Every organization struggles with growing business. The on-boarding process can particularly challenge manufacturers when they obtain new clients. Learning how to integrate new processes, deadlines and demands from new customers is critical to client retention and “up-selling” efforts.
The Double-Edged Sword of the “Big Contract”
As a manufacturer, you long for the moment of scoring a big contract. You see the dollar signs and can’t help but think of how great this will be for your company. Not only will a big contract increase revenue, it can add credibility to your organization and assist with future marketing efforts.
However, euphoria can quickly fade and turn into worry if you aren’t ready. Your organization must now actually produce and deliver the products. This is where an Enterprise Resource Program (ERP) can help manage the process.
When You Need an ERP
For many small manufacturers, the typical manufacturing process can be handled with a simple information and control system. The information and process might simply “be known” amongst the staff members. The company already knows where to source raw materials, or how to meet their existing deadlines and serve current customers.
New sales growth challenges the existing information system because increased sales means new/less familiar customers and new products. The quantities of raw materials or parts needed may exceed the capacity of current vendors. Increased inventory also means increased risk, as order cancellations are always possible. Questions arise, such as:
- When, how much, at what price and from whom should raw materials be procured?
- When should raw material be put into production?
- How much product is required to fill orders? How much is needed for safety stock?
- What is the real cost of manufacturing this product?
Previously, the answers to these questions were simple. The owner could keep track of everything with a simple spreadsheet or text document. Because of increased volume, the possibilities begin to extend beyond human ability to calculate potential risks and rewards. This is where an ERP system comes into play.
How an ERP Works
An ERP will calculate the required inventory levels and number of production workers needed to meet your sales forecast. Other features include:
- Inventory shortages and excess inventory are reduced as the ERP will calculate when and how much inventory to order.
- Production variances are instantly calculated providing management with a bird’s eye view of how efficient the manufacturing process is. Management does not have to rely on standard costs to calculate monthly profitability and production variances are readily available.
- Checkpoints can be put into the system to prevent inventory or shipments of goods held back for quality assurance or other purposes.
- Information can be produced on a real time basis so management does not have to wait until reports are generated, sometimes days or even weeks later.
- Sophisticated ERP’s even allow customers to check availability and place orders without human intervention.
The Downside of ERPs
Costs can be high when implementing an ERP system, but increased computing power seems to reduce the price. Increased computing power and the use of cloud-based software cut into the burdensome cost of ERP software and hardware. However, there are some pitfalls each company must overcome when it installs an ERP. The production schedule is only as good as the sales forecast. The old adage “Garbage In, Garbage Out” is particularly apropos here.
The ERP assumes raw material is available from vendors any time. In the real world, this might not be true. Vendors also suffer from shortages so sometimes a strategic purchase of materials is advisable. Company personnel must be committed to running and feeding information into the ERP. The use of personal computing spreadsheets must be avoided and new processes must be fully embraced to be successful.
MMTC offers a variety of Lean Business Solutions. For more information, contact MMTC at 888.414.6682, visit www.mmtc.org or email firstname.lastname@example.org.
Since 1991, MMTC has assisted Michigan’s small and medium-sized businesses compete and grow. Through personalized services fitted to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at www.mmtc.org.