So what does an ERP Consultant do?

I often get this question, 'So what do you do?'

'I work as an ERP Consultant Implementing ERP for customers', I reply.

'What is ERP?' is the invariable next question.

'ERP stands for Enterprise (wide) Resources Planning', I answer

What does ERP do?

Let me take a typical person who raised this question and try to illustrate ERP.

'Why do you look worried?' I ask

'I have a surgery planned in the next month that will cost me a million rupees. I am worried where I can raise the money from', he replies.

'How much money do you have?'

'About 200,000 in the bank'

'What about medical insurance? Won't it cover the expenses?', I query

'It will cover only 300,000. I will still need to raise about 500,000. Where are you going with this?'

On probing we find that his grandfather had given him 1000 shares of MRF shares which are worth about 700 Million rupees at the current market price.

(You think this story is not feasible? Check out this video)

This guy is very rich and he did not know his net worth. He is worried about a mere 500,000 when he is worth 700 Million.

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This is the simple (you may say extreme) case of an individual not knowing what he had due to what is known as 'Information Asymmetry'. In this fortunate case, this person had more assets than he had a track of. What if the situation was reverse. What if he had debt / loans that he was not aware of and he had been totally unprepared for servicing them. He might be looking at bankruptcy. It is important that all of us have a clear idea of the sources and uses of cash in our lives. And that is impossible if the information were lying in different entities and not tracked in a coordinated manner.

In case of individuals the problem may be simple, they may probably have a couple of assets and liabilities to track and control. In addition, in case of individuals, it is a stock issue. Once the various assets are brought under proper tracking, his work could be more or less done. However, in case of companies, they will have to track the stock as well as the flow, meaning, they will not only have to get a grip on their current business situation and also regularly track and control the future outcomes of their business as an ongoing activity (Flow means 'Ongoing Activities', while Stock means 'The current situation').

Imagine the case of a company with many more transactions. Let us look at the business process of a simple bakery. There is no ERP in the company and all processes and documentation are handled manually. The Purchase Department raises Purchase Order (PO) on the supplier to buy Flour, Oil, Flavourings and Preservatives. The PO is send to vendor and a copy is sent to the materials department. Let us assume that the material is received after 15 days at the material stores. On receipt of the material the stores department raises a 'Material Receipt Note (MRN)'.

The Vendor's invoice along with the PO and MRN is sent to the finance department who manually verifies that material has been received against the PO and makes the payment issues the payment advice on the vendor.

At the store, the material is inspected, accepted and stored in the correct area. Now the production department raises a Production Order to produce a few quantities of bread. The Production Order is sent to the stores department for issue of required raw material. Based on the Production Order is received, the stores department issues the raw material and raises a 'Material Issue Note (MIN)' against the production department. The production department, in turn receives the material against a 'Material Receipt Note (MRN)'.

The finished product that is produced in the production floor is sent to the Stores by way of a 'Material Transfer Note (MTN)' and the stores receives the material by way of an MRN. Copies of Production Order, the two MRNs, the MIN and MTN are all attached together and filed for audit purposes.

Now the Sales Order department raises Sales Order on the customer to sell bread. A copy of the Sales Order is sent to the customer and another copy is sent to the material stores and a third copy is sent to the logistics department to arrange for shipment. Based on the Sales Order, the stores department ships the material. A copy of the Sales Order along with the Shipment Information is sent to the finance department who raise a Sales Invoice on the customer. The finished product is shipped to the customer along with a copy of Sales Order, Shipment details and Sales invoice.

How many departments were involved in this simple business process? How many document flows can you identify?

We identified five different departments - Purchasing, Material Stores, Production, Sales Order and Finance, and three external entities - Customer, Vendor and Logistics Service Provider.

What about the document flows? See the simple diagram below to understand the complexity in a very simple business that we discussed. I have not even touched upon the approvals and controls required for managing these transactions.

Do you see the complexity involved in tracking these transactions manually?

Disputes abound. A typical one is between vendor and purchase department who get a call from vendor that his payment is not yet released, despite him already shipping the material about 15 days ago. Purchase department get into a tracking mode. First they dig up the PO that they created a month ago and had filed manually somewhere. Then they call up the stores department to check if material was received against the PO. Material was received 15 days ago, confirms the stores manager, but it failed the quality test and has been moved to the 'Returns' area. 'Why I was not informed', asks the purchase manager, 'depending on the severity of the issue, we need to blacklist the vendor and identify a new preferred vendor'. 'I tried calling you', replies the stores manager, 'but your line was busy. I thought you will see the missed call and call me back', replies the stores manager.

This is just a simple example of the confusion in the organization.

If such confusion can happen in a small bakery, imagine an SME or a large enterprise.

If you observe the above test case, the root problem is that each department acts as individual 'SILOs' while the processes cover multiple departments (process flows) and expect departmental integration. Lack of this integration caused by focus on processes rather than on process flows is the root cause of all the problems faced by the company. ERP help bring integration between departments by focusing on Process flows and not just on disparate processes.

The diagram below shows a summary of the key process flows in all manufacturing organizations. (Non-manufacturing organizations can ignore the 'MANUFACTURING' Process flows)

Let us look at how the above process works in ERP.

The purchase manager will raise a PO in ERP. The information regarding this PO will flow to the stores, the finance and to the vendor. When material is received the MRN is created in ERP. This note is attached to the PO and the information goes to the finance manager.

When finance manager enters the supplier invoice in ERP, he can /match' the PO and the MRN to verify that material has been received as per the PO. Based on this verification, he can release the vendor payment.

When the production manager enters the Production Order in the ERP, information goes to both stores and purchase department (for purchasing material that is not available in store). When stores issues material to the production floor, ERP generates the MIN which flows to the production manager. As the product progresses, information and documentation is shared across the relevant departments.

By ensuring synchronization between Process Flows, Material Flows, Documentation Flows and Accounting flows, ERP ensures complete data integrity and traceability.

Now let us look at CFO.

He doesn't care for transactions, but he wants that transactions are correctly accounted for. By ensuring real time accounting ERP system ensures data integrity between physical transactions and their accounting impact.

CEO and shareholders look for a different set of information. They are looking for three critical information. One is the company's overall health, which is shown by the Balance Sheet, two, the profitability of the company shown by the Profit and Loss statement and three, they want to know from where the company has received cash and where cash has been used. This information is available in the Cash Flow Statement. If properly configured, an ERP helps deliver these reports on a real time basis.

As you can see, if these transactions were to be handled manually, or even in excel, there is potential for information asymmetry, data leakage and endless disputes between department managers. This is why companies need ERP.

And what do I do? I work as an ERP Consultant Implementing ERP for customers.

 Note: For better understanding the Seven Process Flows in an ERP, you can check the article in my blog.