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Tackling the Challenge of Inventory Lot Size with ERP Data

in: Company News, Acumatica

ERP solutions can help your business address the challenges of optimizing inventory lot size. The inventory lot size refers to the number of products a manufacturer can produce before changing the equipment over to another product. It’s similar to batch size and campaign size, two terms used in other manufacturing industries. Inventory lot size usually refers to discrete products rather than components (chemicals), pharmaceuticals, or metals.

Improving inventory lot size calculations offers many benefits. First, manufacturers can reduce costs, thus enhancing net profits. Secondly, you can use your plant more efficiently by managing changeovers and clean up, set up, and startup costs and timelines. Fewer days when equipment idles means more orders filled.

As more data become available thanks to the usefulness and ubiquity of ERP systems, manufacturers have more tools to improve business management and cost-effectiveness. Meeting the challenge of inventory lot size with ERP data improves your ability to manage all aspects of your business.

The Manufacturing Unicorn – Ideal Inventory Lot Size

Finding the ideal inventory lot size can sometimes feel like finding the unicorn of the manufacturing world—impossible, but everyone tells you that it’s possible, so you keep trying.

There are many ways that experts suggest companies use to find ideal inventory lot sizes:

  • The “Acoustic” method (hat tip to Invistics) or “he who yells loudest gets the most.” In other words, keep making Widget A until someone starts screaming for Widget B. Whoever shouts the loudest for the next product wins the shouting match. Although this sounds like a joke, it is, unfortunately, the state of many manufacturing facilities which are stuck in decades of “we’ve always done it this way, so we keep doing it this way” thinking. They’re still manually tallying orders on a clipboard and shouting orders across the shop floor. It’s time to put this method to rest, once and for all.
  • Economic Order Quantity (EOQ). This method involves math, so some of you are already checking out, but stick with us. It’s a formula that calculates the quantity of production by the square root of 2x annual sales x order cost divided by carrying cost. Eyes glazed over yet? Again, stay with us here; it’s essential. This formula, although it appears cumbersome at first, is another older method of determining inventory lot size. It takes into account several important qualities: annual sales, order costs, carrying costs. However, it can be challenging to figure out on the fly, when talking to customers to tell them when you can get their items manufactured, and for most workers to do the actual math. It also assumes you’re making a single product rather than a product mix. That might have worked well decades ago, but most factories today rely upon a product mix to meet their quotas. The formula doesn’t work well for flexible manufacturing demands.
  • ERP systems: ERP systems provide a much better solution. Most ERP systems are easy to understand and use. The number crunching is built into the system, so all you need to do is review the final reports to find what you need.

But even ERP systems alone lack the final special ingredient that makes calculating ideal inventory lot size a reality. That secret? Customer service.

Nearly all methods of calculating inventory lot size leave out customer satisfaction and service from the mix, and they really shouldn’t leave it out at all. After all, if the customer isn’t satisfied with the products, no amount of perfect math is going to make up for the lack of sales.

Let’s look at how ERP, blended with customer service, changeover costs, and inventory costs offers the absolute best way we have right now to calculate ideal lot size.

The Sweet Spot: The Intersection Between Service and Costs

The trick for optimal inventory lot size is to find the sweet spot among three variables:

  1. Customer service
  2. Changeover costs
  3. Inventory costs

The best lot size optimization methods include the customer’s needs first. This is important for several reasons. First, if the customer isn’t satisfied or you’re late with his order, he may cancel, take his business elsewhere, or leave negative reviews. The best inventory optimization in the world cannot make up for dissatisfied customers and lost sales.

Next comes changeover costs, which vary according to the manufacturing plant, the size of the operation, the equipment, and other changeover requirements, personnel variables, and more. Each job requires estimation and a thorough understanding of the costs involved.

Lastly, the inventory costs should be factored into the mix. This includes not just the cost of production but the cost to warehouse, manage, and store inventory. For some products, this cost is minimal and fixed. For others, such as products that must be kept at constant temperatures, chilled, or otherwise handled with special instructions, the costs may vary.

Using ERP Data to Enhance Inventory Lot Size Estimates

ERP data comes in handy when you’re working on inventory lot size estimates. Review information from the ERP system, including:

  • Current, historical, and projected demand
  • Current supply
  • Current, historical, and forecasted order and customer history
  • Inventory status

Review the current product mix and inventory status. Check materials on hand and estimate time to acquire anything that is out. Include clean up, set up, and start-up time and effort costs in the estimate, too. All these factor into the time it takes to switch from one product to another on the production line.

Flexible ERP Dashboards and Reports

An ERP system that provides flexible reports and customizable dashboards offers a handy tool to the manufacturers concerned with inventory lot size optimization. Such flexibility enables you to adopt any of the inventory estimate methods to your needs. It provides data that you can use quickly or include in your calculations as you work on changeover requirements and estimation.

Using ERP Data in the Inventory Lot Size Calculations

Let’s take an example of how one manufacturer used ERP data to help with inventory lot size calculations. This manufacturer makes chemicals for a wide range of industries. The high-mix specialty chemicals require changeups with more extended cleanup and set up than other sectors.

The manufacturer took the following steps to calculate inventory lot size:

  1. Gathered data from the ERP, including the time to manufacture similar materials in the past, inventory on hand for the order, and supply chain information
  2. Assessed using historical data clean up and setup times
  3. Performed lot size analysis, determining when the customer needed the order and using that information to inform a judgment on the final lot size analysis
  4. Entered the resulting data back into the ERP system to assist with calculations and scheduling
  5. Ran the order
  6. Assessed data from the results
  7. Asked the customer some questions relating to order satisfaction, quality, and time to delivery
  8. Inputted the results into the ERP
  9. Provided team with report and results
  10. Used the information to improve performance for the next product run

As you can see from these steps, optimizing any process is a circular process. Data informs the initial decision making, with actions taken to use the data and monitor the results. Results then inform the next run of the process to improve and implement changes based on quantifiable improvements continually.

The resulting improvements not only helped orders ship more quickly, but they saved costs, too. By calculating requirements, measuring incremental improvements, and implementing improvements over time, this manufacturer shaved costs off each order. The results boosted net profits while improving customer satisfaction, the formula for any successful business.

Acumatica Cloud ERP: A Manufacturer’s Friend

Acumatica Cloud ERP offers many of the advantages discussed here related to inventory lot size calculations and ERP systems. For example, the flexible reports described here are a key feature of Acumatica, along with its ability to integrate third-party applications. It’s easy to get the data you need from your ERP system when you can run reports easily and quickly.

Another great feature of Acumatica is the customizable dashboards. Dashboards can be adjusted to suit each user or their role. This helps the manager responsible for changeovers instantly find the information needed for set up, clean up, inventory levels, customer order demand—even personnel and scheduling, as needed.

Although there are many good ERP systems on the market, small to mid-sized manufacturers regard Acumatica cloud ERP as the industry best practice when it comes to choosing an ERP.

Mindover Software can help you find the right ERP for your needs. We are Acumatica Gold Certified Partners, and offer ERP consulting, business consulting, system selection, implementation, and training. Acumatica provides a flexible cloud-based ERP system that includes accounting, finance, operations, and CRM data for one complete ERP package. Third-party applications integrate easily with the basic system to provide you with the exact configuration you require.

Improving inventory lot size is a complex task requiring accurate data. Choosing the right ERP to track manufacturing information is the first step in the process leading to improvements, cost savings, and growth.

For more information, contact us at 512-990-3994.