By Sandeep Walia
May 6, 2010
Enterprise Resource Planning (ERP) in general is not a fast endeavor when it comes to return-on-investment (ROI); however, there are often overlooked areas where ERP can be applied within business operations to speed it up.
Businesses have seen a tremendous paradigm shift in that a lot of work is now outsourced, such as heavy manufacturing now done with subcontractor vendors in Asia. For business owners, this equates to a much more focused approach on managing the supply chain and optimizing inventory in the warehouse with typical lead times for new product delivery in the 60-90 day range. This shift means that managers require better forecasting, demand planning, purchasing planning and tracking of critical inventory items. Poor warehouse and supply chain management can burden costs significantly.
Take, for example, a business that builds heavy engineering equipment experiencing minor delays in production because of gating parts (i.e., parts not available that holds up the completion of an item). Adding just six weeks to the production cycle because of needed parts can have a detrimental impact on overall operations.
Here is the math:
Average price of product – $2 million.
Cost of capital to business – 10 percent.
Cost of six weeks of capital – $23,000 ($2 million * 6 weeks/52 weeks * 10 percent).
Total cost of delay on 100 shipments due to gating parts = $2.3 million.
Before you say - this example doesn’t apply to me because my company doesn’t deal with $2 million ticket items - change the numbers a bit. It could be 10,000 shipments of a $20,000 priced product or 100,000 shipments of a $2,000 priced product etc. and you’d still have the same cost of capital of $2+ million.
If you can shave off just a few weeks of production delay you are still saving at least hundreds of thousands of dollars by optimizing your inventory and supply chain with better planning. So how can you do this? Fortunately most of the newer generation ERP systems provide functionality to handle this right out of the box.
For example, Microsoft Dynamics AX (one of the more popular ERP systems) has built in functionality to automatically generate planned purchase orders by looking at a variety of key performance indicators such as:
-¢ Safety Stock levels
-¢ Sales Orders
-¢ Purchase Order
-¢ Inventory that is Available to Promise
-¢ Vendor Lead times
For a single individual (or even small group), to take into account all of the above parameters and provide a planned purchase forecast manually is next to impossible - even if the company only has 200 finished good SKUs. No individual buyer or group of buyers is going to be able to run a multi-parametric calculation that involves six parameters and create a planned timeline for your products for each vendor without rough ballpark estimates. ERP will provide the automated processes and needed sophistication to do it right, taking care of roughly 90 percent of forecasting resulting in cut labor costs, reduced incidences of inventory stock out and lowered costs for carrying inventory.
If your company handles a complex web of customers with varying buying patterns, forecasting becomes a much simpler process, having the ability to plan by customer, customer group, seasonality or business cycles. However, for companies who may not need this level of forecasting, ERP also offers accurate planning based on open transactions including sale orders, purchase orders and current inventory.
Some recommendations to achieve quick ROI from your ERP are listed below:
1. Leverage out of the box functionality to the extent possible to obtain Fast ROI. Choose creative configuration over customizations.
2. If your business process does it one way and the ERP system does it another way, ask yourself how married you are to your business process. Does your current process truly bring value or are you doing it just because you don’t like change? Stay away from incorporating old, bad habits into the ERP system.
3. Spend time understanding the ERP package. It’s amazing how many times I find companies customizing only to find that their ERP already does it out of the box - yet no one took the time to research.
4. Use the ERP implementation as an opportunity to build best practice in the organization and improve overall business processes.
As offshore manufacturing continues to play a critical role in North America, businesses will have to rely on better supply chain and inventory management methods to ensure third-party components critical to operations arrive on time and in optimal quantities. Utilizing ERP for inventory planning and accurately predicting customer buying patterns is a path towards quick ROI, especially if applied towards decreasing production delay. Businesses must take into account, however, that ERP like any enterprise software is just a tool — proper training and understanding of its intricate features and capabilities is crucial before fully implementing into day-to-day operations.
Sandeep Walia is the president of Ignify, a global CRM and ERP consulting firm and eCommerce solution provider targeting the medium and large enterprise market segments. For more information visit http://www.ignify.com.