On Thursday, April 17, 2025, the Sunrise Sip Club, hosted by Expandable Software and Mirador Software Group, was pleased to welcome Peter Adams, Vice President of Business Strategy for BACS Consulting Group, to discuss how to optimize and extract value from your existing ERP.
Why do companies implement an ERP?
When you are in the market for a toaster, is that because you want a toaster, or do you want toast? No one other than the software vendors, resellers and consultants really want an ERP. Business executives want effective and efficient processes, and they want better data to answer business questions and to predict business outcomes. To do that they turn to this thing we call ERP because as a tool it:
Is the primary repository of business operations and transactional data
It holds, promotes, optimizes, and enables the automation of process
Enables effective reporting (historical) and data analytics (future/predictive)
Why do ERP systems get such a bad rap?
ERP is typically implemented in phases with core elements/functionality first followed sometime later by additional modules. In addition, businesses exemplify a dynamic environment. People, Customers, products, and markets are always changing. That change may require a change in process to best serve the new needs. Companies with rigid processes (embedded in a rigid ERP) are less adaptable to change; that makes change expensive. At the same time, you could argue that not adapting to market changes is a kiss of death – and that is very costly.
Market data shows the average utilization of ERP capabilities is only 31%. That leaves 69% unused.
Survey data also indicates that most ERP Investments have never yielded a measurable ROI. More than 50% of companies in the U.S. upgrade their ERP software every three years, which adds cost and prolongs the time to ROI. As long as the cycles are this short, the ERP cannot generate an ROI.
Furthermore, the same surveys say Executives site the lack of accurate data as the reason they are not benefiting from their ERP investments, with many on a never-ending mission to cleanse it.
This data says there is a significant amount of value that is left on the table. How can we uncover and realize that value?
Identify the gaps between real world processes and ERP processes.
Identify places where ERP processes are (must be) augmented by Excel usage to be useful.
Identify any situation where a Customer is told “We can’t do that because our system won’t allow it.”
Identify any situation where people ask for information that isn’t readily available.
Do you trust the information you receive from your ERP system?
These situations will help you clearly see where your ERP is falling short of expectations.
What are some of the symptoms of ERP Issues?
Symptoms typically reveal inefficiencies. These can include
Manual re-entry of data
Data input by people far removed from the actual work
Using .CSV file exchanges as an integration tool. This is only effective in low volume or simple integrations (e.g., export to Payroll Processor).
Excel is being used to store transactional or static data (Excel is not a database).
The same data differs in different systems — Name spelling, address, etc. Which application or function is the “Master”? What/where is “the single source of the truth”?
You don’t know what it costs to make your own product.
You don’t know what (or where) your inventory is.
You can’t easily confirm what your Customer ordered before.
What Should We Do About It?
Understand the business outcome you are after: This can be quite simple – Profitability and Growth, for example, or more complex – increasing Market Share, entering new Markets, achieving higher Efficiency or milking Profits from a “Lifestyle Maintenance” business.
Make sure your internal team is aligned and committed: When the Team is not aligned, bad things happen, including application proliferation and “bolt-ons.”
Know your requirements and impacts for every department/function: You need to make sure that an improvement in one area doesn’t adversely impact another. One example of this is when Manufacturing makes a design change to promote production efficiency but makes it impossible for the Service Team to repair it in the field.
Engage your ERP provider and your Customers in exploring solutions: Most of the time, your ERP Vendor can give you options on how to use the system to get what you want; just be careful of custom programming or interface requirements – they’re expensive!! On the other side, your Customer can tell you what they like – and DON’T like – about working with your systems. Just remember, if you ask them, you have to listen and respond to them.
Specify the cost of the current way of doing things vs the anticipated future cost – Process, Process, Process!Flowcharting any process will show you where the bottlenecks are, and the people in the process will validate that for you. Flowcharting may be “old school,” but it works.
Any ERP is only as good as its implementation (over time!!!). Your systems and processes need to evolve over time just as your business does.
How can we derive more value from existing systems?
Eliminate Application Bloat: Search for multiple applications in different groups to address similar problems. Pick one and optimize it to support all functions, not just one. That may mean some losses in functionality in one area versus another, but you’ll get better data overall.
Review your Inventory of applications and integrations: This must be comprehensive! You’ll be surprised at how many little aps and sub-routines you have floating around in your business.
Don’t be wedded to tradition:“That’s the way we’ve always done it” may not be the best method.
Your Desired End State is to utilize as few integrated systems and solutions as needed to meet the business requirements.
How does AI fit into this?
All data analytics and AI rely on clean data. Companies can get overly excited about AI and buy expensive tools to integrate with their ERP systems only to find that the AI’s can only generate garbage because their data hygiene is poor. Cleaning up data is not fun or sexy, but it is imperative if you want to be able to effectively deploy many AI tools. Any new ERP implementation or optimization is a timely opportunity to enforce data hygiene.
The Bottom Line: How do you optimize your ERP?
Understand what business outcome you are after/What problem you are trying to solve
Address TRUE Business needs before selecting Technology solutions
Don’t treat symptoms, treat root causes
Specify the requirements for your future business, not the past or present
Engage and build your team!
Thanks and credit to Peter Adams for his contributions and insight for the Sip Club.
Peter Adams has started and sold multiple Managed Services/Enterprise Business Systems companies and now provides help to executives that are stuck in the confluence of business and technology. Peter is an expert on building teams, selecting enterprise software, and deriving value from enterprise systems. https://www.linkedin.com/in/petercadams/
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with over 40 ERP implementations in his portfolio. He is also an Adjunct Professor in the MBA program of the Leavey School of Business at Santa Clara University. https://www.linkedin.com/in/jeff-osorio-1412181/
On Thursday, March 20, 2025, the Sunrise Sip Club, hosted by Expandable Software and Mirador Software Group, invited its regular facilitator, Jeff Osorio, Consulting CFO at Engine Room, to answer this question. Walter Salame, VP of Customer Success at Expandable Software, was the guest facilitator.
What is the meaning of “Parts is Parts”? Setting aside the classic Wendys commercial from the 1980’s, https://www.youtube.com/watch?v=OTzLVIc-O5E it relates to simplifying the discussion when it comes to analyzing business flows in general or manufacturing flows specifically.
When evaluating a company for a new (or improved) ERP system, a logical first step is to understand the fundamental flow of the business. Oftentimes, the User response is “We’re different”, followed by a detailed discussion of the miraculous and awe-inspiring technology that is used to produce the product. They are focused on how it is done as opposed to what is done. The harsh reality is that they’re not different. In manufacturing environments, they buy things, they assemble things, and they sell things — the rest is just detail. “Parts is Parts.”
Clients can get caught up in the manufacturing technology and lose track of the flow; from a Systems and Financial perspective, we really don’t care how it’s done. We just need to understand the production flow. “Parts is Parts.”
Clearly, outside processing steps — a business process where one or more operations of a production process are outsourced to a supplier who provides specialized manufacturing services – impacts the production flow, how it’s done isn’t necessarily important.
Expandable and Engine Room collaborated on an implementation in central Washington state. The Client made prototype printed circuit boards, with a complex flow involving many work centers – some with multiple pieces of processing equipment. In this case, the Process Routing determines steps and time collection points, but the material flow is simple; they buy parts, they process and assemble parts, and they ship parts. Time collection and yield data by process step is important and in this case was complicated (and captured by an MES system), but the material (and cost) flow were simple. “Parts is Parts.”
KEY CONCEPT 1: Financial Follows Physical
One of Walter Saleme’s mantras is Financial Follows Physical. This means that to accurately track and capture cost, systems and processes need to follow the physical flow of materials rather than some more complicated or arbitrary flow. If we understand how the material flows, we can appropriately account for it.
KEY CONCEPT 2: Everything has a Process
Financial Follows Physical doesn’t just apply to systems implementations — it works for any new process. It is also important to note that everything has a process. When you get up and get ready for work every day, you have a process. You may not realize it, but you do things in a certain way and sequence, every time; that’s a process, even though it is undocumented. And when you violate that process, something happens – you forget your phone or keys or glasses or have mis-matched socks, or whatever.
KEY CONCEPT 3: Focus On Actionable Reporting
ERP Systems can generate mounds of reports and data, but if it’s not actionable – provoking someone to take actions that provide benefit – what’s the point? Synthesize data into information that someone can use to take corrective actions.
The Bottom Line
If you are trying to evaluate your manufacturing business for systems or process changes , use the KISS Principle – Keep It Simple, Sam. The technology behind and integral to your product may be fascinating, but it may not be critical to understanding the underlying fundamental process you are reviewing. Remember, all manufacturing companies buy things, they assemble things, and they sell things — the rest is just detail. Don’t let technology and tools distract you from the fundamentals of your manufacturing business. “Parts is Parts.”
“Management is the art of distinguishing the truly important from the merely ego-satisfying”
Steven W. Berglund
With thanks and credit to Walter Saleme for his contributions and insight for the Sip Club.
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with over 40 ERP implementations in his portfolio. He is also an Adjunct Professor in the MBA program of the Leavey School of Business at Santa Clara University.
The first session of the Sunrise Sip Club, sponsored by Expandable Software and Mirador Software Group, convened on May 16, 2024 with Mr. Rick Koski, Vice President of Enterprise Solutions at BACS Consulting Group, as the featured speaker on The Three A’s of Manufacturing.
What Are the 3 A’s?
The Three A’s of Manufacturing are Automation, Analytics and Artificial Intelligence (AI). The good news is we have all three at our disposal; in fact, we have had Automation and Analytics for a long time. What is changing rapidly is how they are being used, especially when combined with AI.
Automation continues to advance across industries, and not just in manufacturing environments. Current paths to automation are in business processes such as Accounts Receivable and Payroll.
Analytic tools are also evolving. Data mining and data extraction has grown to the point where even Excel has these capabilities – and they are expanding daily. Our businesses already have data people Financial Planning and Analysis (FP&A) and Sales and Marketing (CRM). We already have data in our existing systems, both public and private – but can we access it efficiently?
Artificial Intelligence is new to the conversation, and we are receiving hot new tools daily, but this is not a new capability. Microsoft 365 users have Power Automate and Power BI, Excel has data analytics and automation capabilities, and many AI applications have free versions, including ChatGPT, Copilot and Bard.
US Manufacturing is Returning
The timing to develop, enhance and utilize these tools is perfect. Global manufacturing has been a theme for 40 years, and there are very few products fully manufactured within US borders. But the United States wants key industries to return – and is willing to fund it. Prime examples include the CHIPS and Science Act, providing $13.7 Billion to lower manufacturing costs, create jobs and strengthen supply chains to counter Chinese manufacturing, and the Build Submarines Initiative – $3.9 Billion in funding for FY 2025 in addition to the $10.3 Billion already allocated.
Challenges
The challenges to resurrecting manufacturing in the US are significant. US Industry needs to rebuild competitive manufacturing on shore, and Defense related materials are a priority.
There is a particular concern about China as the world’s manufacturing powerhouse; the US relationship with China is tenuous at best and under constant pressure from political rhetoric.
The need for manufacturing expertise is acute and the strategy for addressing this is unclear; the US is dependent on foreign supply chains which can be unreliable, and there is still an underlying concern that we don’t know what we don’t know. Our confidence in our manufacturing prowess from the 40’s and 50’s has been undermined by offshore manufacturing strategies focused on cost reduction.
The 3 A’s Give Us an Advantage
The Three A’s can be integrated into all aspects of the enterprise. This includes labor allocation, supply chain management, product and job costing and labor and tax management.
The Three A’s enable real-time performance reporting and a shift away from history-focused Key Performance Indicators (KPI’s) to future-predicting Key Performance Drivers (KPD’s) – the driver being the thing that makes the indicator move positively or negatively, just as the gas pedal and brake impact the speedometer in a vehicle. This enables a company to drive performance as opposed to watching it or reporting on it after the fact.
The Impact of AI
How does AI play into all this? The impact of AI can be significant but must be closely and tightly managed.
AI is great at answering questions, but you have to know how to ask the question correctly. Improperly posed questions can generate inaccurate answers. The question you ask may not yield the answer you are looking for.
Data Integrity is essential: You need to manage and control how AI is seeking and retrieving data. Without proper monitoring and set up, AI has been known to generate incorrect data and even create references for sources and materials that do not exist. This is the evolution from “Fake News” to “Fake Data.”
CFO Concerns: While AI can be a great assistance in the Finance world combined with Analytics, CFO’s will have ongoing concerns about the auditability of AI generated data.
AI Early Adopters
Who are and will continue to be the early adopters of AI technology? There are several leaders in the arena.
US Government, particularly the military industrial complex. The US Government is a common funder and developer of new technologies in all industries. It is also slow to adopt advanced technologies. This dichotomy provides businesses with a rare opportunity. Given their own needs, we expect them to be at the forefront of AI development in conjunction with tech leaders.
Social Media Platforms: They have access to a massive data set and cash to invest in the technology. They are already at the leading edge of this technology; based on your behavior patterns, they can already direct you to activities and data you regularly frequent.
Large Scale Consulting Entities: Large consulting firms have both the resources and the data sets to make AI investments generate a significant Return on Investment. This includes public accounting firms as well.
What should we be doing?
What should smaller companies with limited resources be doing with respect to the AI explosion? The ostrich approach is not viable as the status quo changes daily.
Develop a data strategy: At a minimum consider the following: What data do I have / what do I need / what should I delete? What problem will more data solve? Where will bad data lead me? How do I validate data?
Develop a Technology Roadmap looking out 3 to 5 years
It must be a plan that supports the business strategy – AND NOT – a purchasing plan.
It must be a living document, not static, with enough granularity to be useful but not so voluminous that it is inflexible and difficult to update. A simple white paper can be sufficient to capture ideas and stimulate critical thinking.
It must align with the business and data strategy: The reality may be that AI is not a significant impact for a small business.
IT support should be outcome oriented (not necessarily focused on infrastructure). It’s not about the tools, it’s about what the tools can generate that promote a benefit to the business.
The Roadmap is a guide not a guarantee. Just as a budget is not a license to spend, a Roadmap is a guide not a commitment. The endpoint may change as conditions change. You have to be flexible.
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio.
Rick Koski is Vice President of Enterprise Solutions at BACS Consulting Group (htttps://www.bacscg.com). Rick brings the disciplines of Finance, Operations, and Technology together to produce meaningful value for his Customers.
What are the most up to date trends in Life Science companies, and what operational and financial challenges are they facing?
On Thursday, February 20, 2025, The Sunrise Sip Club, hosted by Expandable Software and Mirador Software Group, was pleased to host Mike Rose, Co-Founder and CEO of Engine Room. Engine Room is a completely outsourced, completely integrated infrastructure for growing life science and technology businesses. Engine Room’s capabilities include finance and accounting, information technology, human resources, and even facilities. Engine Room provides all the non-core talent and processes you need to focus on and flourish, minus all the head count, headaches and inefficiency.
Life Science Overview
Life Sciences companies tend to segregate into four major industry sectors
Biotechnology: Using biological systems to develop products like medicines, vaccines, and alternative fuels
Pharmaceuticals: Creating medicines that generally have a chemical basis
Medical devices: Creating products like medical technologies and digital health
Anatomy: The study of the form and function of plants, animals, and other organisms
Genetics: The study of genes and how they are passed from one generation to another
Cell biology: The study of cells, the basic structural and functional units of life
Developmental biology: The study of how multicellular organisms grow, develop, and differentiate
Trends in Life Sciences Businesses
Over the last 3 to 5 years, the Life Sciences industry has had a slight shift in focus from pure drug development to more medical devices. Whether this is due to market demand, funding availability or capacity or the long (and costly) development cycles for development of new drugs is unknown.
New Challenges and New Requirements
As companies shift towards Medical Devices, new challenges appear. Scientists familiar with project research face the prospect of managing procurement, inventory, production, and logistics, as well as issues related to product returns and warranty. The companies involved now have an ongoing search for partners who can provide these services in a manner compliant with FDA requirements – or create these functions internally, requiring a whole new set of skills.
These new functions also create a demand for more sophisticated systems and financial support compared to basic functionality for project tracking of development expenses. Once again, it becomes a matter of finding appropriate outsource partners or building internal capabilities, with cost, as well as resources and skill sets, as primary drivers.
Funding Cycles
As businesses have begun to change, so have the funding cycles.
BioPharma (Early Stage – Seed / Series A) have seen a shift towards fewer but larger funding transactions, including more mega-deals, with the total transactions increasing from $3.8B in 2023 across 156 deals to $7.7B in 2024 with 137 deals – doubling invested dollars in one year.
BioPharma 100% All Venture Financing deals have also grown, but at a lesser rate. 2023 saw $21.2B distributed over 573 deals while 2024 delivered $28.1B over 569 deals – over a 30% increase.
M&A transactions in this sector were over $1B, and 2025 projects 20 to 25 IPOs
Med Devices (Seed/ Series A) recorded $727M in investment over 105 deals while 2024 yielded $971M over 106 deals, an increase of 33%.
All Venture-backed investment for Med Devices totaled $6.5B across 430 deals in 2023 compared to $7.5B over 421 deals, a more modest 15% year over year increase.
To date in 2025, Med Device First Financings are projected at $1B for a few large Series A investments, but overall, at $7B. M&A activity is expected to be robust, but few IPO’s will be completed.
Relationship with Government Funding
It is far too early in the current Federal Administration to predict what the next four years will portend for Life Sciences. To date, we have seen wild swings in spending and staffing cuts (and re-hiring) across a wide range of government agencies. Conversely, it may spur more investment from the private sector. Suffice it to say 2025 will be eventful if not chaotic.
With thanks and credit to Mike Rose for his research and insight for the Sunrise Sip Club.
Mike Rose is the CEO and Co-Founder of Engine Room. He has spent over 30 years observing first-hand the class of support life science and technology start-ups need to survive and win and has helped dozens of young life science and tech companies grow, get funded, and grow some more.
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio. He is also an Adjunct Professor in the MBA program of the Leavey School of Business at Santa Clara University.
How can manufacturers improve Product Management strategies and explore new market opportunities with PIM (Product Information Management) and e-Commerce tools?
On Thursday, January 16, 2025, The Sunrise Sip Club, hosted by Expandable Software and Mirador Software Group, was pleased to host Daniel Gohlin, CEO of Gung, located in Göteborg, Sweden, to share his thoughts in this question. Gung was founded in Sweden in 2015 to deliver a B2B-focused eCommerce platform to small and midsized manufacturers and wholesalers. The product was imagined and designed by Enterprise Resources Planning (ERP) software specialists, who brought a unique, ERP-first philosophy to eCommerce.
So, what is Product Information Management [PIM]? Product Information Management (PIM) is the process of organizing and distributing information about a product. PIM systems help businesses ensure that product data is accurate, consistent, and up to date. [1]
Centralization: PIM systems store product information in a central database.
Organization: PIM systems organize product information into a single platform.
Distribution: PIM systems distribute product information to sales and marketing channels.
Collaboration: PIM systems allow teams to collaborate on product content. [2]
What does PIM include? PIM systems include product descriptions, images, videos, technical specifications, care instructions, warranties, marketing information, and digital assets. Essentially, PIM is the ultimate data warehouse for product-related information that is stored in an ERP AND external (and usually unintegrated) systems and data files.
What are the benefits of PIM? The main benefits of PIM include:
Faster time to market
Increased brand loyalty
Ability to sell more products faster, including cross-sell and upsell opportunities
Improved operational efficiencies by streamlining critical workflows and cross-functional collaborative data enrichment
Better product data quality and compliance with industry standards
A more engaging, omnichannel product experience. [3]
What is PIM versus PLM? PLM is Product Lifecycle Management, a technology that helps businesses manage the entire process of a product’s life, from its inception to its disposal. PLM helps businesses develop and market products more efficiently. [4] It is usually an Engineering/Manufacturing driven system. PIM is the collection and management of product related data that is more in line with Sales, Marketing and Customer-facing functionalities.
Extend Your ERP in Every Direction: Your ERP is already a solid foundation—but modernizing and expanding it can unlock new opportunities.
ERPs manage the essentials, but Customer demands, and market dynamics are evolving. Today, there are trends shaping manufacturers:
Supply chain complexities demanding visibility and efficiency.
The question isn’t “if” you can modernize – it’s “how.” Think about massive retail sellers like Amazon – how do they maintain all of the product data they have for hundreds of thousands of items, everything from product descriptions and pictures to specifications and drawings? This is not the function of an ERP which captures transactions; this is a new system that integrates with ERP for the benefit of Customers and Suppliers.
How does PIM integrate with ERP? Do I need a whole new ERP? You don’t need to replace your ERP to achieve big results – build smarter tools on top of it and benefit from – and leverage – your existing investment.
Product Information Management: Streamline data and content for multi-channel use.
E-commerce: B2B buyers demand online convenience.
Order portals: Empower sales teams, Customers and Suppliers with 24/7 access to pricing, stock, and orders.
What Are Manufacturers Achieving Using PIM? Real manufacturers are already leveraging ERP extensions to drive growth and efficiency.
Sales channel efficiency: Firms are seeing faster time-to-market with integrated tools – and consolidated information.
Supply chain optimization: PIMs enable better supplier collaboration and reduced lead times.
Customer experience transformation: PIMs help meet Customer expectations with self-service, trackability, and returns.
Visual brand impact: PIMs provide a unified product presentation across platforms.
Growth strategies: PIMs enable expansion into new markets with minimal disruptions.
The Digital Shift is Here – Are You Ready? Customer expectations are evolving rapidly. Extending your ERP prepares you for what’s next.
75% of buyers now prefer digital-first interactions.
1 in 3 buyers prioritize online tools when choosing vendors.
50% of manufacturing revenue already comes from online sales.
Start small but think big: Modernizing doesn’t have to mean a total overhaul. [5]
Conclusion: Product Information Management is the next step in the evolution of business operating systems, starting with the basic ERP functionalities that have been expanded upon and leveraged with Quality, PLM and CRM systems with a focus on consolidating diverse data sets into a consolidated database and enhancing Sales, Marketing and Customer-facing activities.
With thanks and credit to Daniel Gohlin and his presentation to the Sunrise Sip Club.
Daniel Gohlin is the CEO and founder of Gung. He is an experienced leader with a demonstrated history of working in the information technology and services industry and skilled in Business Process, Sales, Partner Management, Go-to-Market Strategy, and Customer Relationship Management (CRM).
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio. He is also an Adjunct Professor in the MBA program of the Leavey School of Business at Santa Clara University.
One of the big questions in any business involved in selling goods is (or at least should be) “How much does it cost?” Even the hot dog vendor outside the home improvement center on the weekend needs to know what his costs are. It actually should be one of the prime business questions, although the practical reality is that product pricing is often derived based on what the market will bear rather than what is a reasonable price based on the cost. And that makes sense; the initial product price based on low production volumes is usually too high to use cost-plus pricing. At the same time, if the market is willing to pay 99 cents for a fast-food soft drink that costs 6 or 7 cents, most of which is the cup, why charge less?
Still, there are many nuances to identifying and computing product costs. On August 15th, The Sunrise Sip Club, sponsored by Expandable Software and the Mirador Software Group, was fortunate to have Karen Wallace of Lighthouse Worldwide Solutions share her insights on the process. Karen is an uncommon individual these days – a guru in Cost Accounting in general and generating product costs in particular in an environment where producing in the United States has been waning.
Karen reviewed her process with the Sip Club, and at the highest level, her methodology for setting standard costs relies on sound source data. I should note that the rest of this discussion focuses on using Standard Costs, as it is the most prevalent method for manufacturing companies. We define a Standard Cost as a cost which is currently attainable under existing efficient conditions at the time the standard is set. The source data supporting this process can be broken down as follows:
PurchasedPart Costs: These are the fundamental building block for generating product costs. They are typically a weighted average cost based on relevant history [depending on review cycle and purchase history, three months] provided by a Purchasing Team with a few caveats
Purchasing estimates may be used for first-time buys
Small lot purchases, expedite charges or other price extremes [I.e., aberrant prices] based on purchasing history, are typically excluded from the weighted average.
Prospective, i.e., future-looking, costs may be used if purchase orders with confirmed delivery dates and prices are available.
Shipping, freight, delivery, expedite and other similar costs may be included in the material cost, although typically it is easier and more accurate to include these as an Overhead or Period cost.
Material Costs for Assemblies: These are computed utilizing the product Bill of Material [also called Product Structure or BoM]. A Bill of Material is a document that shows the quantity of each type of direct material required to make a product.
The accuracy of the Bill of Material is critical to the accuracy of the cost. If the Bill of Material is inaccurate, the resulting cost will be inaccurate.
The standard quantity per unit for direct materials should reflect the material required for each unit of finished product
Production Yield % can be included but typically not scrap costs [a Period Cost] in assemblies costs.
Labor Costs: Direct labor price and quantity standards are usually expressed in terms of labor hours and labor rates.
Labor costs are usually established using a Process Routing including Workcenter(s) utilized in the operation and Labor and Overhead rates by Workcenter.
A Process Routing is the equivalent of a Bill of Material for Labor. It includes the sequence of steps or Operations to be performed by workcenter with standard times per step.
The Process Routing is also used for directing product and material flow through the production process
Process Routings are typically established, maintained and controlled by Manufacturing Engineering and validated by Finance.
Finance typically establishes, maintains and controls standard Labor and Overhead rates for each work center.
Outside Processing Costs: Outside Processing Costs are costs incurred that are generated by functions/entities outside the Company, sometimes called Outsourced Manufacturing Costs.
Outside Processing Costs are a hybrid of material and labor standards; these costs are established like Purchased Components (i.e., cost per piece) influenced by normal lot size.
Production Overhead Costs: These are costs incurred in the Production process that are not Direct Costs (i.e., directly attributable to the Product), such as Facilities costs, equipment depreciation, production supervision, warehousing costs, etc.
Overhead Costs are usually assigned to products using an allocation process.
The allocation base can be any metric that causes or drives the Overhead Costs. Typical allocation bases include direct labor costs, direct material cost, or machine hours by machine or workcenter.
Multiple Overhead rates and bases can be used depending on the complexity of the Production process.
Data, Data, Data
As you can see, there are many data elements to manage in this process, and depending on the complexity of the product, can relate to tens of thousands of parts; think about the number of items to make a supercomputer or jet aircraft.
To paraphrase Doctor Who, computer systems are very sophisticated idiots; they do exactly what you tell them at amazing speed, even if your instructions, and most importantly, your data, are wrong. If your source data has issues, how can your cost be accurate?
How Often Should I Change Costs?
The process of “rolling up” and revising product costs really depends on the volatility of your products. In some Companies, once a year is sufficient. Given the efficiency of new ERP systems, some companies have moved to quarterly or even monthly cost roll up cycles. The bottom line here is this: consider cost rolls based on your business needs, material events and key business drivers and not necessarily on traditional calendars. If your market is dynamic with rapid (and significant) price fluctuations and volatile Bills of Material and new product releases, you may want to review costs more frequently.
Who’s Driving the Bus?
So, given all the data requirements, who owns the cost generation process, and specifically, who owns the cost? My answer is simple: The Company Does.
Purchasing owns Purchased Parts and Outside Processing Costs
Manufacturing/Manufacturing Engineeering own the Bills of Material, the Process Routing and the Labor estimates per operation.
Finance owns Labor and Overhead Rates and data audit and validation. Most importantly, Finance owns the process, coordinating the efforts of all the functions in the Company participating in the process.
The critical point is that a Product Cost is not “Finance’s Cost” – it is the Company’s cost based on all the inputs provided by the functions that actually produce the product. Finance conducts the Orchestra, but the Orchestra plays the music.
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio. He has also served for over 15 years as an Adjunct Professor in the MBA program of the Leavey School of Business at Santa Clara University.
I often tell Clients “Manufacturing is simple: you buy stuff, you put stuff together and you ship stuff.” Often, their response to this is “We’re different” – mostly based on the complexity of their technology or manufacturing process. But regardless of the technology, the process, insourced or outsourced manufacturing, onshore or offshore production or the volume of activity, at the highest level the fundamentals are the same – they buy stuff, they put stuff together and they ship stuff.
One of the biggest challenges (and source of headaches) for manufacturing companies is Inventory Management and Control – or “Where’s my stuff?” There are several layers to this issue
Where’s my stuff?
Is it the right stuff?
Do I have enough stuff?
Is my stuff still good?
Did I order the stuff I need?
When will my stuff get here?
Manufacturing companies struggle with these issues every day. And while the Procurement, Inventory Management and Finance teams want to control “the stuff”, Manufacturing teams are laser-focused on just putting stuff together and shipping it, until stuff is missing; then, the Procurement, Inventory Control and Finance teams messed up, even though Manufacturing may have caused their own problems by not tracking or transacting their stuff.
At the third session of the Sunrise Sip Club, sponsored by Expandable Software and Mirador Software Group, on July 18th, 2024, Raj Vora of VAS Engineering, Inc. shared his experience and views on Inventory Management.
VAS Engineering is located in San Diego, California, and has provided quality contract manufacturing services for the electronics industry since 1987. This is a significant challenge in itself; manufacturing in the United States in general and in California in particular is a highly competitive industry, and much of this work has been moved offshore to be cost competitive.
A Call To Action
When Raj joined VAS in the Spring of 2018, he quickly found that one of the biggest losses in productivity (and increases in cost) was generated by the lack of Inventory control and visibility – they routinely could not find their stuff and it took expensive senior resources to find it, while production personnel potentially sat idle.
Raj tackled this problem with his passion as a technology enthusiast and the creativity and vision to transform innovative and disruptive ideas into process improvements and profitability.
Leveraging Expandable
Raj and the VAS team took a bold step and began to create middleware apps leveraging Expandables’Sequel database. The first step was to create an optical scanning app that scanned every item coming into the factory, assigned a lot or serial number to each and updated Expandable. Now they knew every bit of stuff that had been received and where the stuff was located. This significantly simplified the kitting process (which is still manual).
The next step was to create another, similar app in the Work in Process area. Many of the components used in VAS’ products come on reels, and those reels are loaded on printed circuit board (PCB) stuffing machines. The second ap optically scanned and counted every component utilized and applied it to the appropriate job/workorder. Now they knew exactly how much stuff was used. Inventory accuracy in both the warehouse and the production floor improved dramatically. After production is completed, the stuff is moved to Finished Goods for shipping and Expandable is updated.
What about ROI?
You’re probably wondering about the cost of hardware, programming and software to create the new middleware. For Raj and his team, the Return on Investment (ROI) was high, and the payback period was short. Looking at the amount of time saved by senior team members looking for stuff and correcting errors on stuff as well as the elimination of production downtime waiting for stuff showed that the investment was more than justified.
The Fundamentals Still Apply
Fundamental Inventory Management systems and processes still apply. Material Requirements Planning (MRP) is still utilized. Variance Reporting, Cycle Counting and Excess/Slow Moving/Obsolete Inventory Analyses are still employed, although with the warehouse and WIP well under control and working to firm backlog and orders it makes these controls important but less critical.
Next Steps
Raj and his team are not done working on their systems and processes. It’s a little bit like Disneyland – it will never be finished and there will always be room for improvement. Automating the kitting process and WIP Completions and Shipping are still on the horizon, and the use of AI has implications across the board. But one step at a time…
Conclusion
The methodologies employed by Raj and the VAS Engineering team may not be applicable for every manufacturing operation, but it gives us an existence theorem that with vision and creativity Inventory Management can be achieved and manufacturing in the United States can still be viable.
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio. He is also an Adjunct Professor in the MBA program of the Leavey School of Business at Santa Clara University.
The second session of the Sunrise Sip Club, sponsored by Expandable Software and Mirador Software Group, convened on June 20th, 2024, focusing on Key Performance Indicators (KPI’s).
Why do we Measure?
This is the fundamental question – why do we create and monitor KPI’s? There are several answers to this question –
Businesses have Fiduciary responsibilities and Legal requirements to fulfill
Business leaders and investors want/need to understand the state of the business
At the highest level, Business Leaders want to know Are we winning or losing/Are we making money?
Measurements drive behavior, and things that get measured get better. We’ve all been indoctrinated by this in years of school – if we’re getting graded (measured) and we care about the outcome, we tend to perform better (or at least work harder).
Balanced Scorecards
Balanced Scorecards were first introduced by Kaplan and Norton in 1992 in The Harvard Business Review. The Balanced Scorecard is a framework that claims to incorporate all quantitative and abstract measures of true importance to the enterprise.
The earliest Balanced Scorecards were comprised of simple tables broken into four sections – typically these “perspectives” were labeled “Financial”, “Customer”, “Internal Business Processes”, and “Learning & Growth”. Designing the Balanced Scorecard required selecting five or six good measures for each perspective. This is an interesting concept, but can anyone really internalize (or even remember) 20+ metrics? Businesses can be incredibly complex and hard to completely understand, but at the same time, Employees need to be able to focus on a few, critical measurements. And are “Financial”, “Customer”, “Internal Business Processes”, and “Learning & Growth” the right categories for every business at every stage in the business life cycle, from Start-Up to multi-million-dollar business?
As it turns out, most Balanced Scorecards AREN’T. Industry survey data tells us
50% of companies surveyed use some sort of balanced scorecard that compiles and tracks both operational and financial measures 1
But 75% of performance measures are financial in nature, and
Companies without balanced scorecards rely on 82% financial measures1Why? Because we know how to compute them and what they mean.
Key Points on KPI’s
First, and foremost, KPI’s tell you status, not what to do. Your training, experience, interpretation and insight must drive your actions. Think about a Doctor; he takes your body’s vital signs – pulse, blood pressure, weight, etc. – but his course of treatment is driven by his interpretation of those indicators.
Second, it’s important to stay focused with your KPI’s. Some basic rules of thumb:
Only 4 KPI’s per function. FOCUS: Executives (and Employees) have a hard time remembering more than 5, and four graphs are easily presented on one page
Why 4 graphs per page?The “Old Brain” is Visual 2: Many Executives think in graphs rather than numbers. Know your audience.
Which indicators and Why? Select a combination of Financial and Operational indicators, leading and lagging indicators that are important to your understanding of your business, and KEEP IT SIMPLE – items we know how to measure and that people understand. You may have the perfect metric, but if no one understands it or its relevance, it’s useless.
Key Performance Drivers
In the last 15 years there has been more and more discussion around Key Performance Drivers (or KPD Metrics) — an important concept for improving operational performance and hence business results. A KPD is a measure that directly affects a business outcome or achievement of a KPI.3 Think about your car – the speedometer tells you how fast you are going (KPI) but the pressure on the accelerator or brake determines your speed (KPD). Tracking the KPD may be more beneficial (and predictive) than the KPI.
KPD Metrics can be
A leading indicator or early warning that a situation exists that if not addressed will lead to a poor result
A performance metric that is associated with a preceding step in a value stream or business process
A metric that contributes directly to a KPI and may be a component in the way a KPI is calculated
KPD metrics must be actionable to positively impact business outcomes, and
Measured against a goal or best practice
Monitored frequently so issues can be identified and corrected quickly
Assigned to an Owner that is RESPONSIBLE FOR RESULTS and has the AUTHORITY TO TAKE ACTION
Best Practices
Top performing companies are able to strike a balance between external and internal information, non-financial and financial measures, and leading and lagging indicators4
With a balanced scorecard that focuses largely on historical results, companies are certainly missing current or potential problems and opportunities that could be brought to light by also including more internal and external operating measures 4, aka “Driving Looking Into The Rear View Mirror”
Leading edge companies are realizing that information that is predictive of what will happen to your business is far more important than information that is reportive of what happened 4
The focus here must be on delivering the right information at the right time, not just more information all the time4
Lessons Learned
Keep it Simple: If it’s there, it’s there. If no one understands your metric, how does it help?
If it’s not easy to measure, is it the metric you want? Can you benchmark your metric?
Stay Focused: No more than 5 per function – Executives and Employees have a hard time remembering more than 5 things
Measure Consistently: Items that can be measured consistently across organizations (i.e., percentages vs. target) can be better/more effective than absolute measurements.
Visual is Better:People tend to relate to graphs better than pages of numbers. Trended data provides context – which way is the metric moving (and why)?
Computers don’t think; people can. Don’t eliminate thinking from your decision making process4
Some companies are going back to the old-fashioned approach, with analysts supporting senior management, selectively adding to information that precious commodity called insight 4
4 “Collecting More Data But Gaining Less Insight” David A.J. Axson
Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio.