Why Manufacturers Should Invest in ERP Software

Most manufacturers are very concerned with operations and place less emphasis on the finance or accounting operations.  They understand where their money is made, on the production floor.   However, this thought process can often lead to much less attention being paid to how much time clerks are spending entering data and how much time is spent finding and adjusting inventory.   After 15 years working for Custom Information Services (CIS) focusing on  manufacturers, I have seen a lot of companies doing it wrong with lots of inefficiencies and a lot of companies that are operating right with the correct ERP in place!

My husband is in sales and project management for a company that works with manufacturers building conveyors, blenders, grinders, etc. for primarily the food and cosmetics industry.    We often joke that he gets the deals before I do because even though the software I represent takes the order and prints the invoice, software does not mix the raw materials and make the finished good.  Owners invest in what is going to give them the most immediate return on investment (ROI).    I do think companies often miss the ROI that they can get from having accurate inventory quantities and increasing their inventory turns by having the right raw materials on hand.   Having a purchasing agent that is buying too much or too little can cost companies lots of money.    I am not blaming the purchasing agent.  If they don’t have the right tools in place to notify them when materials need to be purchased based on lead times, min/max,  demand, or a forecast then they don’t know when or what to purchase.   There is nothing worse than having a large order that needs to go out the door by the end of the week and not having the resources such as, capacity, raw material or containers in stock to complete the order.  You can end up paying extra for freight costs to get the material delivered or you have to pay a premium since your cheaper vendor is out of stock or too far away to ship in time. 

If you overbuy then you also have several risks: costs for  inventory sitting on the shelf; perhaps it has a shelf life.  I went to a CCAI (Chemical Coaters Association International) meeting in January and the presenter Roger Talbert, talked about a coatings company buying three 55 gallon containers of water based paint that they only used about a gallon of a month.  Of course the paint went bad and could not be reformulated.   The explanation was that they got a better price on buying 55 gallon containers, three at a time.   However in this case they actually paid for more material than they needed and nearly all of it had to be scrapped.   How much did that cost this coatings company? 

I have also been to companies that print out their work orders or batch tickets then walk the warehouse looking for the raw materials needed.  Then they purchase what is missing since they do not have a good ERP system in place.  Often times their production is at a standstill or they are producing products for customers that are not a priority or making for stock.   

Writing this article made me wonder what the exact statistics are for technology and how it affects manufacturing.  I perused the Internet and found this article on the https://www.manufacturing.gov/report/index.asp?dName=report  website: Competing and Winning in a Global Economy.     This article is the first of 3 chapters of a comprehensive study that is the result of President George W. Bush’s Manufacturing Agenda during National Manufacturing Week in Chicago on March 5, 2003.

Here is an expert from page 22 and 23:

In 1987, in a review of the book Manufacturing Matters, Nobel Prize-winning economist Robert Solow famously observed, “You can see the computer everywhere but in the productivity statistics.” In the latter part of the 1990s, however, the evidence of the computer’s effect on productivity finally surfaced. Compared with the relatively slow rates of productivity growth experienced between 1973 and 1995, labor productivity grew “roughly 1.2 percentage points [faster] a year from 1995 through 2000, a rise of more than 80 percent” above the previous trend line.  Investments in information technology are estimated to account for 60 percent of that increase in productivity.

Computers have also made possible most of the revolutions in business processes as well. In the absence of the computing power available today, concepts such as “just-in-time” production and “demand-pull” manufacturing processes could not exist in their current forms.1  The dramatic increase in computing power has created an ever more powerful tool for developing new products, lowering production costs, raising quality, measuring performance, and managing business.

Computer software and technology in general should be an investment that manufacturers should include in their budgets as well as plant equipment and maintenance.    Most technology partners such as CIS try to make these expenditures affordable through the use of financing, software as a service,  and most importantly by improving productivity and reducing inventory costs.   The Section 179 Deduction can also be used for computer software.  Please also see my article on the Section 179 expensing computer software in 2011.

Custom Information Services or CIS is a Microsoft Dynamics GP reseller in North Texas.   If you would like more information on our product and service offerings for manufacturers, please contact me through email at nphillippi@customis.com or by phone at 817-640-0016 x 109.

by Custom Information Services