An ERP Inventory Management System in Retail: Why is it not enough?

  • Jul 12, 2022
  • 12 min read
Cover: An ERP Inventory Management System in Retail: Why is it not enough?

Retail is a dynamic and competitive sector. To excel and achieve results, you must have advanced, proven solutions at your fingertips. And it is often necessary to state that there are no universal means, and technologies must be chosen specifically for the industry or challenge.

By the way, about challenges. There's been enough of them lately in everything related to supply chains and inventory. And this was once again confirmed by the Goldman Sachs 29th Annual Global Retailing Conference, at which it was noted that large retailers are forced to keep more than expected stocks to avoid disruptions in supply chains. And it follows that the conversation about which technological solutions best help to overcome difficulties in logistics and inventory management is even more relevant.

What are the most popular inventory management tools?

As the retail market, in general, and specific companies, in particular, evolve, retailers can use various tools to track the inventory status and support replenishment procedures. 

  • Spreadsheets. For some time, even well-known Microsoft Excel can satisfy business needs. This tool, however, requires a lot of non-automated work by employees and managers. Too much depends on the accuracy and level of people's training. Errors due to the human factor can affect the results significantly.
  • Accounting or ERP inventory management systems. As sales volumes, SKUs and inventory increase, using spreadsheets becomes extremely inefficient. At this point, the retailer decides to implement an accounting system or ERP system. These can be systems of global vendors such as SAP, Oracle etc., local providers, or custom software developed in the company.

Such systems can cover multiple business processes of the enterprise and are not aimed solely at stocks and logistics. The inventory management option in such software is usually provided as part of one of the modules and can provide basic functionality and stock analytics.

  • Specialized inventory management systems. As the retail chain grows, the management is faced with the fact that if the capabilities of complex systems remain pretty sufficient for some business areas, then crucial business processes begin to require more expertize, extended functionality and higher-level analytics. This is especially true for inventory management, as it is one of the largest cost assets in a retail business, along with salary fundand space rent. When inventory volumes become so significant that any mistake costs dramatic losses, companies consider an additional advanced solution - a specialized automated system for inventory management. 

LEAFIO Inventory Optimization is a cloud-based solution designed for inventory management at all levels of the supply chain: from distribution centers to outlets. For the development of this IT product, significant volumes of data on retail were used, which made it possible to take into account the specifics and subtleties of the industry.”  
Helen Kom, Product Director of LEAFIO Inc.

How does a retailer know that an ERP inventory management system is no longer enough?

Companies can use the various types of tools we've described, separately or in combination, so that their functionality complements each other. The decisive factors in the choice of tools are the features and priorities of the current stage of business development.

If you're in doubt about whether you should switch your inventory management to specialized software, ask yourself a few questions:

  • How satisfied are you with the levels of stock availability and inventory turnover?
  • Are there any problems due to the unavailability of certain products?
  • Are you concerned about dead stock?
  • Are you satisfied with the results of your promo campaigns?
  • Do you think that your employees are spending too much time making orders?
  • Do the tools you currently have provide analysis of inventory management metrics at a level that allows for process improvement?
  • Does the situation arise when the period of deferred payment of goods is less than the average period to sell the inventory?
  • Is your existing inventory management software enough to help you monitor suppliers for timeliness and completeness of their deliveries?

If the answer to at least a few questions from the list was affirmative, then the inventory management processes of your retail chain need additional improvement. 

Most growing retailers go through milestones of gradual improvement of inventory management automation. Tools in this area should match the scale of operations and complexity of business processes. As the number of SKUs, suppliers and outlets increases, the functionality of spreadsheets becomes insufficient. Similarly, over time, dynamically developing retail chains may find that the capabilities of ERP systems regarding inventory are limited and need to be enhanced with specialized tools.

Benefits of specialized inventory management solutions

Let's examine why an ERP system alone cannot effectively manage your retail business's inventory. Additional advantages brought by the use of specialized inventory management systems, in particular, are manifested in the following aspects:

1. Advanced forecasting and higher automation level 

ERP software demand forecasts, in most cases, are based on data from past periods. But the conjuncture and circumstances of the current period may differ significantly from the previous ones. Accordingly, it is risky to order goods based solely on historical data without taking into account the variety of demand factors.

The demand forecasting algorithms used in the software play no small part. If this element of the system's functionality is irrelevant, purchasing or store managers begin to adjust the software-calculated orders based on their experience and understanding of current demand. Accordingly, additional risks appear. When it comes to categories such as fresh food products and medicines with limited shelf life, the cost of an error in inventory planning becomes more dramatical.

Modern automatic replenishment systems are capable of generating thousands of orders every day. They take into account such factors as seasonality, promotional campaigns, supplier schedules, lead times, current balances, goods in transit, etc. The system will calculate and apply the necessary factors; the employees only have to follow the hints and make minimal adjustments if necessary.

High inventory management automation allows you to significantly redistribute such valuable resources as the working time of specialists engaged in procurement. The less need to manually create or adjust orders for suppliers, the more opportunities to shift employees` focus to service improvement and innovation. 

2. Prevention of problems instead of their late detection 

Overstocks, lost sales, and financial losses from write-offs and disposal of expired goods are the worst nightmare of any retail manager. An accounting system will show you, for example, a poor turnover of capital but it will not explain what caused them.

Since specialized programs are developed for specific inventory management tasks, they can provide not only a maximum level of immersion into the business process but help prevent problems through continuous KPI monitoring and timely prompts.

For example, LEAFIO has the insightful dashboard as the purchasing manager’s main working page by default. It provides insight into how surplus and lost sales have changed. If there is a negative trend, it's necessary to pay attention to additional reports which help understand the cause of the trend. Using methodologically sound approaches, the solution gives the manager an opportunity to see in just one click what is wrong in the company's inventory management. It provides not just information but a problem that has already been analyzed, which can have a severe impact on the business.

3. In-depth analytics and seeing the big picture 

Users of the inventory management sections of ERP systems can be compared to football fans who only see the numbers of the final score of the match on the scoreboard. Instead, football experts examine every detail of the game, such as how many kilometers each player ran or how many successful and unsuccessful actions they made. If you do not analyze all the indicators of a football match and do not draw conclusions based on them, then the numbers on the scoreboard at the end of the next match won’t be completely different. 

The analytical toolkit of the specialized software allows you to observe and evaluate every detail of the inventory issues and significantly exceeds what a standard ERP system can offer.

A powerful BI module of the LEAFIO Inventory Optimization platform allows you to generate more than 40 visual analytical reports that cover all the main KPIs adopted in retail practice. Thus, managers can see the big picture of inventory status and replenishment in real-time.

Usability and speed are important for any software, so an intelligent information panel, on which relevant analytics are displayed, helps specialists to intervene in time at critical moments in processes in vulnerable links. And by the way, detailed analytics will show who is who among your suppliers, and communicating with them, having visual reports at hand, will be much easier.

4. Consideration of retail specifics

In every industry, and retail is no exception, there are details and subtleties that can only be understood by someone who has worked in it or often dealt with its specifics. When creating specialized inventory management platforms, experienced practitioners are brought in and a lot of actual information and retail business cases are used.

Retail is a very dynamic and fast-paced industry, and ERP systems are much slower to respond to changes in the environment. Their implementation can be too time-consuming and multifactorial. Given that complex ERP systems take several years to implement, inventory management methodology can become obsolete before they are fully integrated.

Specialized inventory management platforms are much more suited to help retail managers with specific operations. We will provide some details:

  • Novelties and assortment rotations. Specialized solutions provide the rotation suggesting the candidates for the exclusion from the range. And what to do with the novelties that have just appeared? There is no sales history, which means there is no basis for forming orders. So, let's limit ourselves to trial lots for the manager's consideration, little by little "feeling" the market. However, many retailers can afford to do things differently, capitalizing on customer curiosity about new products. How is the same issue resolved in the profile solutions for inventory management? For orders for new SKUs, demand is automatically forecasted using the sales history of similar products, i.e. analogs.
  • Fluctuations in demand, including seasonal. This is one of the leading retail challenges. Thus, AI-based demand forecasting helps specialized software cope with it. For instance, LEAFIO has a multi scenario seasonality planning function, which allows you to take into account fluctuations in demand for product categories with several scenarios. Even intra-week fluctuations can be taken into account using a special coefficient.
  • Promotional campaigns and other marketing activities. It is difficult to rely only on the intuition of your employees when ordering goods for the campaign. Some specialized solutions for inventory management provide a promo module, which includes the forecast calculation, the adaptation of stocks to promotional sales, and the analysis of the effectiveness of ongoing activities. 

There are many similar examples regarding the features of inventory management in retail, even in the example of LEAFIO Inventory Optimization alone. We are talking about those subtleties that cannot be taken into account when developing ERP systems, which are not aimed to reproduce the diversity of all the business processes they serve, and often simplify them. In other words, you are sometimes offered a flat picture instead of a volumetric 3D model, which is available in specialized IT solutions.

5. Flexibility and customization

The processes of stock replenishment and logistics may differ between companies. Therefore, there may always be a need for custom modifications and settings of the automated system. In which case are the chances of getting the desired customization higher?

First of all, it should be mentioned that ERP systems are designed not only for inventory management, and not only for retail but for all the main business processes of any economic sector. This means that your inventory is only a small fragment of their big picture. Accordingly, any modifications are often slow and expensive. The reconfiguration will also be expensive. This is natural: the larger the software, the more complex its architecture. It follows that more resources and, first of all, time have to be spent on connecting parts of the program with each other. The same regularity applies to the introduction of any changes and adjustments.

Specialized platforms are focused on customization in development and settings, which are done much faster and cheaper. After all, if we already illustrate the points of this article, with the help of LEAFIO Inventory Optimization features, it is appropriate to mention that this cloud solution works according to the SaaS model. It goes without saying that this service model is much more customer-centric and flexible than an out-of-the-box product.

More and more retail holdings are choosing to integrate their accounting systems with specialized solutions. This model of inventory management automation gives businesses more opportunities to improve inventory efficiency and reduce losses.

Inventory optimization

Inventory management involves overseeing and optimizing the storage, tracking, and organization of a company's goods or assets to ensure efficient.

6. Implementation and cost savings here and now

As we’ve already mentioned, the implementation of ERP systems can take several years. The effect of implementation can be expected for the same amount of time, and sometimes longer. There is also no certainty that you will see any positive developments in the inventory management and logistics of your retail chain, which you were most concerned about. Instead, specialized systems are focused on achieving a visible result in a short period, which can be measured using generally accepted KPIs. Optimized inventory, freeing up capital that was previously frozen in excess stocks, on-time order fulfillment percentage, profitable promotions, reduced lost sales, saved labor costs, etc. are simple and clear results that demonstrate the benefits of inventory optimization software. 

Therefore, if you think that inventory and supply chain management are the weak points of your business that need to be transformed immediately, then strengthening your toolkit with a specialized automated inventory optimization module is a justified step. 

Last but not least. There is a principle that increases the specialized vendor’s involvement in your business’ success: you continue to use the software because you get an economic effect from it. The duration of use will depend on how satisfied you are with the results.

Final Thoughts

As reported by McKinsey & Company, "applying AI-driven forecasting to supply chain management can reduce errors by between 20 and 50 percent, reducing lost sales and product unavailability up to 65 percent." In turn, according to the same source, due to this technology "warehousing costs can fall by 5 to 10 percent, and administration costs by 25 to 40 percent".

The above confirms that effective inventory management in conditions of permanent changes is not possible with standard inflexible means. Leading companies implement specialized software for optimizing inventory and logistics, which is based on modern algorithms and takes into account all the diversity of retail operations.

If you have health problems, you can go to a general practitioner but a clearer diagnosis and effective treatment you are more likely to get from a specialist. We think the metaphor is quite clear. Empower your retail team with cutting-edge tools like LEAFIO Inventory Optimization software, and the results will not make you wait.

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