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Manufacturing applications versus Bills Of Materials (BOM’s)....on Steroids
As Australia, and many other countries, rely more and more on imports from China, the demand for full blown manufacturing applications has greatly reduced in the small and medium enterprise (SME) segment.
SME ERP applications have tended not to be seriously considered to meet Manufacturing Process requirements - which has led to many organizations either developing their own in-house manufacturing systems or getting by with manual paper trails or spreadsheets.
Integration between in-house manufacturing systems and ERP applications has generally focused on raw material purchasing and finished goods becoming available for sale. Material Requirements Planning (MRP) has been very difficult as, in order to do effective MRP, you need critical information that is generally stored in both the manufacturing system (such as what raw material and labour, often referred to as the "ingredients", as they are required to make one unit of finished goods) and the ERP database (such as sales history, finished goods stock levels, creditors supply lead times).
Full blown Manufacturing applications are now often a huge overkill, as these organizations are importing the key manufactured components and assembling their finished goods with minimal "factory" labour or external contractor services.
This is where standard "leading" ERP applications such a Sage, SAP, and Dynamics are back in the selection process as a suitable, uncomplicated and cost effective "manufacturing" solution. Many of the leading SME ERP applications have incorporated a strong Bill of Materials (BOM) function that links the Finished Goods to the ingredient (raw material, labour, sub contractors, waste factor etc).
These applications also have the ability to incorporate specific automated business processes (becoming BOM's on steroids!!), such as:
Converting the BOM into a production order that can "suggest" the ingredients to be used in “manufacturing”, or in this case more like the assembly, and allowing the updating of the BOM with actual raw material and labour usage when it is converted to the Finished Good. This ensures correct finished goods costing by applying the actual raw material used.
Production Labour Costs and Recovery
Providing invaluable information on the accuracy of Standard Costs that have been used for such things as setting finished goods customer price lists. For example the BOM labour component can credit the factory labour recovery account with every finished goods produced, thereby indicating any under or over recovery of the labour used to produce finished goods. It is surprising how factory KPI's can be incorporated that support the under or over recovery of labour (such as overtime incurred) or in fact simply highlight inaccurate standard costs.
Work In Progress
Work in Progress (WIP) can often be all guesswork at the end of the month when trying to produce accurate financial reports. Standard reporting tools (Report Dashboards/BI Tools) can very easily provide accurate WIP figures based on BOM's not yet completed.
Material Requirements Planning
BOM’s are an excellent link between the Finished Product that is sold, and the Raw Material that is used to make it.
This allows the effective forecasting or MRP of Raw Materials in order to generate the finished product to fill Customer Orders on time.
Accurate Finished Goods Costings is the Big Plus!
Companies that can manage the accuracy of both the inventory quantities and the inventory costs, via an integrated ERP application, can generate valuable Sales Analysis reports that provide invaluable information on such things as:
- “Drilling Down” from Company Profit and Loss Gross Margin figures to a Product level. (E.g. If Budgeted Total Company Gross Margin is 30%, which products are contributing positively and negatively to this?)
- Stock Holding costs by product , Stock Turnover
- Sales Commissions – Should they be based on Sales Amount or Profit Amount? Why pay sales commission on a product that is sold at a loss?
Many Companies may feel that the above issues do not relate to them as they are not “manufacturers” as such. However, if you do add additional labour or materials to product that you sell it is well worth considering implementing a standard ERP application that can cater for these requirements.