In today’s business environment, installing an enterprise resource planning (ERP) software package and the systems needed to support it are requirements for a well-functioning enterprise. Although some organizations attempt to design and maintain a business model based on “Best Practices,” they rarely have the discipline to execute business process improvement (BPI) without an ERP software in place.
Sometimes, companies attempt to create best-of-breed systems, selecting and integrating pieces of functionality to mirror the results of a single ERP package. Yet, unless you have in-house staff with the technological expertise to logically knit together disparate business systems, it’s better not to go down that path.
While it’s generally understood that most manufacturing and distribution companies will eventually need an ERP system to function optimally, when evaluating solutions and their potential return-on-investment (ROI), it helps to truly understand how an ERP system contributes to both productivity and profitability.
The Name of the Game is Inventory Reduction
Within the manufacturing and distribution environments, the name of the game is inventory reduction rather than head count reduction. (In fact, many companies may even see head count growth in some departments like IT and production planning after implementing an ERP system.)
Inventory reduction comes through better inventory management, which should be a key objective for any ERP initiative. This allows companies to:
- Know when to purchase or make inventory
- Identify how much it costs to purchase or make inventory
- Decide where to put inventory once it is purchased or made
- Understand how to easily retrieve inventory to sell it
- Determine how to keep inventory at minimum levels
If your company is trying to do all of this without an ERP system, you are functioning in a world that could come apart at any time – and you probably aren’t even aware of the impending doom.
The point here is this: If you can NOT control your inventory, you will be out of business soon – and you don’t have to read the rest of this chapter!
Establishing an Interdependent Workflow
Still reading? Then welcome to my world of ERP. In the next few paragraphs, I will take you through the justification of an ERP system.
As you have probably concluded, installing an ERP system should your help your company improve business practices and inventory management. What’s more, many companies experience better plant utilization and increased labor productivity due to more efficient and realistic scheduling. These attributes allow for a reduction of raw materials, on-hand piece parts and finished goods inventory. They also directly improve customer service through more on-time deliveries.
Have you noticed the interdependencies between inventory, productivity, plant utilization, materials and customer service?
As you can see, an ERP system has the ability to establish process flows that translate to significant improvement in many areas of your company. Individually, each ERP component is not worth the investment (think best-of-breed). But collectively, the whole ERP system is greater than its parts, delivering widespread benefits across the entire organization.
When you begin to discuss reduced inventory through better management, and its effect on working capital, increased plant utilization, increased productively and better customer service, your company’s competitive position is improved.
But what would happen if your company kept the status quo – while your competition adopted a cutting edge ERP system? In this scenario, instead of having a competitive advantage, you would find it very difficult to compete at all!
The Value of Key Performance Indicators
Until this point, we have only discussed activities surrounding the actual manufacturing or distribution process. Yet the finance functions within an ERP system are equally valuable because they collect and disseminate data that comprise the Key Performance Indicators (KPIs) used by management to lead the company toward greater success.
It is within the finance department that the costs of production are calculated and money is allocated to support manufacturing and distribution activities. Receivables, payables, fixed assets and the general ledger collectively form the transactional tracking for evaluating the performance of the enterprise. Without effective data capture, analysis and presentation to management in the form of KPIs, an enterprise is blind and cannot make effective and timely business decisions.
If it takes you more than five days to close the accounting period – and you can NOT get assess the health of the business until the period is closed – you have a problem.
Trying to resolve this issue by hiring more people to perform financial functions only puts you further behind because this approach costs more money without providing results. On the other hand, using an ERP system to automate real-time data collection, and summarize that data in meaningful ways, puts the business leaders on the cutting edge of decision making. Many manufacturing software systems even provide Executive Dashboard functionality that allows management to access up-to-date KPIs on demand.
Reducing Costs across the Board
Implementing an ERP system is one of the most challenging projects your company will undertake. It is also one of the most worthwhile initiatives for securing your place in a competitive market. A successful, enterprise-wide implementation will move your company from one with piece-meal business procedures and no overall plan, to a re-engineered organization that is poised to take growth and profitability to a whole new level.
Based on my experience, a company that undertakes an ERP system implementation can realize up to a 20% reduction in inventory costs, a 17% reduction in manufacturing operating costs and a 16% reduction in administrative costs. Recent industry surveys substantiate these numbers and can be used as guidelines for calculating you own ROI.
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About the Author
Bernard “Bernie” Goldband has over 35 years of information systems and technology management experience in manufacturing, distribution, finance, planning and process improvement. Before founding Bernard Goldband LLC, Bernie was a partner at Tatum LLC and a Senior Consulting Manager with Grant Thornton LLP, where he focused on operational improvement programs in manufacturing and distribution companies. Bernie holds a B.A. degree from Long Island University and a M.A. degree from the City University of New York. He has also held adjunct positions as Lecturer at the City University of New York and Professor of Business Administration at Dowling College. For more information, Bernie can be reached at firstname.lastname@example.org.