not only help in optimizing your inventory but can enhance overall efficiency and productivity.

4. Forge Strong Relationships with Vendors

It is important to build robust relationships with vendors, just as you would with customers.

After all, they make the products you want to sell. When you maintain good relationships with them, they are more likely to make you a priority customer, and give you good service, including timely deliveries, fair prices, and favorable payment terms.

This means you can avoid stockouts and overstocking, and keep costs low.

ALSO READ: Debit notes vs Credit Notes

5. Automate Inventory Management

Even the most efficient and experienced employees can make mistakes, especially when handling mountains of data day after day.

The best way to avoid this situation is to automate your inventory management processes.

The Inventory Management module in Tranquil ERP offers several smart tools that allow you to configure alerts that are sent to you when inventory touches specific threshold levels so that you can reorder; you can even set it to send out the orders itself.

It can make predictions regarding future demand for specific products, tell you about the speed at which different products are getting sold, and much more.

Using a robust solution like Tranquil will help you manage your inventory efficiently so that you carry optimal stock.

No overstocking inventory to increase expenses, and no understocking to cause loss of sales, customers, and revenues.

ALSO READ:  Reasons to Move your PLM to the Cloud

How Does Software Help Prevent Inventory Understocks and Overstocks?

Inventory management software like Tranquil ERP helps you track and manage inventory efficiently, and optimize your inventory.

This means no overstocking or understocking.

How does this happen?

• The inbuilt inventory control features enable you to track inventory efficiently, allowing you to fulfil orders and eliminate stock shortages. The inventory control feature records past sales, providing you with real-time information of your current inventory, and allowing you to configure reorder points. This way, you can know when to reorder goods without resorting to guesswork.
• Inventory management solutions help businesses to understand consumer behavior through the analysis of past sales and current trends. They can make smart predictions about customer demands for the near future based on this data.

ALSO READ: Procurement vs Purchasing

• Tranquil is a cloud-based ERP solution, which means that any employee who needs information can access it quickly, regardless of where they are. This helps them take immediate, data-driven decisions that help in improved inventory management.
• Robust ERP solutions can especially help in the case of complex businesses that have multiple locations, warehouses, thousands of products, hundreds of vendors, a huge customer base, and multiple processes. The software can coordinate inventory transfers between locations, creating a streamlined process for the same, and ensuring employee collaboration.
• Modern ERP solutions like Tranquil integrate seamlessly with third-party business software, making it easy and convenient for you to access and update data, and interpret it to take better decisions for your company. You can increase efficiency and productivity, enhancing your bottom line.

ALSO READ: Things to Know About the P2P (Procure to Pay) Cycle

Tranquil Cloud ERP is one of the most reliable and economical software solutions that can help in efficient inventory management. Schedule a demo with us to know how we can help you transform your business.

Knowing when to order products and how much to order, to replenish your stock, is a critical element of inventory management.

Unfortunately, many businesses do this without much forethought, and in a haphazard manner.

They place orders on guesswork rather than use a scientific approach.

This may not always be effective, as several external and internal factors can impact your need for those goods.

In other words, you may place an order for 100 units of a product, knowing that the demand is 25 units per week, and it takes 2 weeks to reach.

You plan to reorder when you have 50 units left.

But let us suppose that for some reason, the demand spikes up, and you sold 75 units in two weeks.

ALSO READ: Why is Cycle Stock Important for Your Business?

You place the order, but the product gets stocked out – you end up losing sales, as the customers who come later cannot find the product.

The opposite can also happen – you order too much, and you end up with excess or dead stock.

Therefore, instead of ordering what you think you need right now, it makes sense to use the Economic Order Quantity formula to order a specific inventory item.

This scientific approach will save you money and aid you in informed decision-making regarding reordering inventory items.

What is EOQ?

EOQ means economic order quantity.

It is a formula used by various departments like supply management, logistics, and operations.

Quintessentially, economic order quantity in inventory management is a tool that helps to establish the volume and frequency of orders needed to fulfil a specific level of demand, and at the same time, ensure minimal cost per order.

ALSO READ:  What is Negative Inventory and How Can you Prevent it?

The Importance of EOQ

We have seen above that the EOQ helps to lower the cost per order, as well as inventory carrying costs.

When you have large volumes of orders, the per-order cost of ordering inventory reduces, thanks to economies of scale.

But then, when the inventory size increases, the inventory carrying costs also increase.

EOS is the point that balances and lowers both these costs which are inversely related.

EOQ is an important measurement that can showcase the sustainability of your organization, as ordering in excess can leave you with fewer finances for other business activities, apart from incurring high carrying costs.

Departments like R&D and marketing can help in lowering expenses and increasing revenues, but may not get sufficient funds if you have a lot tied up in inventory.

ALSO READ: Benefits of Blockchain in Cloud Computing
Inventory is part of your working capital; this is a capital that comprises business assets required to conduct operations regularly.

However, excessive working capital can hamper your profitability, and increase your opportunity cost.

EOQs are not required for things like office supplies, but for expensive, high-volume purchases.

When the volume of your orders and inventory stocks grows, EOQ will have a more significant impact on your profitability.

With accurate forecasting of inventory, your business can boost profits instead of having to deal with dead stock that can cause losses.

In short, this is the golden rule as far as inventory forecasting is concerned: the lesser the funds that are tied up in inventory, the more ideal is the level of inventory stock maintained, and the more precise the ordering.

ALSO READ: What is Demand Forecasting? 

What Does Economic Order Quantity Tell Businesses?

EOQ conveys to a company, the ideal ordering quantity for each product they stock.

The formula for EOQ however, makes an assumption that there is no variation in the demand for a product for the year.

However, if your business is growing and the demand keeps changing, then this method may not be the best one to calculate your optimal order size.

After calculating the economic order quantity, you will be able to know how many orders you ideally need to place in a year and the optimal size of the orders.

You can adapt the model to include defective items, backorders, discounts in pricing, and so on.

In fact, the answers provided by your economic order quantity calculator will let you have an ideal schedule of your supply chain order.

ALSO READ: Understanding the Importance of Distribution Management

Benefits of Economic Order Quantity or EOQ

The most important benefit of economic order quantity is increased profit.

Let us see what other benefits this tool provides, in some detail:

Improved Order Fulfilment

EOQ ensures that you have the requisite products with you when you need an inventory item for order fulfilment or manufacturing.

This means you can continue uninterrupted production or ship out the order in time, and keep your customer happy.

It translates further into enhanced customer experiences and better sales.

ALSO READ: Important ERP Implementation KPIs to Know 

Reduce Excessive Ordering

With proper forecasts, you will know what you need so that you don’t order too much and have funds overinvested in inventory.

Reduced Wastage

With optimized order schedules, you can avoid obsolete or dead stock; this is especially important for companies dealing in perishable inventory or products likely to go out of vogue soon.

Decreased Cost of Storage

When your orders are aligned with your demand, you will have lesser inventory and thus lower inventory holding costs, like storage rentals, utility bills, insurance, security, labour, and more.

ALSO READ: Why Safety Stock is Important?

Bulk Order Discounts

When you plan and the time your orders properly you can avail good discounts, as most suppliers offer discounts on bulk orders.

Challenges of Economic Order Quantity

While EOQ is very beneficial for determining optimal order sizes, this method comes with its own challenges; it is not very easy to achieve.

Here are some of them:

Unreliable Data

This is one of the main challenges of EOQ calculation.

Often, businesses have manual systems or use simple spreadsheet-based systems.

These systems are unlikely to give you up-to-date and high-quality data; this can even cause improper calculations.

ALSO READ: What is ABC Analysis in Inventory Management?

Obsolete Systems

Old systems are not likely to have complete and updated information, leading to several problems.

This can be solved by implementing an ERP solution like Tranquil.

Not Ideal for all Businesses

The EOQ formula is great for businesses that have fairly consistent inventory requirements.

But a rapidly growing business cannot rely on this method, as it can cause a shortage in inventory and stocked out situations.

Seasonal Demands

For companies selling products that have seasonal demands, EOQ, while not impossible, certainly becomes difficult.

The demand keeps changing throughout the year, and hence it does not make sense to have one single formula.

ALSO READ: What is UOM in Inventory?

EOQ Formula

After carefully considering what could be the factors affecting economic order quantity, a formula to calculate the same was devised.

The EOQ is calculated by reducing the total cost per order by defining the first-order derivative as zero.

The formula elements that comprise the total cost of each order are the expense of carrying that inventory and the expense of ordering the said inventory.

You need to remember these components and their abbreviations:

D – Quantity of Demand per year
Q – Quantity or Volume in each order
S – The fixed cost of ordering or Ordering Cost
C – Variable per unit cost
H – Variable holding cost
i – Interest rate or carrying cost

ALSO READ: What is Storage Cost of Inventory?

Ordering Cost or S

The number of orders that are placed each year can be derived by dividing the yearly demand by the volume in each order.

It is expressed as:

No. of orders = D/Q

For every order that has a fixed cost – regardless of the quantity or number of units, the yearly ordering cost or S is arrived at by multiplying this fixed cost by the number of orders.

Expressed as:

D/Q * S

ALSO READ: A Complete Guide to Cash Flow Analysis

Holding Cost

Stocking inventory has a cost associated with it; this can be direct costs like the storage cost of the inventory, or indirect, like the opportunity cost of storing inventory rather than using those funds for purposes like marketing.

The per unit carrying cost is expressed as the per unit cost multiplied by the interest rate, like this:

H = iC

This of course, assumes that there is no variation in demand, and the stock in hand gets depleted at a steady rate.

When the inventory finishes or reaches a certain level, the company places orders for replenishing the inventory.

The inventory holding cost is arrived at by calculating the total inventory product at a given time and the carrying cost per unit. It is expressed as:

Q/2 *H

ALSO READ: Debit notes and Credit Notes

Total Cost and the Economic Order Quantity

Adding the two costs tells us the total cost of orders for the year.

To find the ideal quantity that can be ordered to keep this cost at a minimum, the total annual expense is differentiated with regard to the element Q.

It is expressed thus:

Annual Total Cost (TC) = D/Q * S + Q/2 * H

EOQ Formula

EOQ = dTC/dQ = √2SD/H
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ALSO READ: Why is Physical Stock Verification Necessary?

Using EOQ to Improve Inventory Management

When you calculate the economic order quantity, you get the optimal order size that will help you get maximum profits for your business.

It eliminates the need for guesswork and helps you avoid situations like stockouts and excessive ordering.

You can leverage the data and figures to take improved, informed, and timely decisions about the inventory requirements of your organization.

Economic Order Quantity can have an especially significant effect on your business if you have a big business if you are incurring heavy inventory carrying costs, or if your inventory is very expensive in itself.

You can significantly enhance your operations to improve productivity and efficiency, cash flows, and profitability for the future.

Tranquil Cloud ERP has a robust inventory management module that can help you manage your inventory efficiently, and always maintain the optimal stock. This can help you cut expenses and boost profitability, and make sure that your financial and other resources are not unduly tied up in inventory. To see how our software works and how it can benefit your business, do schedule a demo at your convenience. We will be happy to give a detailed explanation and answer any queries you may have.