ERP or Enterprise Resource Planning is the most common software tool used to manage a business’ day-to-day operations. ERP software provides a link between the everyday transactions of the business and its accounting systems. Without an ERP, smaller business will operate a simple accounting package. Accounting packages allow for sales to be invoiced, goods and services to be purchased (with or without the use of purchase orders) and employees to be paid correctly.
Inventory movements are usually recorded manually and updated in the system at month end or via a stock take. Spreadsheets are often used to handle tasks that the accounting package does not handle such as recording the cost of individual jobs, planning production, and costing new projects. The accounting package can then generally generate a profit and loss statement, balance sheet, cash flow summary and a range of other financial reports for management. It will often usually assist with calculating tax and other compliance requirements.
Most businesses cope quite well with using an accounting package plus spreadsheets when they are small, but this becomes harder and harder as the business gets larger. By the time that most businesses have reached $10m in revenue, they will have implemented an ERP software system. Otherwise, are likely to be having a lot of challenges managing the day-to-day transactions of their business and finding out what is going on in their business!
When Do I Know I Need an ERP?
An ERP is a costly and complex piece of software that is usually difficult to implement, therefore it is better not to implement it until it is necessary. There is no hard and fast rule of thumb to determine when you need to invest in an ERP. We typically see several signs that indicate that your business is ready to step up to ERP software:
- Current systems (especially spreadsheets) are becoming overwhelmed with data and unreliable.
- An increasing number of staff are becoming engaged in data entry and transferring data between systems.
- The business is frequently hit with unexpected accounting variances.
- The value of inventory and number of transactions means that it can no longer be managed offline or via periodic stock takes.
- The business cannot work out whether it is making profits on individual products or losses.
- The business struggles to plan its resources and has constant problems with shortages of capacity, materials or staff.
Are You Prepared to Implement an ERP System?
Most businesses facing these challenges will see an ERP system as the cure for these problems. A bit like taking a paracetamol to cure a headache. However, taking this approach is most likely to lead your business to even bigger headaches. A poorly implemented ERP system will make these problems much worse. It is important to recognise that an ERP system is just a piece of software. All it does is automate business transactions. An ERP will not fix dysfunctional business processes.
In fact, it will just add to the dysfunction. Therefore, before implementing an ERP system you need to first decide how your business processes operate now and how they need to operate. This is best achieved by mapping your end-to-end business processes. At TXM we assist companies to map their overall business process using a value stream map and then map individual sub-processes in detail using swim lane diagrams. First develop a current state map showing exactly how the process operates.
This is likely to be different to how you think it should operate! Then develop future state process maps of how the process should operate with the new ERP. These process maps will provide an excellent tool to help select the right ERP product for your business as they can help you define exactly what you want to the software to do and, just as important, what you don’t want. Apart from defining processes, before you implement an ERP system you need to implement good controls and disciplines of day-to-day operations.
A good example of this is inventory. If your business has poor discipline about storing inventory, recording movements, and issuing inventory to production, then it is likely these mean that the inventory data in the ERP will be incorrect. Your customer will place an order for an item that should be in stock, but when you go to pick the stock, it is nowhere to be found, because it has been used elsewhere, misplaced, miscounted, lost or damaged.
Before Implementing
Before you implement your ERP, you must establish good disciplines that ensure that inventory is always located in the right place and that there are strong controls over the receipt and issuing of stock. Practical 5S™ is a system of workplace organisation that TXM uses in warehouses and factories. By setting clear visual standards for workplace organisation and ensuring these are followed, Practical 5S™ can assist in achieving the level of stock control to ensure the ERP system works effectively.
Another example can be the management of bills of materials and routing. Firstly, to operate the ERP correctly you will need bills of materials and routing for your products. When an ERP creates a production order, it will request materials for the order based on the bill of materials and labour and production capacity based on the routing. If the bills of materials and routing are wrong or they are not followed (e.g. substitute materials are used) then the ERP will issue the wrong materials in the wrong quantities, consume the wrong amount of labour and allocate capacity to the wrong machines or workstations. This in turn will lead to material variances and shortages, inaccurate job costs and confuse management even more!
Keep It Simple
Most ERP systems are packed with features. This is necessary to enable the software vendors to meet the needs of the maximum range of potential customers. Therefore, packages will often come with built in materials requirement planning (MRP) functionality, a warehouse management system, computerised maintenance management system (CMMS), production scheduling tools, inventory optimisation tools, forecasting tools etc. As a business owner you are likely to feel that since you have paid for these capabilities by purchasing the software, you should use all of them. Business owners and leaders constantly apologise to me for only using a fraction of their system’s capabilities.
My advice is to forget about all these other capabilities. If you have defined your future state processes well and your system is handling those processes well and delivering the requirements you set before the project, then you are getting value for money. Adding more capabilities that you don’t need will just add complexity for little benefit.
A good example is production scheduling. Most ERP systems offer a tool for day-to-day production scheduling. However, in over 30 years I am yet to see a scheduling tool that works well. Most struggle to keep up with the dynamic nature of the shop floor where the situation changes in real time. The factors determining the sequence in which jobs are run are also usually very complex and difficult to model effectively in a scheduling tool. Some ERPs offer what is effective an electronic planning board, where the planner can manually schedule production on a screen by “dragging and dropping” production jobs.
These can be useful when people in multiple location need access to the planning board but are often cumbersome to use and usually only update as production is recorded, which can be up to 12 hours after the production actually occurred.
Another unfortunately reality about many of the additional functions sold with ERP systems is that they don’t work very well. Often purpose build third party software for functions such as warehouse management, estimating, forecasting and inventory optimisation will be both cheaper and a lot more effective than the version sold by the software company. Therefore make sure that the system you select has good APIs that allow easy interfacing of the specialist software tools you think you will need.
Summary
Most manufacturing and distribution businesses will need to implement an ERP system. The three key messages here are:
- Only implement the software when you need it – don’t burden your business with additional software cost and complexity when it is not really necessary.
- Prepare thoroughly prior to the selection and implementation of software by knowing exactly how you want the system to work and implementing good day to day process disciplines in your business.
- Keep your implementation simple by avoiding all the unnecessary “bells and whistles” offered by the software companies and consider using specialist bolt on software tools for specialist tasks rather than just the ERP “module”