KEY CONCEPTS in INVENTORY MGMT … A MISM GRAUDATE must know in order to become a successful CIO

This blog is from personal experience with the de-facto standard of the ERP market this is SAP MM module.  I got a chance to be a part of a project where Inventory Management (IM) module was being implemented. My objective is to give you a brief overview of IM process so that when you become an IT manager you are aware what is the de-facto industry standard for IM. This process is not just SAP specific but most of the ERP vendors be it oracle, MS Dynamics or anything else all use a similar IM structure and the names might just differ. As far as the pre ERP era is concerned all what is told in this blog was on papers and the Inventory was processed in a similar fashion just that the technology and automation component was missing.

Let us consider you get a job in Apple Inc. as an IT Manager after passing out from Carnegie Mellon University and you have been given the responsibility to prepare a blueprint of Apple’s IM process in SAP and you have to share this document with stakeholders who have no clue about the IM process at Apple. What you will do? How you will do? Where to start?

First thing that we need to understand is that holding too much inventory and too low inventory both is bad. A company must understand its inventory needs and should try to minimize costs resulting from obtaining and holding inventory and should also understand how much inventory it should hold for number of valid business reasons.

Second that that you should understand is the Plant Structure. You should understand how a plant is used in IM process. Plant is a location that holds valuated stock or as an organizational unit that is central to production planning. For example in Apples case it can be California based plant that assembles mobile components and packs the final product. A plant can be further divided into one or several Storage Locations. Storage Location is the place where actual inventory is held and is the lowest inventory level in the SAP IM component (exception is there when you implement SAP warehouse component). A storage location can be a physical location or a logical location i.e. it might be virtual just for the sake of ease to maintain the inventory in the system. 

Thirdly you should understand the Goods Movement process. It refers to the movement of stocks within the plant that can create a change in stock levels within the storage locations inside the plant. The stock transfer can be either inbound from one of your vendor, outbound to your customers, a stock transfer between plants or an internal transfer posting within a plant. Besides that you also need to understand that when the items are in the plant they need to be stored in an area that is appropriate for their physical characteristics. Besides that whenever there is a receipt of material from a vendor then you have Goods Receipt process and whenever there is a reduction in stock triggered i.e. goods are shipped to the customer there is a Goods Issue process. Many times items purchased from vendors have defects or fail quality testing then a Returns process comes into picture and many times there is a critical or high priority production needs to take place so a Reservation process needs to take place in order to hold the material.

Fourthly u should understand that unnecessary movements inside the plant or between storage locations is a waste of time energy and resources and companies should minimize this kind of movements. Well said this some of these movements are inevitable and Stock Transfer takes place when there is a physical movement of materials and Transfer Posting takes place when there is a logical movement of material.

Fifthly suppose after 10 years Apple merges with Samsung (I strongly believe this can happen – if Apple stops innovating J ) then there can be a scenario when two inventories will need to be consolidated and there can be an issue where the material number nomenclature is the same and this will result in a conflict. In order to overcome that whenever there is a M&A activity in a company Material Conversion takes place.

Finally on of the most important concept is that of Physical Inventory, we all are humans and we are bound to make mistakes. Physical Inventory is a count of what is currently in stock in your companies’ plant or storage location, compared to what the SAP software indicates is in stock. Every year there is a manual counting of materials in inventory in order to verify that the system is in sync with reality and also help us in curbing any sort of mismanagement / illegal activity.

I hope this article will help you in understanding basics of IM for a IT manager. There is plethora of information online. I would recommend you to buy a Discover Logistics with SAP ERP (http://www.sap-press.com/products/Discover-Logistics-with-SAP-ERP.html) from where I have got most of the above information.