A significant benefit of ERP systems is that they can help forecast inventory needs to better match supply with demand and manage inventory costs. In today’s turbulent economic environment, this business benefit of enterprise software is particularly pronounced.
For example, the January 27, 2010 edition of the Wall Street Journal featured an article about how companies are struggling to address the “bullwhip” effects of the economic recovery on their supply chains. The article discusses Caterpillar and other companies that are not seeing a slow and steady increase in production, but instead are seeing highly volatile swings in their supply chains and demand for their products.
During better economic times, companies may have been able to deal with some level of inefficiency in their forecasting and inventory management processes. However, 2010 features leaner business environments with more limited resources, so it is even more imperative for companies to leverage their ERP, CRM, and other enterprise systems to help manage seemingly unpredictable supply chains.
Five Key Factors Contributing to the Need for More Effective Use of ERP Systems to Manage Supply Chains During the Economic Recovery
- Businesses are restocking inventory. As outlined in the aforementioned WSJ article, most companies burned off inventory during the last downturn in order to be more lean. As the economy shows signs of life in 2010, companies are forced to restock their inventory levels. This, in turn, is trickling throughout the entire supply chain; if a big company like Caterpillar decides to order a large quantity of materials such as steel, this has a big downstream effect on suppliers throughout its supply chain.
- The economic recovery is poised to be uneven. Unfortunately, most economic indicators suggest that this will be a choppy rather than a steady or robust recovery. This makes it even more important for companies to anticipate changes in demand and manage their inventories accordingly. This is especially true for companies with a multi-national presence, as different regions of the world are emerging from the recession in very different ways.
- Inventories are likely to be leaner in the foreseeable future. Most businesses are still finding it difficult to access credit, are uncertain about the future, and are therefore more likely to keep inventories as lean as possible. As a result, even relatively small upticks in demand are likely to challenge safety stock margins of error.
- Head-count is not likely to increase in the near future. Most economists agree that unemployment will not ease until 2011 at the earliest, which suggests that companies are not going to be hiring to relieve their lean labor forces anytime soon. As a result, poor forecasting and supply chain management functionality in companies’ ERP systems are more likely to result in overlooking early warning signs of needing to adjust inventory to match demand.
- Managing receivables is more important than ever. For most businesses, the next best thing to cash is receivables. Although not directly related to supply chain management software, robust financial and receivables management in an ERP system will help better finance inventory investment needs in the long-term.
These five reasons underscore the importance of leveraging an ERP system to better manage increasingly turbulent supply chains.