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Design considerations for inventory item coding

Introduction

Intelligent coding of inventory items is one of the most important activities in an ERPimplementation for most of the manufacturing organizations. As they approach ERP,most of the organizations find that their inventory items have been wrongly coded ornot coded at all. Further access control issues related to creation of new items arealso identified. Many a time these problems are observed relating to Raw Material andConsumable item rather than finished product items. In addition they also find thatthe same it ems have been classif ied dif ferent ly f or dif ferent requirements.

The above issues lead to consequences including lack of control on the inventoryit ems, wrong valuation of inventory, it em duplication, wrong / mutually exclusiveclassification, organization receiving wrong picture of their inventory, lack of realtime accurate inventory data etc. Most of these consequences play havoc with thedownstream activities including production planning, inventory planning, MRP,

available to promise, issues with tax authority etc to name a few.

The main advantage of ERP implementation, if properly done, is that it forces theorganization to take a long and hard look at the way the inventory items enter, movethrough and move out of the organizat ion and helps in making the necessary changesleading to manifold benefits for all the stake holders in the organization.

Objective of this document

This document aims to provide t he ERP Consult ant with a set of design considerat ionsand check points to ensure an opt imal inventory coding for t he purpose of ERPimplementation.

Design considerations in inventory coding

1. Landscape analysisBefore undertaking the exercise, it is beneficial to look at the organization /proj ect landscape. The key points include, the number of ERP Packages being usedin the organization and the commonality of inventory items being used by thesepackages, t he inventory coding const raints imposed by dif ferent ERP packages, t heinventory reports provided by these packages, the number of external applicationspresently available in the organization, the flow of inventory data between theseapplications and the corresponding constraints. Also consider the future ERP

roadmap of the organization (are they planning any new ERP implementation? forexample) and the expected customization requirements.

2. Ensure that you are only a facil it atorAt the outset it must be made clear t o the organizat ion that you are going to act asa facilitator in helping the organization to decide on the item coding. It is veryimportant to set this expectation right at the beginning since there is a possibility

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that the organization may expect you to execute the inventory coding for them.However, as a consultant you may not have a clear picture of the inventory relatedact ivit ies / t ransact ions in t he organizat ion. Any coding of inventory wit hout aclear picture of t he above wil l lead to subopt imal coding.

3. St art earl y.As discussed in the introduction to this article, there are substantial issues relatedto inventory coding in most of t he organizat ions. Along wit h this, dif ferent part s ofthe inventory are owned by a different set of stakeholders who have their owninternal coding conventions. Added to this, if you have complex coding conventionsand large item master it spells a potentially risky situation from the ERPimplementation timeline point of view. Hence it is better to sensitize theorganization of t he importance of inventory coding as early as the proj ect bootcamp and follow up the progress in al l the senior management meetings.

4. Involve senior management f rom the beginning.There is a tendency in the organization to leave the responsibility of item codingto the middle management personnel in the materials management department.Even though they are the drivers of the whole exercise, they may not have theauthority to demand output from the line departments. It is very much necessarythat t op management is involved in this exercise from day one to ensure success ofthe implementation. If possible, consider inventory coding as a sub project in theexercise of ERP implementation. The consultant must remember that whileinventory coding is not a component of the standard ERP implementation plan, thisis a crit ical act ivit y that can derail t he project schedules.

5. Involve Finance Depart mentAs discussed in point 4 above, inventory coding looked upon as a 'materialsmanagement' activity. However finance department is the key user of most of thegranular reports related to inventory and material consumption. Inventory is one ofthe key components of 'current assets' in many organizations and accuratevaluation of inventory has significant balance sheet and P&L implications. Financedepartment need to be extensively consulted before the commencement of thecoding exercise. They should also be one of the agencies signing off on anydeliverables related to the inventory coding program.

6. St art wit h the report s:As a first step towards the inventory coding, a consultant needs to take a look atthe various management report s being used by t he organization. There aremultiple reports that an organizations top management requires to assess thef inancial healt h of t he organizat ion. These include Stock Quant it y Ledger, StockTransaction report, ABC Analysis Report, Stock Valuation report, Raw Material /Consumables Consumpt ion report , Cost Sheet etc. A consult ant need to be famil iarwith these reports especially the granularity of reporting, and the categorization

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of t he data required in t hese reports. Some of the common categories include itemtype (RM, SFM, FG etc), purchase category (Local / Imported) etc.

7. What are the det ails required for querying t he it em?Suppose the it em required is 'Raw material it em, diameter of 0.5 inch, used forcustomer 1, Imported, purchased from supplier 1 and used for a specific categoryof FG'. Here each of t he details (known as segments in cer tain ERP productterminology) required to be captured for an it em.

8. What are the details required to be captured in t he inventory code?After understanding the details needed to be captured for an item, next step is tosegregate the details that need to be captured in the item code and those that canbe captured in the it em descript ion / att ributes. In database terminology thisprocess is known as normalization. Analyze the data in step 3 and decide which ofthem need to be captured in the inventory code and which of the details can be

captured as attributes to the item. This calls for a detailed knowledge of theproduct and its features. In the above example, you may like the value of Rawmaterial segment, diameter segment and a unique 3-4 character running serialnumber to be captured in the item code where as the other details could be movedto the attributes.

9. How many segments do t he product all ow?Packages li ke Oracle al low mul t iple segments to be used in inventory coding. In theabove example you can use segment 1 for i t em t ype (RM, FG, SFM etc), Segment 2for diameter (0.25 inch, 0.5 inch etc) and segment 3 can be used for the runningserial number. The advantage of this segmentation is that you can set default rules

as well as validation rules to ensure that wrong combinations are not permitted bythe system.

This is not the standard practice of inventory coding and being an unfamiliarmethod, wi ll call for increased training and communicat ion effort from your side tofamiliarize the users to this approach. In the above example, an item may look like'RM-50-001'

However some packages do not allow mult ipl e segmentat ion. In this case, you haveto ensure manual rules to delineate the segments. While this method is intuitive, itwill call for superior training to ensure that user errors are kept to a minimum.This is because in this method it is difficult to set the kind of default validation

rules that was set in case of multiple segments. In this method the above item willread as 'RM50001'.

A note of caution if you are using both Oracle discrete manufacturing and Oracleprocess manufacturing (OPM) in the same implementation. While the former allowsmultiple segments, OPM allows only a single segment for item code. In suchorganizations (especially if t hey are of the SME variet y), most of t he t ime a single

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user handles both discrete and process inventory. In this scenario, it is better to goin for single segment for both discrete and process inventory.

10. Use numbers inst ead of alphabet s while coding the inventory.This is important especially if you have a large inventory master. Numeric codingwill ensure faster data access enabling faster query fetch and report output. This isrelated to the internal characterist ics of most of the databases currently available.

11.Keep i t simpleAnd finally keep your inventory coding optimal, intuitive and as close as possible tothe way in which inventory is presently created in the organization. This willensure quicker training and widespread acceptability to the ERP implementation.

Conclusion

Along with realistic design of Chart of Accounts, the appropriate coding ofinvent ory i t ems is one of the key paramet ers that decide on the success of an ERPimplementation. Properly coded inventory can reap windfall benefits to theorganization in providing accurate real time inventory data to the organization.The potential benefits to the organization include accurate profitability data,increased inventory turnover, quick ratio matching current ratio, increase in cashflow and decrease in inventory carrying cost. Moreover inventory optimizationhelps in de-bottlenecking of the production flow, freeing up additional space andoptimum production and capacity planning exercise.

Considering the significant expected benefits, it is very important for theorganization to devote superior talent, planning and time to the exercise of

inventory coding. Following the above guidel ines can go a long way in ensuringminimal surprises while undert aking the above exercise.

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