The intangible or non-financial benefits of an integrated enterprise
resource planning (ERP) system can be viewed from several perspectives. For
illustrative purposes, the discussion will focus on the benefits for
accounting, product and process design, production, sales, and management
information system (MIS) functions. From the overall company standpoint, ERP
provides a framework for working effectively together and providing a
consistent plan for action.
Each of the intangible effects could be quantified in terms of cost savings.
Duplicate data maintenance, for example, requires personnel time in entering
data (and possibly managerial time in determining which set of data should
be used for decision making). Expediting efforts have a visible effect of
consuming personnel time. These quantified cost savings can also be used to
show impacts on financial results.
Effects on Accounting
With a common database from ERP, accounting no longer requires duplicate
files and redundant data entry. Product costing, for example, can be
performed using accurate and up to date product structures. Product costing
simulations can be used to analyze the impact of changing material costs,
labor rates, and overhead allocations as well as planned changes to bills
and routings. Differences between actual and standard costs are highlighted
as variances. Order related variances help pinpoint problem areas.
Customer invoices can be based on actual shipments (without duplicate data
entry), which helps speed invoice processing. Payables can use purchase
order and receipt data for three way matching with supplier invoices.
As manufacturing transactions are recorded, the financial equivalents are
automatically generated for updating the general ledger. This provides a
complete audit trail from account totals to source documents, ensures
accurate and up to date financial information, and permits tracking of
actual versus budgeted expenses. Detailed transaction activity can also be
easily accessed on line for answering account inquiries.
Since manufacturing transactions automatically update the general ledger,
time consuming manual journal entries can be eliminated. Period end closing
procedures can be performed in hours or days, rather than weeks. This
improves reduces clerical accounting work, and improves the timeliness of
financial reports.
Financial reports can be easily customized to meet the needs of various
decision makers. Financial projections can be based on detailed ERP
calculations for future requirements. Cash planning, for example, can
account for current and projected sales orders and planned purchases, as
well as current receivables and payables. Decision support tools (such as
spreadsheets, graphics packages and data managers) can use the financial
data maintained in the ERP database.
Effects on Product and Process Design
The product structure database offers engineering much greater control over
product and process design, especially in terms of engineering change
control. Planned changes can be phased in and emergency changes can be
communicated immediately.
ERP systems offer numerous analytical tools for the engineering function.
When diagnosing the impact of changes to materials and resources, for
example, engineers can check where used information to identify the affected
products. Lead time reduction efforts can use critical path analysis of item
lead times in multi-level bills to focus attention on those key components
affecting cumulative manufacturing lead time. Costed multi-level bills can
be used to focus cost reduction efforts on high value items. Bill
comparisons can be used to highlight differences between products or between
revisions of the same product such as to identify upgrade kit requirements.
ERP systems support custom product configurations. Rules-based configurators
reduce the need for expert assistance from engineers, and ensure sales
personnel (or even customers) can develop timely accurate configurations.
Cost estimates and pricing for custom product configurations can also be
quickly calculated.
Effects on Production and Materials Management
ERP systems help establish realistic schedules for production and
communicate consistent priorities so that everyone knows the most important
job to work on at all times. Visibility of future requirements helps
production prepare for capacity problems, and also helps suppliers
anticipate and meet your needs. As changes to demands or supplies do occur,
ERP helps identify the impact on production and purchasing.
Finite scheduling capabilities in ERP ensure production activities get
scheduled based on capacity, tool and material constraints. Scheduling rules
help minimize setup times and optimize sequencing. Changes in factory
demands, as well as changes in available machine time, labor headcount and
skill levels, tools, and material, can be immediately simulated to assess
the impact on production and purchasing. ERP helps eliminate many crisis
situations, so people have more time for planning and quality. Buyers can
spend more time in vendor negotiation and quality improvement. When the
shortage list is no longer used to manage the shop, the quality of working
life can improve.
Effects on Sales
Customer service can be improved by making valid delivery promises and then
meeting those promises. Custom product quotations can be developed faster
and more accurately, which improves job estimating. Delivery lead times can
be shortened and customer inquiries on order status can be answered immediately.
E-commerce capabilities enable customers to place orders and check status
over the internet at any time. In addition to customer convenience, this
reduces the time requirement for sales and customer service personnel.
Effects on the MIS Function
An ERP system implemented as an integrated software package offers several
advantages to the MIS function. The software package can offer a growth path
from simple to comprehensive applications built on top of a database
management system. It provides an upgrade path to technology and functional
enhancements supported by the software vendor. It can reduce the development
time and cost for software, documentation, and training classes. These costs
would be incurred before the firm can start obtaining the benefits of an ERP
system. It permits the MIS staff to focus their attention on organizational
change and servicing user needs for customization and professional assistance.
About the Author
Dr. Scott Hamilton has specialized in information systems for manufacturing
and distribution for three decades as a consultant, developer, user, and
researcher. Scott has consulted for over a thousand firms worldwide,
conducted several hundred executive seminars, and helped design several
influential ERP packages. He previously co-authored the APICS CIRM textbook
on How Information Systems Impact Organizational Strategy and recently
authored Managing Your Supply Chain Using Microsoft Navision. Dr. Hamilton
is currently working closely with Microsoft partners involved with
manufacturing and distribution, and can be reached at
ScottHamiltonPhD@aol.com or 612-963-1163.