Business Software: a change is not a holiday

September 29, 2010

Implementing a new ERP or Business and Accounting software system is not a walk in the park. As with any systemic change, even a comparatively smooth and problem-free implementation will not be without a degree of stress and upheaval.

I was reading this interesting article on the subject of handling the change process, and in general I agree with many of the author’s points. (I do however have concerns about the ease of finding a good, impartial and knowledgeable consultant, but that’s a topic for a different day.)

The remaining points the author makes are very good and well presented. We see some business owners insulating themselves from the entire selection process, only to then complain after the fact that their requirements were not met. Sounds like a mission for Mindreaders Anonymous…

At the other extreme, the business owner (or management) choose an ERP solution without involving the key employees (i.e. future users) in the process. Having a new system thrust upon you without being consulted is not necessarily the best way to win you over, is it? And there’s no question that employee resistance / suspicion / fear will (inadvertently) sabotage any business software implementation, no matter how appropriate the software selection process may have been.

Good article.

More Stomach (or Inventory) Turns

September 20, 2010

Following on from my last post, let’s consider the gross margin vs. inventory turns question. Remember, by “inventory turns” we mean the number of times per year that your inventory, on average, is completely sold and replenished. It’s obviously an average, because inevitably some products remain in stock for more than year. So if you received products only on the first of every month, did not purchase during the month, and had nothing left in stock at the end of each month, the number of inventory turns would be 12.

Generally, a higher inventory turn rate is a good thing (to a point). Firstly, turning over your products regularly allows you to react more nimbly to price changes. Secondly, you will generally maintain lower inventory levels, meaning you’ll have less working capital tied up in the warehouse (and potentially need less warehouse space). And thirdly, as a consequence you’ll end up with less dead stock.

Now, I frequently hear warehouse and operations people making comments about their ERP Software, like “if only the software did X or Y, we’d be more efficient at managing inventory.” And while that’s true to a degree – a good inventory management software system can be a massive aid in improving your inventory turnover – it also requires changes in business philosophy.

Which brings us back to the entrepreneur’s obsession with gross margin, and fear of missing out on sales. The two biggest preconceptions that need to change in this context are:

  1. “It’s a good deal at that price, let’s buy as much as we can – we’ll always find a way to sell it.”
  2. “I must have these products in stock – if my customer orders and I cannot ship immediately, I may lose the customer.”

Here’s a question: what are the pitfalls in the above beliefs? Please use the comments section below to make a suggestion. The best comment will be incorporated, with accreditation, into the third and final segment on this topic later this month.

The Difference between Inventory and Stomach

September 14, 2010

The story you’re about to read is true. Only names (people and company) have been changed, to protect innocent people involved.

Frank Stein is the CEO of MonsterWSD Inc. – a fourth generation family business distributing food related equipment and supplies in a large metropolitan area. Frank is mindful of the importance of gross margin to his business. [Gross margin is the difference between what you sell an inventory item for, and the true cost to your business of acquiring that item and having it in a saleable state.] Most other costs are fixed, and the only significant variables are how much he can sell, and how much gross margin he makes on the sale. (Or are they…?)

So Frank carefully tracks the cost of each item in stock, and will not – under any circumstance – sell an item for less than 20% above cost. Sounds sensible – yes? Well actually, no. MonsterWSD purchase much of their inventory from abroad, and are subject to currency fluctuations.

A couple of years ago, they landed up with a large amount of inventory that had cost them more than the price at which several of their competitors were selling the same items. Now Frank had a choice: sell below cost, or hold onto the items until the exchange rate changed again, and the competitors raised their prices once more.

The question is: why were Frank’s competitors able to sell (and presumably make money) at a much lower price? Good wholesale distribution software, and lower costs, of course – but how?

The answer, folks, is in the title of this post. When your stomach turns, that’s not so good. But the more your inventory turns, the better. You see, Frank’s competitors were much better at managing their inventory levels so that when cost factors reduced, they had very little left in stock, and so were able to purchase items at the lower cost while Frank wa stuck with a large quantity he’d purchased at the higher price.

Anyone who’s studied inventory management would know that Frank would have been better off selling his inventory below cost, rather than holding on to it indefinitely, but without a coherent purchasing and inventory management strategy the problem would re-occur down the road.

Now why do so many entrepreneurs (like Frank) focus on gross margin and totally ignore inventory turns? We’ll explore this further in my next post later this week.

Inventory Replenishment – 3 Common Mistakes

September 7, 2010

The amount of information available on the Internet on Inventory Management, and specifically purchasing / replenishment / procurement, is quite staggering. One would think that, with so much advice and so many tools at our fingertips, we’d all be doing a much better job of purchase planning and management of inventory levels than, say, 10 years ago.

One would be wrong.

Like all tools (and weapons), information used inappropriately can be quite dangerous. And we’ve seen many people in many organizations make some basic mistakes in their purchasing process. Specifically, I’ve witnessed incredibly sophisticated spreadsheet based predictive models that draw data from an ERP Software package, use EOQ calculations and conditional formulae to project demand, and yet result in poor purchasing decisions.

Here are 3 common mistakes when using a spreadsheet model to manage the process:

  1. Ignoring one key factor: any model needs to take into account not only forecast demand and on hand quantities, but also units committed on existing orders, those on unreceived purchase orders, needed for production or assembly, and in some businesses projected returns. A company that typically has upwards of 25% of products shipped pre-December returned in saleable condition in January, totally ignored this in planning and placing orders for February, resulting in major overstocking of those products.
  2. Formula errors: sounds ridiculous, I know, but even the most carefully crafted spreadsheet models tend to become increasingly complex over time, as the author tweaks the model – and at some point makes a mistake on a formula. Any example I’ve seen was a change in the formula that computes the recommended purchase quantity, that was copied to only part of the model, resulting in a different (older) formula being applied to around 30% of the products.
  3. Manual transposition errors: key-punch errors when (manually) generating the purchase orders per the spreadsheet calculations.

The easiest way to avoid these errors: use the purchasing tools available in modern wholesale distribution software to assist with purchasing. And if your purchasing model is too complex for your ERP Software to handle, then either you need to change your software, or you may want to re-think your purchasing model.

Agree? Disagree? Or simply don’t care? Please feel free to comment.

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