How to Know You Need An ERP

If you’re a small business owner that manufactures or distributes physical products, and you do not have an ERP (Enterprise Resource Planning) system, you may be wondering when you should make this investment. It’s common for startup manufacturers to use financial software, like QuickBooks and spreadsheets, to track payroll, inventory, sales, expenses, and more. But as your business grows, these systems get cumbersome, expose you to risk, and limit your ability to make critical decisions. 

So, how do you know it’s time for an investment in an ERP? Here’s a guide to help you evaluate your risks and measure the opportunity of implementing a great-fit ERP. You are probably ready for a real ERP if: 

Spreadsheets are powerful tools for tracking, tabulating, and even automating some data entry. You may have templates set up to estimate costs, track inventory, keep customer data for marketing, and much more. You may even be a guru at formulas, pivot tables, linking, and macros. However, no matter how sophisticated these spreadsheets, or Access databases, they fall short when:

• You have only one or two people who are proficient in making changes to them. Sometimes the business owner is updating these systems, and sometimes there is one key person in the organization who knows how to make changes. Either way, your company is at risk if a key person leaves or if the owner is spending too much time fixing systems rather than running the business. Often there are unintentional consequences to seemingly small improvements. Since your company ​“expert” at Excel or Access does not have an IT team to troubleshoot issues, fixing things can take a long time or not be feasible. He or she may also lack the experience in a particular part of the business (for example, accounting) necessary to make the best decisions.

When you use an ERP solution, you gain the benefits of manufacturing specialists who already know the system. There are financial, operational, quality, and production people who contributed to the ERP’s original design and can train your organization on how to use it.

• You must enter the same data in different places. Duplicate data entry not only wastes company time, but it facilitates data entry error. Small errors can have significant consequences when you don’t have a number you should, for example. When you have unlinked files, it could take hours to find out what percent of your quotes convert to orders, which orders are most profitable, how much scrap pieces are costing, or why your profit has decreased for the last six months. Reports that are ​“normal” for ERP systems must be custom-built when your databases track quality, sales, and inventory are separate files.
  
• You want to know what jobs and product lines are the most profitable. As your manufacturing business grows, you’ll want to get a better understanding of profitability. To see this granular information, such as ​“How much did I estimate this job would cost compared to how much it actually costed?” — you’ll need the sophistication of an ERP system designed to do this. Typical job costs include labor (how many hours at what cost?), inventory (raw materials), and outside processes (work is done by someone else). On a higher level, you will need to see which product lines and customers are the most profitable. Unless you collect and tabulate the details of costs by job, you can’t be sure the high-level product line reports are accurate.

In the manufacturing business, your customers expect quality products at competitive prices, delivered on time. You want to reduce your cost of quality, drive down expenses, and decrease lead-times to improve overall profitability. The International Organization for Standardization (ISO) provides an internationally known standard for Quality Management Systems (QMS) to help manufacturers accomplish these three goals. Additionally, if you sell to other ISO certified manufacturers, they will need your products to be certified as well. ERP systems provide the infrastructure and data-management needed for these QMS procedures, which means it’s a good idea to have to have an ERP to ISO certify, even if it’s not required. ISO is all about documenting your manufacturing processes. The documentation without an ERP system can be time consuming and tedious. To prevent repeating this difficult document process twice, it’s best to put your ERP implementation ahead of the ISO certification.

The more people you have, the more critical it is for everyone to access the same system for their job functions and pass data along the process. The typical ​“Quote to Cash” process follows looks like this:

Quote > Sales Order > Work Order/Job/Bill of Materials > Purchase Orders for raw materials > Inventory Receipt > Labor Collection & Other Costs Collection Against Jobs > Finished Goods Inventory with Costs > Shipping > Invoicing

An ERP system ensures that necessary customer information entered at the time of quote follows through to invoicing. The people in production see the specifications entered at the time of the sales order. Shipping sends the products to the correct shipping address, using the customer’s instructions on the Sales Order. Without an ERP, you need the same documents (Sales Order, Purchase Orders, Packing Slips, Invoices, etc.), but if they are created separately, they are prone to errors, take longer to enter, and are not linked to financial reporting.

In summary, you know you need an ERP system when your current business processes consume too much time, depend too much on one or two people, don’t provide the information you need, and don’t support your growth plans. Get started today on your ERP search and discover how an ERP system can launch your manufacturing business to the next level. 

For manufacturing businesses, also read our additional guide to the top manufacturing ERP systems.