What is ERP?

WHAT IS ERP?
Improving Business Performance!

What is ERP - is a question with many different answers!

For family businesses, an ERP system can play an important part in creating the infra-structure necessary to grow the business, increase profits and to help transition the business from one generation to the next.

According to Wikipedia:

Enterprise resource planning (ERP)is an integrated computer-based system used to manage internal and external resources including tangible assets, financial resources, materials, and human resources. It is a software architecture whose purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders. Built on a centralized database and normally utilizing a common computing platform, ERP systems consolidate all business operations into a uniform and enterprise wide system environment.

That definition is clear, precise and straight forward, but not all ERP systems are the same.

In fact, there are literally hundreds of ERP systems and while the basic definition stays the same, the application software will vary from one developer to another – and from one industry to another – and from smaller-sized businesses to larger-sized and complex international companies.

“We often recommend ERP as a business building tool for our family business clients engaged in manufacturing and distribution businesses - and certainly as a succession management tool when the business is transitioning from one generation to the next” says leading family business expert Don Schwerzler. "When I am asked ‘what is ERP,’ I do not think in terms of definitions, I think in terms of success strategies for family businesses.”

Schwerzler has been studying and advising family business entrepreneurs for more than 40 years and he is the founder of the Family Business Institute and the web organization Family Business Experts, both of which are headquartered in Atlanta GA.

At a recent workshop for family business owners considering an ERP system for their family business, Mike Roman, a nationally recognized family business ERP expert addressed the question “What is ERP” in terms of the benefits gained from an ERP system.

“Using a well-tuned ERP system gives a family business a huge competitive edge in the market place in terms of quality, reduced costs, faster order processing times, reduced labor, smarter forecasting, lower inventories and higher profits” said Roman. Read Mike Roman Interview When a family business is thinking about getting a new ERP system or wants to upgrade the ERP system that is currently being used, Mike uses a survey that includes important questions – the answers to which will enable the management team to make better ERP decisions.

What is ERP? ERP means different things to different people.

The question is similar to one scientists discuss when asked about how do we tell that there are more than three dimensions.

To help people understand that they use the example of a shadow in a two dimensional universe. A two dimensional universe ‘knows’ there is another dimension because they see shadows produced by an unknown source.

To "see" what you are looking at in an ERP system, it is important to measure and analyse the data - and then to establish performance benchmarks for your family business.

Although the specific areas to measurement vary based on the type of industry, there are a number of common measures for most organizations.

If your ERP System does not provide that fundamental information, your ERP System is not delivering proper value - it may need a "tune-up"!

Your ERP system should have a pulse on the business in these areas:

WHAT IS ERP - CUSTOMER SERVICE

What are your company’s inventory turns?

APICS defines inventory turns as the ratio between annual cost of sales and average inventory value.

In other words, inventory turns tell an organization how much value the inventory contribute to an organization’s cost.

The higher the ratio between inventory and cost of sales, the better the value is for the organization. Mid-sized manufacturing and distribution companies with an inventory turns ratio below 5 can generally do much better.

Generally, a company that has a higher inventory turn ratio has more cash on hand, is more flexible and better able to react to the demands of the market. Simply stated, higher inventory turns enables a family business to provide better customer service!

A company with a higher index has less chance of having obsolete inventory or inventory spoilage of shelf-life items.

The ability to know the inventory turns exists within all ERP Systems. The value is easy to calculate most reliable when cost of sales and inventory accuracy are known and tracked. Both are available in a properly tuned ERP System.

How well do your customer shipments match the original ship date the customer requested?

Customer satisfaction is important for an organization’s success. Meeting customer ship dates is a big part of satisfactory customer relations.

One way to measure how well you meet customer expectations is to have a measure of whether you meet the original customer shipment date.

Most ERP Systems allow for defining the original customer shipment date. Does your system allow you to report whether shipments met that expectation?

How often does the customer return a shipment or partial shipment for quality issues?

How many RMAs (Return Material Authorization) occur monthly?

Which customers return which products?

Are patterns emerging of which management needs to be aware?

The measurement of these data is an important call to action for the organization. Educate personnel about the importance of capturing this very important company information.

What is the fill rate for the initial shipment on a customer order?

Regardless of whether you are in a “fill or kill” environment or not, performance to delivery request date ranks high on the priorities of most businesses.

How effective is your organization conformance to customer delivery requests?

Did each line of the sales order ship complete?

Did each line of the sales order line ship on time?

Was the quality acceptable for each sales order line?

Was material packaging in compliance with the customer’s request?

Was the proper paper work in compliance with the customer’s request?

Regardless of the customer request, track compliance to the customer’s request. Performing customer follow-ups are easier tasks as a result. Such follow-ups build customer rapport and earn repeat business opportunities.

Who is your best customer and what have they purchased in the past 30, 60, 90 days?

In the past few years, some ERP systems are mimicking web-based businesses processes.

Customer buying habits and frequency are easy to track in an ERP System and some innovative organizations are generating emails and literature to companies thanking them for their interest and support of their organizations.

Forward thinking companies mine this data to produce additional selling opportunities. Instead of waiting for business to come to them, they are using this information to create unique selling strategies aimed at generating more business based on selling more of what the customer usually buys.

Customers react favorable to this approach. Are you taking advantage of such opportunities?

WHAT IS ERP - SUPPLIER PERFORMANCE

How well do your vendor shipments match the original shipping date on your PO; and how often do you return a full or partial shipment to the vendor for quality issues?

Successful family business owners expect the same business relationship with their suppliers that they have with their customers.

Supply chain inputs and supply chain outputs need the measurement processes.

Do you use those measures to rate Supplier Performance and define improvement opportunities with suppliers who perform below expectations?

Using your ERP System to track this data and work with your suppliers to define acceptable levels of service for each functional measure is a smart business practice.

WHAT IS ERP - INVENTORY VALUATION

What is the value of obsolete inventory?

The definition of “obsolete” varies depending on what you want the value of your inventory to reflect. Regardless, obsolete inventory is no longer a company asset and the ability to define “obsolete” inventory by lack of use after 15, 18, or 24 months is easy to do.

Obsolete inventory may be symptomatic of poor product quality, poor management of demand forecasts, and/or poor inventory management activities.

Looking at the amount of obsolete inventory a company creates gives family business owners an idea of how well a product is selling and the effectiveness of a company's inventory management process.

Removing obsolete inventory (physically and financially) helps focus management activities on inventory that has more value. Other benefits might be better space utilization, and traffic flow improvements.

What is the value of your obsolete inventory?

What are the reasons for your obsolete inventory?

What is the inventory accuracy?

An important reason for purchasing an ERP system is to improve inventory accuracy.

Without dedicated cycle count programs (with root cause analysis improvement opportunities) inventory accuracy improvement does not happen.

Inventory management gurus suggest inventory accuracy greater than 95% to support an effective system to manage the internal supply chain. This is not an aggregate number! In a company with 1000 SKUs, inventory errors of 100 items produces an inventory accuracy of 90%, far below the recommended accuracy for any company!

What is the inventory accuracy at your business?

What is the Bill-of-Material accuracy?

Many companies focus inventory accuracy initiatives in two areas:

1. Inventory cycle count programs

2. Bills-of-Material (BOMs) cycle count programs

Cycle count programs (which work through counting all of the inventory items multiple times yearly) are money savings processes. An effective cycle count program replaces yearly, quarterly, or monthly physical inventory programs.

What is the cost to stop production, count inventory and change the numbers in the computer?

What is the fall out for doing so?

Is your inventory more or less accurate when someone unfamiliar with particular parts, count them and then change the computer counts?

Cycle count programs use partially or fully dedicated personnel to manage the process. The process includes counting inventory; find the root cause for any errors, changes to the computer counts and action programs to address the reasons for the inaccuracies. Using the same people regularly allows proficiency to the task to take root more quickly.

Cycle counting the BOMs generates accurate costs for manufactured items. When organizations cycle count the BOM, they eliminate the most frequent reason for inventory inaccuracy. An additional benefit is that the production team does not have to shut down activities during the cycle count process.

WHAT IS ERP - SHOP FLOOR CONTROL

What is the Bill-of-Operations (BOO) accuracy?

Scheduling the shop is necessary, and everyone knows that run times are less than accurate. Regardless, “you do not control what you do not measure,” so measuring runtimes is an important task for several reasons:

Improving BOO accuracy cannot begin until run times are measured.

Having good run times reduces the chaos on the shop floor.

Having accurate runtimes on BOOs create more accurate Part Costs.

When multiple paths through the plant exist, knowing which paths produce the most accurate run times will continue to contribute to shop floor harmony.

The more accurate the runtimes are, the less chance of creating late deliveries for customers without costly expediting charges for overtime and/or expedited freight charges.

How many hours of work are in a backlog in the shop?

It is not necessary to walk out to the shop to know how well the shop is doing or not moving material through the production process.

Data exist in the Bill-of-Operations (BOOs) that drive the scheduling system in the shop. Just run the shop load report to find this information.

Monitoring backlog is a good indicator of company sales.

Additional information is also available by looking at the backlog report and looking at the number of hours booked from sales during the current week. For example, by subtracting those sales from the backlog report, management can generate a gross measure of the plant throughput.

How many hours of work are waiting at each work center in the shop?

The ability to see what work is at a specific work center is standard in most ERP Systems. What value is this information?

Does the shop have work that only certain people can perform because they prefer to work only those types of orders?

What happens when those people go on vacation?

What happens when that work center is unusable due to mechanical or electrical problems?

Which customer orders are affected by machine availability?

Should customer service appraise customers ahead of time that orders will be late?

Proactive customer interactions are better than getting a call from irate customers who want to know the status of a late order!

How many standard hours does each work center EARN on a daily, weekly, and monthly basis?

There is another set of data easily available from the shop floor system - “Earned” hours at each work center.

Knowing that standard helps rank employee productivity, and provides the ability to identify employee trends that additional training will correct (when the trend becomes habit..!).

Poor performance to standards may also reflect an incorrect standard for an item.

Both scenarios are easily understood and addressable when standards are used and performance to standards measured.

What are you doing to improve the efficiency of those work centers?

After identifying an opportunity to improve a process, what’s the next step?

Educational programs, training programs, mentoring programs are all options.

If specialized equipment is a concern, what programs exist to provide continuing training to shop personnel?

Does the education/training/mentoring process include a recognition activity for the individuals?

Don’t forget to provide that personal touch to recognize personnel who contribute to the success of the organization.

How well do shop employees work from a priority dispatch list?

Without proper direction, it is not uncommon for shop employees to "cherry pick" their assignments.

Meeting defined customer ship dates is the goal of a scheduling system, and the priority dispatch list is the execution piece of that system.

When the priorities dispatch list functions as intended, meeting customer expectations is the usual result. Supervisors need to manage their work centers through this report and measure each work center’s conformance to that report.

WHAT IS ERP - PLANNING

If you use a forecast to predict customer demand, how accurate is the forecast?

Forecasting is not a new tool and every manufacturing or distribution company is a candidate for the use of a forecast system. A number of management review points arise to address that process. Those issues are:

Who is responsible for the forecast (gathering the data, publishing the results and maintaining those data)?

Who is accountable for maintaining the accuracy of the forecast?

What tools does a company use to measure the accuracy of the forecast over time?

Planning is a function that provides the biggest single benefit achievable from the use of an ERP System. The forecasting tool is a very powerful tool since it has the capability of managing the spending for:

1. Material

2. Labor

3. Subcontracted production activities

4. Expense items

When working the plan, the needed labor force is known because that information comes from the BOO used to make the predicted parts.

When working the plan, the material requirements are known because they come from the BOM used to make the predicted parts. The same is true for subcontracted processing (outside vendor requirements).

Managing expense supplies is easier to accomplish because of the existence of a predictable production schedule. Remember forecasting at BOM level other than the final sales item is doable and often times a better alternative than forecasting at the sales item level.

KPIs (key performance indicators) are vital to understanding where opportunity improvement projects can contribute directly to the bottom line of the organization.

KPIs provide an additional level of control that may not be present in your ERP System - perhaps because no one told you they were available!

What is ERP? Bottom Line - ERP systems provide family business owners the information they need to grow their family business and to improve the profitability of their family business!


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