Maximizing Return on Investment Using ERP Applications

EXAMPLE 1: COST REDUCTION

In many cost-reduction programs, inventory elimination (of all types) will be a significant component of anticipated benefits. In order to properly estimate the overall returns on these reductions, there are many components that have to be taken into consideration, some reduced costs and some increased costs in the near term, but all must be considered. What is included is a product of what type of inventory you are eliminating. For example, if you are reducing warehouse stores (spare parts for machinery that are stocked for repair orders), then you may be eliminating obsolete or excess inventory. In either case, you must calculate the book value of the inventory as costs and offset this with the benefits that you accrue, which may include reduced notional interest on the working capital, decreased storage costs by freeing up space for other needed parts or for other uses, and so on. Often, however, it can become much more complex.

Some years ago, we had a large amount of excess finished goods inventory that was to be reduced through modifications in the way inventory was ordered, the way production campaigns were planned, and the amount of safety stock. The division staff had approved the reduction in inventory because the remaining inventory would be better targeted to demand and would also improve customer service simultaneously. Inventory restocking orders for the new targets were calculated and entered, manufacturing runs planned and executed, and ...