Recently I was walking through a warehouse with the owner of a small distributor, when one of his employees brought him a widget that had been damaged by a forklift. The owner told him to trash the widget, and tell accounting to write it off; the value of this widget, $170. This got me thinking, “are they aware of the cost to replace this widget?”
Later, I asked the warehouse person how much they would need in sales to replace this widget; he said $170. Well, not exactly, let me explain.
In order to replace the cost of the damaged widget, the money must come from the margin of future sales. This company earns a 2% margin for this widget, so they must sell 50 widgets, just to pay for the widget that was damaged! That is $8,500 in additional sales!
$170/.02 = $8,500 in new sales needed to replace damaged widget
$8,500/$170 = 50 widgets
This example doesn’t take into account carrying costs; if carrying costs were 30%, the replacement cost would be $11,050!
This chart illustrates additional sales required to make up for lost/stolen/damaged inventory:
Gross Margin
Item Value
2%
3%
4%
5%
6%
$25
$1,250
$833
625
$500
$417
$50
$2,500
$1,667
$1,250
$1,000
$833
$100
$5,000
$3,333
$2,500
$2,000
$1,667
$200
$1,0000
$6,667
$5,000
$4,000
$3,333
$500
$2,5000
$1,6667
$12,500
$10,000
$8,333
$1,000
$50,000
$33,333
$25,000
$20,0000
$16,667
Again, to breakeven on lost, damaged or stolen inventory, the replacement cost comes from future profits! How much harder must your sales team work to make up for damaged, lost or stolen inventory?
These little inventory costs that occur daily and weekly add up over time, and at the end of the year, these “little” costs can have a substantial effect on the bottom line. Therefore, it is important for employees to understand costs associated with inventory, and the impact it has on the company’s financials.
One of the most important benefits of ERP systems vs off-the-shelf accounting packages is that information becomes available and leveraged across the enterprise as opposed to being stored in in stand-alone applications and made available only to a select few employees having access to the silo application. This benefit of shared/leveraged information is realized whether all the information resides in the ERP (e.g., informing the A/R department that a customer can be invoiced, because all product ordered has been shipped by manufacturing) or if the information resides in multiple applications that are effectively and efficiently integrated.
Integrations will be effective and efficient if the integration provides information in a timely manner and allows the user to use the application of their choice. For example, if a sales person uses the CRM system as their key tool, all the information they need to do their job should be viewable in the CRM application. Requiring a salesperson to log into the ERP system to view the information is by definition inefficient, will lead to frustration and will result in additional licensing costs for the ERP system.
The below narrative focuses on the benefits of having the ERP system integrated with the company’s Customer Relationship Management (CRM) system and with the Product Lifecycle Management (PLM) application.
ERP / CRM integration
The benefits of this integration are quite extensive, but a top level summary of the benefits include providing information or process improvements to Sales and Customer Support teams as listed below:
Sales Team
Orders not yet shipped by customer
Unpaid invoices by customer
Product and Pricing
Previous purchases by customer
Customer Support Tickets; opened and closed
Quote to Order Automation
Automation of adding a new customer to the ERP system
The above benefits can and usually do have a significant positive impact on the company’s Sales, Operations and Finance departments. By way of example:
Sales rep phone calls into Operations to see if a customer order has shipped will be reduced/eliminated.
Providing timely and accurate quotes as well as the ability to provide quick answers to customer questions regarding previous orders will increase customer satisfaction.
Automating both sales order entry and adding a new customer (with controls by Finance; i.e. new customers are given a status of “On-Hold” until approved by Finance) into the ERP system, will reduce errors and eliminate duplicate data entry.
The avoidance of walking into a customer and being surprised by a very unhappy customer, because the sales rep was not aware of a Customer Support ticket that has not been resolved.
Customer Support Team
Warranty information by serial number
Visibility into the customer’s installed product configurations
The visibility to the above information will:
Reduce warranty costs, because warranty validation is available to all customer support reps thereby eliminating providing free product/services to products no longer covered by an active warranty.
Customer Support reps will be able to increase customer satisfaction, because the customer’s installed product and configurations can be viewed while the rep is talking with the customer.
ERP / PLM Integration
The engineering department typically controls the Bill of Materials (BOM) for products the company manufactures by recording, tracking and releasing Engineering Change Orders (ECO) to existing BOMS and to enter BOMs for new products. If the engineers use the functionality embedded in the ERP system then this information is available immediately to all users of the ERP system. In addition, the engineers will have access to all the relevant information that is already stored in the ERP system to enable them to complete their tasks efficiently and cost effectively.
However, if an external PLM system is used without solid integration between the ERP and the PLM, this can lead to many inefficiencies and cost issues that could have been avoided had an integration existed.
The key benefits of having bi-directional integration between the ERP and PLM systems include:
Engineering: providing the Engineering department with information regarding product costs, inventory levels and open purchase orders. This will enable Engineering to:
Design new products or redesign existing products with complete visibility to costing information for the parts used; i.e., design lower cost products
Analyze existing inventory levels and purchase orders already placed so that a release or cut-over to a new design can be determined with proper consideration of potential inventory write-offs due to obsolescence or excess inventory
Purchasing: By providing the ERP system with approved ECOs and new product design BOMs, the Purchasing department will be in position to modify their inventory purchases to account for the change in the BOM. In fact, the ERP system itself should be able to provide a purchasing employee with a warning if they are entering a purchase order for an inventory part that has a ECO that has been approved.
These two examples serve to highlight the power and the importance of solid integrations between applications where the information in one of the applications is important to users of another application.