Author: TRANQUIL

Almost anything you buy today has barcodes – from apples in the supermarket to the latest Smartphones, you can find them everywhere.

In fact, they have become so commonplace that we have almost stopped noticing them.

Barcodes were invented over 7 decades ago, and today they are important tools for any business.

They help in bringing greater efficiency to inventory control and sales operations and can keep track of product movement across the supply chain.

What Is a Barcode?

To put it simply, a barcode is a rectangle containing upright black lines of differing thickness, numbers, and white space, which combine and identify products and their details.

Scanners in computers, mobile devices, and standalone scanning devices are capable of using the unique bar–space–number combination to extract the product data.

As scanners (both handheld and checkout station ones) can read them and instantly retrieve information, they can save time and money, as it eliminates the need for a manual search for getting product information.

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1 Dimensional and 2 Dimensional are the two main types of barcodes.

The former is found on groceries that one buys, and the second is generally seen on ads or some products, and it takes the user to the company website.

1-D or linear barcodes are the most popular and can be easily read by most scanners.

Universal Product Code in the US and European Article Numbers in Europe are the most commonly used linear barcodes.

How Do Barcodes Work?

0 and 1 are represented by the width of the black bars, and their sequence signifies a number between 0 and 9.

The scanner’s processor or the computer connected to it contains information on what product is mapped to each unique bar and space combination; it performs some mathematical operations to identify the right item and displays it on the screen.

In warehouses, barcodes may encode product features like color, size, location, etc. so that the company gets inventory details and fulfill orders or physically count inventory quickly.

In a retail store, the barcode may contain the name and price of an item an employee needs to ring up a customer.

Barcodes can be used by organizations to track products across their life cycles – from production to distribution, buying, maintenance, and repair.

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Barcode Elements

Barcodes have a uniform design to enable scanners to read them and send the coded information to a computer.

Through different elements, a barcode may contain information regarding manufacturer, product category, origin country, and so on.

The different elements are the check digits, stop character, quiet zones (white spaces), start characters, data, and so on.

Types of Barcodes

1. Linear Barcodes

Black upright lines with numbers below – these linear barcodes are the ones we see most often, they contain letters, numbers, and symbols, each mapping to product attributes.

To function correctly, a 1-D barcode should be linked to a database.

These codes are used on books, consumer goods, shipping labels, and loyalty cards.

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2. Matrix Barcode

These are 2D or QR codes and are capable of storing more information like website URLs, quantity, images, etc., and do not need to be linked to a database to reveal this information.

QR codes often direct users to the product website.

QR codes for inventory tracking are being increasingly used where meticulous tracking of products or components is necessary, like pharmaceuticals and medical equipment.

3. Data Matrix

This type of 2D barcode is capable of storing files and have the exceptional capability to check errors.

It is robust and can be read even if damaged, so often used on appliance electric rating plates, circuit boards, surgical tools, etc.

ALSO READ: Guide on Zero Inventory

Differences

1D barcodes have lines in one direction while 2D can have both, and also other shapes – allowing them to contain up to 2000 characters, against 80 in 1D barcodes.

2D barcodes also necessitate sophisticated scanners or smartphones; they can also be small in size, making them perfect for small items.

Benefits of Barcodes

As they give a quick and unambiguous ROI, barcodes are very popular.

They offer benefits like:

1. Accuracy

By eliminating manual data entry, you can achieve more accuracy in product information.

Barcode errors are almost nonexistent

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2. Real-time Information

Whenever a barcode is scanned, the inventory and sales figures in the company’s systems are instantly updated, offering real-time, updated data to businesses.

This helps in calculating valuable KPIs that offer insights into the inventory and sales performance.

3. Less Training

Employees don’t need much training as barcodes are self-explanatory, and reduce need for memorizing.

Even without knowing product codes, employees can be productive.

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4. Inventory Control

Companies can avoid spending excessively on products and improve their inventory management.

Employees have access to updated inventory data which empowers them to make informed decisions regarding purchases and discount offers, which eventually help in reducing inventory holding costs and avoiding dead stocks – translating into long-term profitability.

5. Reduce Costs

The initial financial outlay is not as huge as for other similar systems, but this system offers immense value.

Small companies can start small with just a few barcodes for internal use and can increase the number as they grow, without incurring huge cost.

ALSO READ: What is Product Bundling in Inventory Management?

Uses of Barcodes

1. Inventory Tracking

Businesses have to know current stock levels and where they are located at any given time.

Warehouse employees or mounted automated scanners scan new products 1) when they come in, and 2) when they are shipped out.

Every SKU has a barcode linked to a database with the requisite product data.

Thus, barcodes being scanned when products come in and go out helps in inventory management.

2. Asset Tracking

Businesses use QR code for asset management, for tracking assets used to support their everyday operations – vehicles, equipment, computers, etc.

When combined with asset tracking software, barcodes enable businesses to track the asset status and location, storing important information regarding repairs and maintenance, as such assets are held by companies for years and used for prolonged periods.

Barcodes for mobile items like vehicles and computers may also show details of last usage.

This helps management understand the condition and usage of various assets, to plan for the future.

ALSO READ: What is Asset Depreciation and Why is it Important?

3. Invoicing

Invoices with barcodes become easy for tracking accounts payable and receivable, and to also link them to specific customers.

Scanning the barcode at payment receipt can ensure that the correct account is credited, and so on – this can also speed up the fulfilment process.

With invoice printouts, warehouse workers can simply scan the code to see which items to pick from where, eliminating errors, and can scan barcodes of items after picking to ensure all items are as per the order.

ALSO READ: What are the Benefits of e-invoicing for your Business?

4. Mail

Companies can also use barcodes to track packages and documents sent by mail by just scanning all packages before sending them to the courier companies.

This links tracking data to the order which can be sent to customers to check order status.

5. Mail Merges

Mail merge is the linking of a spreadsheet or similar data source with other documents to populate the data automatically in the predefined fields.

Companies use mail merges to generate barcodes for specific item batches easily – and is more efficient than manual handling.

What is Barcode Asset Tracking?

It is a simple and economical method for businesses to manage and monitor their physical assets.

Barcode labels and readers make it possible to perform lifecycle management of assets and for inventory control.

Every organization needs physical space, land, appliances, furniture, office supplies, computers, and accessories to function; manufacturers and other businesses may need heavy machinery and other equipment.

All these are assets, needed for effective functioning, revenue generation, or for maintaining operations.

The tangible, durable equipment or properties used by organizations in their operations for revenue generation, are called fixed assets.

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Their value depreciates as they are used, and this has to be recorded in the company’s books of accounts.

Without that, it is not possible to know what the fixed assets the company owns, their location, and their status.

This kind of neglect can cause assets to be misused, damaged, stolen, or lost, leading to heavy expenses, taxation mistakes, frustrations, and waste of time.

With QR code equipment tracking or barcode asset tracking, you can allocate unique barcodes to every fixed asset.

When it’s scanned, it will reveal the chief properties of the asset, its location, and any other important information the company wants.

Along with asset tracking software, barcodes can connect users with information like its entire history of maintenance, depreciation, maintenance schedules, relevant photos, or any other relevant records.

ALSO READ: What is a Ledger in Accounting?

Keep Track of IT Assets with Barcoding

Tracking IT assets is critical because most companies today invest huge money in them.

Failing to track those assets can cause a serious dent in the bottom line.

IT asset tracking offers several important benefits – mainly, transparency in your efforts of IT asset management.

It helps in recognizing and eliminating flawed IT assets, say those that have frequent problems, leading to workflow disruptions and downtimes.

It also affords greater visibility into IT assets, enabling management to prevent duplicate purchasing and identifying idle assets, reassigning them to teams that need those assets instead.

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A platform for IT asset tracking helps businesses to stay updated with their records when they remove certain assets.

Precise maintenance of records eliminates ghost assets and companies can avoid paying insurance for assets no longer in their inventory.

You can also configure notifications to make sure that the correct procedures are followed for the disposal or retirement of fixed assets.

Customized alerts allow IT managers to stay on top of routine services, updates, and maintenance to ensure maximum uptime and efficiency, and minimal risk from cyber security threats.

The Benefits of Tracking Assets with Barcodes

QR code asset tracking offers multiple benefits:

• Improved accuracy of inventory management
• Fast data collection
• Reduced cost of asset tracking
• Fewer errors
• Easier maintenance of records
• Easy rollout with short learning curve for employees
• Real-time location updates
• Information on maintenance schedules
• Captures and stores a lot of information for every asset
• Better data integrity
• More accountability
• Lower cost of labor
• Save time

Modern organizations realize that barcode asset tracking is critical for success, and not merely for accounting and compliance purposes.

While earlier, organizations had to depend on expensive handheld scanners for the purpose, today QR codes and barcodes can be scanned by Smartphones and tablets, which can be used for various other purposes too.

You simply need to have a robust asset-tracking software solution installed.

Tranquil asset management software is a robust solution that can help you do all this and more. Schedule your free demo now to know more! We are happy to explain how it works.

The success of a company depends to a great extent on how well it recruits, inducts, manages, and rewards its employees.

You cannot afford to do guesswork here; if you leverage the power of data, you can get all of it right, and be successful.

You can be proactive and organize programs for career development, and compare total remuneration metrics against the cost of bringing new employees in the place of top-performing ones.

Employee turnover refers to the number of employees quitting a company in a specific time period.

Usually, this is a one-year period.

It can be measured pan-organization or department-wide – and even demographics-wise; like males or females, which age groups, which designations etc.

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Calculating Employee Turnover

Computing the employee turnover rate may sound simple, but there are multiple factors that can tilt the scales.

The HR department should evaluate the rates of attrition and the reasons for the same.

If they are unable to do so, they can consult external human capital management specialists and get insights from them.

According to HR specialists, you need to calculate the turnover rate of employees by dividing the number of employees leaving in a specific period, say a month by the average number employed on the payroll in that same time period, and then multiply the figure by 100.

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This means you need:

• Complete headcount including every employee on the payroll, temporary workers, workers laid off for a short period, those on leave, etc. It does not include workers supplied by external agencies or contractors and are on that agency’s payroll.
• Average number of employees per month; divide the total number of employees every month and divide it by the number of months or total headcount from the reports, if you need to measure this more frequently.
• Total separations which comprise both terminations and resignations, but do not include temporary lay-offs, and employees on vacation, etc.

So, we have the formula:

Number of separations / average number of employees x 100 = Employee turnover rate

Therefore, for a company with an average of 250 employees working in a particular month, and 30 employees go, the turnover rate would be 12%, when we follow the formula:

(30/250) x 100 = 12%.

Remember to exclude temporary employees or layoffs on either side of this equation, which can skew your results and give you a higher employee turnover rate than the actual.

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What is the Cost of Employee Turnover?

Replacing skilled employees can be expensive; which is why, businesses implement measures to decrease employee turnover, whether voluntary or not.

The cost of hiring, onboarding, and training a new employee can be nearly double the salary of the existing employee.

If you apply the formula, if you have to replace an employee who earns SAR 100,000 a year, you may have to spend up to SAR 200,000.

Let us continue with the example of turnover ratio.

You have 12% turnover; if the average salary is SAR 80,000, this means you could have to spend up to SAR 160,000 each on the 12 workers you replace per year.

If you’re experiencing high turnover because of wrong hiring and having to terminate the employee almost immediately, it’s a case of financial and productive loss.

It also impacts the employee morale negatively, and affects the quality of work done by others.

Therefore, the cost of employee turnover is not limited to the financial aspect.

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Types of Turnover

Employee turnover is mainly of two kinds – voluntary and involuntary.

Voluntary Turnover

It is voluntary turnover refers to the employee choosing to quit; the reasons could be any – better job opportunity elsewhere, dissatisfaction at your company, conflict with coworkers, moving to another city, disability, and so on.

There could also be instances where employees move from one department to another; in this case, there is turnover for a particular department but not for the organization as a whole.

Involuntary Turnover

When employers dismiss an employee for under-par performance, bad attitude, fraudulent activities, or any other reason, it is termed involuntary turnover.

Turnover is completely normal for any business and cannot be eliminated; however, you can keep it low.

Now what constitutes a low turnover depends on the industry, size of the company, region, and type of job.

This means a retail chain cannot compare their turnover ratio with a bank, and so on.

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What Causes Employee Turnover?

Now that we’ve seen what employee turnover is and how to calculate it, let us look at the main reasons for employee turnover:

Industry experts agree that the main reasons for employees moving to other companies are better pay, more holidays, great benefits, prospects of promotion, conducive work atmosphere, and supportive superiors.

Turnover can be stemmed significantly when a company is prepared to hike overall remuneration, be more flexible, ensure their managers are effective and take quick remedial action when they notice above-average attrition in any particular department.

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A company that does not value its employees and care about their wellbeing is a poor paymaster, or does not have a positive work culture and atmosphere, is certainly going to have a higher turnover rate than those companies who do implement these things.

Mind you, however, there is no way you can have zero turnover.

Some attrition is anticipated, and normal. It is when the turnover takes place for the wrong reasons and takes place at an unreasonable rate that is bad.

Let’s take a look at the most common causes of employee turnover:

• Few openings for professional growth or advancement
• Burnout and fatigue
• Internal transfers and promotions
• Dissatisfaction towards management
• Harmful work environment
• Better offer from another company
• Significant life or family event
• Poor life-work balance
• Poor performance at work
• End of contract period
• Misbehavior at work
• Not a team player
• Committing fraud
• Damaging company reputation

ALSO READ: Ways to Improve the Procurement Process

When you understand the reasons for employee turnover, you can take the requisite action to maintain your staff at the levels you need.

Multiple factors impact turnover, and so the benchmark level of turnover depend on those factors.

It is critical that businesses consider industry related as well as individual factors to measure their turnover rate, and evaluate the results to make informed decisions to bring down that rate.

Turnover Rates and Your Business

You cannot look at turnover rates in isolation; you need the context. Certain industries have higher attrition than others – like hospitality, ITES, retail, etc.

A company should compare its results with other businesses in the same industry to get an idea of how many employees churn they have.

If you take the example of retail stores, you’ll find that there are many newcomers, seasonal workers (more help is needed for the busy season), and part-time workers.

But such businesses can also reduce turnover by improving employee satisfaction with say better benefits, working hours, discounts on store products, and so on.

In general, high turnover rates are definitely problematic.

It could either be because of improper hiring, poor culture, bad compensation structure, inadequate benefits, incompetent managers, or any other factor.

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Can you Reduce Employee Turnover?

Yes, it is possible to bring down the employee turnover rates to acceptable levels.

Here are some tips:

1. Define Managerial Responsibilities

Make sure that your managers know what is expected of them to stem employee turnover.

Managers must be able to understand personal motivations and what encourages employees to stay or leave, to be more productive, proactive, loyal, and so on.

It is vital that managers report on these matters regularly and keep top management in the loop regarding the causes of employee churn.

Each employee who leaves is likely to have a completely different set of reasons.

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2. Communicate Openly about Opportunities within the Company

Most employees want to move up and progress, and earn new skills, and of course, better pay.

They may not be aware of such opportunities existing within the organization unless you publicize them.

When you do communicate openings, most workers will be happy to grab the opportunity as they are likely to be more comfortable continuing in the same organization.

This helps the business save on recruitment expenses as well.

3. Study Turnover Data Meticulously

If there’s more attrition in any specific department it is essential you find out the cause; is it unsupportive managers, dissatisfaction with their roles, not getting along with colleagues, unhappy with salary or benefits, or any other reason.

4. Communicate Properly

Hold town halls and conduct surveys to really listen to your employees; after all, communication is a two-way activity.

You can highlight company vision and regulations, and give an ear to employee problems; recognize employees for their good work, and announce programs for professional development, newly introduced benefits, and so on.

ALSO READ: How ERP Can Improve Business Efficiency?

Improve Tracking and Employee Turnover Reduction with HR Software

A robust, feature-rich HR management software like Tranquil can help you bring down employee turnover significantly by

• Helping HR personnel to collect and study data easily and track HR metrics that can help bring down attrition (including turnover KPIs). HRIS analysts can provide concrete answers to managers rather than confusing spreadsheets full of figures which they need to decipher.
• Enables companies to identify problems with absenteeism, and implement predictable and flexible scheduling systems that employees need.

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• Setting off alerts at preset triggers; for example, when an employee completes one year at a company, the manager is notified of it. This shows that the employee is not merely job hopping; it also helps the manager to make the employee feel valued by having a small celebration of the work anniversary, and so on.

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• Linking performance KPIs with company goals can help recognize and reward the achievements of employees. It can also help you to see what is your employee strength hierarchy wise and to prepare the junior employees to advance to the next level of seniority with the proper training and well-defined career paths.

ALSO READ: What is Product Bundling?

• Easing the transactional elements of the employee’s job and making it accurate, like correct calculation of payroll and timely payment, smooth onboarding, correct tracking of accrued vacation days, ensuring easy enrollment for benefits, responding quickly to their queries and redressal of their solutions, can go a long way in improving employee satisfaction and reducing churn.

With the right HRMS like Tranquil, you can provide a better employee experience, improve engagement and satisfaction, and reduce employee turnover rates. This can help your company save costs and improve productivity across the organization. Tranquil can help you keep your employees happy and productive. If you’re not sure yet, simply schedule a demo at a time of your choosing, and we’ll be happy to show you how.

 

While most people think that it’s the product, marketing, or the founders that make a company successful, it’s only partly correct.

What makes a company successful, is the human resources – the employees.

If you are one of those people tasked with choosing those people, it can be pretty daunting.

Human Resources management is a challenging job – crafting company policies, hiring new talent, managing employees, and ensuring timely payments – it’s a lot, and it’s easy to make mistakes.

Common HR Mistakes

Let’s take a look at the most common HR mistakes and how you can avoid making them.

1. No HR Plan

Not having an HR plan in place can turn out to be pretty risky, as it will lead to uninformed and random decision-making, and it may not be the best thing for your business.

To craft an HR plan, you can take a look at what the big companies in your industry are doing, and develop something on similar lines.

An HR plan will guide you about your staffing requirements – how many employees to hire, the order or priority for each departmental staffing, and more.

This also affords the time to think about and start drafting your HR policy and procedures.

ALSO READ: Must-Have HRMS Modules and Features

2. Not Documenting, Displaying, and Updating HR Policies

This is one of the biggest HR mistakes to avoid.

Depending on your region of operation or industry, there may be regulations that necessitate displaying posters providing details on important sections of regulatory compliance related to labor laws, medical leave, etc.

Therefore, every business should record its policies and procedures properly.

Policies should be framed regarding BYOD, social media use, safety at the workplace, appraisals and promotions, disciplinary actions, and so on.

These policies must be in line with government regulations.

3. No Employee Handbook

While you may find it unnecessary, it is a valuable tool for small businesses.

Employee handbooks clearly state what employees can or cannot do at the workplace, their rights and duties, safeguards, and more.

HR policies are mentioned in full so that your employees have a manual and are aware of what is expected of them, the company policies and procedures, and the like.

You can make use of templates for the same.

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4. Inadequate Interdepartmental Communication

It is important for the various departmental heads to communicate with the HR management and inform them of their expectations regarding the number and type of employees they need for their departments.

The same has to be communicated properly to the prospective candidates as well so that everyone is on the same page regarding expectations, job roles, duties, and skills needed.

This way you will be able to get the right persons to apply for the job in the first place.

5. No Proper Hiring Process

It can be daunting to work out how to hire and whom to hire when your company is relatively new, or your HR personnel is new; not having adequate information regarding the process or the recruitment methods your company needs to get the right fit can lead you to create mediocre job descriptions.

This could translate into hiring employees of a low quality and not really the right people for your business.

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It is vital that the HR department has ample information regarding the resources required and recruitment methods that will be ideal for your company.

You need to know the desired skillset of your employees, and the number of people you may hire in the near future, and so on.

You can take advantage of several resources and tools available for this purpose, hire a recruitment firm if you have the funds, or, invest in a robust HR solution like Tranquil.

This will help you streamline your HR process from end to end.

6. Not Training Employees

Unfortunately, many businesses look at training as unproductive and unnecessary, and is a huge HR mistake; they feel that employees will automatically learn on the job.

If you do that, you will have employees with haphazard skills and half-baked knowledge.

But if you provide proper training, your employees will be able to perform their tasks more efficiently and be more productive.

Training helps in lowering turnover rates as it makes employees feel valued, and that the company wants them to be successful, for which they are taking requisite measures by way of their professional development.

Happier employees mean less attrition.

Therefore, you must ensure you provide adequate training.

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7. No Proper Onboarding

The interview of a candidate is the first step in a proper hiring process, and it is followed by an orientation.

The hiring process ends once the candidate is handed their offer letter, and they start their work.

A systematic onboarding process helps in retaining new recruits and boosting their productivity.

When new employees come in, they need to be provided the right orientation training, and their workstations must be properly set up.

It is a good idea to have an onboarding checklist so that the whole process is seamless – it will also help to make the employees feel more comfortable and quell their apprehensions.

The checklist can guide the HR employee in charge, the new hires, and the managers with a list of what is to be done in the first few days, helping them be more productive early on.

ALSO READ:  ERP Implementation KPIs to Know

8. No Retention Planning

Getting qualified and high-performing employees to stick on at the company is even more important, and probably difficult, than even hiring them.

You should try to think what motivates your employees by taking feedback or individual discussions and create experiences that are aligned to those motivations.

Employees all over the world are most concerned about these factors:

• Job security
• Work/life balance
• Health – physical and mental
• Fair treatment
• Getting recognition
• Trustworthy and supportive coworkers
• Financial stability
• Proper rewards for achievements

When you take measures that improve these areas, you will see that your employees are happier, they display more loyalty and are more productive.

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9. Bad Hires

Hiring the wrong people can cost any business dearly.

The wrong person does not necessarily mean that they don’t have the required qualification or skill set; it could be about mismatched values, attitudes, and vision too.

Whether it’s professional or interpersonal skills, if your new hires lack them, you will have to spend a lot of time, money, and effort in training these people to acquire those skills.

To avoid hiring mismatched professionals, it is a good idea for the interview process to take place in rounds – managers, executives, and coworkers – to get a more balanced opinion about the person.

You will get an idea of the general attitude and abilities of the candidate, and this will help immensely in taking the final decision.

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10. No Records of Performance Issues

When you document issues in performance, it enables employees to improve their daily tasks; more importantly, in case there are legal repercussions, this becomes important evidence.

The company can show that they had a valid reason to discipline the employee.

The record should mention the expectations from the employee and their failure to fulfil them, or company rules and regulations and the violations committed by the employee, any previous disciplinary action or counseling, the expectations in the future, and consequences in the event of not fulfilling them.

You could also include performance improvement plans in this document

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

11. Incomplete or Missing Employee Information

It is essential to have complete information about your employees including the full address, contact information, bank details, the date they joined the company, years in a specific role, performance appraisals, promotions, pay hikes, leaves, recognitions, salary, benefits, disciplinary actions – everything.

This will be of help in many situations like considering promotions, disciplinary actions, pay hikes, recommendations, and so on in the future, in addition to ensuring proper and timely payment of wages.

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12. No System to Evaluate Performance

This is a very serious HR mistake to avoid.

When you conduct performance appraisals, it has two purposes: one, employees know that they cannot slack off, and will do their best to be productive; two, they will be happy that their efforts will be recognized and rewarded.

By not conducting performance appraisals or recording them properly, you will either encourage employees to slack off or make them unhappy.

HR automation also helps in tracking performance reviews, via continuous, comprehensive feedback from departmental heads, peers, executives, and self-assessment; in other words, through an agile process.

This helps employees feel heard and assures them the chances of future improvement.

These reviews should be taken seriously so that both managers and employees know that they are important.

ALSO READ: Why Distribution Management is Important?

13. Non- Compliance and Potential Litigation

HR teams must be alert to any change in the laws and regulations related to human resources or labor, and immediately notify changes to employees and managers.

This helps everyone in the company to be aware of compliance expectations.

It also helps the company to stay compliant and avoid lawsuits by employees due to non-compliance.

14. Unsecured Data

Businesses of all sizes face multiple cyber-security risks like data breaches and theft, ransomware, phishing attacks, and so on.

When employee information is compromised, malicious persons can use their credentials to steal sensitive financial data and even commit financial fraud.

Unsecured data can prove to be one of the most expensive HR policy failures.

It is important that you have tight measures in place and train your employees regarding data security. Guide them on the need to have strong, cryptic passwords and the need to change them on a regular basis to reduce the risk of a data breach.

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15. Inadequate Payroll System

Payroll is one of the most complexes, yet important HR processes, which must be carefully handled to avoid wrong payments.

If you are careless, you may calculate salary or bonuses wrongly, or not compensate employees adequately for work-related accidents, leading to unhappy employees.

When you don’t record employees’ information or classify them wrongly, you may end up delaying their payroll.

Unfortunately, it’s all too common.

The best way to avoid this HR mistake is to automate your payroll; automation can also help you maintain compliance with labor, wages, and compensation laws.

ALSO READ: What Is Cloud Data Protection?

Automate your Payroll System Now with Tranquil

Tranquil’s automated payroll system can help you stay compliant, and have error-free, timely payroll calculations.

All the necessary information is stored in a centralized database, and exact calculations will be performed for each and every employee depending on their role, salary structure, benefits, actual time worked, and so on.

The system maintains proper records of due wages and payment dates, eliminating mistakes often made in manual systems.

ALSO READ: A Detailed Guide to Stock Status

To Sum Up

By avoiding these common HR mistakes, you can run your business smoothly and efficiently. You can hire the right people, inform them of your expectations and their rights, retain them, make them feel valued, boost their productivity, ensure compliance, and protect yourself from litigation – all with a robust HR solution like Tranquil.

We’d be happy to show you how it works and how easy your HR processes can be – just be sure to schedule a free demo at a time of your convenience.

 

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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• 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.

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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.

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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.

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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.

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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

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• 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.

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• 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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.