Rethinking Inventory Management in ERP and OMS

Traditionally, ERP (Enterprise Resource Planning) systems have served as the primary repository of inventory data, responsible for managing stock levels, procurement, and financial reporting. However, with the rise of OMS (Order Management Systems), which focuses on order processing and fulfillment, the boundaries between ERP and OMS have blurred. To keep pace, many organizations are shifting toward a composable ERP architecture that allows for more flexible and modular integration of specialized systems. One significant area of innovation within this modular setup is the possibility of treating inventory management as an independent service layer - a shared, centralized source of truth accessible by both ERP and OMS. 

The Traditional Divide Between ERP and OMS in Inventory Management 

In the traditional setup, ERP systems have long been the backbone of inventory management, particularly within product-centric industries that rely on accurate stock levels for procurement, manufacturing, and accounting.

Today, ERP systems continue to evolve with a focus on cloud-based solutions, AI-driven insights, and machine learning, and are essential for handling: 

• Long-Term Forecasting and Demand Planning: For companies that need to manage seasonal fluctuations or bulk orders, ERPs provide the structured planning capabilities necessary to ensure adequate inventory without overstocking.
• Supplier and Contract Management: ERP systems are built to manage complex supplier relationships, purchase orders, and contracts. This structure is crucial for enterprises with multi-tiered supply chains, where a strong relationship with suppliers and predictable procurement is necessary to maintain smooth operations.
• Financial Reporting and Compliance: ERPs provide extensive financial and compliance management features that are necessary for regulatory adherence, making them ideal for industries with strict reporting requirements. 

ERP provides the structure needed for handling complex tasks like material requirements planning (MRP), demand forecasting, and financial consolidation, aligning inventory data closely with a company's financial records and compliance needs. 

OMS platforms have emerged as specialized tools that help businesses orchestrate and fulfill orders across various channels, offering visibility into inventory as it pertains to customer orders. They excel in providing inventory visibility across distributed locations (whether internal such as stores, FCs or DCs, or external such as DSV or vendor locations) and ensuring that items are available for customers whether they are shopping online or in-store. Unlike ERP systems, OMS platforms provide a more flexible, real-time view of stock availability, like multi-channel visibility, real-time inventory updates, integration with fulfillment services, etc., which are essential for e-commerce and omnichannel strategies where customers expect fast and accurate fulfillment. 

This difference, while functional, presents challenges. For instance, inventory data in ERP systems is often updated only when invoices or receipts are processed, leading to discrepancies between what OMS sees and what ERP reports. As a result, the OMS may provide a more immediate view of inventory, but this view can be inconsistent due to missing information or delays in reflecting changes from invoicing processes. 

The Rise of Composable Systems: Inventory as a Service 
The concept of composable ERP and OMS represents a shift from monolithic systems to modular architectures, enabling companies to use specialized systems for different functions and integrate them seamlessly. By decoupling core functions, such as inventory management, businesses can address specific needs without overhauling entire systems. Furthermore, since ERP systems are primarily financial systems, any new capabilities or integrations often require careful consideration from financial leadership. When advocating for new features, it's crucial to communicate with CFOs about the impact on the general ledger and financial reporting, highlighting how a composable approach can enhance flexibility and adaptability while ensuring financial integrity and compliance. This enables organizations to innovate and respond to market demands without jeopardizing their financial systems. 

This modularity has led some companies to consider treating inventory as an independent service layer that operates as a shared resource accessible to both ERP and OMS systems. 

Adopting inventory as a service allows companies to centralize inventory data management, synchronizing updates across all connected systems in real-time. This approach has several compelling benefits:

1. Real-Time Inventory Visibility: With a centralized service, inventory data can be updated in real-time, reducing discrepancies and ensuring that both ERP and OMS systems operate with consistent, current data. This addresses one of the main challenges faced by businesses where ERP updates may lag behind OMS, creating misalignments that can disrupt fulfillment operations.
2. Enhanced Data Consistency and Accuracy: A shared inventory service mitigates the risk of data discrepancies between ERP and OMS, which commonly arise due to differences in how inventory events are recorded and synchronized. This is particularly advantageous for companies with high transaction volumes or complex supply chains, where inventory adjustments need to be accurate and timely.
3. Automated Reordering and Demand Response: An ERP can perform reorder calculations based on demand forecasts, while the OMS can initiate automated responses to sudden demand spikes. This collaboration through a shared inventory service between the OMS and ERP ensures that high-demand items remain consistently available without the risk of overstocking.
4. Operational Agility: Treating inventory as a standalone service supports composable ERP principles by allowing businesses to swap or upgrade components without major system overhauls. As businesses grow, they can easily scale the inventory service to meet demand, optimizing resource allocation without affecting the broader ERP or OMS infrastructure.
5. Streamlined Reconciliation Processes: By maintaining a single source of truth for inventory, companies can reduce the time and effort required for inventory reconciliation. Instead of syncing data between ERP and OMS on a periodic basis (e.g., daily or weekly), companies can rely on the service’s centralized updates to keep inventory aligned.
6. Seamless Returns Management: An OMS can streamline returns management by centralizing return orders from various channels. By integrating this with a shared inventory service between the OMS and ERP, businesses can achieve precise inventory adjustments and ensure accurate financial reporting on returned items. 

Real-World Challenges and Solutions
While the benefits of an inventory-as-a-service approach are evident, businesses must also address certain practical challenges that arise in implementation. A few key challenges and potential solutions include: 

1. Inventory Ownership and Data Governance: Integrating OMS and ERP into a shared inventory service introduces questions around data ownership and governance. ERPs often have strict controls for financial and regulatory purposes, while OMS needs flexibility for real-time adjustments.  
2. Fulfillment and Financial Reconciliation: In businesses where ERP is responsible for inventory financial reconciliation, having a separate inventory service may introduce additional complexity.
   • To address this, the service could be designed with dual-write capabilities, where changes made in the inventory service are automatically mirrored in ERP for financial purposes. However, OMS and ERP typically use inventory data differently. While OMS focuses on fast-moving, real-time transactions to manage fulfillment, ERP might focus more on accounting, financial tracking, and reporting, which often prioritize end-of-day or periodic inventory snapshots. To overcome this challenge, one could lookk at establishing separate interfaces tailored to the specific needs of each system. For example, OMS can access inventory through a low-latency API designed for real-time transactions, while ERP can use an aggregated or summarized view suited to its financial reporting needs.
   • Alternatively, regular automated audits could ensure alignment between financial and operational inventory.
3. Performance, Scalability and Cost Management: In scenarios where OMS requires immediate responses to high volumes of transactions, any latency in fetching data from a centralized inventory service could impact performance. ERP systems, when querying the same inventory service for large datasets, could introduce additional load and slowdowns. Plus, scaling a centralized inventory service to support both high transaction volumes from OMS and complex data queries from ERP can be resource-intensive and costly.
4. Maintaining Data Integrity Across Systems: Data integrity is critical in a modular setup where inventory data is accessible by both ERP and OMS. Implementing strict data governance protocols, such as role-based access controls and version history, can prevent unauthorized changes and preserve data accuracy. Integrating an audit log for inventory adjustments also helps in tracking changes and maintaining trust in the data.
5. Legacy ERP Constraints: Many ERP systems, especially older ones, are not designed to interact seamlessly with modern microservices architectures or REST APIs, making integration with a centralized inventory-as-a-service complex and potentially costly. 

Key Considerations for Moving to an Inventory as a Service Model

Deciding whether to implement inventory as a separate service requires careful evaluation of the business's needs and existing infrastructure. Some essential factors to consider include: 

• Industry-Specific Requirements: Businesses in industries with high inventory turnover, such as retail or e-commerce, may benefit more from a real-time inventory service than those in manufacturing, where stock levels are managed on a production schedule.
• Integration Complexity: The ease of integrating an inventory service depends on the existing systems in place. Companies with legacy ERP systems may face challenges in connecting to a centralized inventory service, while cloud-native platforms could simplify the integration process.
• Cost vs. Benefit Analysis: While a standalone inventory service offers many operational advantages, businesses should consider the cost implications. Factors such as data storage, processing power, and maintenance costs should be weighed against the expected gains in efficiency and accuracy.
• Compliance and Reporting Needs: For businesses in regulated industries, inventory data must often be auditable and compliant with industry standards. Ensuring that an inventory service can meet these requirements may require additional investment in security, auditing, and reporting capabilities. 
  
  

The Future of Inventory Management

As composable ERP and OMS continue to gain traction, the trend of modularizing critical functions like inventory management is likely to grow. By treating inventory as a centralized service layer, companies can optimize their operations, reduce data redundancy, and enhance customer satisfaction through accurate and timely fulfillment. While traditional ERP systems may still play a role in financial inventory reconciliation, the future of inventory management lies in a flexible, service-oriented model that integrates seamlessly across all business functions. 

In this paradigm, ERP and OMS become consumers of a shared inventory resource, each benefiting from the real-time visibility and accuracy provided by a centralized inventory service. This approach aligns with the overarching trend toward composable business systems, empowering organizations to adapt more quickly to changes in the marketplace and meet the evolving expectations of today’s customers.