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Why should a company adopt an ERP system?
There are many ‘pro’s’ and ‘cons’ on this topic, and it could be argued that a small company (under $20 million in gross revenue) can operate efficiently without an ERP. However, virtually no multi company organization can operate properly without an ERP. Why is that?
In one word, it’s accounting. Multi company organizations and especially those with internal ‘inter company’ transactions need to be able to consolidate their financial statements for at least tax purposes. The complexity of these consolidations snowball into an onerous amount of work. In addition, there are many great benefits to operating an multi company system, including the efficiencies of sharing inventory and staff across multiple entities. This article will describe the details of these opportunities.
Normally we write these articles neutrally, meaning that we don’t highlight or suggest any single ERP system. In this case, our discussion and recommendations will be made in reference to Epicor Kinetic, which we feel is one of the best small to medium sized ERP systems on the market.
Inter-company transactions
Let’s say you have a company made up of HVAC manufacturing companies. They all make different products for the same industry, and perhaps you are ‘rolling up’ your industry so you have purchased a number of companies that complement each others’ product lines. Your products may be unique, but ultimately your common needs are in sheet metal, paint, hardware, motors, blowers, pumps etc. Being able to coordinate procurement of common items as well as having the ‘buying power’ to command deeper discounts make sense for this kind of organization.
When you get into the details of these kinds of projects, there are many barriers to overcome. For instance, part numbering is likely different across any number of companies. As an example, let’s say that many of your companies purchase ½ horse power motors. Once company may have made up descriptive part numbers (also called ‘intelligent’ part numbers), and another might use the Grainger or McMaster Carr numbers. A third company might use the manufacturer’s part numbers. Your system needs to be able to cross reference any number of ‘aliases’ in order to determine the demand across companies for the same product, and Epicor Kinetic will do this.
Addressing Cost and Overhead Complexity
Complexity enters into this discussion regarding overhead rates and other company or plant specific details. One company might value a motor differently than another, which then affects the cost and profitability of doing these transfers. There is the cost of shipping the product from one location to another, and from a global perspective (global in this context means items or information shared across plants or companies) the organization still desires to ensure profitability. The cost of shipping a motor from Massachusetts to California might be more than the cost savings being enjoyed by using a company transfer rather than buying from the local Grainger outlet that provides free shipping.
In times of scarcity however, being able to take advantage of the global company’s inventory at other plants could be very important.
Capacity Planning and Procurement Efficiency
Capacity planning is another area of opportunity. If multiple plants have similar equipment, when one plant is over loaded with work, it might be great to be able to ask another plant to produce subassemblies or full assemblies for their sister plants. Obviously the engineering might be somewhat different, along with the overhead and other costs, but the opportunity to shed demand from one overloaded plant to another, and meet customer needs is important.
Procurement may make more sense to be centralized in a multi company environment. The system can roll up demand across companies and allow centralized purchasing to place larger orders with multiple delivery requirements so that common products can be purchased more efficiently.
Managing Inter-company Transactions and Consolidation
When these kinds of transactions are done within an organization, the intercompany transactions need to be ‘eliminated’ in order to produce a consolidated financial statement. In Epicor Kinetic each transaction is coded to be tracked properly. When a purchase order leaves one company and is received by another, it is automatically ‘flipped’ from a purchase order into a sales order at the destination facility.
Likewise when the product is shipped, the invoice from the supplying entity is flipped to align with the purchase order from the originating company. At the end of the financial period, the company won’t want to overpay on taxes by showing these intercompany transactions, so they are automatically ‘eliminated’ by the system. Obviously this adds a layer of complexity to the multi company environment, and fortunately Epicor Kinetic handles this smoothly.
The same can be said for utilization of various units of measure, or other details surrounding these kinds of transactions. Epicor Kinetic allows any number of attributes to be tracked and cross reference calculations are embedded in the software to ensure smooth transactions. This capability coordinates with country specific accounting practices which are used if the companies are in different countries.
Multi company functionality allows companies to maximize profitability by sharing overhead, inventory, and manufacturing capacity across multiple plants and companies. Because of the obvious advantages, it’s easy to justify purchasing an ERP system for multi company organizations.