For years companies across the globe have tried with varying degrees of success to leverage enterprise resource planning (ERP) software and supply chain management systems to automate their supply chains, improve global operations and better manage inventory levels. Though these systems can bring enormous benefits, companies must take care to avoid a number of pitfalls when choosing, implementing and using them — especially in times of economic recovery.
Some of the challenges of ERP initiatives include finding the "right" software, implementing on-time and on-budget, and realizing all the business benefits expected from the technology. Not every company effectively accomplishes these things in the best of times, and a weak global economic environment further underscores these challenges.
Five Reasons ERP Must be More Effective
ERP systems can help a company forecast inventory needs to better match supply with demand and manage inventory costs. In today's turbulent economy, this benefit is particularly pronounced. During rosier economic times, companies may have been better able to deal with inefficiencies in their forecasting and inventory management processes. However, 2010 features leaner business environments with more limited resources. It is even more imperative for companies to leverage their ERP and other enterprise systems to help manage seemingly unpredictable supply chains.
Unfortunately, this unpredictability seems to be a trend. The Wall Street Journal recently featured an article about how companies are struggling to address the "bullwhip" effects of the economic recovery on their supply chains. The article highlighted organizations that are experiencing highly volatile swings in their supply chains and demand for their products rather than the slow and steady increase in production anticipated.
In light of this turbulence, companies should consider 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 detailed in the WSJ article mentioned above, most companies burned off inventory during the last downturn in order to be leaner. Now companies are forced to restock their inventory levels. This movement is trickling throughout the entire supply chain; if a big company like Caterpillar decides to order a large quantity of material such as steel, this has a big impact on downstream suppliers throughout its supply chain.
The economic recovery is poised to be uneven. Most economic indicators suggest that this recovery will be choppy. In order to prosper — or even survive — during these upheavals, companies must anticipate changes in demand and manage their inventory accordingly. This is especially true for organizations with a multinational 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. Because most businesses are still finding it difficult to access credit and are uncertain about the future, their inventories are being kept as lean as possible. As a result, even relatively small upticks in demand will likely challenge safety stock margins of error.
Headcount is not likely to increase in the near future. Most economists agree that unemployment rates will not ease until 2011, 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 ERP systems is more likely to overlook early indicators of inventory/demand adjustment needs.
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, robust financial and receivables management in an ERP system will help better finance inventory investment needs in the long-term.