Month: November 2022

Knowing the concept of assets and depreciation is vital for your small business.

This will impact your tangible assets, how they are accounted for, and what tax they will attract.

So, let us get a clear understanding of all the terms, and how depreciation is important for your business.

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A business has tangible and intangible assets.

Tangible assets are those assets which you can touch and see – physical assets like land, office building or space, stock, furniture, machinery, vehicles, equipment, computers, and so on.

Intangible assets are those assets owned by your business but cannot be seen, like goodwill, branding, trademarks, copyrights, patents, and so on.

While intangible assets steadily maintain their value, tangible assets depreciate in value over time.

Therefore, your business can depreciate your physical or tangible assets for the purposes of accounting and taxation.

However, intangible assets are also shown on financial statements like the balance sheet for the purposes of accounting.

What is Depreciation?

Asset depreciation becomes critical when you have expensive physical assets.

In its simplest form, depreciation refers to the practice of deducting the cost of a business asset partially every year, over several years, rather than allocate that expense to a single year.

In accounting, there are five main asset depreciation methods: units of production, declining balance, double declining, straight line, and sum of the years’ digits.

Every method is used by different types of businesses for various types of assets.

While many small business owners tend to think of depreciation as mere loss of value or as a necessary calculation for the purposes of tax liabilities.

But it’s not as simple as that. While it is an essential element of your business tax returns, depreciation is pretty complicated.

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Let us see in detail how it is calculated and how it will impact our business.

There are two main elements of depreciation: firstly, the loss of an asset’s value over time; second, allocation of the original price you paid for the asset, over the period of time the asset is used, or in other words, the number of years you will account for its depreciation.

The time period over which an asset gets depreciated depends on how many years the asset can be used, or its useful life – estimated, of course.

There are several asset classes.

For the purpose of your annual budget or balance sheet, the depreciation cost is considered a fixed one.

It will be considered variable only if you use a unit of production method, which causes the amount of depreciation every year.

ALSO READ: Physical Stock Verification and Its Advantages 

What Assets can be Depreciated?

According to the principles of accounting, only those assets you own which are expected to last over a year, and have a useful law that can be estimated, can be depreciated in the books.

As per Saudi law, depreciation is allowed for an asset if:

It is intended to be used fully or partially for the businesses to earn an income and is not meant for resale.

It loses value due to normal use, obsolescence, wear and tear, and has a value that goes beyond the end of the financial (taxable) year.

The business owns the asset and has proof of ownership in the form of invoices, contracts, or other documents

The depreciation of fixed assets is allowed in a particular year, even if the asset becomes unusable or inoperable in that taxation year.

Buildings, equipment, furniture, computers, other electronics, machinery, and so on.

ALSO READ: What is a Ledger in Accounting?

What Assets cannot be Depreciated?

Any asset that does not get used up, become obsolete, or worn out, cannot be depreciated.

This includes land, personal property, assets less than a year old, investment, and collectors’ items like art, coins, and so on.

Types of Depreciation

There are several methods used for depreciation.

Let us take a look at the most common fixed asset depreciation methods:

1. Straight-line Depreciation

The least complex and easiest depreciation method is the straight-line method.

It divides the value of an asset in equal measure across several years.

This means, each year, you pay an equal amount as part of the useful life of the asset.

This is an ideal method for small businesses that have basic accounting systems, or where the owners themselves prepare and file the tax returns.

The straight-line method is easy and relatively free of errors, and it allows businesses to write off the same amount every financial year as depreciation of assets.

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This simplification is also its drawback, as the estimated useful life of an asset is, after all, an estimation.

It fails to consider the quicker loss of value in short term or higher maintenance cost as the asset ages.

It basically divides the difference between the asset cost and its scrap value by the estimated useful life to arrive at the depreciation amount to be accounted for in a year.

The Formula for Depreciation of Fixed Assets Calculation

Cost of depreciation = (The cost of the asset – salvage value) / estimated number of years of useful life. Here, salvage value refers to the estimated value of the asset in monetary terms, at the end of its life

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2. Double-Declining Depreciation

This method is a type of declining or reducing balance depreciation that allows you to write off a higher amount as depreciation immediately after purchasing the asset, and lesser amounts as the years pass.

This is ideal for businesses that are interested in recovering more value from the asset in the initial years, rather than wait for a few years.

This means small businesses or startups that have plenty of initial expenditure and need more funds quickly, can use this method to their advantage.

The double declining depreciation method offers the advantage of offsetting the higher maintenance expenditure for the asset as it gets older.

Another benefit that businesses get by writing higher amounts as depreciation in the initial years is that they can get maximum tax relief.

Although, you must keep in mind that if your business already has a tax loss in a specific year, you won’t be given an extra tax deduction for that year again.

ALSO READ: Detailed Guide on Budget Variance Analysis

The Formula of Depreciation:

(Single line depreciation rate x asset value at the year’s beginning as per the books of account.) x 2.

You can also make use of a double-declining calculator.

The cost as per the books of account refers to the amount got after deducting the amount of depreciation you have already taken in the past years, from the original cost of the asset.

3. Sum of the Years’ Digits Depreciation

Like the double declining method, the sum of the year’s digits or SYD depreciation method is a method of calculating accelerated depreciation.

In this method, there is no decrease in the book value of the asset; instead, a weighted percentage is worked out, depending on how much useful life of the asset is left.

This method is suitable for businesses that need to retrieve a higher value initially, but with a more equitable distribution than that compared to the double declining method.

The biggest benefit with this kind of accelerated depreciation is that it lowers your income that can be taxed and hence your tax liability in the initial years of the life of the asset.

However, it is quite complex to calculate, and it is possible you may make errors.

ALSO READ: What is Inventory Aging and Why is it Important?

Depreciation Formula

You first need to calculate the sum of the years digit by adding the digits of every year of depreciation.

So if you have to calculate for 4 years, the sum would be 4 + 3+ 2+ 1 = 10.

Next, you divide each year by this number to arrive at the depreciation percentage for that year.

Therefore­, to calculate the depreciation percentage for year 1, you need to divide the digit of year one (4) by the sum, or 10. 4/10 = 40%.

Then apply the formula:

(Years of the useful life of the asset remaining / sum of the years digit) x (cost of the asset – scrap value)

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4. Units of Production Depreciation

This method is relatively simple when compared to sum of the years and double declining, and depends on the frequency of use of the asset.

Units of production can be anything that the said machine or equipment makes or produces.

The number of sandwiches a grill can do, the number of hours a freezer operates, the number or hours a motor runs, and similar.

This is the ideal method for businesses that have to write off machinery with an accepted and quantifiable output in the course of its useful life.

You must have a system in place to trace your equipment usage and be prepared to write off varying amounts each year.

This method provides a very accurate view of how much your asset depreciates based on its actual use, provided your system of tracking is proper and accurate.

Unfortunately, however, it cannot be used in several real-life situations.

This is because one cannot forecast the number of units an asset can produce till the end of its operational life.

ALSO READ: A Complete Guide to Cash Flow Analysis

How Does Depreciation Affect Tax Liability?

In accounting, depreciation is something that reduces your taxable income and hence your tax liability; it is, in other words, a type of tax deduction offered to businesses, by monitoring how much value is lost in the course of its use or operation.

The more the depreciation, the lower your taxable income.

According to laws in KSA, these are the depreciation rates for the following categories of assets:

Buildings – 5%

Industrial and agricultural buildings (movable) – 10%

Cost of geological surveys, exploration, drilling, and other preliminary work aimed at the development of natural resources – 20%

Vehicles for cargo and passengers, factories, computer software, machinery, and equipment – 25%

Any other tangible and intangible asset not falling into any of the above categories, like goodwill, trains, ships, aero planes, furniture, and so on – 10%

For the purposes of taxation, declining balance method as per the rates mentioned here have to be followed.

ALSO READ: What is Demand Forecasting? 

However, for Zakat payers, the straight-line depreciation method is permissible, as per Zakat rules.

When it comes to acquiring or disposal of assets, 50% of the permitted price paid or received is added or subtracted respectively from the asset pool in the year or purchase or sale, and the remaining 50% in the next year.

The cost base of assets moved between companies of the same parent company or group must be fixed at the net book value.

Why put in your precious time and effort manually calculating your tax liability? Switch to Tranquil cloud ERP – Saudi Arabia’s leading ERP solution. It has a robust Finance module that will take care of all this and more. Schedule a demo at your convenience to know more.

The modern business environment necessitates agility, quick response and competitiveness in the marketplace.

Ergo, organizations are increasingly adopting technology to help them achieve this and more.

Numerous software solutions are available that facilitate digital transformation.

Let’s examine two such systems today and see how PSA Vs ERP match up head-to-head.

ALSO READ: Guide on How Do ERP Systems Work

What is ERP?

ERP or enterprise resource planning is a software solution that organizations implement to streamline, automate, and integrate routine business activities, and foster better collaboration between departments.

It gets rid of information silos and centralizes data, which helps employees across the organization to access any information they need to make the right decisions for the business.

ALSO READ: ERP vs CRM

ERP Business Functionalities

ERP software comprises of modules that handle business functionalities:

Financial Management

This is at the core of ERP software, and it gives a bird’s eye-view of the financial health of your business; you can see how money moves through your company, and manage it better.

This module takes care of cash outflows and inflows, manages the ledger, performs bank reconciliation, minimizes manual effort, and helps you comply with regulations.

Human Resources

You can streamline your HR processes, with automated workflows that help you manage the entire lifecycle of employees from recruitment to retirement and everything in between.

Departments can collect and share employee data, facilitating a unified source of information to every team member.

Procurement

This module affords increased visibility and control of the entire procurement process.

It also helps you manage vendors by allowing you to store their details, their terms, rates, and transaction history.

You can automate the process of requesting, receiving, and negotiating quotes.

Inventory

For any business that deals in physical goods, inventory management is an especially important business function.

The more the number of products they manufacture or sell, the more complex this function.

This module equips you to track inventory in batches or individual units, help you avoid dead stock, and ensure you have adequate stock for continuous production.

You can get alerts when stock levels go below certain quantities so that you are never caught short.

Sales and Distribution

This module helps you improve your sales process end-to-end, giving your customers a great purchase journey and increase their satisfaction level.

The enhanced efficiency means you can eliminate delivery delays, offer personalized customer services, and boost your revenues.

ALSO READ: Guide on ERP Configuration vs ERP Customization

The Benefits of Enterprise Resource Planning

ERP offers numerous benefits, especially, savings in cost, time, and effort.

• With a single database shared across the whole organization, you can eliminate disparate solutions, and simplify the IT environment in addition to saving money, and providing faster access to information.
• Automation and streamlining via ERP minimizes manual intervention and enhances accuracy and speed.
• ERP systems provide information and insights in real-time, in a unified format across multiple business departments. This results in eliminating data mining and analysis from across the various sources in the organization and speeding up the decision-making process.

ALSO READ: Important ERP Implementation KPIs to Know

• Exercise better control over your business, maintain regulatory compliance, and ensure business continuity thanks to accurate data.
• Quickly generate and share reports, saving time and manual effort
• Provide enhanced customer service by accessing detail customer information that lets you resolve their issues faster

Professional Services Automation

Professional services automation is typically used in service-based companies like consultancy, marketing, accountancy, engineering, and so on.

Knowledge is the source of their value, and they generate revenue on this basis.

PSA solutions leverage technology in the automation of everyday tasks and processes otherwise performed by employees.

ALSO READ: BI vs ERP

Professional Services Automation Modules

PSA modules deliver functionality throughout the organization.

The most common ones are:

Project Management

Manage even large or complex projects easily by breaking it down into smaller tasks.

It becomes easy to assign tasks, roles and responsibilities, and allocate resources to tasks.

You can track project progress by checking if you achieve milestones and deadlines within set budgets.

With all data in a single location, you can get an overall view of costs associated with the project, and calculate profitability.

It gives organizations clarity regarding the actual cost of a project, and what you will need to execute it successfully.

ALSO READ: Benefits of E-commerce and ERP Integration 

Resource Management

This module helps organizations to see the manner in which resources are assigned across teams and projects, along with the cost of those resources.

It offers real time, accurate information, helping businesses use their resources more efficiently.

Organizations can also make quick decisions about allocating them across not just existing projects, but for future projects as well.

ALSO READ: Benefits of ERP in Production Planning

Time & Expense Management

This feature allows employees to log the hours worked on each task or activity within a project, making it easy to track time and cost across numerous teams and projects.

This helps in billing customers accurately, and facilitates improved time and expense forecasting.

Customer Relationship Management

As the name suggests, this module helps to manage customer relationships and sales opportunities.

It enables you to record and store client information in detail, like contact details, purchase history, preferences, interactions, payment history, and so on.

Updates can be added in real time as necessary.

Your teams can collaborate in real time and track sales opportunities through various stages in the sales funnel.

ALSO READ: Critical Factors to Consider in Designing ERP User Interface

The Benefits of Professional Services Automation

As more and more organizations adopt technology to become more responsive and agile in this dynamic market landscape, they are reaping rich rewards.

In a recent survey, over half of the responding employees claimed that they were be able to save over 2 hours a day thanks to automation.

That translates to 240 hours annually, per employee.

• Helps in managing complicated projects easily through tracking schedules and milestones
• Undoubtedly, the biggest advantage is that automation helps you save money and reduce errors that creep in during manual entry
• PSA helps you to ensure that the right resources are allocated to the appropriate projects at the correct time

ALSO READ: Important ERP Implementation Questions to Ask

• With PSA software you can improve your time and expense management with the provided tools. These let you monitor the actual effort taken, and predict the effort required to complete each activity or task in the project, record each cost, and automate the process of billing and invoicing.
• By automating mundane and cumbersome tasks, employees are free to work on core business activities that add more value to your organization.

ALSO READ: What is Hybrid ERP System? 

• With real-time information access in a unified format across the organization, PSA enables team members to make data-driven decisions. The data they can access can be analyzed, and decisions to help decrease costs, improve forecasting, and pinpoint potential problems before they hamper the business etc. can be taken.
• By gaining more visibility, identifying issues and taking quick remedial action, and managing billing and sales more efficiently, PSA helps companies enhance productivity and profitability.

PSA vs ERP: The Differences

There are numerous similarities between these two software systems; both PSA and ERP help in automating and streamlining business processes that are mundane, repetitive, and cumbersome, saving organizations time, effort, and costs.

Both have several modules, each handling a specific business function.

The main difference is that ERP is used mainly in industries dealing in tangible assets like inventory, products etc.

This includes the construction, manufacturing, retail, healthcare, power, oil and gas, chemical, contracting, and similar industries.

This is why most ERP have modules related directly or indirectly to goods, like warehouse management, supply chain management, manufacturing, inventory management, and so on.

On the other hand, PSA is implemented by businesses that concentrate on intangible assets in service industries like consultancies, accounting, insurance, financial management, legal, and so on.

PSA software stresses more on resource utilization, time and expense management etc.

So that businesses can manage their employees more efficiently.

ALSO READ: ERP implementation Failure Reasons and Tips to Avoid

The Current Scenario

However, contemporary software solutions have evolved and now both these solutions can be used complementarily.

There is an even better solution: Tranquil ERP, which marries project and resource management with financial management.

With a single solution, you don’t have to bother with disparate solutions to handle various activities in your organization.

ALSO READ: Benefits of Mobile ERP

Thanks to this amalgamation, consultancy and professional service firms are able to explore innovative growth opportunities and enhanced profitability – which could not be unlocked with conventional ERP or PSA solutions.

A fully integrated system like Tranquil provides a unified data source that lets you have complete control not only over all your projects, but your entire business.

It will deliver visibility into the following aspects:

• Combined accounting for the project with an overall view and access to expense and sales data and tracking, along with data for budget and predictions
• United planning and budget, and access to planning workloads as well as individual calendars
• Inbuilt time and expense tools that facilitate the seamless flow of related entries via electronic approval process into an invoice

ALSO READ: ERP Trends

To cut a long story short, an ERP solution that also includes functionalities of PSA software can help you be extremely efficient and productive, and offer the best financial visibility for professional service firms as well.

However, the software you choose will of course depend on your exact business requirements, and the problems your organization is facing, which you are looking to resolve.

Any new technology is likely to impact your whole organization, and it may be wise to take feedback from all your department heads and other important stakeholders.

Tranquil has years of experience in providing the right digital solutions for our customers, cutting across industries. If you are confused about what software to implement for your business, don’t fret. At Tranquil, we are always ready to give you a free demo where we explain in detail how our software can benefit your business. All you need to do is tell us when it would be convenient to schedule a walk through for you. Our executives will be at hand to answer any query you may have regarding the software.

 

High costs of procurement can have a negative impact on the profitability of your business, and you have to plan meticulously to avoid that.

Apart from reducing expenses, you also need to manage your vendors better to improve your bottom line.

But there is no cause for worry; from easily implemented to time-consuming and complex cost reduction strategies in procurement, we have them all laid out for you.

ALSO READ: Inventory Reduction Strategies 

Cost Reduction Strategies in Procurement

1. Request Supplier Discounts

While this may seem simplistic, it’s actually very important, and one of the easiest ways to reduce your procurement expenses.

It becomes easier when you purchase regularly from a few specific vendors and build a good relationship with them; it puts you in a stronger bargaining position.

Negotiate with them; you can offer early payment or bigger orders.

Even a small percentage of discounts can bring you significant net savings – more so, if the vendor supplies large volumes of materials regularly.

You can also make a blanket purchase order which allows you to get products from the vendor at the same price for some time.

ALSO READ: What is Cross Docking?

2. Review Contracts to Plug Spending Leak

This leak can take place beyond the terms of the contract.

This is why it is imperative that you diligently track purchases to ascertain if they are in compliance with contract and payment terms.

Those purchases which don’t adhere to the contract can lead to spending leaks.

You must identify such purchases and take the necessary steps to stop them from occurring in the future.

Unchecked leaks can lead to a flood of money going out of the business that is not really bringing you value.

Reviewing your contracts every once in a while is an important procurement cost reduction method.

ALSO READ: Understanding the Importance of Distribution Management

3. Consolidate Spending

If your organization is large and has considerable procurement requirements, consider consolidating your purchases, and thereby your expenditure on a few specific vendors.

This can be more beneficial rather than having disparate vendors.

When you source several products from the same vendor, you get the advantage of economies of scale and gives you a better shot at negotiating for better payment terms, discounts, and so on.

However, it might be prudent to have a backup list of vendors who can be relied on to deliver if your main vendor is facing issues and unable to deliver on time.

ALSO READ: BI vs ERP

4. Review Purchasing Needs

Before you actually make the decision to purchase, you may want to take a look at your inventory.

Consider strategies to dispose of unsold products.

Dead stock can be very problematic and drain your finances in terms of carrying costs and missed sales opportunities, eating up shelf space of more profitable products.

Whether it’s direct or indirect materials, make sure whether you really need them, and also how much you need.

This will help you reduce your inventory and warehousing expenses.

Before placing new orders, review inventory levels, and first see if you can use up what is there on hand.

5. Prevent Maverick Spending

Maverick spending refers to purchases that happen outside the procurement policy.

They can be made by persons not authorized to make the purchases or from vendors who are not the preferred ones.

This inefficient procurement must be identified and prevented as soon as possible.

For this, it is absolutely essential that you have a robust procurement policy in place and strictly enforce it.

Be very mindful of who is authorized to place orders, and ensure that the procurement department is aware of who has to do what and is responsible for what in the entire process.

ALSO READ: Common Inventory Management Problems and Solutions

6. Evaluate the Product Life and Quality

To reduce expenses, you don’t have to compromise on quality.

You must also think about sturdiness and the shelf life of the product.

A product may be comparatively expensive but may not necessitate repairs or replacement for a long time; it is worth having such products.

On the other hand, if you need something for temporary use, you don’t have to buy the best quality.

You can choose a mid-range product.

Always evaluate your need and strike a balance between quality, durability, and cost.

ALSO READ: Implementing Artificial Intelligence in Procurement

7. Regularly Review Suppliers

It’s a good idea to assess your vendors on a regular basis, and check their performance.

Ensure whether they are delivering products as per your specifications, at competitive prices, and in time.

If a vendor doesn’t satisfy these expectations, remove them, and look for new vendors who can meet these requirements.

This will help you in supply chain cost reduction and optimize your spending.

ALSO READ: Essential Procurement KPIs You Cannot Ignore

8. Implement Self-service Portals for Suppliers

Having a self-service portal that will help suppliers to manage their accounts, communicate with your business, and view transactions will help you save a lot of time and effort.

No more repeated back-and-forth communication to ensure that the deliveries are as per your specifications.

This is especially helpful if you are a large business with several vendors.

9. Leverage Procurement KPIs

By setting up procurement metrics, you can identify opportunities to improve your procurement processes, as the tracking data will provide insights into your performance.

ROI of procurement activities, cost per invoice, compliance rate, supplier lead time, number of emergency purchases, and PO cycle time are some of the KPIs you can configure and track.

To see how efficient the procurement department is, it is essential that you set the metrics relevant to your company, and monitor them.

This can help you save expenses significantly, provided you implement it the right way.

10. Set Clear Procurement Policies

This is one of the important cost reduction strategies in supply chain.

Craft a robust procurement policy with unambiguous parameters for procurement and purchases, and it will help in cost reduction.

With a thorough framework in place, you can make it easy for everyone to follow the policy, avoid unnecessary purchases, and ensure a smooth supply chain process.

you must also assess your procurement practices and check if they are in line with your business strategy and your budget.

You can review it annually and change or improve aspects that are inefficient.

ALSO READ: Detailed Guide on Budget Variance Analysis

11. Examine your Replacement Strategy

Your item replacement methods can also impact your bottom line.

Every component doesn’t need to be replaced regularly.

Critical machine parts need regular replacement to ensure proper machine operations, but consumables only need replacement when it’s required.

You also need to factor in the lead time and cost of waiting to get a replacement.

Your supply chain should not be disrupted waiting for a trivial replacement.

ALSO READ: What is Goods Received Note and Why is it Important?

12. Consider Outsourcing

You can think of outsourcing procurement functions that are not the most essential ones, to third-party providers.

When it comes to security, managing facilities, logistics, and transportation, it is especially suitable.

These providers are specialists and can help with cost reduction in supply chain management.

Benefits include:

• Reduced expenses thanks to their economies of scale (they combine all their customers’ needs)
• Release internal resources and direct them towards more important tasks
• Get access to market knowledge and global expertise in segments where you lack experience
• Specialists manage negotiations and contracts

13. Use Technology

Several software solutions are available that help to automate and streamline either the whole procurement process – like Tranquil, or even parts of it.

These can significantly help you save expenses.

Automation reduces dependability and expenses associated with human effort, especially in tasks like vendor on-boarding, evaluating vendor performance, daily operations management, and so on.

Manual processing not only takes time, it is also prone to errors, and some of them can be expensive.

Your team can concentrate on tasks that add real value.

The cost incurred in investing in the system will pay off in the long run.

ALSO READ: Importance of Reorder Point in Inventory Management

14. Employ Category Management

Category management aims to group together types of expenses historically and manage them across the whole procurement lifecycle.

This has to be well thought out and planned.

Once implemented, this strategy will allow procurement teams to utilize their time optimally, and avoid resource wastage due to repetitive transactional purchases.

It will allow you to leverage cumulative expenditure on a product to offer more volume to vendors.

This measure can identify opportunities to save costs within short times.

ALSO READ: Benefits of Integrating E-Commerce and ERP

15. Centralise Procurement

Savings opportunities are often drowned in the sea of transactions when the procurement structure is not centralized.

There are more instances of purchase duplication and maverick spending in such an environment.

Centralization helps to have a unified sourcing strategy; you can also implement a tool to analyze global spends.

With a rationalized supplier database, you can create competition among suppliers and enjoy reduced prices.

ALSO READ: What is Demand Planning and Why It is Important?

16. Improve Risk Management

By managing risks related to procurement, you can be ideally prepared to take care of unforeseen events and eliminate non-budgeted expenses.

Depending on a specific supplier is one of the biggest risks for businesses, and hence it makes sense to have backup suppliers.

Be aware of contract terms and stay in touch with vendors to avoid logistics problems.

17. Data Collection and Centralization

To understand your business performance properly, you must gather data accurately, Data from all departments must be integrated to get a clear idea.

Only when you have data from across the organization on one page, will important KPIs give you proper insights – inventory carrying costs, lead time, and turnover ratio.

Centralized databases can help you see what to purchase, how much to purchase when to purchase, and at what frequency as well; it can even help you understand if a particular vendor needs to be changed.

You can get reports and guides in real time to implement cost-reduction strategies in procurement.

ALSO READ: What Is Cloud Data Protection?

18. Integrate Procurement Systems

While you can automate only certain tasks in the procurement system, it is not really optimal.

You must integrate the different systems like inventory, purchasing, accounting, and so on for a smooth working from start to finish.

This way you can reduce labor expenditure and eliminate mistakes.

Your supply chain is complete and you can easily control all your business functions.

ALSO READ: Why ERP User Interfaces are Important?

19. Train your Staff

Procurement is an organizational problem, and not limited to procurement alone.

Ergo, you need to educate your staff on procurement best practices and encourage them to come up with ideas to reduce costs.

Cutting down spending is a team effort – whether it is sustainable procurement methods or business operations.

Your team must inculcate a mindset to reduce purchasing expenses, and optimize costs with best practices.

Tranquil’s procurement management software is the ideal solution to your procurement woes. Connect with us for a schedule demo, and we will be happy to show you how Tranquil can benefit your business.

 

Artificial intelligence has tremendous potential, and its benefits are permeating into more industries every single day.

In fact, companies have embraced AI in their operations as it helps them gain a competitive edge.

Today, artificial intelligence in procurement is being adopted, as technology simplifies complex and monotonous processes.

However, as this is a radical change, executing it can be quite tough, and can take time.

Therefore, it is critical that procurement leaders should be aware of both the opportunities and the challenges associated with artificial intelligence.

ALSO READ: How AI transforming ERP? 

The Need for AI in Procurement

So, what is the need for AI for procurement?

Procurement managers are searching for novel ideas to leverage the potential of procurement to the fullest, and unleash its full value.

In the digital world that we live in, the full and real value of procurement rests in becoming a tactical unit of the organization, contributing to its business growth.

By giving AI its due importance, and using it to guide demand trend forecasts, optimize bids for projected savings, calculating vendor scores depending on contract terms, tracking budget performance, etc.

AI in procurement can help teams in automating cumbersome tasks and processes, increasing productivity and cost-effectiveness.

AI can help you save time and money, be more efficient, and give you an edge over the competition.

ALSO READ: Inventory Management Trends to Know

Opportunities In Artificial Intelligence In Procurement

The potential of artificial intelligence in procurement and supply chain is tremendous, and there are limitless opportunities for modern industry.

However, they can be too complex or arduous to identify directly.

And yet, this is one technology that is capable of impacting your bottom line positively if procurement teams understand the specific opportunities it provides.

ALSO READ: What is a Ledger in Accounting? 

Boosting Efficiency in Everyday Operations

Technology has been at the forefront in helping procurement teams to simplify tasks and handle cumbersome tasks.

AI is another technology that can quicken procurement operations.

It has the capacity to study, recognize, and forecast the requirements of procurement much before expert professionals can, and with the same, or even greater level of accuracy.

Furthermore, AI can give you data that is clean and organized, which enables employees to make informed decisions in the future.

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

Making Products Available Quickly

AI can be helpful in making products available quickly; this is achieved due to the relationship AI has with sophisticated manufacturing processes.

AI solutions are capable of generating digital product designs and routing them to systems like 3D printers and injection molders to create the products automatically and make them ready to be delivered.

Manufacturers often have complex designs and varying order sizes; 3D printers and injection molders are more than capable of handling such orders efficiently, and vendors can respond to such requests faster because of this technology.

This affords tremendous flexibility in procurement; thanks to product sourcing backed by technology like artificial intelligence, procurement leaders need not worry a great deal about potential backend issues with supply.

ALSO READ: Guide on How Do ERP Systems Work 

Enhancing the Customer Experience

It is not just the procurement teams that benefit from AI in procurement.

The customers also benefit. Using automated smart assistants, also called virtual procurement assistants, companies can offer tech support throughout the ordering process.

Customers can get responses to their queries. When their concerns are promptly and precisely resolved, it can increase the customer satisfaction meter, and also save employees time, freeing them from being tied up with customer queries.

Procurement staff can rather, concentrate on more value-adding internal tasks of procurement.

Customers will feel valued as they are attended to throughout the ordering and invoicing procedures.

ALSO READ: Essential Procurement KPIs You Cannot Ignore

Challenges In Artificial Intelligence In Procurement

As in everything else, there are certain downsides or challenges associated with the use of artificial intelligence in procurement.

While they are certainly not insurmountable, it is imperative that you know about them before you jump onto the bandwagon.

Trust Issues

Machines taking over human jobs, and consequently, lives, has been a sore point for human beings – especially, industrial workers, as they are actually facing this problem now.

It is understandable that modern workers will distrust the management when they try to introduce new technology and automation, as they will be worried about their future in the company.

They may feel they no longer have any control, and fear for their future.

It is up to the senior managers and owners of businesses to talk to their employees and reassure them about their job security.

They should convince the employees about the benefits of implementing artificial intelligence and provide ways for employees to feel valued in the organization.

ALSO READ: Difference Between Procurement And Purchasing

Pure Complexity

Organizations may be slow in adopting AI in procurement as the technology is pretty complicated.

While it can help procurement by delivering clean, well-arranged data, the business still requires human experts who can analyze that data, and take necessary actions based on it.

Industry experts recommend that companies engage in re-tooled hiring; that is, a new segment of expert professionals who are specifically hired to work with AI systems.

How Does AI Help the Procurement Process?

We have seen both the opportunities and challenges that AI has for procurement.

But how exactly does AI benefit the process?

Would you be amazed if we told you that it can help procurement and sourcing teams at all the touchpoints in the procurement process.

ALSO READ: A Comparison of Sales Orders and Purchase Orders

Let’s take a look at what all AI can power:

1. Sourcing

Artificial intelligence can help you see what you need to source, and where to source it from.

The AI system can factor in all your requirements with regard to office supplies, and their specifications if any, and recommend the best contract or vendor to manage and deal with.

This can help you to reduce the time you spend on sourcing products, and also get the best deal you could possibly get.

A robust ERP like Tranquil with inbuilt AI capabilities studies your patterns and analyzes past behavior with regard to sourcing, and offer smart recommendations regarding vendors for the future.

ALSO READ: Challenges Facing Purchasing and Supply Management

2. Auctions & Supplier Performance

Bidding and e-sourcing of items are another factor that artificial intelligence can help you with.

The AI system can make bids on behalf of vendors, release RFPs or RFIs, and perform real-time tracking of project performance.

The language processing ability of AI enables it to read the necessary content and dynamically generate proposals depending on that data.

It can also offer insights into what can be improved, and how to avoid potential mistakes commonly made by procurement teams.

This helps procurement leaders to decrease the time they spend on detecting and remedying mistakes and saves efforts of all teams.

Tranquil ERP can empower your procurement team through the analysis of vendor performance data like credit scores, assessments, audits, and delivery time.

This can be leveraged to assist in future decision-making with regard to specific vendors.

ALSO READ: Ways to Improve the Procurement Process

3. Spend Analysis & Classification

Machine learning and artificial intelligence are capable of handling huge volumes of data in a matter of seconds or minutes.

This property is valuable and can be extremely helpful in predictive analysis, which can empower procurement teams to make smart decisions.

This process can be automated and streamlined by artificial intelligence and can help in tracking the spending by your organization, for pinpointing abnormalities.

AI helps to evaluate spending in real-time and to decrease the time your organization spends in the procure to pay process.

At Tranquil, we can help an organization identify opportunities for savings, offer more visibility, and facilitate smart decision-making.

ALSO READ: Complete Guide to Cash Flow Analysis

4. Contract Management

Artificial intelligence systems track, review, and obtain contract insights to be used now and in the future.

This can greatly help in mitigating risk and maximizing savings opportunities for the organization.

You can concentrate on guaranteeing that your product requirements are fulfilled, and AI will do the task of identifying vendor risk.

This leads to improved compliance and offers more insight into vendor performance, and likely policies of risk mitigation.

It can also help to detect issues with vendors at an earlier stage.

ALSO READ: Debit Note vs Credit Note

5. Catalog Management

Though it sounds simple, managing catalogs is anything but often, one can find several versions of the same product being mentioned and managed at the same time, in different catalogs, and with various suppliers.

All these multiple differences can be easily handled by artificial intelligence by identifying duplicates, recognizing opportunities for new products, linking items with the right catalogs, and more.

With AI, you can have optimal catalog management, and decrease expenses with regard to the sourcing of relevant products.

ALSO READ: Vendor Managed Inventory and What are its Benefits

6. Invoice Processing

When you get a vendor’s invoice through email, the norm is to download it on your computer.

You will then proceed to obtain the relevant information in the invoice.

This whole process can be automated by artificial intelligence.

All you need to do is enable automating the invoice matching feature. It functions with the intelligent reading and understanding of the invoices and will extract relevant details like the invoice number, supplier details, the date the invoice is due, product details, cost per unit, the total amount due, and more.

Vital data points are analyzed, and invoices are automatically classified to refine the process further.

This helps in making invoice submission even more accurate, and consequently, timely payments.

You can also get help with capturing discounts for early payments, have greater visibility, and get significant opportunities to save costs.

ALSO READ: Benefits of e-invoicing for your Business 

Conclusion

Undoubtedly, artificial intelligence has immense potential to empower procurement teams and help them get a competitive edge when they adopt this technology early.

Such organizations can certainly achieve higher returns on their investment.

It can be said with some certainty that AI adoption stands to increase across other departments in businesses, and won’t be limited to procurement alone.

Already, companies are adopting AI for functions like classification and analysis of spends, contract management, HR, and others.

ALSO READ: ERP Software to Enhance your Purchase Management

Procurement management is a complex activity, which when done right, can offer innumerable benefits to the organization. Tranquil ERP leverages the power of AI to help you implement smart procurement practices. Schedule a demo with us to understand in detail how our procurement management software can help your business.

 

Any business has to maintain stocks of supplies, spare parts, or other items to ensure their operations can continue without interruptions.

For example, a manufacturing company needs to stock tools and components so that the production lines can keep running.

Retailers need office supplies, electronic components, cleaning materials, etc. all such materials are collectively referred to as MRO inventory, where MRO stands for maintenance, repair, and operations.

ALSO READ: What is an Inventory Control System?

It basically means all the activities required to ensure that the production processes and facilities continue to run smoothly.

One may not think so, but MRO inventory can take up a good part of your overall procurement expense; some experts opine it can go up to over 4% of revenue in certain industries.

It is therefore important to manage your MRO inventory efficiently and minimize cost while making sure that there is sufficient inventory to meet operational requirements.

Keeping the cost of this inventory down can improve your bottom line significantly.

ALSO READ: Ways to Improve the Procurement Process

What Is MRO Inventory?

It is made up of materials, supplies, and equipment consumed for maintenance, repair, and operational activities.

They are NOT part of the finished goods of a manufacturing company, even if they are used in the production process.

An example could be lubricant used for the machinery engaged in manufacturing non-stick utensils.

The grease is part of the manufacturing process, but not used as an ingredient in the making of the product.

Similarly, all tools, spare parts, safety goggles, hard hats, gloves, masks, etc. used by factory workers are part of the MRO inventory.

As it impacts the productivity of all departments, effective MRO inventory management is a critical function every business needs to carry out.

ALSO READ: What is Zero Inventory?

MRO Inventory Examples

• Maintenance and repair supplies like lubricants, machine oil, light bulbs, bearings, gears, valves, wires, motors, etc.
• Safety equipment like gloves, face shields, masks earplugs, hard hats, PPE kits, respirators
• Housekeeping supplies like mops, floor cleaners, sprays, disinfectants, brushes, buckets
• Office supplies like paper, toners, furniture, pens, markers, cables, electronic equipment like computers, scanners, etc., light fixtures.
• Spare parts, like side view mirrors, wipers and hubcaps for the auto industry
• Lab supplies like syringes, beakers, test tube, scales, vials, flasks
• Price tags, stickers, and labels
• Packaging materials like bubble wrap, paper bags, carry bags, gunny bags, sacks, etc.

ALSO READ: What is Order Up to Level in Inventory Management?

What Is MRO Inventory Management?

It is just like inventory management, only, here you have to manage your MRO inventory and not your manufacturing inventory.

MRO inventory management involves the purchase, storage, use, and replenishment of app your MRO inventory items.

You must aim to conduct all of these activities in a cost-effective and efficient manner so that your company has the right MRO inventory in place, at the appropriate cost, and when you need it.

It is a cumbersome and time-consuming task as businesses often need to purchase and store hundreds of such items.

ALSO READ: How Can you Track UOM?

What is the Importance of MRO Inventory Management?

MRO items are crucial to keep a business operational; if there is component failure of critical machinery in the course of production, the whole process may be stopped because of it; this may even mean having to discard the work-in-progress depending on its nature.

In case the required spare part is unavailable, this can have a cascading effect with loss of hours or even days, waiting for the part to be delivered.

Stoppage of production means delayed shipping, which could in turn lead to unhappy customers, and loss of business and revenue.

Customer relationships take a hit when delivery deadlines are overshot.

ALSO READ: Common Inventory Management Problems and Solutions

Sometimes businesses resort to shortcuts to keep production going, and this may cause even bigger problems like loss of quality in the product or further damage to the machinery.

Conversely, loading up on MRO inventory to avoid getting stocked out can leave you with less money to be invested in more productive purposes that could spur business growth, and you may even end up with obsolete products because you simply don’t consume that many.

Panic purchases of components also happen because they were not properly stored, and you couldn’t find them when needed.

In any case, this inventory eats up space in your warehouse and is unproductive to boot.

Everyday operations can also be impacted by poor MRO inventory management, as technicians spend a lot of time trying to find parts they need.

The small amount of downtime that occurs every time can add up to a lot eventually.

Not finding the required part in time can also be irritating for the workers, and hamper their productivity.

Without accurate counts of such inventory, your business runs the risk of overstocking, stoppage of production, duplicate orders, and other similar problems.

ALSO READ: How to Avoid Understocking and Overstocking in inventory?

Components of MRO Inventory Management

There are several core components of MRO inventory management; however, there can be a wide disparity in the way they are implemented.

1. Identification of MRO Items

Listing every component and supply item the business needs to stock along with their details and the quantity on hand at present.

Certain items may be commonly used across the organization while others could be used only for specific processes or departments; therefore, recording details of MRO items can help different groups check if the item they need is available.

The ability to identify which item is available quickly is vital when production issues occur.

ALSO READ: What is Inventory Reorder Point? 

2. Organizing Inventory

Determine how MRO inventory should be organized so that organizational needs are met.

Businesses often choose to centralize storage; however, sometimes it is more prudent to store items used specifically by certain departments, near them.

It is crucial that you have a system to organize MRO items within each location, enabling workers to locate them quickly.

ALSO READ: What is Storage Cost of Inventory?

3. Building a Process for MRO Inventory Procurement

Just as for manufacturing inventory, having a proper process in place for MRO item procurement can help your business to purchase the appropriate quantity of MRO products economically, to guarantee that you always have what you need.

The process also involves the identification of the required items, choosing suppliers, creating requisition requests and approvals, and order tracking.

ALSO READ: Advantages of ABC Analysis in Inventory Management

4. Establishing Inventory Control

This element of MRO inventory management includes tracking inventory levels, demand forecasting, and replenishing items in time.

How Can You Manage MRO Inventory?

We have already seen that MRO inventory management comprises the purchase, storing, distribution, and replenishment of MRO items efficiently and economically; the goal being, maintaining sufficient stock taking into consideration storage space and budget.

There are four main steps involved in efficient management of MRO items.

1. Deciding which MRO Processes are Essential to Ensure Continuity of Business:

An organization should always have an adequate supply of the MRO items which are required to support critical processes – the things a business needs to operate on a daily basis.

For example – maintenance supplies for the most critical processes, and employee safety equipment.

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

2. Conduct an Audit:

This will help you decide whether all the MRO items that you require are in stock and whether there is inventory in stock that is not really required.

By regularly counting the physical inventory, you can confirm that the inventory counts in the system are accurate, plus you get visibility into the stock on hand.

3. Selecting Suppliers:

This is a very important element of managing your MRO inventory efficiently.

You can simplify purchasing by having a few strategic distributors with whom you place orders, and also decrease admin expenses.

Of course, you will need to consider several factors like the quality of products, reliability of the vendor, and the speed and cost of shipping.

ALSO READ: What is Dead Stock – How Can You Avoid It? 

4. Demand Forecasting:

Study seasonal patterns in the use of MRO inventory, and make necessary adjustments to your purchases; this will help you ensure that you have an adequate quantity to fulfil demand, avoid obsolete inventory, and keep carrying costs low.

MRO Inventory KPIs

Key performance indicators for MRI inventory allow companies to see how efficient their MRO inventory management is, and also recognize what all needs to improve.

Acquisition costs, ability to fulfil demand and efficiency are the focus of the most popular MRO inventory KPIs.

ALSO READ: Important ERP Implementation KPIs to Know 

1. MRO Expenditure as a Percentage of Total Procurement

The lower this figure, the better – assuming of course, that the company has sufficient inventory to fulfil its requirements.

The percentage of total expenditure that is part of MRO inventory differs by industry.

Product-intensive industries like manufacturing, retail, FMCG, packaged goods, etc. are likely to have a lot more MRO inventory than other industries.

2. Supplier Consolidation

This refers to what percentage of overall MRO spending goes to the strategic suppliers selected by the company.

The general rule is that 15% of suppliers should get about 80% of your overall spend.

ALSO READ: Vital Procurement KPIs You Cannot Ignore

3. Days Inventory on Hand

This shows how many days specific inventory remains with your business, and ideally, anything under 30 days is good, regardless of the industry.

Idle inventory costs businesses significantly.

4. Percentage of Emergency Orders

Emergency orders tend to be expensive and should be at the bare minimum – an exception, not the norm.

if this figure is high, it could indicate that your inventory management process is not efficient; an example could be improper forecasting of demand.

ALSO READ: How ERP Can Improve Business Efficiency? 

5. Stockouts

This is an indication that you are not maintaining adequate MRO inventory to ensure that you have what you need.

When comparing the number of stockouts to the total picked items, if the answer is anything above 1%, you have a problem.

ALSO READ:  Guide on Make to Order vs Make to Stock 

MRO Inventory Management Best Practices

You can ensure that the expenditure on MRO inventory is within budget and that you have sufficient inventory to meet your requirements by employing the following best practices:

Employee Education

All your employees must understand the procurement process for MRO items, and the method to find the items they require.

Facilitate meetings between procurement staff and various department heads so that you can eliminate or minimize indiscriminate spending, and cut expenses.

ALSO READ: Benefits of Having an Employee Self-Service System

Central Storage of MRO Items

This makes it easy to track inventory and avoid duplicate purchases of MRO items.

Vendor Managed Inventory

You can ask for your MRO item vendors to manage your inventory on the site by tracking inventory levels and replenishing them automatically when the item levels go low.

This frees your employees from this time-consuming task, enabling them to focus on more productive tasks, and it also streamlines your MRO inventory procurement.

Deploy Inventory Management Software

Automation streamlines and quickens the entire process, forecasts demand more accurately, eliminates the possibility of fraud, and simplifies inventory tracking, among other things.

ALSO READ: Tips to Improve Inventory Turnover 

MRO inventory management is probably one of the functions accorded the least importance by organizations, and it is indeed unfortunate.

As we have seen, indiscriminate spending or improper purchase can all impact your bottom line negatively.

A reliable ERP like Tranquil can take away the guesswork from this function and increase efficiency and productivity with its robust inventory management features. Do schedule a demo to understand how our software can help your business.

 

Cost savings is not the only value that companies demand from their procurement teams, and this has led to them always being on the lookout for means to enhance their procurement process and ensure its sustainability.

They need to monitor a range of procurement KPIs so that they can make

But while procurement KPIs are measured by almost all procurement teams across industries; however, they are not cut and dried.

Different businesses may accord different importance to each purchasing KPI.

In fact, most of the times, procurement teams are not really aware of what element is a KPI and what isn’t.

So, when the time comes to make decisions and track performance, how can you ensure that the most metrics that are most relevant to the business are being tracked?

For this, you need to understand the numerous procurement KPIs that leaders in the industry use.

ALSO READ: Ways to Improve Procurement process

About Procurement KPIs

Procurement key performance indicators are used as tools to measure the performance of a company with regard to procurement management.

They can help businesses in the optimization and regulation of cost, time, quality, etc.

Procurement KPIs also enable businesses to stay in step with their overarching business objectives, procurement strategies, and process goals.

Why Should You Measure Procurement KPIs?

Peter Drucker, regarded as one of the foremost management gurus had said that what cannot be measured, cannot be improved – and it is true.

Without knowing how you are doing how will you improve your performance.

Procurement plays an important part in the supply chain, especially in times of economic slump.

In addition to saving money, measuring purchasing metrics can help you find out what needs to be improved, whether your business is improving, and how your business compares with other businesses.

It can also help in:

• Assessing and tracking the procurement management of your company
• Streamlining and optimizing the company’s time, quantity, spending, and sourcing of products
• Empowering procurement managers to make informed improvements in processes
• Aligning results of the procurement process with the general goals and strategies of the company
• Enabling businesses to take decisions on competitive strategy and process improvements

While cost savings are an obvious objective of procurement performance, it is not just restricted to that.

ALSO READ: Procurement vs Purchasing

By measuring the performance of a procurement process, organizations can find answers to other important questions like:

Procurement KPIs You Must Track

The appropriate metrics are those that are pertinent to your business goals and can be easily tracked.

Understand the purpose of various KPIs before deciding which ones actually are relevant for your business.

KPIs can be categorized by what they improve, like Quality, Delivery, and Cost Savings KPIs, or by which party it scrutinizes, like Vendor, Employee, and Organizational KPIs.

ALSO READ: Debit Note vs Credit Note

Important Procurement Metrics

Let’s check out the most commonly used and important procurement metrics:

1. Compliance Rate

Complying with policies and contracts are crucial for ensuring legal security.

If your compliance rate falls, it can lead to a rise in indiscriminate spending.

To improve the compliance rate, you should have a watertight purchase contract with well-defined penalties.

You should note these metrics: the difference between quoted and paid price, and the ratio of disputed invoices to total invoices.

ALSO READ:  Challenges in Procurement and Supply Chain 

2. Supplier Defect Rate

This ratio helps in assessing the quality of a vendor.

Measuring the defect rates and separating them on type of defect can demonstrate how reliable a vendor is.

Supplier defects are normally measured per million.

Defect rate = number of defective products/ total number of products tested

3. PO Accuracy

Your operating expenses can be vastly increased if your PO accuracy is low.

This basically tests how reliable your vendors are in delivering what you ordered, and whether they delivered it in time (supplier/vendor quality metric).

You must monitor the ratio of goods and services delivered beyond the service target agreed upon, and the percentage of incorrect deliveries over the total number of purchase orders in a specific period.

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

4. Rate of Emergency Purchases

These are unplanned orders you are forced to make to be able to meet production or sales requirements.

These tend to be very expensive.

The lower this number, the better for your business.

You can measure this metric by comparing the number of emergency purchases to the total number of purchases made in a fixed time period.

You can ensure continuity, save money, decrease the risk of supply, and improve your procurement strategy by reducing your emergency purchase rate.

5. Supplier Lead Time

This is simply the time the vendor takes from the time of receiving an order to delivering the goods and is measured in number of days.

The confirmation of the availability of goods is the start time, and the delivery of goods to the customer is the end time. This is a supplier quality metric.

ALSO READ: Sales Order vs Purchase Order

6. Purchase Order Cycle Time

PO cycle time refers to the time it takes for a purchase requisition that is submitted, to be sent to a vendor or supplier, and is measured in hours or days.

It covers the ordering process from start to finish. It includes creating the order, approving, generating the invoice, delivering, and payments.

From this KPI you can identify which vendor responds the quickest. You can divide them into different categories depending on the cycle time, like short, medium, and long.

You can give your urgent orders to the supplier with short PO time.

By reducing the overall PO cycle time, you can reduce procurement cost, increase procurement function and staff productivity, and boost revenues.

ALSO READ: Benefits of ERP Software in Purchase Department

7. Number of Vendors

It is a good idea to have multiple vendors for your goods, eliminating the dependency on a single supplier.

This metric monitors how many vendors the business deals with.

Diversifying your sourcing protects your business against the risk of order cancellations at the last minute by a vendor.

However, if you have way too many vendors, you may not get discounts regularly either.

So the ideal thing is to have a few different suppliers for each product; of course, after evaluating their reliability, availability, discounts offered, and defect rates.

8. Cost per Invoice and Purchase Order Side

Every business may have a different cost spend for each purchase order and invoice, as it depends on what factors are considered in the calculation.

If you employ manual methods, you are likely to have higher costs of processing vis-à-vis organizations that use automated processes. You need to have a lower cost per invoice to have better profits.

ALSO READ: Inventory Management Trends to Watch Out for

9. Spend Under Management

This management metric refers to the percentage of procurement expenditure controlled by the management.

This includes rates set with vendors and control systems that ascertain that the spend under management metric covers the use of the prices agreed upon.

While measuring this metric, you must include these elements, and you can enjoy tremendous savings in costs.

Managers must frequently evaluate expenditures, assess suppliers, and analyze contracts so that strategic and operational savings can be detected.

You can save big simply by consolidating your purchases and bargaining for discounts on purchase volume.

10. Procurement ROI

Use this metric to check how economical and profitable your investment in procurement is, for your internal analysis purposes. It is calculated as cost savings per year/ procurement cost per year.

ALSO READ: Detailed Guide on ROI on ERP Implementation

11. Price Competitiveness

When there is very little competition among suppliers, a situation of monopoly may come about, reducing quality in the long term.

Ergo, you need to focus on shortlisting suppliers who are customer-centric and offer you a clear competitive edge.

You can measure this by comparing the price you pay against published market prices listed online.

12. Purchases within Time and Budget

The procurement managers must be up to date on the purchasing time and budgets at any given time.

It is the manager’s job to ensure that purchases are completed within the set deadlines and budgets agreed upon.

Monitoring this metric allows procurement managers to detect the variances in the procurement pipeline as well as the utilization of resources.

by tracking this metric, you can also detect what percentage of your purchases you can achieve within your budget and deadline.

If this percentage becomes too high, then it is certainly a worrisome thing for the procurement manager.

It is important for them to assess why the budget KPIs of procurement could not be fulfilled; this can help them streamline or fine-tune the procurement plan.

ALSO READ: What is Goods Received Note (GRN)? 

Automate and Improve Procurement Performance

Enhancing procurement performance necessitates measuring key metrics, and going digital.

A cloud-based ERP solution like Tranquil helps businesses collect, organize, categorize, route, and retrieve data related to procurement, inventory, and more.

Procurement teams can be freed from mundane tasks and their energies can be spend in more productive tasks like analysis of the collected data.

Automating the procurement process with the right software can help you in:

• Reducing process time significantly
• Increasing productivity drastically
• Boosting speed and efficiency
• Improving compliance rates
• Save costs substantially
• Reduction of risk
• Gaining visibility into the entire process

We have seen above that the whole process of developing metrics for procurement is not a simple job.

ALSO READ: Tips to Increase Gross Margin Return on Investment (GMROI)

When procurement managers spend time to have a clear understanding about their business needs and what each procurement key performance indicator is all about, they can easily decide which ones are aligned with their business goals and are a good fit for them.

Tranquil is a cloud-based ERP system with a robust procurement management module.

Get dedicated tools to handle purchase orders, contracts, invoices, and other procurement functions, and also get effective vendor management.

Tranquil offers a holistic view of the entire procurement process cycle, delivering all the data from these functions in a single space.

You get consistent and transparent information all through fundamental processes like performance ratings, vendor evaluation, and so on.

ALSO READ: Top Inventory Reduction Strategies 

Tranquil Cloud ERP’s procurement management module simplifies the monitoring of procurement metrics with numerous user-friendly tools, minimizing human effort. You can share the data that is collected with all stakeholders and provide strictly role-based access to protect your data. You can also get automated reminders and send them to vendors as well, to make sure that the processes proceed as planned. Tranquil ERP facilitates the generation of tailored reports that show metrics that are important to you so that you can see what works and what doesn’t. Do schedule a demo at your convenient time, to see how Tranquil can help your business – we will be happy to show you how!

Inventory is crucial for any business dealing in products – manufacture or sale.

Managing inventory is a very complex function as there are multiple factors to be considered.

One of them is inventory turnover.

What is Inventory Turnover?

Inventory turnover refers to how much inventory or stock of products your business has sold in a specific period.

Knowing the figure offers several insights into which of your products are selling well, along with how the overall costs are managed by the company.

So, what does this mean for your organization essentially?

A low inventory turnover is not good news; it means delayed replenishment of inventory or excess stock of inventory that doesn’t sell quickly.

On the other hand, a high inventory turnover indicates good cash flow because there is high demand for your products.

ALSO READ: Common Inventory Management Mistakes to Avoid

What is Inventory Turnover Ratio?

The inventory turnover ratio is an indication of the efficiency of your inventory management, and is arrived at by comparing the average inventory held over a specific time period, with the cost of goods sold.

It shows the number of times the average inventory of a company is turned or sold during a specific time period.

This effectively translates into the number of times a company could sell its average inventory in monetary terms in a year.

If a business has an average inventory of SAR 20,000, and SAR 100,00 in annual sales, it means that it turned its inventory 5 times in a year.

ALSO READ: Inventory Cycle Counting and What are its Benefits?

How Is Inventory Turnover Ratio Calculated?

We can calculate the inventory turnover ratio by dividing the total COGS for a specific time period by the average inventory for the same period.

The inventory turnover formula can be expressed as :

                                             Inventory turnover ratio = COGS / Average Inventory

What is Considered a Favorable Inventory Turnover Rate?

Anything between 4 and 6 is considered a good inventor turnover ratio as it indicates that you have a good balance between restocking items and sales inventory.

Anything above it indicates strong sales performance and below it could be an indicator of poor sales.

For example, if you use the inventory turnover calculator and get the answer 1 it means that you had say 200 items in stock and you sold 200 – all of them.

However, if you sold 800 products and still have 200 items in inventory, it means that your inventory turned four times, or your ITR is 4.

The inventory turnover ratio is typically calculated at the end of the financial year; however, it can differ depending on unique business requirements.

ALSO READ: Inventory Management Trends to Know

How to Improve Inventory Turnover?

Now that you know what is inventory turnover and how to calculate it, you should also know how you can bring more efficiency in managing your inventory, reduce warehousing expenses, and increase sales.

The benefits of improving your inventory turnover are many:

• When inventory sells quickly your carrying costs are low
• Your cash keeps getting freed, enabling you to replenish stock or invest them elsewhere
• Enables businesses to respond quickly to the marketplace and react to demand changes
• Minimize the possibility of excess and obsolete stock, and selling at a loss.

Track your inventory turnover ratio closely so as to see how well you’re doing this.

Calculating inventory turnover helps to measure your efficiency at this.

ALSO READ: What Is Gross Margin Return on Investment (GMROI)?

A low turnover ratio could have several causes:

• Not having the resources to place more orders
• Minimum order quantities to be maintained with suppliers
• Lack of warehousing facilities

Holding less stock increases risk of getting stocked out, and having to turn customers away.

So here are some guidelines on improving your inventory turnover.

ALSO READ: Detailed Guide on Budget Variance Analysis

Tips to Improve Inventory Turnover

1. Knowing the Inventory Items’ Position in their Product Life Cycle

Demand for products varies as they progress through their product life cycle.

Products in the growth stage experience rising demand, and it falls as they mature, holding steady at a particular level.

The demand tends to become erratic as the product ages, and then declines and becomes very low.

This means that your inventory portfolio at any given time, has hundreds of SKUs exhibiting varying demand patterns.

You need to focus on products entering the stage of decline and monitor their demand closely to build strategies to decrease stocks before they become obsolete.

Reducing reorder quantities and safety stock levels, using marketing campaigns or pricing strategies to boost demand and sell the stock faster before customers become disinterested, are all tactics you could try out.

ALSO READ: What is Inventory Aging and Why is it Important?

2. Better Demand Forecasting Accuracy

If you want to improve your stock turnover, it is essential that you order those items which are likely to have good demand in the market – this brings us to accuracy in demand forecasts.

Using moving averages and specific stock days for demand calculation will not give you the right forecast.

Without accurate forecasting, you may end up overstocking, which leads to dead stock, or understocking, which leads to loss of sales, customers, and business.

To be able to factor in the fluctuations of demand and supply and get precise demand predictions, you need an effective inventory management solution.

This will give you demand forecasts based on scientific and statistical methods.

ALSO READ: Make to Order vs Make to Stock

Basically, you need to factor in the demand type of a specific inventory item based on its position in the product life cycle, and accordingly fine-tune the forecast algorithms.

Products that have seasonal demand patterns should be identified to adjust the forecast further.

The third thing that needs to be done is to factor in the unpredictability of demand in the market to fine-tune the forecast further.

For example, for markets where demand is generally slow, define longer periods of forecasting, and if the demand is unpredictable, use shorter forecasting periods.

Lastly, you need to factor in promotional activities like campaigns, which may boost sales as well as competition which may cause a fall in sales.

ALSO READ: What is Assemble to Order Process?

3. Inventory Classification for Prioritizing Stock

Apart from variations in demand type, your inventory items will also differ in terms of their demand fluctuation, cost of selling, profit margin, and frequency of picking.

This is why it may not be a smart idea to have a generalized policy for inventory stocking, managing all the items in your portfolio in the same manner.

You need to instead look at prioritizing inventory items based on the factors mentioned above.

When you categorize inventory items into different groups, you will be able to handle products with similar features in the same way.

In this manner, you can optimize your inventory levels, and have a better inventory turnover ratio.

ALSO READ: Physical Stock Verification and Its Advantages

ABC analysis or other basic inventory classification form allow you to categorize inventory items on a single dimension – the value they contribute to the business.

But you need a more detailed and sophisticated categorization mechanism, looking at multiple variables that impact turnover rates; for example, demand, cost, or picking frequency.

This will allow you to have inventory stocking strategies that are multi-dimensional in nature, and decide how much to buy and store of what items.

Optimizing inventory levels will help you boost your inventory turnover quite rapidly, without running the risk of getting stocked out.

ALSO READ: Benefits of Stock Status 

4. Reorder Smarter

Placing huge orders to get discounts from suppliers looks attractive at first; however, it will impact your inventory turnover badly.

After all, you need to spend to carry inventory, and so your working capital gets tied up in inventory to a great extent.

Again, if the products you purchase don’t have high demand, they could end up as dead stock, costing your business dearly.

The ideal situation is ordering small quantities regularly so that you have minimal investment, and your stock keeps turning.

You need to remember however, that restrictions on ordering imposed by suppliers or inefficient processes may not render this possible.

Here it becomes critical that you replenish products very thoughtfully and intelligently.

The right ERP solution can help you do this easily, with features like order fill up (in case of minimum order quantity) where it recommends the most suitable products to add to the purchase order.

It takes into consideration, sales trends, seasonal behavior and more, so that you fill up the minimum quantity with the ideal products.

ALSO READ: What is Inventory Reorder Point(ROP)?

5. Finish Excess Inventory Stock Redistribution

Businesses with multi-location warehouses are likely to notice that in each location, the inventory turnover is different.

The same SKU may be in excess in one location, while it is stocked out elsewhere. Hence, it is prudent to look at pan-organizational data, and optimize inventory items across locations, by redistributing stock before you replenish them.

This way you will not have to resort to placing expensive emergency orders with suppliers, and also maintain a lean inventory.

6. Automate and Improve Insights

As mentioned earlier, the need of the hour is a robust inventory management system like the one provided by Tranquil ERP.

It lets you monitor stock levels and offers an accurate base for the inventory turnover calculation to improve it.

Tranquil ERP can calculate and track inventory turnover ratios right down to the level of SKUs so that you can easily identify the products which do not deliver the requisite return on investment.

It can also optimize your inventory levels, forecast demand accurately, help you plan your inventory purchasing, stocking, classification and replenishment activities more efficiently.

ALSO READ: What is Stock Adjustment and Stock Transfer?

To Conclude

Inventory is a vital asset for any business, and managing it properly in a way that it increases the profitability of the business is a complex and critical function.

Tranquil ERP can simplify this function for you and allow you to focus on value-adding activities.

Do schedule a demo at your convenience and we will be happy to help you understand how Tranquil can benefit your business. Our executives will be at hand to answer any query you may have.

 

GMROI or gross margin return on investment is a ratio that assesses the profitability of inventory.

It fundamentally studies the ability of a company to convert inventory into money for an amount over the inventory cost.

It is mainly used by retail businesses; the calculation in itself is a simple one, and the ratio is useful as it gives visibility into the average inventory returns over its cost.

It is therefore also known as the gross margin return on inventory investment.

ALSO READ: Detailed Guide on ROI on ERP Implementation

What Do We Mean By the Gross Margin Return on Investment?

We have already seen that the GMROI helps the business owner or investor to understand what is the average sum over its cost that is returned by the inventory.

A ratio below one means that the business is selling products for less than what they spent to purchase it; if it is above one, it means that the firm is selling the products at a price that is above the acquisition cost.

It means that the firm has balanced inventory cost, margin, and sales effectively.

Some industry experts opine that a ratio of a minimum of 3.2 is required for covering all the costs related to labor and occupancy, as well as the profit are met.

ALSO READ: What is Dropshipping and it’s Benefits?

How Can You Arrive at the Gross Margin Return on Investment?

There are various approaches to measuring of the gross margin return on inventory investment, depending on the unique accounting systems of various businesses.

Retail firms incur different types of expenses every month like storage, rent/lease payments, transportation, labor, marketing, utilities, and so on.

More or less, the formula is similar, with only the specific expenses considered being different, based on the goals of individual businesses.

Put in its simplest form, the formula is: Gross Margin/Average Cost of Inventory = GMROI.

For the purposes of internal accounting, retailers may use their own version of this formula, to get different figures.

ALSO READ: Detailed Guide on Budget Variance Analysis

Let us say that a retailer wants to calculate this margin as a percentage, using this formula:

First, from the Revenue, the Cost of Goods Sold is subtracted.

This figure is divided by Revenue in the next step and multiplied by 100.

[(Revenue – Cost of Goods Sold) / Revenue] *100 = Gross Margin percentage.

Eventually, the exact formula depends on several variables, mainly, the internal accounting system of each company.

This number can be presented in monetary value terms – like SAR, a percentage, or a ratio; however, its purpose stays the same – that is, measuring how profitable is your investment in inventory.

It is important to calculate two key metrics: average inventory and gross margin.

When you deduct the cost of goods sold from a company’s revenue, you get the gross profit.

This is then divided by the revenue, as we have seen above.

To calculate the average inventory across a specific period, you total the closing inventory for that specific time period, and divide it by how may periods were there periods in it.

You also have to consider the situation of obsolete inventory.

ALSO READ: Importance of Cash Book in Accounting

How is the Gross Margin Return on Investment Used?

Let us try and understand this with the help of an example:

Suppose retailer A has an annual income of SAR 100 million, and their cost of goods sold is SAR 40 million when the financial year ends.

This means that the company’s gross margin is at 60%, meaning, it retains 0.6 Riyals for every Riyal.

If we state the gross margin in terms of SAR: let us assume that the average inventory cost for the company at the financial year end is SAR 15 million.

Then the firm’s gross margin return on investment is SAR 60 million/15 million = 4.

That translates into 400% of expenses, this means, retailer A sells their goods for a markup of a minimum of SAR 4 for every Riyal invested in inventory.

ALSO READ: What is Storage Cost of Inventory?

Let’s look at their competitor, Retailer Z. With a total income of SAR 100 million, their cost of goods sold is 80 million.

Their gross margin is SAR 20 million, meaning they retain 0.2 Riyals for every Riyal spent on inventory.

Assuming their average cost of inventory is 25 million, their GMROI is SAR 20 million/SAR 25 million.

This means it earns about 80% of its expenses or is getting a margin of 0.8 Riyals for every Riyal spent on inventory.

Now when we compare, we see that Retailer Z is only making 0.8 Riyal per Riyal spent, and that is in no way sufficient to meet marketing, administrative, wages, and other expenses of the business.

Retailer A on the other hand is doing a much better job.

If I were to invest my money, I would do that in the business of Retailer A.

ALSO READ: What is Landed Cost and How to Calculate It?

Why is GMROI Useful?

The gross margin return on inventory investment ratio is useful in many ways:

• Firstly, it helps you see if you are making a profit on your inventory
• It can help you detect inventory issues that are preventing you from making bigger profits
• Many retailers often have inventory that costs them money without earning them revenues, and it hampers your profitability that you get from other sales. The GMROI helps you make better inventory decisions.
• You can invest in products that sell well and earn you a good profit rather than wasting money on products that do not.

ALSO READ: Importance and Calculation of Safety Stock 

What is a Good GMROI in Retail?

A GMROI over SAR 1 does show that you are indeed making profits on the inventory; however, it may not be sufficient to cover your entire business expenses.

A low GMROI even though it’s positive, may still be indicative of poor business performance.

That begs the question, what exactly is a good ratio of GMROI for retail businesses?

Well this is not an easy question to answer as each business in the retail industry is unique, and the average GMROI can differ depending on the type of retail business you are in.

ALSO READ: What is Inventory Aging? 

For example, a mobile dealer and a greengrocer are likely to have very different ‘good’ GMROIs.

Similarly, the market segment – luxury or economy – also matters.

Retailers who have large sales volumes usually have smaller margins as they need excess inventory for their operations.

SKUs with large stock turn normally have low margins.

On the other hand, high-end items with high margins move slowly and contribute to a slightly lower GMROI overall.

So, for some retailers SAR 2 may be indicative of a healthy business; for some, this may be too low and for some, it may be unattainable.

Eventually, how good a GMROI a retailer attains, completely rests on the degree of control a retailer exercises over expenses and prices.

Ergo, retailers who deal with vendors that dictate costs, or those doing business in very competitive markets are likely to have a lower GMROI.

Retailers who deal with specialty products, make their own products, or are more vertically integrated, are likely to have a higher GMROI.

Similarly, high-end brands will have a higher GMROI than discount ones, as the ratio depends significantly on the market position enjoyed by the business.

To know what is a good GMROI for you, compare your business to similar businesses – in the same vertical and category.

ALSO READ:  Top Inventory Reduction Strategies 

How Can You Increase the Gross Margin Return on Inventory Investment?

To do this, you need to take a series of actions; remember that these actions make up a general approach toward GMROI, no matter which industry you are in.

Experts tell us that the following stages are critical:

1. Better Forecast Accuracy

We have seen that if something is not right about your inventory investment, you are likely to have low GMROI.

It means that you are purchasing more stock than what you sell.

If you improve your sales or demand forecasting, you will be able to make better inventory decisions in terms of purchase.

Knowing how much to buy to maximize sales will automatically increase your GMROI.

2. Optimize Pricing

While the GMROI is inextricably connected to the unit price, merely increasing it will not necessarily increase your GMROI.

In fact, the price rise may be followed by a dip in sales.

What you need to do is optimize prices so that they remain competitive (unless you are selling a high-end, exclusive product) and don’t experience a decrease in sales.

This strategy of optimizing prices will help you to boost your GMROI.

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

3. Reducing Inventory Costs

You need to have smart, innovative strategies on inventory.

With customers becoming more discerning and tech-savvy, they demand more flexible pricing choices, and cutting inventor costs in time can help enhance the GMROI significantly.

Storing inventory units cost-effectively is a key aspect in boosting GMROI.

ALSO READ: Sales Order vs Purchase Order

4. Gross Margin Return on Investment Tree

We have seen that the GMROI is a ratio of inventory profitability that tells us how quickly or efficiently an organization can convert its inventory into cash.

This value is applicable mostly to businesses that rely on stocks heavily for their business – chiefly, the retail industry.

It is the most apt for GMROI consideration.

The GMROI tree for retail has many important features.

• As excessive inventory is needed, there is a deep association between high sales volumes and small margins.
• Larger the stock, the lower your margins will be

ALSO READ: Benefits of Goods Received Note (GRN)

The GMROI is a valuable tool for retailers to know how efficient their inventory strategy is.

All you need to do is calculate the gross margin and the cost of inventory.

Optimize prices, reduce inventory costs, and improve your forecast precision, and you’ll achieve a higher GMROI.

Sounds like a tall order? Doing all of this manually can be cumbersome and time-consuming, after all.

Efficient inventory management is critical for any business, and for retailers, it is absolutely crucial.

Manually doing all of this can be exhausting; you may also have more errors, and tie up your employees for long periods.

Switch to a robust, cloud-based ERP like Tranquil to automate and streamline your inventory management process with its feature-packed Inventory Management module.

Maintain optimal stocks of inventory, enjoy continuous sales, reduce costs, maximize profitability, and achieve business growth.

ALSO READ: How to Manage Backordering?

If you’re not sure how Tranquil ERP can benefit your business, do book a demo at a time of your convenience. Our team will be at hand to explain everything and answer all your queries.

Before delving into budget variance analysis, let’s understand what business budgeting is all about.

For a business, budgeting means the process of creating and managing a financial document that contains the estimated earnings and expenses for a period, usually one year.

It is an important activity that helps businesses ensure that departments and employees have the requisite resources to carry out initiatives and achieve goals.

The money left over after subtracting expenses from the projected income is assigned to projects.

Previous budgets can be compared with actual allocation and performance to get a clear picture of how close the forecasts were to actual expenses.

ALSO READ: What is Job Costing? 

If the budget overshoots, you need to find out the reason – whether the allocation itself was incorrect, or the project was executed inefficiently.

These insights can be used to improve the process the next time.

There are different types of budgeting that prioritize different factors, and each company has to select the one that suits its unique requirements.

• Zero-based budgeting, where each item is at zero monetary value at the beginning of the period
• Static or incremental-based budgeting, where historical data is used to add or subtract a percentage from the previous period to draft the next budget
• Performance-based budgeting which focuses on the cash flow of each unit of product or service
• Activity-based budgeting which works backward from the company’s goals and works out what the cost of achieving them would be
• Value-proposition budgeting, where only those line items which provides direct value to the company are included

ALSO READ: Guide on How Do ERP Systems Work 

Importance of Budgeting

Budgeting is a complex activity where you need to pay attention to detail and make informed decisions regarding the allocation of funds.

Here is why it’s important:

• It ensures that an organization has sufficient funds to achieve its goals; with advance planning, you can see which departments and activities need more resources, and where you can reduce spends.
• In addition to allocating expenses, budgets also help you determine how much revenue you need to generate to achieve goals. Budgets help to set pan-organizational and department-wise goals. It is helpful in updating employees regarding the progress of goals and align them towards growth for the upcoming period. Goals determine the expenses required to reach them and vice versa.

ALSO READ: Inventory Reduction Strategies

• It helps you to prioritize projects as you have to predict the ROI on investment per project, how they align with company values, and how much impact they have on broader goals. This necessitates the study of how much value each item contributes to the organization.
• Documented budget information is a pre-requisite if you are seeking investment or loans. Lenders and investors will be interested in analyzing your past performance, current situation, and forecasted financial performance too as it shows how good your company is in handling finances and allocating funds.
• Budgets are roadmaps for the near future, but we know that the future can be very unpredictable. External factors can lay the best plans to waste. You must therefore have an agile approach so that you are able to work around the situation and sail through the tough times.

Budgets can help a business stay on track, but don’t necessarily indicate the performance of an organization.

So how can that be established? By performing a budget variance analysis.

ALSO READ: Importance of Cash Book in Accounting

What is Budget Variance Analysis?

Budget variance analysis is a basic corporate performance management activity, and the application is an industry-standard.

Comparison of the budget with the actuals enables the assessment of organizational performance, and take remedial action to be successful.

Actual results are compared with budget values for that period, and the differences or variances if any, are analyzed.

Budgets are created to guide a business towards its goals, and hence, you must regularly measure how much the business stayed on track.

The comparison itself is simple, with the most critical data coming from the variance analysis.

Regardless of whether the results are positive or negative, the analysis is carried out.

Budget Variance in A Flexible Budget Vs. A Static Budget

If you’re using a flexible budget, you can adjust if there are changes in the assumptions you made during budget creation.

However, this is not possible in a static budget and can cause different results to happen when you perform a financial variance analysis.

ALSO READ: What is a Ledger in Accounting? 

Why Should You Assess the Variances Between Your Budgets Vs Actuals?

For any financial planning and analyzing process, one fundamental procedure is budgeting.

Variance analysis helps you investigate the differences between budgeted and actual, and see where your business exceeded expectations and where it fell below par.

Predictive budgeting can also be useful here.

The finance department may need to explain the causes for these variances.

Analyzing where your business performance fell short and where it exceeded expectations, you can learn to change your financial plan in the future according to the changed situation.

The finance department can quantify business performance and the organization’s financial health, giving management visibility into bottlenecks, victories, and new business opportunities.

Basically, you get to see what worked and what did not.

ALSO READ: What Do You Mean by Bank Reconciliation?

Researching each and every abnormal budget variance can be daunting and take up a lot of time, so you need to decide if a specific variance warrants investigation.

Regular variance analysis can help in the prevention of minor frauds, protecting your company’s finances.

Companies can measure their year-to-date performance and identify the initiatives and processes that caused a positive variance.

After conducting an actual variance analysis, management can identify what remedial measures should be taken.

They can take informed, data-driven actions to put the company on the fast track to greater success.

How Do You Calculate Budget Variance?

Mathematically speaking, this is a simple calculation.

Compare the actual results with the budgeted figures and find the difference in both values.

This is the most common approach, though there may be other methods.

You put the budgeted figures in one column, and the actual figures in the neighboring column, and note the difference in another column.

As it is mainly the sales values and cost values that are compared with the budget figures, this process is also called the sales and cost vs budget approach.

A short description is usually written to explain the budget variance.

ALSO READ: What Is an Inventory Control System?

How To Do Budget Variance Analysis?

Using spreadsheets can simplify your task of performing variance analysis.

You can also opt to choose Budget Variance Analysis Software from Tranquil which will consolidate your spreadsheets and save you the trouble of aggregating the data manually.

1. Collect Data

Collect all the relevant data and collate it in a single location, rather than leaving it in silos or disparate spreadsheets; that can cause difficulties in the variance analysis.

Doing this helps in streamlining the report generation and helps you have more control over the different data versions that may be created.

Normally data from various time periods are collected and stored together; you can then display the details more broadly, and detect trends.

The budget must be a part of this data package, as actual results will be compared with it.

ALSO READ: Why ERP User Interfaces are Important?

2. Identify the forecast amount

Pinpoint the budgeted amount; this is done using revenue and expenses for calculation.

Tranquil financial accounting software consolidates data and rapidly analyzes it, taking into consideration factors like gross profit, net income, cost of goods sold, and so on.

3. Determine the actual amount

Then you need to calculate the actual results for the specific time period – annual, quarterly, or monthly, depending on how you have budgeted. You’re now ready to calculate the variance.

4. Calculate Variances

After getting all of your data in one place, you can make a template to calculate variance.

Put the budgeted figures for all data points you want to compare in one column, like sales, cost of goods sold, labor cost, etc.

Some businesses may have multiple revenue sources.

Here, the budgeted and actual numbers for all sources must be identified; the same rule applies to expenses as well.

Grouping all sales together might not help you identify which product is doing well and which is lagging.

It can happen that some products are exceeding expectations but others are lagging; hence, there may not be an overall impact in spite of individual variances being present.

ALSO READ: Benefits of Integrating E-Commerce and ERP

5. Analyze Variances

Before you begin analyzing, determine which variances really need looking into; is the time and effort spent in studying a variance going to be worth it?

A cost-benefit measurement of the time taken for the analysis can be done to set a materiality threshold.

Once these are implemented, you can start analyzing the different variances.

This part takes the most time and effort.

It is critical that the Finance team members undertaking this task are meticulous and diligent when they try to establish the root cause of each variance.

It would be a good idea to work with the different department managers to get an idea about what happened that could have caused the variance.

6. Compile Management Reports

The next step is to combine all the different results into a unified report for the top management.

The report must comprise of the variances that were picked, and the underlying causes for all of them.

The remedial measures and suggestions to the management on necessary actions should also be included in the report.

The analysts conducting the variance analysis should be thorough and document everything.

They must be prepared to make a complete presentation and answer any query top management has for them.

ALSO READ: What is Landed Cost and How to Calculate It?

7. Adjust Forecasts

After identifying the actual values and developing trends, new information must be used to bring the financial models and the forecast up to date.

Forecasts must function like a compass that helps businesses reach their goals, and also monitor them to ascertain that they are on the correct path.

Ergo, forecasts must be updated for the information gained from the variance analysis, as well as the steps the management chooses to implement.

ALSO READ: What is Storage Cost of Inventory?

While financial variance analysis can be done manually, it can eat into your time, and be prone to errors. Implementing an ERP like Tranquil which has a robust financial management module can simplify matters for you. Besides helping you to budget and perform variance analyses, it can help you manage your finances much more efficiently. Do schedule a demo to know more, and we will be happy to explain everything.

 

For any business dealing in products, whether production or just selling of finished goods, inventory is a critical asset.

It is what generates revenue for the business.

Inventory management is therefore a very important function for such businesses.

What Is Inventory Management?

Inventory management can be defined simply as the process of ordering, stocking, using, and selling a company’s stock of goods.

While this sounds simple, it is actually not so.

It is a complex process where the inventory manager has to consider numerous factors.

What to order, how much to order, when to order, whom to buy from – these are questions that must be answered after taking multiple factors into consideration.

The business needs to have sufficient stock on hand to meet the needs of production or sale to customers; however, excessive stock can lead to high carrying costs.

ALSO READ: Common Inventory Management Problems and Solutions

Local vendors may deliver products quickly while international vendors may be much cheaper.

Then there are seasonal variations in demand to consider as well.

Mistakes in predicting demand can cost a business revenue loss or they can end up with dead stock.

So, you can see that there’s a lot more to inventory management than meets the eye.

Business managers often combine different types of inventory management processes and come up with their own unique system that helps them to efficiently manage inventory levels, pricing, supply chain, logistics, and so on.

However, inventory management can be cumbersome and time-consuming if done manually.

An efficient ERP system like Tranquil can help you automate and streamline your inventory management, thanks to its robust inventory management module.

What Are Inventory Models and Why do you Need Them?

Inventory models refer to the different systems of inventory management that are used by businesses in an effort to efficiently maintain optimal inventory levels.

No one method can be considered perfect – each has its own pros and cons.

Here are a few different inventory models for businesses to choose from:

• Just in Time – this method minimizes carrying costs with its near-zero stock but can be badly impacted by price fluctuations and disruptions in supply chain.
• Day Sales of Inventory – this method is suitable when you are dealing with perishable products, and for small retail outlets with minimal space
• Materials Requirement Planning – this method is ideal to source raw materials across complex supply chains
• Centralized Inventory Model – is useful when you want to track and control inventory levels and movement of products, and minimize inventory shrinkage
• Economic Order Quantity – helps to reduce carrying costs, order costs, and shortage costs, as it involves calculating the ideal quantity to order after considering all relevant factors.
• Economic Production Quantity – when you need to control expenses and shrinkage in production, this method is ideal.

There are even more models out there though these are the most popular ones in use.

ALSO READ: Advantages of ABC Analysis in Inventory Management

Top Trends in Inventory Management

Let’s now check out the most popular inventory management trends:

1. Cloud Technology for Hybrid Work

Cloud technology makes inventory management more efficient as the vendor takes care of servers and software updates, and there are fewer IT problems.

Data like purchases and inventory levels can be easily synchronized across stores, warehouses, and supply chains, irrespective of location.

With remote working becoming more common by the day, cloud computing is being increasingly adopted, and it facilitates hybrid work setups as well.

Cloud-based inventory management systems are the best.

ALSO READ: What is Hybrid ERP?

2. IoT for Complete Connectivity

The Internet of Things integrates cloud technology throughout locations, allowing computers to communicate with one another.

It is possible to add products, equipment, scanners, loading bays, and other things to the IoT network.

ALSO READ: Future of Enterprise Resource Planning

3. Connected Omnichannel Services

This refers to offering multiple channels to customers for purchasing goods – physical stores, social media, specific apps, online marketplaces, and company websites.

This also extends to activities like returns, after-sales service, deliveries, and more, and not just marketing goods and services to customers.

They can get access to data related to warehouses, supply chains, and distribution too.

However, omnichannel services necessitate a highly connected system.

From the vendor to the manufacturer to transporters to retailers, everyone has to be connected and communicating with one another to deliver this omnichannel experience.

ALSO READ: Guide on Zero Inventory

A customer must be able to look up prices online, and stocks at a store they prefer, and go to the store to verify the information.

They should be able to know the status of their orders and get information related to possible delays.

This necessitates real-time communication between different systems and updating of information as it changes.

This means that factors like demand planning, supplier management, inventory reconciliation, and tracking of distribution and logistics need to be coordinated.

Thanks to omnichannel services, customers can get the most updated information possible.

4. AI and Machine Learning

AI and ML are no longer new, but they are being increasingly used in inventory management.

As these systems continuously learn about the inventory system of a business, they help in improving it.

They are capable of integrating inventory levels and track movement across complicated networks, and help in detecting inefficiencies increase expenses.

For example, you may be able to discover that a specific type of packing leads to higher shipping rates.

With IoT integration, artificial intelligence and machine learning get more data to study and become more robust.

5. Data Analytics for Predictive Picking

When a sufficiently large amount of data has been recorded and subjected to analysis, you can speed up picking time in the warehouse.

Analytics can show which products are preferred by specific customers, which items are usually bought together, and so on.

These products can be stocked close to each other in the warehouse, saving pickers time and speeding up not just the picking but delivery too.

Data analytics depends on AI, ML, and IoT.

With development happening in these three spheres, more companies will be able to adopt predictive picking.

ALSO READ: How to Avoid Understocking and Overstocking in inventory?

6. Warehouse Automation

Warehouse automation already exists, but industry experts predict that the automation will be taken to newer levels, reducing dependence on human effort, and thereby, wages spends.

With sharp advancements in robotics, AI, and ML, the areas for automation are increasing, and with greater availability of software and hardware, costs are coming down.

ALSO READ: What is Inventory Reorder Point?

7. AVGs and AMRs for Better Automation

Automation means replacing human effort with machines like automated guided vehicles or AVGs, and autonomous mobile robots, or AMRs.

The former has been in use for over 5 decades, while robots of course are more recent, and hence, capable of doing a lot more.

AMRs are fuelling automation of warehouses significantly.

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

8. Multi-Warehousing

Multiple locations of distribution across a specific region, nation, or even the whole world, are required for distributed inventory management.

A geographically streamlined supply chain management and quicker deliveries are made possible when you store supplies and products.

You can scale and grow easily, and handle crises more efficiently too.

ALSO READ: Benefits of E-commerce and ERP Integration

Major global e-commerce companies and online marketplace companies have been using multiple warehouses to expedite shipping and decrease transportation expenses, spurring others to follow suit.

Multi-location warehouses were especially useful during the pandemic lockdowns, and will significantly help during any emergency.

To make multi-warehousing possible, it is necessary to have cloud technology.

Cloud-based inventory management software is becoming more advanced with improved capabilities, and the cost is reducing, making it a better option by the day.

Multiple Warehouses Enable:

• Quicker shipping as your products can be stocked closer to your customers’ location, unlike when you have a single, centralized warehouse.
• Reduction of carbon footprint thanks to faster shipping
• Quick scaling and growth of your business
• Spreading of risks during natural calamities or political unrest; with multiple warehouses, you can pick up products from a warehouse in a safe location and ship to your customers.

ALSO READ: The Ultimate Guide to Dropshipping

9. Third-Party Logistics

Small and medium-sized businesses are normally not capable of funding the equipment, special software, or warehouse designs to get the most out of specific inventory management methods – so they outsource to TPLs or third-party logistics companies.

This ensures that there is no need to make heavy capital investments, as the TPLs have the requisite resources which the business can access for an affordable fee.

10. Smart Inventory Forecasting

With data analytics and artificial intelligence offering improved insights into both sales and sourcing, businesses are better informed and able to make better decisions with regard to purchasing.

With smart inventory forecasting, companies will be able to predict how much inventory they will need with the dynamic conditions and can maintain optimal inventory levels.

ALSO READ: Difference Between Procurement And Purchasing

11. Personalization

Smart inventory forecasting helps in personalizing marketing messages and product suggestions for customers, based on their past purchase history.

The expectation of future purchasing habits can also help businesses in ordering products well in advance.

12. Safety Stock

Safety stock is a buffer that is maintained to protect against sudden and unexpected demand spikes, production disruptions, or delays in receiving goods that were ordered.

The safety stock helps to meet production or sales demands till new stock arrives or is manufactured.

It ensures business continuity; in the event of a disruption in the supply chain or production, or unexpected demand, the company can continue to sell.

Post the COVID-19 pandemic, the importance of safety stock has increased considerably, with more companies opting to maintain a buffer.

13. Sustainable and Robust Supply Chains

Businesses can achieve better communication across inventory management networks thanks to the technology advancements in IoT, artificial intelligence, and cloud capabilities.

Multi-warehousing and other decentralizing methods will decrease dependency on a specific region.

These changes will make supply chain processes more robust and sustainable not only for individual businesses but also across industries.

ALSO READ: What is Product Bundling in Inventory Management?

14. Investing in Inventory Managers

With the increased adoption of technology in inventory management, the way in which this function was handled has undergone a sea change.

Managers have to upskill themselves and learn new ways.

Companies are investing in training programs, courses, seminars, and certifications for their managers so that they become efficient in handling new systems.

This way, the company derives maximum benefits from their technology investments.

These inventory management trends are by no means the only ones or the final word on the subject; however, these are the most popular ones according to industry experts.

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

As a business, or as an inventory manager, you can simply choose to implement a robust ERP solution like Tranquil, and take the guesswork out of the equation. Our ERP solution has a feature-rich Inventory Management module that makes use of AI, makes accurate demand predictions, and helps you maintain optimal inventory levels. Schedule a demo to see how our software works; we will be happy to answer any query you may have.