There Are Many Reasons to Use ERP Software
The primary reason any company should use ERP software is because it is a centralized, fully integrated, end-to-end, database which collects and stores all data produced by and needed to run your business. It is commonly used by companies working in supply chains to help them keep track and manage their manufacturing and distribution requirements within their supply chain, collaboration within your company and with your suppliers and customers, simplified compliance and risk management, improved inventory management, production planning, financial management, and resource management.
What Are the ERP Tools Which Make ERP Valuable
How does ERP enable you to achieve these reasons to use ERP software? Some of the more specific reasons are: it uses single entry system which dramatically reduces entry errors, it is management by exception, it is a single source of information enabling all users to find the information they need when they need it, job costing, job scheduling, MRP, quoting, order entry, purchase order entry, shipment and receiving processing, accounts receivable, accounts payable, purchasing, quality assurance, general ledger, currency exchange management, multi-location, quality control, and many more.
Why Do Most Companies Use ERP Software
Almost every manufacturer will tell you reporting, job costing and job scheduling are the three most important reasons to have ERP software. Let’s talk about job costing and job scheduling for a moment. Why is job costing on everyone’s short list? Job costing is defined as a method of recording the costs of a manufacturing job. The components of any job cost system are direct labor, raw materials, subcontract costs, and manufacturing overhead or burden. If you have a meaningful warehousing operation, you might include material burden. Job scheduling according to Wikipedia, “Scheduling is the process of arranging, controlling and optimizing workloads in a production process. Companies use both backward and forward scheduling to allocate plant and machinery resources, plan human resources, plan production processes and purchase materials.” There are two types of scheduling, finite and infinite. The difference is for infinite scheduling there is no consideration given to manufacturing capacity. Finite scheduling gives consideration to capacity and schedules demand across that capacity.
What is Job Costing
Why does a manufacturer need job costing? It is simply to ensure product pricing covers actual costs, overhead and provides a profit. The purpose of any business is to make a profit and job costing enables this goal to become a reality. How does an ERP solution collect job costs? Let’s deal with each of the 5 components of job costs.
In order to collect job costs, you must have a “container” to hold the costs as they are collected. Let’s call it the “job.” In this case, a job is an electronic job and does not have a physical existence. Throughout the life of the electronic job (going forward just called “job”) it is the collector of the various job costs: direct labor, raw materials, subcontract costs, and manufacturing overhead or burden, and if appropriate, material burden.
What is Direct Labor
Direct labor is most often collected through a “Manufacturing Execution System” or MES and sometimes called a “labor collector.” Before each person on the shop floor works on a job, they need to log onto the MES system. They would identify themselves, identify which job and operation they are about to work on, and whether they are about to work on setup or production. Once complete, they would log out of the job and in the logging out process report the number of parts made, including, how many were good, non-conforming, and/or scrap. The time between clocking into and out of the job times that shop employees pay rate is captured in the job as direct labor cost. This process of capturing direct labor continues throughout the life of the job.
What are Raw Materials Costs
Raw materials costs are captured by the job when they are either bought directly to the job or issued to the job from inventory. These costs can vary based on the setup of the part costing method. The part costing method could be standard, average, FIFO, LIFO, last, and several other costing methods. Whatever the costing method, the raw material cost would reflect each materials cost. However, if the parts are purchased directly to a job, their costs in the job will reflect their actual cost.
What are Subcontractor Costs
Subcontract costs are usually the charges of the subcontractor which includes their charge for their service, any expedite and other fees, which might include freight. Some subcontractors charge a minimum fee which can have a dramatic impact on a job with a small quantity. The subcontractor costs hit the job when the subcontractor’s invoice is entered into the ERP accounts payable.
What is Manufacturing Overhead Costs
Manufacturing overhead or burden is the sum of all costs which cannot be attributed to any specific job, excluding General, Sales & Administrative costs. Manufacturing Overhead might include costs like shop janitorial services, utilities, manufacturing managers salaries, some quality assurance/control costs, and some shipping costs, etc. Burden is applied to a job based on the total number of machine hours used for each operation may vary based on the specific machine used for each operation.
What is Material Burden Costs
If material burden is used it is because the company has a significant warehouse cost, for example, the cost of the building, warehouse labor costs, utilities, etc. Material burden is also applied based on machine hours.
What is Job Scheduling
In many ERP solutions, finite scheduling is the most power module/tool in the software. All other transactions can be managed by a human with some being more difficult than others. It is only finite scheduling which excels beyond human capacity perform when it is managing 100s, maybe even 1000s of jobs at any one time where each job might require 8-12 months to complete.
Often the main reason for using finite job scheduling is increases the probability of successfully shipping jobs on time. Some unintended benefits might be reduction of WIP, which releases working capital for other purposes, increases the number of times WIP turns in a year, and many others.
What is the Always Overlooked Reason to Use ERP Software
There are many reasons to use ERP software. The primary reason is ERP is a centralized, fully integrated, end-to-end database which collects and stores all data produced by and needed to run your business. But are you collecting all of your data. Let’s discuss on the most overlooked reason to use ERP software…PERPITUITY!
What is perpetuity? Perpetuity is the state of lasting forever. Forever is a real long time. That’s what makes this such an important topic. So how does ERP software provide perpetuity? In short, ERP software provides a company the ability to capture the information a company requires to be successful. To make this more relevant, let me tell you a story.
“Whenever I’m first speaking with the new owner of ERP software, I always feel the need to ask them, ‘What is your short list of reasons why you purchased your new ERP software?’” And, almost every short list has these two in common, and that is job scheduling and job costing. But I never hear – at least, what I believe – is the most important reason for having ERP software to run your shop (besides the fact that it’s end-to-end software, and it’s the only database that you need to own).
That reason is perpetuity. ERP software provides you with a vehicle which can capture all company information, including company tribal knowledge – that information that’s in your employee’s heads. This tribal knowledge is information you’ve relied upon for all these years. Have you ever considered the fact that all employees will leave someday? When they leave, all that tribal knowledge which you have not captured will leave with them.” All companies need to capture as much of that tribal knowledge in their ERP software as possible. That way you’re not as vulnerable as you would be to any employee’s departure from the company.
Some employee’s departure could be a surprise – they could walk out at the end of their work day and get hit by a car; they could quit for reasons which have nothing to do with where they work – there’s a lot of reasons why somebody might leave.
But whenever they leave, no matter their reason, their knowledge leaves with them, unless you’ve captured their knowledge and saved it in your ERP software. By capturing their knowledge you’ve increased your ability to succeed over time – resulting in perpetuity.