Why ERPs Are Not a Standalone Solution For Purchase Order Management

For product-based businesses, inventory is the most important asset on the balance sheets. A significant business impact can be achieved by improving gross margins or delaying future stock operations hires. This article explains how companies use technology to manage purchase orders (PO) today. It also analyzes the gaps in ERP systems' management of PO and makes recommendations for improving efficiency and digitizing purchase order flow.

Present State of Purchase Order Management:

Many firms have undertaken research projects to answer this question. Here are two of the most well-known studies.

American Productivity & Quality Center - This agency is involved in many supply chain research projects. They published data in November 2020 on the average cost for businesses to complete a purchase order. APQC surveyed companies from various industries (consumer goods and industrial manufacturing, petroleum, etc.). They found that the average cost of a purchase order is between $35.88 and $506.52/PO. The average cost of a $1,000 PO was also reported in the literature. It ranged between $5.37 and $28.09. These metrics can be viewed from a different perspective and show that a business pays.6 to.3 cents per $1 in PO value.

Center for Advanced Procurement Strategy - CAPS research numbers is similar to those of APC. They show that the average purchase order costs range from $50-$1,000 depending on vertical and industry.

These metrics include costs associated with internal purchase order execution and requisition, external (factory), purchase order processing, shipping dates confirmation and requirements, product receipt and confirmation, invoice processing, and sorting any errors. These metrics don't include costs associated with finding, testing, and onboarding new vendor vendors. They also do not account for product design/sampling or cost-related to demand planning. These studies capture the cost of finding new vendors and calculating demand plans. Teams also spend hundreds to thousands of more hours searching for them. This time and cost are not included in the above metrics.

After we've looked at the current PO management process and how it affects businesses, it makes sense to examine the systems used by companies to manage POs. Below is an infographic by CAPS that shows data about how enterprises most often create and manage standard POs. Participants had the option to choose multiple answers. The following three buckets were most frequently selected.

First, we should look at the 17% paper/manual order management. Some industries don't and won't use technology. This category includes companies that rely solely on paper, phone, or email to process orders. These legacy companies are only a small percentage of businesses. These metrics indicate that the majority of businesses in our world have made an effort to digitize PO execution. It is surprising, however, that only half of ERP users use PO automation capabilities.

An astounding 96% of enterprises use ERP systems to capture POs. This article is not meant to suggest that 96% of companies are wrong in using ERP systems to capture POs. Netsuite was where I worked for the past 5.5 years, helping hundreds of consumer products businesses to adopt new ERP systems. I learned that ERP systems were not only necessary for enterprise companies but that they also needed software to manage the supply chain. This blog will explain where ERP functionality ends and manual intervention starts. Today, tools exist that can be used to wrap your ERP system to provide better and more comprehensive PO automation, digitization, and tracking.

Are ERPs Strong?

ERPs excel in accounting, baseline inventory management, dashboard level reporting/insights, and general accounting. Accounting refers to managing AP & AR expense reporting, period close, and payroll. Primary financial statements include income, cash flow, balance sheets, corporate budget, and primary financial statements. Baseline inventory is the act of executing purchase orders, marking merchandise as received, tracking inventory levels, and managing basic pick/pack/ship processes. Dashboard level reporting is a way to say that ERPs provide a lot of information and business insight to many business stakeholders.

Why Businesses Avoid ERP Customizations?

ERPs can effectively cover a broad range of processes and offer valuable functionality. However, those who have a negative opinion about ERPs claim they are "jacks-of-all-trades" and "masters of none." In the ERP world, customization is a dirty word. Many of the ERP-related projects I worked on required customizations to complete tasks that were not possible with the platform.

If you are looking to upgrade your ERP or evaluate ERPs, the first thing that comes to mind is "customization" or scripting. This usually means that you will be given a quote for hundreds of hours at $150-$300 per hour. The goal of this task is to create a simple workflow. It takes time to design customized workflows, objects, and forms because every record/object in an ERP can be dynamically linked back into the chart of accounts. If the ERP was not built correctly or promptly, it could fail. It is dangerous to add customizations without permission to an ERP, as it stores financial and proprietary information. While custom fields can be added to ERPs fairly easily, it is not difficult or simple to create workflows, objects, and reports. Customizations and extending access to third parties are required to manage the PO process from beginning to end in an ERP.

Why Businesses Don't Allow ERP Access to External Parties?

Companies should not, and generally speaking, do not want to grant ERP access to vendors or suppliers because this could lead to an external party having access to financial information or worse, putting in bad data. ERPs have good architecture and segmentation. Administrators can take hours to configure roles that allow vendors access to certain fields only for their inflight POs. The added risk of granting access to third parties is also a concern. An average ERP user costs between $50/user/mo and $120/user/mo. It's not surprising that vendors are rarely granted access to their data. Custom integration to suppliers/vendors is another option that some companies may consider. Integrations can still be more expensive than ERP users and need to be maintained ($),. There could be hundreds of suppliers within a company's network.

Because ERPs are not standalone systems, they have many shortcomings in PO management, I mentioned the points above about ERP customizations and extending accessibility to external parties. Let's take a look at four processes that PO management requires that ERPs don't natively have:

1 Communication and Collaboration

2 WIP/Status Tracking

3) Demand planning

4) Supply Chain Marketplace.

Communication & Collaboration

ERPs do not have a Slack or Zoom Esque feature set that allows you to communicate and collaborate with other members of the supply chain. Although ERPs can be useful for routing and executing internal tasks, approvals, and other functions, access to ERPs is usually restricted to the business or organization. When you look at a PO process, it is only the beginning of a chain of communication that triggers downstream communications. I managed hundreds of thousands of units in a PO when I was with Blaze-In Sportswear. I can't recall ever having to call or email multiple times to confirm an order. Hours of back-and-forth communication were inevitable, regardless of whether it was order confirmations, factory receipt of raw material, size/SKU/quantity breaks, or shipping/freight carrier carriers.

Factory workers have many preferred communication methods. This does not mean that I only use email, WhatsApp, Wechat, and Zoom to communicate with factories. I also include native languages and time zones. Multi-lingual communication would make your PO process much easier and more efficient. Suuchi GRID is a solution that does exactly this! ERPs won't be able to solve this problem without a supply chain management platform. Instead, integrated email services will. These email integrations can be very inefficient as many businesses have multiple POs with the same vendor. ERP integrations are ineffective because so many people (internal and external) touch a PO. This makes it difficult to have multiple email addresses for coterminous POs. Emails can be tagged to multiple POs by the same vendor, making it difficult to establish a central communication channel for all information related to a specific PO.

ERP systems have a data storage limit that limits how centralized all documentation can be. High-resolution images, such as photos of intricate garments or complex electrical products, are crucial to share with your vendors and to communicate POs. High-resolution images can eat up data storage and decrease the amount of documentation that is stored in one central location.

WIP Tracking

If I could have a dollar for each client who asked NetSuite to track the status of their inflight POs I would be very rich. Every Supply Chain Manager wants a beautiful dashboard to show every PO. It can be filtered by product, status, vendor, and line of business. Although any ERP can add a custom field to purchase or order, such as "status," there are no drop-down options for "order received," in progress," cutting," stitching," finishing, "shipped to the customer" and "received." Few vendors will build their entire process around your system. Your system will not be updated every day by any vendor. Even if they did, what if they made a mistake or incorrectly updated your system? Keep in mind how much ERP users can cost.

ERP users who customize their PO forms and allow access to other parties to modify them, 99 percent of the time end up going back to email-driven communication with suppliers. ERPs were not designed to open up access to the supply chain system. Next-generation supply chain platforms will allow factories to seamlessly integrate with your platform, creating the ideal WIP/PO status dashboard.

Demand Planning

For basic demand planning, ERPs can also be used. My ERP can be programmed to alert me whenever I have sold less than X units of product Y. This will trigger a reminder in my dashboard. My ERP can also automate my PO process, recommending and executing a PO. My ERP can trigger a purchase order, pending approval for the quantity of 'Z' product. If I have less than 'X' units, my ERP will approve. ERPs use the concept of min/max/preferred inventory level planning.

This may sound great in theory but it is not the truth. It lacks the critical criteria buyers need to execute POs. What happens if I have multiple vendors that I can buy the same product? What happens if I have a Chinese vendor that is more efficient for bulk orders but has a South American partner who is more responsive and offers superior service and lead times? These outside metrics are not included in my ERP, so I will need to manually set a preferred vendor or I could accidentally trigger POs that I didn't intend to.

Another thing to consider is what happens if the stock level of a product changes. Growing businesses will naturally sell at a faster pace than others. This sell-thru rate can change over time. ERP allows you to set stock levels and reorder points. This is fine with ERP. The ERP is not suitable for buying products. There is more analysis involved and less consistency. Setting a reorder level is also insufficient. This is a common problem in seasonal businesses that don't have an evergreen or non-expiring product model. You might only purchase each SKU once or twice since there are always new skin and boot designs in the skiing vertical. Although you could buy the same amount year after year of the latest version of the product, that would be blindly believing that next year will have the same trends. How about your company's growth rate. What if Atomic's 2021 plan is better than K2's? There may be a trend where consumers want longer, fatter skis and that neither provider is viable.

Demand planning is complex. You need to plan for handbags and skis, Nestle nerds ropes, or skis before you can execute any POs. This is not possible in an ERP.

Supply Chain Marketplace (identifying potential vendors)

It would be great to create a virtual bidding platform where all possible suppliers from your network can respond and offer their POs for the best price, quality, and lead time. The virtual marketplaces are the future of supply chains and are where they are heading.

Although an ERP system does not automatically optimize purchase order management it can manage some key steps of the PO management process. As they can see APs, an ERP system makes accounting and finance happy. The everyday supply chain participants who are responsible for executing a successful inventory purchase still have to pick up pieces from disparate systems and communication channels.

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Pre-ERP and post-ERP are two different types of businesses. A pre-ERP business that is lean will save bandwidth and allow you to invest early in a supply chain digitization platform. This will help delay the time-consuming ERP rollout. You may have noticed a few flaws in your ERP system if you have been using it for more than a year. To achieve the vision that you originally thought your ERP could, you may be considering adding other tools to the mix. You can delay future headcount hirings and increase margins by using a supply chain digitization platform. This platform provides real-time updates, data, and information without the need to add manpower. You can use this data to create smart factory assignments, bid for engagements, identify bottlenecks and take control of your supply chain partners.