The Magic Button

Managing your inventory

Over the years I have had the opportunity to work with multiple companies all trying to do the same thing, sell parts.  Each company taking a similar but slightly different approach to the problems that come with maintaining an inventory.

 Recently I had the opportunity to sit down with a guy that has been ordering parts for the same OEM manufacturer for over 35 years.  This is one of those guys that has been doing the same task for so long that he has memorized a large portion of the part numbers.  He and has intricate knowledge of each of the parts and understands the timelines and seasonality of not only the market, but the parts themselves.  This guy is literally a walking encyclopedia for the brand and the products.

 We got into a conversation about his company and some of the recent changes they had made.  A new ERP system was installed a couple years ago and instead of using the wealth of knowledge, the OEM decided to try to automate everything using algorithms and trends.  They moved him from his position and tried to replace him with an ERP system.  They loaded in the data and started forward forecasting the parts ordering process.  Basically, the OEM was wanting the ERP system to have the insight and knowledge that the human component brings to the table.  They wanted the system to do all of the thinking and dictate the ordering for all of the products they offer.  What they were really hoping for is a magic button that automatically considers all of the instances and adjust accordingly.  This would of course result in fewer people in the purchasing and warehousing departments equating to a substantial cost savings.

Will it work?

 Now I don’t disagree that from a technical perspective, this should work.  The analytical thinkers out there believe a majority of the parts should align with a trend and should be fairly predictable.  It seems very logical.  The problems come with poor data integrity, and changes that the system cannot predict.  Initially, you have to consider the data you input into the ERP has to be extremely accurate.  If your data integrity is not accurate, you have little chance of this system ever working.  The ERP system can only produce a result as good as the data you enter.  You can’t feed a machine a bowling ball and expect it to produce a diamond.  It simply does not work that way.

 The other consideration is changes.  Changes in the market and changes in the product are things the system will never predict.  The human element still has to manipulate the system in order to get the result you need to succeed.  Having a knowledgeable human doing this work is imperative to getting the best result possible.  You can have a segment of parts that sell very well, but if there is an innovation and new items are placed on the market that make your products obsolete, your sales trend is going to change.  Depending on your sku count, this can mean a lot of adjustments need to be done on a regular basis.  The downside to not doing this work means large increases in obsolete inventory you won’t be able to sell.

The moral of the story

 After 3 years of trying to get the system to work, the OEM asked the parts guy to come back and fix the mess they made.  A lot of money was spent trying to pay analyst to fix the system they created.  They doubled the amount of obsolete inventory in a short period of time, and lost a considerable amount of sales due to poor inventory positions.  The moral of the story here is simple.  The magic button doesn’t exist if you are selling to a market that is fluid.  You definitely can pick up a significant amount of efficiencies, but you still need knowledgeable people working to verify the system is producing the desired results.  Instead of looking at the problem from a cost perspective, the risk has to be vetted.  It’s important to remember to consider those lost sales due to zero inventory stock position. The analytical crew usually misses that data point because it cannot easily be tracked.

The best approach

 In the end, you can make things much better by improving your processes and implementing a good ERP system.  Searching for a balanced blend of system and knowledgeable staff is the key to success.  To date there is nothing that can holistically replace a motivated team member with passion, skills and knowledge.

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