How an ERP System Can Help Manufacturers Analyze Costs

March 9, 2021 | Article

As a manufacturing organization, cost is always top of mind. There are your standard costs, overhead and variables to consider.

An ERP system can help you leverage data to analyze costs and make strategic business decisions around pricing. But how do you know if you have the right system set up?

The first step is to validate and evaluate that your system is set up correctly to meet your business needs.

Reasons to Evaluate Your ERP System
There are several reasons you might want to evaluate your ERP system on a periodic basis:

  • You can’t get the right information out of your current system. It may be that your system does not have the robust capabilities of getting the detailed information needed or calculations in your current system have not been updated for some time. It might be time to consider upgrading to a new ERP system to help you analyze your operations in real time.
  • You’re having major swings in your results each month that don’t meet your expectations, such as swings in your Work in Process (WIP). In this instance, you must analyze your inventory and manufacturing processes and how those costs are being captured in your ERP system.
  • You want more real-time visibility throughout the month versus only seeing your results at the end of the month. In this case, you may need to improve your processes with a few best practices or reconfigure your ERP for better, more timely reporting.
  • You want to check your process against best practices. It may be that there’s a change in leadership or operations and you want an outside perspective to confirm that your process is correct, particularly if it’s been in play for a long time.
  • You want to automate a manual process. Many companies have depended on an individual’s long-term knowledge and actions. Engaging others will create a more secure, efficient process in your ERP system.

Automating processes is one way manufacturers can run lean during disruptive times. You can automate tasks as simple as managing lights and as complex as work order creation, scheduling and picking. It won’t take long for the savings to be evident.

Here are a few more ways to contain costs.

Recommendations for Optimizing Your ERP System
In assessing your ERP system, you’ll likely find it is calculating what you want it to, but it’s not breaking out the calculations that are helpful for the management and operations teams. When we find this in our costing analysis, we recommend breaking down the particular variance so it’s more visible and isn’t buried under variances or cost of goods sold. We also find ways for you to track activity throughout the month and improve the reporting process.

In many cases, you can accomplish this with a better understanding of your ERP system and configuration changes that allow for better, more timely information. Suggested reconfigurations include:

  • Setting up new accounts, like general ledger accounts, or changing the posting accounts to track things better in your financial reporting.
  • Adjusting your overhead rates, or standard costs, because they’ve changed since you last set them. Costs and estimates may have changed, and maybe new equipment has increased efficiency and lowered your overhead.
  • Educating/coaching people on how to look at variances. In addition, doing variance analysis on a monthly basis so they understand and gain visibility into the reasoning for those variances.
  • Simplifying your analysis and reporting. Sometimes, there isn’t value in every detail. If it’s too complicated, see how you can work on a more summary level without losing value.

The Value of Information at the Operational Level
To get the financial results you want, we recommend pushing information out to the operations or manufacturing floor during the current month, so operations have more real-time visibility into the data. With this visibility, they can make valuable adjustments, see where backlogs are and find opportunities to get more throughput. You can provide this information and reporting with dashboards and analytics they can view throughout the month.

Benefits of Improving the Cost Analyzation Process
Once you’ve evaluated and optimized your ERP system to ensure it has the right capabilities for your business needs, the next step is to pull data from the system for better cost analysis. When we work with clients on cost calculations, our goal is to provide recommendations that will increase the company’s revenue, decrease their expenses or reduce their risk. Here are a few benefits of evaluating and improving additional business processes:

  • Validate or enhance pricing. When you accurately perform inventory costing, you have a better analysis of where you want your margins to be and where your true margins are.
  • Increase production efficiencies and delivery times. With better information and/or improved processes, you get more efficient production and delivery. This results in higher customer satisfaction, long-term customers and increased sales.
  • Optimize time spent on value-added tasks. Process improvement allows employees to focus on the right things, rather than spending time on fixing a problem. Eliminate waste by cutting time spent on activities that don’t provide value to your company, the customer or the product.
  • Reduce risk and expense of manual processes. Manual processes, such as working in spreadsheets or outside the ERP system, add complexity and risk of error or loss. For instance, if the information resides within an employee and is not documented, you risk losing valuable business knowledge should they leave. Utilizing an ERP system and/or automating provides greater efficiency and reduces risk of loss.
  • Greater visibility to make quick decisions. An ERP system provides accurate information to give you more visibility into your processes to make timely and justified business decisions. For example, purchasing additional product at the right time to fill production demand without disrupting the production flow.
  • Agility amid disruption. The real-time visibility gained from analyzing your system can be immensely helpful in times of disruption and uncertainty. The earlier you have visibility into quotes, orders and inventory status, the more responsive you can be.

Accurate costing is key to determining that you’re selling a product at the right cost. To do that, you must track the correct costs to calculate the right margin. Your ERP system can help you pull the data together to price your end product appropriately.

Get beyond running your business solely on financial statements. There is a lot to gain from having clear insight into the health of your business and operations.

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