The purpose of this post is to explore the value-adding features offered by Enterprise Resource Planning (ERP) solutions and the benefits they provide to supplier organizations. Are these benefits real? Is an ERP solution good for your organization? To help answer these questions, I’ll cover the following components to help you determine if an ERP solution is right for your company:
- Overview and History;
- Inventory Management;
- Summary and Conclusion.
Not yet using an ERP tool? Then this post may be for you. An old hand at ERP? I’ll try to contribute to what you may already know and perhaps add some additional value. Or maybe I can learn something from you. Please share your comments or experiences via the comments section.
Overview and History
Businesses are continually on the lookout for opportunities to improve their efficiency and productivity. While the use of paper continues to be commonplace in many organizations, eliminating paper-based systems and streamlining processes through the implementation of a robust ERP system can provide measurable improvements in inventory management, sales, invoicing and payment.
Before we get started on the value-adding opportunities provided by ERP solutions, a little background is in order. The purpose of an ERP system is to collect, update, and maintain enterprise-wide information, and to provide functional departments (sales, manufacturing, accounting, shipping, finance and accounting, etc.) access to this information to help with decision making and problem solving.
ERP systems have, in large part, developed in symbiosis with advances in technology. Hatched in the late 1960’s as Materials Requirements Planning systems (MRP), they were originally designed to manage inventories and production processes in manufacturing environments. By the 1980s, MRP had grown to encompass more of the manufacturing process, prompting it to be rebranded Manufacturing Resource Planning, or more commonly MRP II. By 1990, these systems had expanded beyond the manufacturing floor, incorporating back office functions such as accounting and human resources, setting the stage for further advances.
Today’s ERP technology has expanded to encompass business intelligence (BI), and front-office functions including, among others, sales force automation (SFA), marketing automation, and e-commerce. And even though by definition ERP is for “enterprises,” high-growth and mid-size companies can also realize benefits from incorporating an ERP system. Interestingly, Intuit QuickBooks could be considered an ERP solution for small business. But unless your organization is selling only a few products, you might want to consider something a little more sophisticated.
The latest iteration in ERP is Software-as-a-Service (sometimes SaaS or “cloud computing”). These cloud-based solutions not only make ERP systems more affordable, they also make them simpler to implement and manage. As importantly, cloud-based ERP solutions enable real-time reporting and BI, increasing their value to executives and staff seeking visibility into the business.
Business performance improvements from ERP fall generally into three categories; quantitative financial gains, qualitative operational and intangible gains. Keep this framework in mind as you review the benefits below and consider the value of ERP for your organization.
It is important to remember that an ERP solution is simply technology run by humans (although the growth of Artificial Intelligence will make this less commonplace). And, ERP systems that are inadequately designed and managed will provide significantly inferior results. In fact, unless your organization is prepared to invest in training and a well-designed system, you may be better off waiting until all relevant stakeholders are on board and have bought into the idea of implementing an ERP system.
Now that we have some idea where ERP fits, let’s take a look at some individual components of the technology and their value-add. It should be noted that we will refer to them as part of an overall ERP solution. However, some of these components can be effectively implemented as standalone systems or as individually utilized components of a larger ERP package.
Inventories can include everything from raw material and parts in a manufacturing environment, to finished goods in distribution and retail businesses. They can be situated in one local warehouse, in multiple warehouses over national or international geography, or even somewhere down the supply chain anywhere around the world. In each case, information about availability and timing are the lifeblood of manufacturing and sales. With this in mind, a well-designed inventory ERP system is key.
Some of the advantages of an ERP-based inventory system include:
- Reduced investment in inventory and associated carrying costs through the ability to maximize inventory turn. A key driver of effective inventory management is turns, whether measured in days sales, annual turnover times, or some other metric. The key to this value metric starts with maintaining an accurate inventory in your ERP system. The methodology for that is beyond the scope of this post, but it is of vital importance.
- Improved customer service and satisfaction from the inception of the sale through delivery. It does not take much imagination to see the impact and competitive advantage good execution has on the bottom line (whether it’s a sale realized vs a sale lost, or the reality of extra freight costs for material not in inventory and the associated overtime required to meet delivery commitments). Good execution results in increased margins and the opportunity for increased sales.
- Increased employee efficiency and satisfaction allowing for cost-effective scalability and growth of the business.
Some (particularly sales and marketing executives) would allege that sales advantages should have been our first consideration. This is true to the extent that sales drive the business. However, without a sound inventory ERP system, sales will be lost to competitors, goodwill will be lost as a result of missed delivery dates, and gross profit margins sacrificed as a result of the inability to accurately estimate costs.
Several of the additional benefits from a sales ERP module include:
- Reduced time spent searching through inventory cards or spreadsheets. Whether on the phone or in the field, a sales force with access to real-time inventory status can make more sales in less time. This, combined with the improved ability to service the customer between the sale and actual delivery, provides the additional benefit of greater customer satisfaction and goodwill.
- The ability to integrate with Customer Relationship Management (CRM) systems, providing further leverage and effectiveness in sales and marketing.
- A third value-adding benefit is the availability of sales data to other stakeholders in the organization, including credit management, billing, collections, etc.
Automating invoicing provides several value-adding opportunities, including:
- Reduced processing time, errors, and cost.
- Delivering accurate invoices to customers through EDI or e-invoicing solutions rather than traditional mail or fax.
- More timely delivery of invoices resulting in reduced Days Sales Outstanding (DSO).
Arguably the most important component of the four areas, payments can also see gains from the implementation of an ERP solution, including:
- Reduced costs and greater accuracy over manual receipt and posting.
- Quicker approval, processing and payment delivery resulting in improved BI and cash flow management ability.
- Greater security and internal controls.
- Faster and more accurate cash application processes.
Implementing a robust ERP solution to better manage and streamline these areas can mean more customers, increased sales and faster, more reliable payment – including improved overall order-to-cash metrics.
When you consider these advantages, the value of an ERP solution – particularly a cloud-based solution – is very clear. With an ERP system, employees have access to accurate information that enables them to make better decisions faster. Additionally, ERP software helps to eliminate redundant processes and systems, dramatically lowering the cost of doing business.