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Warning: Your Manufacturing ERP Can’t Do it All

Until recently, nearly every company had an expectation that the manufacturing ERP system should be sufficient to run the business. However, despite the name: enterprise resource planning (ERP), most ERP systems rarely cover all processes enterprise-wide. The reality is that software vendors build them to focus on core operations. The planning capability is typically limited to high-level budgeting while providing placeholders for business users to populate estimates from external sources. In this context, perhaps a more fitting name would be financial resource and document tracking (FRDT) system. To become genuinely enterprise-wide and provide robust planning capabilities, most systems require additional modules, customization, special reports, and bolt-on sub-systems. This approach might initially seem odd. However, it’s quite reasonable once you consider the rationale for designing them this way.

Manufacturing ERP Elements Decoded

There are three elements to decode. First is the organization’s need for a historical record, which is satisfied by tracking base information across many transactions. Next is the need for audit-quality output, which is achieved by limiting both user options and complexity of calculations. Finally, the organization needs future-oriented complex calculations. This element is counter to core ERP design and therefore other specialized systems are required.

Warning - Your Manufacturing ERP Cant Do it All

Manufacturing ERP Element 01: Critical Historical Record

At the most basic level, companies need a historical record to document performance and obligations. The manufacturing organization uses these historical figures to track resource utilization and value creation, such as materials consumption into finished goods and finished goods conversion into sales. They also use them to measure performance against pre-established budgets, so managers can monitor variance against expectations and adjust as necessary. The historical data is used as the basis to forecast future performance and identify potential future budget variances.

Most manufacturing ERP systems do a good job of documenting high-level information about the past however, business users need more than just the foundational historical data to do their jobs. Typically, people throughout the organization manipulate these historical figures outside the ERP system so they can leverage intelligence beyond “history repeats itself.”

manufacturing ERP compared to types of data and reports

Manufacturing ERP Element 02: Financial Reporting

Beyond the historical record, companies need to publish financial statements in a standardized format. Typically, owners, shareholders, investors, lenders, and many other stakeholders require the accounting standard known as GAAP, generally accepted accounting principles. This set of common accounting principles, standards, and procedures specifies accepted ways of recording the major financial statements including income statement, statement of equity, balance sheet, cash flow statement, and supplemental notes. Each of the financial statements is a summary level report of operational information. For example, the income statement's top line is labeled Revenue which is a single dollar value that represents the sum of all the amounts invoiced to customers in that historical period. Every figure on every financial statement comes from adding up the underlying source documents and transactions. Most basic ERP systems strive to protect the integrity and "auditability" of the financial statements by avoiding going too deep into core operations or too broad beyond core operations.

In manufacturing ERP, many data points feed the income statement

Manufacturing ERP Element 03: Transactions and Documents

Next, companies need to manage all the source documents and transactions.

  • Every customer sales transaction typically has an invoice and a cash receipt; they often also include packing slips and bill of lading documents.
  • Every purchase from a vendor typically has an invoice and a cash payment; a purchase order and receiving document might also be part of the record.
  • As manufacturing consumes raw materials and resources toward finished goods inventory, a production work order specifies the bill of materials (BOM) and the resource routes.

Most ERP systems do a good job keeping all this straight. However, the architecture that makes an ERP system good at tracking the past is exactly what makes it a poor choice for identifying improvement opportunities or predicting the future. That’s because historical tracking systems are designed to summarize a large volume of data in a repeatable format to audit level scrutiny. The information is typically limited to dollars and units. Conversely, forward looking planning systems require more robust calculations that combine changes to historical trends, efficiency calculations, and a host of other information.

business systems for the manufacturing enterprise

Revamp Your Company’s Manufacturing ERP Expectations

No matter what your company’s current initiatives or objectives are, it’s a good idea to take a hard look at how the corporate leadership and department heads view the manufacturing ERP. Some organizations already have a forward-thinking view of ERP as a necessary and foundational element of industrial transformation. Most businesses however still view ERP as the be-all-end-all to run the manufacturing enterprise. Those are the companies that might find transformative efforts cumbersome and contentious.

Ultimately, we’ve consistently seen that companies with a realistic posture toward ERP experience faster and greater overall success in achieving their business objectives. These manufacturers:

At the end of the day, let your manufacturing ERP do the job it was meant for: bear the heavy burden of tracking the web of activities and documents as the primary system of historical records. Then, decide which best-of-breed sub-systems your company needs to actually run the business.

TAGS: ERP

Written by Sean Lashmar

Sean Lashmar is a finance and supply chain executive with more than 25 years experience in helping companies reach higher levels of business performance. He has zeroed in on improvement opportunities by helping enterprises optimize business processes, achieve better supply chain performance, create and refine S&OP processes, and connect the dots between business objectives and execution at the operations level. He has spent the last 16 years partnering with manufacturing executives so their companies can capture the promise of operational excellence.

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  • 0

Warning: Your Manufacturing ERP Can’t Do it All

Until recently, nearly every company had an expectation that the manufacturing ERP system should be sufficient to run the business. However, despite the name: enterprise resource planning (ERP), most ERP systems rarely cover all processes enterprise-wide. The reality is that software vendors build them to focus on core operations. The planning capability is typically limited to high-level budgeting while providing placeholders for business users to populate estimates from external sources. In this context, perhaps a more fitting name would be financial resource and document tracking (FRDT) system. To become genuinely enterprise-wide and provide robust planning capabilities, most systems require additional modules, customization, special reports, and bolt-on sub-systems. This approach might initially seem odd. However, it’s quite reasonable once you consider the rationale for designing them this way.

Manufacturing ERP Elements Decoded

There are three elements to decode. First is the organization’s need for a historical record, which is satisfied by tracking base information across many transactions. Next is the need for audit-quality output, which is achieved by limiting both user options and complexity of calculations. Finally, the organization needs future-oriented complex calculations. This element is counter to core ERP design and therefore other specialized systems are required.

Warning - Your Manufacturing ERP Cant Do it All

Manufacturing ERP Element 01: Critical Historical Record

At the most basic level, companies need a historical record to document performance and obligations. The manufacturing organization uses these historical figures to track resource utilization and value creation, such as materials consumption into finished goods and finished goods conversion into sales. They also use them to measure performance against pre-established budgets, so managers can monitor variance against expectations and adjust as necessary. The historical data is used as the basis to forecast future performance and identify potential future budget variances.

Most manufacturing ERP systems do a good job of documenting high-level information about the past however, business users need more than just the foundational historical data to do their jobs. Typically, people throughout the organization manipulate these historical figures outside the ERP system so they can leverage intelligence beyond “history repeats itself.”

manufacturing ERP compared to types of data and reports

Manufacturing ERP Element 02: Financial Reporting

Beyond the historical record, companies need to publish financial statements in a standardized format. Typically, owners, shareholders, investors, lenders, and many other stakeholders require the accounting standard known as GAAP, generally accepted accounting principles. This set of common accounting principles, standards, and procedures specifies accepted ways of recording the major financial statements including income statement, statement of equity, balance sheet, cash flow statement, and supplemental notes. Each of the financial statements is a summary level report of operational information. For example, the income statement's top line is labeled Revenue which is a single dollar value that represents the sum of all the amounts invoiced to customers in that historical period. Every figure on every financial statement comes from adding up the underlying source documents and transactions. Most basic ERP systems strive to protect the integrity and "auditability" of the financial statements by avoiding going too deep into core operations or too broad beyond core operations.

In manufacturing ERP, many data points feed the income statement

Manufacturing ERP Element 03: Transactions and Documents

Next, companies need to manage all the source documents and transactions.

  • Every customer sales transaction typically has an invoice and a cash receipt; they often also include packing slips and bill of lading documents.
  • Every purchase from a vendor typically has an invoice and a cash payment; a purchase order and receiving document might also be part of the record.
  • As manufacturing consumes raw materials and resources toward finished goods inventory, a production work order specifies the bill of materials (BOM) and the resource routes.

Most ERP systems do a good job keeping all this straight. However, the architecture that makes an ERP system good at tracking the past is exactly what makes it a poor choice for identifying improvement opportunities or predicting the future. That’s because historical tracking systems are designed to summarize a large volume of data in a repeatable format to audit level scrutiny. The information is typically limited to dollars and units. Conversely, forward looking planning systems require more robust calculations that combine changes to historical trends, efficiency calculations, and a host of other information.

business systems for the manufacturing enterprise

Revamp Your Company’s Manufacturing ERP Expectations

No matter what your company’s current initiatives or objectives are, it’s a good idea to take a hard look at how the corporate leadership and department heads view the manufacturing ERP. Some organizations already have a forward-thinking view of ERP as a necessary and foundational element of industrial transformation. Most businesses however still view ERP as the be-all-end-all to run the manufacturing enterprise. Those are the companies that might find transformative efforts cumbersome and contentious.

Ultimately, we’ve consistently seen that companies with a realistic posture toward ERP experience faster and greater overall success in achieving their business objectives. These manufacturers:

At the end of the day, let your manufacturing ERP do the job it was meant for: bear the heavy burden of tracking the web of activities and documents as the primary system of historical records. Then, decide which best-of-breed sub-systems your company needs to actually run the business.

Written by Sean Lashmar

Sean Lashmar is a finance and supply chain executive with more than 25 years experience in helping companies reach higher levels of business performance. He has zeroed in on improvement opportunities by helping enterprises optimize business processes, achieve better supply chain performance, create and refine S&OP processes, and connect the dots between business objectives and execution at the operations level. He has spent the last 16 years partnering with manufacturing executives so their companies can capture the promise of operational excellence.

Comment, questions or feedback