Inventory Optimization using ERP to reduce final product lead time, Inventory value an inbound logistics cost for MTO, FMCG Company

Abstract

Many multinational companies have adopted ERP systems to make sure material is available on time and inventory levels are low. However most of the companies are unable to choose between the most suitable master data configuration such that common objectives are achieved. Objective of this project was to develop a master data configuration to optimize inventory in such a way that material availability for production is high and inbound logistics costs were low with very low inventory levels. To apply this methodology as a case study we selected MTO, FMCG Company which has been using SAP as its ERP system. Initially at two stages the master data configurations were changed and performance was monitored subsequently. ABC analysis was done to identify the top materials which will be in “A” category in terms of consumption value. After that different master data configurations were adopted at three stages for each of the selected materials and the performance was monitored accordingly. The basic criteria’s for measuring performance were average inventory value, material availability, inbound logistics costs and consumption percentage vs purchases. Finally the best master data configuration was identified based on said performance measures. It was found that majority of the time EOQ theory is correct and it can be used for any FMCG, MTO business models. On the other hand, ROL theory is not practical to use in a FMCG, MTO business model if the demand variation is high. It was also found that MTO, FMCG company material master data should be planned based on SAP MRP planning and for regular items Safety stocks should be maintained based on past consumption and for irregular items safety stocks should not be kept to minimize inventory. This method can be adopted by any company to improve their material availability rate, inventory and reduce inbound logistics cost. The project resulted in 1.2 million USD reduction in inventory within a years’ time, an inbound logistics were reduced by closer to 100000 USD and material availability rate was increased by closer to 20% for an X company which was operating under FMCG, MTO environment. The project was successful because of the efficient material master data planning in SAP. Main limitation of the application is that if a regular item becomes obsolete the entire safety stock allocated for that particular item will be obsolete leading to inventory issues.