By Matt and Jon Schreibfeder
Most ERP systems maintain three perpetual quantities for each inventory item in each warehouse, storeroom, store or other storage facility:
* On-Hand Quantity – This is the amount of the product that is physically in the facility.
* Committed Quantity – This is the quantity that is needed to fulfill existing sales orders, transfers, assemblies and other planned disbursements.
* On Replenishment Order Quantity – This is the quantity currently on incoming orders from vendors, central warehouses and other sources.
The available quantity is defined as the on-hand quantity minus the committed quantity. Salespeople, technicians and others should determine if there is adequate stock to fulfill a new sale order, work order or other requirement by checking the available quantity. The net available quantity is defined as the available quantity plus the on-replenishment order quantity. Buyers should use the net available quantity to determine when to order more of the product from a supply source.
Perpetual inventory tracking may seem straightforward. But many organizations have challenges knowing what quantities of products are free for new potential disbursements. This is often because committed quantities of individual items in their system do not reflect what is needed to fulfill actual requirements. Problems with committed quantities fall into several categories including:
Old Sales, Transfer, Disbursement, and Assembly Orders – The need for the material may have disappeared but no one cancelled the requisition. Material is tied up for a requirement that no longer exists.
Personnel Trying to “Protect” Inventory for Preferred Customers – We have seen many instances where false orders were entered into an ERP system to tie up inventory so it would be available when a certain customer wanted it. When the customer was ready to place the order, the false order was cancelled instantly freeing up the protected stock. In the meantime, this inventory was not available for other requirements.
Customers Placing Orders Far in Advance of When it is Needed – In essence, they are using your warehouse as a free storage facility and preventing you from selling or using it to earn a profit. In many instances, ERP systems will commit inventory as soon as an order is entered, regardless of when the customer requests delivery.
When a quantity of a product is committed when it is not needed to fulfill an immediate need, it is not included in the available and net available quantities. As a result:
* It cannot be used to fulfill a new requirement.
* A replenishment order may be prematurely issued for the item resulting in excess inventory.
We have developed customized solutions with our clients to ensure that accurate committed quantities of products are maintained. These enhancements include:
* A policy that all outgoing sales, assembly and outgoing transfer orders must have an anticipated shipment date. A weekly listing of sales, assembly and outgoing transfer orders with committed material that is currently on-hand but has a shipment date that is more than a week overdue. Salespeople and customers should be questioned as to why this material has not been shipped or delivered. If they cannot provide a good reason, the order should be cancelled and the committed quantity of the product adjusted.
* An enhancement to the order processing system committing inventory for an outgoing order not before a date equal to the sum of the anticipated lead time and order cycle for an item. The anticipated lead time is the length of time it will take to order and receive a replenishment shipment for the item from the primary source of supply. The order cycle is the frequency that replenishment shipments are placed with the primary source of supply. Anticipated lead times and order cycles are discussed in depth in our book, Achieving Effective Inventory Management – 7th Edition and articles on our web site, www.EffectiveInventory.com.
Most companies aren’t selling fine wines or antiques. Their inventory will not appreciate with age. It must be used to service customers and generate profits. Effectively managing committed quantities of products will help you maximize the productivity and profitability of your inventory investment.
