Is Your ERP Reinforcing or Undermining Inventory Discipline?

You would think that an ERP system would not or could not allow itself to track negative inventory. Inventory, after all, is the presence of a thing, not its absence. And yet, negative inventory is a challenge that plagues ERP systems across the spectrum.

Whether you are a service provider, a distributor, or a manufacturer, negative inventory is a data peculiarity that frequently creeps into your systems in your workings. And for many companies, it is a dirty data element that will prevent your system from operating at its optimum.

Understand whether your organization’s ERP is reinforcing or undermining inventory discipline.

How does negative inventory even happen?

Negative inventory is often caused by the fact that not all areas of an ERP system are happening in a real-time manner. For instance, a purchase order receipt may happen with a delay, such that the materials that are being issued to a work order are transacted prior to the receipt of the goods.

In practice, it’s not uncommon for received goods to be rushed to manufacturing to enable the completion of a work order, and this sometimes can prevent or delay the receipt transaction. As such, negative inventory surfaces.

Now, if the receipt of the purchase order occurs such that the materials are received into a different location, you will have a discrepancy. Material will be in the system in a location where it is not physically present, and you will have a negative inventory occurrence in an area where there is now no inventory.

This common situation drives most ERP systems absolutely bananas. This is even worse if, for whatever reason, the purchase order receipt was not done at all. Suddenly, the planning engine is now trying to overestimate the required material in order to nullify your negative inventory and bring it up to a minimum stocking level.

So what can you do to address negative inventory?

Solid system setup.

If your system is set up properly, such that material is received to its appropriate location, it can prevent receivers from fat-fingering or pencil-whipping a receipt into the wrong location. It’s not uncommon that the receiving staff is less system-savvy than, for instance, your planners or your stockroom clerks, and as such you need to try to fool-proof the PO receipt process as much as possible.

Leverage system settings where appropriate.

Some systems will try to help you prevent negative inventory. Epicor Kinetic, for instance, has the ability to restrict negative inventory at a part class level. Even still, it is possible for system processes like material backflushing to override this setting. As such, you may still run into negative inventory situations.

Build your processes in a manner that makes negative inventory less likely to happen.

Some companies justify negative inventory because of their physical processes, which are sloppy and out of touch. Companies that are more apt to run the paperwork up to the office for transaction processing are more likely to run into negative inventory issues. Mandating point-of-use transactions in a real-time manner is one way to greatly reduce the opportunities for negative inventory to present itself. This requires increased training and assistance for members of the receiving staff, but generally, the benefits outweigh the liabilities. An ounce of prevention and all that.

Make negative inventory highly visible.

It is easy in many systems to construct simple reporting tools to make negative inventory visible to all stakeholders. When something is visible, it is easier to correct. Inventory managers, who are responsible for keeping inventory levels accurate, can thus direct their team members to correct situations when they occur and to chase down those issues for root cause analysis so as to prevent them in the future.

Cycle counting is another way to routinely mop up bin quantities in a manner that catches all sorts of inventory discrepancies, including negative inventory. Again, inventory corrections should be driving root cause resolutions.

Are your inventory levels having a negative impact on your mood? Reach out to EstesGroup—we’re positive that we can help.