7 Flows to be considered in an ERP implementation

Short URL for this post is  http://bit.ly/ERP_Seven_Flows


Introduction
A functional consultant who is going to a customer site to implement an ERP solution need to have a clear and structured idea of the various aspects of the business. An ERP implementation can be successful only if it is done top down. This means that the consultant has to identify the business processes, issues and constraint before he gets down to the task of designing the solution. One way to do this is to start with the key reports that the organization is presently using and analyse as to the kind of information that is key to this organization.

To implement ERP in a structured way, one of the methods is to divide the process into various flows. There are 7 important flows that a consultant needs to understand thoroughly and integrate the same in the ERP to ensure a successful ERP implementation. 

1. Business Flow:
Logically business flow encompasses all the processes being presently followed by the organization. However, from the perspective of ERP implementation, the consultant has to focus on certain key questions to understand the business thoroughly. Some the questions which should be used in this analysis are;

Organization: What is the nature of the organization? Is it distribution intensive? Does it have many depots? Franchises? Is it operations intensive? Is it purchase intensive? What is the power structure in the organization? Who is the project champion? Who could be a potential risk? What is the age profile of the users? What is the change culture of the organization? Are they comfortable with technology?

Sales: How does the customer enter the organization? What is the typical customer profile – repeat or adhoc? Do they follow significant customer approach? Do they have separate priority for category 1 customers and another for the other types of customers? What are the criteria for deciding a customer as a category 1 customer? How frequent is the review? How does order gets registered? What are the product segments that the Organization in? What SKUs are they selling? How does Organization handle available to promise issues? Who are their top 10 Customers and what is the proportion of revenue from each? What is their credit policy? Are they operating in a buyer’s market or a seller’s market? Are their collections automated? Which geography do they operate in? What are the three key challenges in sales that a consultant can add value?

Procurement: Where does organization procure materials? What are the key specifications? What are the top three raw materials? How many suppliers are there for each of the critical raw materials? Will the Organization be able to withstand a supplier default? What kind of market the company operates in, buyer’s or seller’s? What are the three key issues in procurement where a consultant can add value?

Conversion: What is the organizations conversion process? How complex is the routing? Do they use sub-assemblies in manufacturing? How is the production planning done – manual or automated? How is production scheduling done, manual or automatic? What are the quality parameters? How is quality check done?

Inventory: How is inventory management done, for example how do they handle obsolete inventory? What is the inventory turnover ratio? What is the level of obsolete inventory in the organization? How is the quality measured? How is the material being managed? How general are the items? Can we divide the items into distinct categories? How is the material issue taking place? What is the size of inventory master? How are items coded?

Inventory valuation: What is the costing method used? Why are they using that costing method? What is the cost of items? How does the costing get done? How does the organization measure the profitability? Is it on a per order basis or a per customer basis?

Local Taxation: How is local taxation and reporting handled? What are the statutory reports to be submitted? What is the frequency of submission? How many different local authorities have to be supported? Are they using some third party application for Statutory Reporting Requirements?

ERP Implementation: What is the driver for ERP Implementation – do they have clearly identified business benefits or are they going for ERP because competitors have moved into ERP? Who drives the ERP Implementation, IT or business? Are the processes documented clearly? Are the Organizational Roles and responsibilities designed correctly?

At the end of business flow understanding, the consultant should have a clear idea of top five business reasons why the organization is going for and ERP and the key reasons for choosing this particular ERP Product. This would give the consultant a clear idea of customer expectation.  Answer to the last section on ‘ERP Implementation’ could give you an idea of the risks involved in this implementation.

2. Process Flow:
The six key flows in a manufacturing industry are Procure to Pay (P2P), Demand to Build (D2B), Order to Cash (O2C), Costing to Inventory Valuation (C2V), Assets to depreciation (A2D) and Record to Report (R2R).

Here is a diagrammatic representation of each of these flows.

 

Of course all of the above are very high level process flows. Each element in the above flow have one or more detailed processes / flows attached. A consultant should understand all the above process flows at a sufficient level of details including the accounting impact of the processes.  This understanding will decide the key setups in the ERP Implementation. 

3. Material Flow:

How is the material come received in the organization? What are the process to be followed at gate entry? How is it inspected and accepted into inventory? How is inventory tracked? How is inventory made obsolete? What is the process of physical inventory? How does the material move to production, is it push or pull? Is it a bulk movement or based on each production order? How does the unused material return to raw material warehouse ( this process is known as backflush)? How does the finished product come into Finished Goods stores? What are the quality check? How are quality rejects handled? How is it picked for shipping, FIFO or LIFO? How is it packed and shipped? This will give you a clear picture of the complexity in material handling process.

4. Document Flow:

For each of the flows discussed in step 2 and 3, you need to know the associated document flows. Some of these documents are internal to the organization (inspection report, GRN etc) where data accuracy is of primary importance, while others are external to organization (PO, AR Invoice etc) where data accuracy as well as presentation are equally important. The consultant should focus more on external reports without spending too much time on the look and feel of internal reports.

The document flow in Procure to Pay (P2P) process is as follows: 

Out of these, only Purchase Order and Payment Voucher are external documents. You may say that Vendor Invoice is an external report, but that is a document that is coming in to the Organization on which the ERP Implementation has no control on.

5. Accounting Flow:

For each of the processes discussed in point 2, you need to know how the Accounting entries are generated and how they impact the profit / profitability of the organization. Please note that for every inventory transaction ERP creates an accounting entry (Perpetual inventory valuation). The consultant needs to be clear of the accounting steps. The inventory accounting has a tendency of getting out of hand. One of the key constraints in ERP is the understanding of local tax accounting flows and mapping the same. The consultant needs to allocate some time for this activity.

The Accounting Impact of Procure to Pay (P2P) process is given below as an example. 

6. Report Flow:
You need to know the key reports in the ERP package which shows that all the above flows are functioning correctly. Some of the reports key reports are Inventory valuation report, Open invoices report in both AR and AP, Supplier advances in AP, Customer Advances in AR, Assets Register, Depreciation / Accumulated Depreciation report, Supplier listing, Customer listing, Open POs, Open SOs, Trial Balance etc.

The above 6 Flows are what is defined as 'Above the Surface' Flows. A functional consultant needs to be clear of the above flows.

7. Data Flow:
How the data flows through the database based on your transactions? What are the key tables? What are their linkages? How does the data flow from one process to another? How does the data flow from one process flow to another?

Conclusion

A consultant should strive to attain a clear understanding of the above flows. This will help her to talk the language of the client. The ability of the consultant to talk business language is very important to get the buy in from the end user, to improve the user adoption of ERP,  to tailor her implementation to the business requirements of the organization and to have a clear assessment of the implementation risks.