How Manufacturing Companies Can Measure The Success Of Their ERP Strategies
Manufacturing companies were one of the first-movers to adopt Enterprise Resource Planning (ERP). ERP has helped manufacturing companies to manage their entire business end-to-end through one platform. From bringing balance in demand-supply, cutting down on production bottlenecks, to standardizing business processes, ERPs have ensured the smooth functioning of manufacturing companies.
They have also provided other benefits such as:
1. Streamlining processes: Manufacturing ERPs give a complete view of the raw material available, inventory status, quality control, and other things that are integral to the smooth functioning of the company. The centralized information facilitates streamlined manufacturing processes.
2. Reducing costs: ERPs help manufacturing companies lower error rates in production floors, ensure a more accurate production planning, and streamline the entire warehousing costs. This enables companies to reduce their costs and find ways to save more money.
3. Improving flexibility: Current ERPs are scalable and easily configured according to the changing demands of the business. This helps in improving business agility and enables businesses to respond to changing market conditions quickly.
4. Automating processes: ERP can automate several manufacturing processes. The advantage of automating the processes is that there is less dependency on humans. So, the output turns out to be better, and there are also minimal chances of error.
How Should Companies Measure The Success Of ERPs?
While we know how vital ERP is for manufacturing companies, it is also essential to measure its effectiveness. Companies need to define the metrics right at the beginning so they can measure their effectiveness throughout the manufacturing process.
Here are a few metrics that manufacturing companies can use to measure the success of ERPs.
1. Cycle time: In manufacturing, cycle time refers to the time spent on converting raw materials into finished products. Customer demands change frequently. So, the faster a manufacturing company caters to the evolving requirements, the better they are in a position to claim their top spot. Reducing cycle time enables companies to reach the market faster and improve profitability. An effective ERP should help manufacturing companies to measure the cycle time and eliminate potential bottlenecks to make the production process more efficient. If it does not help in reducing the cycle time, then it’s time for the company to assess its performance and determine the next course of action.
2. Downtime: Downtime can be called a nightmare for every manufacturing company. According to Aberdeen Research, unplanned downtime can cost the company an astonishing $260,000 an hour. An efficient ERP can minimize the downtime by giving manufacturers a complete picture of their supply chain, production floor, machine status, and reduce the potential risks and costs that can stem through downtime. It can help manufacturers to make more informed business decisions.
3. Financials: Keeping track of finances can become challenging for manufacturing companies even if they have an army of people working in the finance team. A good ERP should be able to provide the finance teams with reports such as account payable, account receivables, cash flow statements, balance sheets, etc. It should be able to give the company the right picture of the company’s financial status.
4. Demand forecast: Demand forecasting has to be accurate. Walgreen, for example, had lost $1.1 billion because of a forecasting error. Under-estimation would mean not having enough inventories, which could lead to losses and even hurt the relationship with the customer. Over-estimation can lead to excess production and could cost the company until the products are sold. Companies must also factor in other components such as economic conditions, seasonality, customer buying cycles, etc. while forecasting demand. Hence, we cannot stress enough about how crucial it is to get the demand forecast right. Having the right ERP is vital. It can help companies to predict the demand based on historical data accurately. It can aid companies in optimizing their inventory and utilize time and efforts of resources optimally.
5. Customer satisfaction: Customer satisfaction is paramount for manufacturing companies. Companies should be happy with the quality of the product, and they must receive the delivery on time. It requires a manufacturing company to monitor the entire production and logistics process at every stage. ERPs can reduce a company’s burden by helping the staff track the average order value, average time dedicated to each customer’s order, refund rate, customer satisfaction rate, etc. These insights can help companies to improve their processes and eventually lead to customer satisfaction.
While the above metrics are specific to the manufacturing industry, companies should also measure other aspects such as – sales numbers, conversion rates, customer retention rates, etc. These factors would indicate the success of ERP.
A typical ERP installation could cost anywhere from $150,000 to $10+ million depending upon the size of the business. So, remember to measure its success regularly to ascertain that it is a worthy investment.