Enterprise Resource Planning (ERP) systems are developed primarily for transaction processing, data collection and data reporting. By design ERP systems are designed to broad in their breadth of offering which results in being shallow in depth of specialized functionality such as Inventory Planning and Optimization.

Often there is a misconception that Inventory Planning & Optimization software performs the same functions as the MRP (material requirements planning) module, the Item Master modules and ordering module of an ERP system. Some of these differences between an ERP and the value of Inventory Planning and Optimization Solutions are explained in this document.

A good way to introduce Inventory Planning and Optimization (Inventory management) may be by quoting a well known Supply Chain book: “Competitive advantage will increasingly stem from a firm’s ability to deliver the right product to the right place at the right time, at the right price. Recent studies show that customers are increasingly substituting brand loyalty for availability” (Source: M. Christopher, Logistics and Supply Chain, 2nd Ed, Prentice Hall).

The implication is that companies with superior supply planning and execution systems will end up getting the lion’s share of the market. As Forrester Research notes, “As the flow of goods more closely matches demand conditions, companies are able to trim inventories, improve customer satisfaction, and avoid nasty surprises” (Source: C. Mines, Six New Technologies to Boost Business Results, Forrester Research, May 2002)

In addition current trends around inventory management are:

• Manual inventory reduction policies – These crude policies have come at a cost to customer service levels.
  
  
• Mass customization - The range and variety of products available to customers is unprecedented.
  
  
• Shorter product life cycles – When demand does not meet forecasts, inventory write-offs are the result.
  
  
• Market leaders invest heavily in technology and advanced planning systems - Leading companies like Wal-Mart and Dell, who make use of advanced SCM solutions have higher inventory turns than their industry competition.
  

Sources: Zacks investment Services and Forrester Research Figure 1 – Inventory Turns widely Differ in Industries

Since 1998, Retailers, Distributors and Manufacturers having been introducing supply chain management (SCM) software, specifically designed to enable firms to better manage the planning (SCP software) and execution (SCE software) of supply chain functions. Figure 2 shows the various functional options available in the SCM market. The black eclipse shows the area of Inventory Planning and Optimization.

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(Source: SCM applications marketplace source: Piper Jaffrey Inc.)

Main vendors in this space, such as SAP APO (Advanced Planning & Optimization), i2 Technologies, JustEnough, E3, and Manugistics are referred to in this document. Whilst some of the above companies provide tools in other aspects of SCM, the document limits its scope to the Inventory Planning and Optimization area.

This is Part One of a three-part article. Part Two will discuss Inventory Planning & Optimization Solutions. Part Three will present the Business Case for implementing these solutions and detail The Bottom Line.