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Inventory Optimization in ERP

Stock availability depends on factors like demand, supply and lead time. However, these factors are subjected to uncertainty. Inventory planners use certain factors to review and update their ERP system. We are discussing below these compensating factors that affect inventory optimization.

Replenishment Strategy

It defines a material planning approach which is required by the ERP system to plan procurement or production of a material. With strategies that automatically calculate safety stock and reorder a quantity based on historical consumption of the material, inventory optimization can be achieved. Key performance indicators for choosing a relevant replenishment strategy in ERP includes past usage value (ABC analysis), usage variation (XYZ analysis), replenishment lead time (EFG analysis), material price (UVW analysis), storage constraints (LMN analysis) and product life cycle (LRODI analysis).

Lot-Sizing Procedure

Inventory Management System looks for the lot-sizing information to determine material shortage. Lot size is defined as the quantity which is either procured or produced. While choosing the lot size, take the periodicity of the requirements into account. If we consider a case involving an expensive material is required weekly, then it is better to consider weekly lot sizes as that will bring material into stock. A monthly lot size would result in high short-term stock value and additional storage costs. Other factors to be considered in materials planning include storage constraints and vendor-dictated minimum lot sizes.

Safety Stock

The additional stock which is used as a buffer to account for demand and supply variability and uncertainty is termed as safety stock. Options for safety stock available in Inventory Software include static safety stock, dynamic safety stock, and automatic safety stock. Static Safety Stock enables the user to manually maintain a safety stock level without considering fluctuations in demand and supply. ERP system determines dynamic safety stock by calculating average daily safety stock needed to meet the planned demand of material for a given period of time. The ERP system uses historical consumption, variability in demand and supply, and anticipated future demand to calculate automatic safety stock.

Reorder Point

The Dynamics NAV Inventory Software automatically triggers replenishment if the stock falls below a defined reorder point in replenishment strategy that includes reorder point planning. Reorder point-based replenishment planning works in tandem with safety stock and replenishment lead time.

Replenishment Lead Time

The total time needed to produce material internally or for the external procurement of a product/ material. The longer the Replenishment Lead Time, the higher the safety stock and vice versa. While calculating safety stock manually, it is recommended to consider replenishment lead time to ensure that sufficient stock is available during that time until new material arrives.

These are few inventory optimization factors that are needed to be updated periodically.

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