How an ERP System Can Help Manufacturers Analyze Costs

March 18, 2021
Engineer using tablet and working in factory

Cost is always top of mind for manufacturing organizations, from standard operating prices to overhead. Luckily, an ERP system can help you leverage data to analyze costs and make strategic business decisions.

But how do you know if you have the right system in place for your needs? The first step is to evaluate your current system and validate whether it’s set up correctly to meet your business’ needs.

Reasons to Evaluate Your Current 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 robust enough capabilities to get the level of information detail you need. Or, perhaps it’s been a while since the calculations in your current system have been updated. If your current system doesn’t provide the in-depth details you need to make informed business decisions, it’s time to consider upgrading to a new ERP system that enables you to analyze operations in real time.
  • You’re having major swings in your results. If you’re consistently missing your monthly expectations, also known as swings in your Work in Process (WIP), you should analyze your inventory and manufacturing processes to evaluate how those costs are being captured in your ERP system.
  • You want more real-time visibility. Rather than only seeing your results at the end of the month, you want to view specific details and have access to an overview of your organization throughout the month to make strategic business decisions at any time. If your current ERP doesn’t allow for this continual insight, 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. With a change in leadership or operations, you may want an outside perspective to confirm that your ERP usage processes are working optimally, particularly if your system has been in play for a long time. Work with a consulting company with expertise in ERP systems and manufacturing to identify the best options for your organization’s needs.
  • You want to automate a manual process. Many companies depend on a single individual’s long-term knowledge and work. Leveraging technology will create a more secure, efficient process in your ERP system for long-term use.

Manufacturers can run lean during disruptive times by automating processes, such as managing lights or complex tasks like work order creation, scheduling and picking. You’ll quickly see the savings.

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 your management and operations teams. When conducting a costing analysis, it’s best to break down particular variances to make them more visible, not buried under the cost of goods sold or other variances. Working with a consulting company like Eide Bailly can provide you with additional ways to track activity throughout the month and improve your reporting process.

In many cases, you can leverage your current ERP system more effectively by simply understanding the system a bit better. There are often unused features or functions which you can implement for your configuration which will offer more accurate and timely information.

Some potential reconfigurations include:

  • Setting up new accounts, like general ledger accounts, or changing posting accounts to track things better can help with financial reporting.
  • Adjusting your overhead rates, or standard costs, is worth it because they might have changed since you last set them. Costs and estimates change over time from things like inflation or the addition of new equipment increasing efficiency, thus lowering your overhead.
  • Educating people on how to look at variances during a monthly variance analysis helps your team gain visibility into the reasoning for variances.
  • Simplifying your analysis and reporting is important, too. Sometimes, there isn’t value in every single detail. If it’s too complicated, see how you can operate on a 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, identify backlogs are and find opportunities to get more throughput. You can provide this information and reporting with dashboards and analytics that employees can view throughout the month.

Check out the latest manufacturing technology trends.

Benefits of Improving the Cost Analyzation Process

Once you’ve evaluated and optimized your ERP system to ensure that it has the right capabilities for your organization’s needs, the next step is to pull data from the system for better cost analysis.

When creating cost calculations, the goal is to provide recommendations that will increase your organization’s revenue, decrease your expenses and/or reduce risk.

A few benefits of evaluating and improving additional business processes include:

  • Validate or enhance pricing. When you accurately perform inventory costing, you have a better analysis of where your true margins are in comparison to where you want them to be.
  • 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, more 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 fixing problems. Eliminate waste by cutting time spent on activities that don’t provide value to your company, the customer, or the product.
  • Reduce the risk and expense of manual processes. Manual processes, such as working in spreadsheets, or working outside the ERP system, add complexity and risk of error or loss. For instance, if information resides within an employee and is not documented, you risk losing valuable business knowledge should they leave.
  • Greater visibility helps make quick decisions. An ERP system provides accurate information to give you more visibility into your processes to make timely, justified business decisions. For example, insights show when to purchase additional product at the right time to fill production demand without disrupting production flow.
  • Maintain 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 whether you’re selling a product at the right price. 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.

Advance 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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