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WHAT AN ERP SYSTEM CAN DO FOR A SMALLER COMPANY’S OPERATIONS By: Norman Katz, Katzscan Inc. Perhaps what has become so difficult to understand about the computer software industry as a whole is not the technology but the industry’s products themselves. The product selection is an alphabet soup of acronyms for a long list of software applications with sometimes cryptic names, (See Table 1.), the functionality which may or may not overlap other software applications. This may be unavoidable, as the names generally do reflect the core functionality of the software applications, but it does not make the shopping experience any easier for the smaller business. There are certainly valid needs and (successful) business cases for all of these software applications as well as others. But business cases showcasing multi-million dollar projects over several years are far outside the perspective of the smaller business. Does a company with five delivery trucks need a transportation management system? How about ten or twenty trucks? Does a company with a warehouse need a warehouse management system, or will an inventory control system work just fine? Does it depend on the size of the warehouse? And what about accounting and sales order processing? Certainly every company does those functions no matter the size. Can you (or should you) purchase a sales order processing application and then install accounting software later? Where does the smaller business, with limited information technology (IT) resources and budget constraints, who must measure project timeframes and return on investment (ROI) in months, not years, begin when considering the search for software to grow and improve the operations of their company? You
can’t spell “Core Application” without “ERP” In general, all these applications can be thought of fitting together in a basic hub and spoke wheel design. While most of these applications can stand alone perfectly well and not talk to other applications, this is not really practical as it does not lead to smooth flowing data and operations for a company. These lines of communication between software applications are, if you will, the spokes leading from the hub and the outer wheel. At the center of it all, (the hub), is a company’s core application, the Enterprise Resource Planning (ERP) system. Perhaps the most cryptic name of them all, an ERP system typically covers the following basic business application areas:
Note that the ERP functions listed cover a company’s core functions in the logical order of a basic business process flow: 1. Raw materials are purchased (via purchase order) from vendors/suppliers (creating a payable). 2. The raw materials are received and are put into an inventory location. 3. The raw materials are pulled from an inventory location and used in the creation (work/shop order) of an item. 4. The item is then sold to a customer (a sales order is created). 5. The item is pulled from an inventory location for distribution to the customer. 6. The customer is invoiced for the item (creating a receivable). 7. The customer pays the invoice and the payment is posted against the receivable. Additionally, if a customer wants to return an item, the item is either returned into inventory or destroyed through the system, and the customer’s invoice is credited. At the center of this core business application is accounting, more specifically, the general ledger. Everything done at a company touches the accounting general ledger. It therefore makes sense to purchase an ERP system that has either developed their own robust accounting modules, or has already linked to some of the more popular 3rd party accounting software packages on the market. The
effects of an ERP system Haven’t we always been told that the greatest asset (“resource”) of a company (“enterprise”) is its people? But like any resource, if it is used inefficiently or incorrectly it is detrimental to the enterprise and most likely to the resource as well. (This helps to explain why many shoes make very poor hammers.) The “planning” of these enterprise resources around their responsibilities (based on business operations needs) and by providing them the right tools (the functions of the ERP system) to perform their tasks helps to make for a well-run organization. When a company’s personnel are so burdened in the management of exceptions as compared to the basic operations and growth of a company, and when there is too much time spent “working around the computer system”, there is a problem. A primary goal of an ERP system is to create an environment where the core business transactions flow through the system with minimal data input and user interaction. True exceptions to the basic business transaction flows should be very rare, but nonetheless their handling should be documented so that they can be dispatched as quickly as possible. As companies begin to implement an ERP system, opportunities to rethink business practices and policies will present themselves endlessly. Comments like “But that’s how we’ve always done business” and “But you’ll never change how Fred in the warehouse does his job, which he’s been doing since before black-and-white televisions were invented” are very typical in implementation meetings. The implementation of an ERP system is a rare opportunity for a company to redefine its internal business procedures and, in effect, start with a clean slate and “do it right this time”. (The industry buzzword that floated around years ago to describe this rethinking methodology was called “re-engineering”.) Sure, standard operation procedures (SOPs) change from time to time. But SOPs that need to change often and/or drastically were perhaps not well thought through in the first place. For many smaller companies, the operations and financial computer systems may be fragmented, possibly dysfunctional due to years of patches and changes, and simply do not have the required functionality for a growing business. For example, look around your own company and see how many employees keep redundant and unqualified data in spreadsheets that should be stored in your business application software. (And what business decisions are being made based on this un-audited data?) The implementation of an ERP system brings with it a known working and integrated solution, and business decisions are made based on quality data from a single software application source. The
benefits of an ERP system The overall benefits of an ERP system to a company (of any size) can be divided between internal benefits and external benefits. The internal benefits of an ERP system include: 1. Increased employee efficiency due to well defined SOPs and better business software. 2. Cost reduction in employee overtime due to increased efficiency. 3. Ability for management to concentrate more on business growth and less on problem resolutions. 4. Ability for employees to grow into more responsible positions. An ERP system can in fact eliminate the need for jobs that were born from having to run a company on ineffective software. As an ERP system tends to require more data to be maintained in one system, these employees can be shifted to support positions for some departments and managers. 5. Identification and analysis of data not previously available, such as costs of goods sold, and various sales analysis reports by region, territory, market, and sales rep. 6. More effective inventory control by increasing inventory turnover and reducing large on hand quantities while reducing and minimizing stock-outs. The primary external benefits of an ERP system really have to do with improving a company’s relationship with its customers. A higher degree of customer satisfaction will be achieved due to fewer problems in processing sales orders. Typical sales order problems are shipping an incorrect item or incorrect quantity, and the wrong item price for a particular customer. Customer returns should be reduced and, in the event of a return, at least it will be processed in an orderly fashion and its effect on inventory (if any) properly recorded. Even the analysis of customers who frequently return items is important; these customers may be costing you more money to keep than they’re worth. A secondary external benefit is improving relationships with vendors. More efficient internal operations should lead to more efficient purchasing of raw materials. You might be able to purchase on a more regular schedule, possibly at higher quantities and reaping the benefits of volume pricing. Even without a volume pricing benefit, purchasing on a more regular basis reduces on-hand raw material inventory, freeing cash, and helps to ensure your vendor is able to replenish your materials on time. In effect, this moves you and your vendors to an informal vendor managed inventory (VMI) relationship. Branching from the hub Don’t be surprised if, in your search for an ERP system, you find that the software vendors have not developed all necessary features such as barcode inventory control, carton packing, freight rate shopping & shipping, Electronic Data Interchange (EDI), etc. Software companies are no different than any other types of businesses: they recognize what their core competencies are and they specialize in delivering the products they know how to manufacture best. What many software companies do very well is to establish strategic business partner relationships with other software companies for functionality not found in each other’s software. The two software companies will work to allow their products to be integrated together. This business partnering helps to prevent the proverbial “reinvention of the wheel”, and also offers their customers an informal “best of breed” solution. Once your ERP system is up and running always remember that when shopping for new application software for the specialty areas of your business (i.e. EDI, TMS, WMS, etc.), these “spoke” applications should be integrated into your ERP system for maximum operations efficiency and data throughput. Conversely, is it okay to establish stand-alone software applications, such as asset management and document management, to handle specific functions without (direct) integration to your ERP system? The answer is most certainly “Yes”. This determination can be made with business analysis and common sense on a case-by-case basis, and may only require an occasional batch data transfer. Also, sometimes the best integration between two software applications is simply well documented procedures. TABLE
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