The rapid growth of your manufacturing SME may be called a “good problem to have.”
But the challenges of growth may also lead to a near-death, or even fatal, experience for your business if they’re not approached with the right skills and tools.
Fortunately, your growth, like that of babies becoming adults, has recognizable stages of development with common and foreseeable problems in finance, management, and systems.
When business owners understand ahead of time what challenges to expect as their business grows, they’ll be much better equipped to overcome those challenges.
In this discussion, we’ll focus primarily on the information systems that will help you lead your business through the following stages of growth.
Still, getting the data you need for decision-making is laborious. You use Excel, basic accounting software, and other software packages. None of your software communicates with other software.
As a result, getting the reports you need to make decisions is labor-intensive because somebody has to coordinate the pulling of data from the various silos of your business functions.
What’s more, some of the data has been entered more than once by various members of your team, which increases the potential for error. These employees may have varying data-entry cut-offs, so the data showing up in your, let’s say, inventory report may be a mash-up of stock snapshots taken by various business functions.
You may have started out tracking your data with freemium software. Now you’re beginning to realize that these programs and your data-collection methods are not adequately meeting your needs for timely and data-based decision-making.
As your revenues pass $5 million, you could eliminate these frustrations, inefficiencies, and risks with an Enterprise Resource Planning (ERP) system. (More on this below.)
Or, you may decide to keep throwing the dice when you make data-based decisions.
To learn more about the higher levels of performance open to your start-up, click on our article, “Why You Should Switch From Accounting Software to an ERP System to Run Your SME”.
While zooming past $10 million in revenues, your manufacturing SME has managed, hopefully, to control the costly inefficiencies that growth can impose. You’ve also gained the confidence of a financial partner that will help fund your upward trajectory.
At this stage, you should have already begun to professionalize your business by delegating responsibility to skilled managers in key positions, such as finance, production, and sales and marketing. Their professionalism should support the sustainability of your enterprise and reduce employee turnover.
Yet, without the right technological tools, your professional managers will soon be overwhelmed. The following describes seven major challenges your SME will face at this post-$10-million stage, and how an ERP system will both simplify management and support your growth.
Growth dramatically increases the data created by all your business functions, e.g., sales, inventory, and production. A basic accounting system, for example, cannot handle businesses with large volumes of data that may be originating from multiple locations, i.e., plant, warehouse, remote employees, and so on.
To input this added volume of data into your siloed systems, you’ll need to hire more clerks. In our current labor shortage, recruitment is tough and expensive ? and the wages you’ll pay will not add value to your bottom line.
Your ERP system unifies all of the data of each of your business functions and centralizes it in one database, which is updated in real time whenever new data is entered. For instance, the moment you ship 10 units of X, those units are automatically deducted from inventory, the customer is invoiced, and a notification for a follow-up call is sent to customer service - all in seconds.
This automation alone removes several steps of repetitive, potentially erroneous data entry. As a result, your ERP frees you from hiring more staff and liberates current personnel to pursue tasks that add greater value, such as sales support.
As we noted earlier, the manual tracking of inventory, with clerks in multiple locations inputting data at different times while stock is being consumed by production, doesn’t allow you to get an accurate snapshot of what you have on hand, except, perhaps, for the moment after the accounting cut-off.
To compensate for this inaccuracy, you may overstock items, but that ties up your operating capital. If, on other hand, you keep stock levels relatively low, you put yourself at risk for production slowdowns, costly rush-shipments of out-of-stock materials, and customer late penalties or canceled orders.
Your ERP’s all-in-one integration works hand-in-hand with rigorous data-entry practices to give you a real-time view of what you have in inventory and where it’s stocked.
Your ERP can also help you keep inventory levels optimal by notifying you automatically when stock levels reach the minimum-maximum thresholds you’ve set beforehand. What’s more, your ERP’s analytics can provide reports on seasonal inventory trends to help your purchasing team make data-supported decisions.
To stay efficient during rapid growth demands that you standardize your day-to-day business processes, such as recruitment, customer onboarding, order processing, and invoicing ? to name only a few.
Once these day-to-day processes are formally defined and structured, your team will save a lot of time in execution and the processes will consistently deliver the desired outcomes.
Yet, many growing businesses only structure their processes in an ad hoc fashion, when a crisis arises in a particular process.
To maintain the integrity of ERP data, an ERP requires that data be entered in a specific sequence. As a result, users need to be following a business process that mirrors the ERP’s input requirements.
Take, for example, the food and beverage industry. In this sector, the traceability of components and products is paramount for compliance reasons. An ERP that specializes in this sector will offer functionality that requires users to assign, record, and trace lot numbers at every relevant point in the manufacturing process. Thus, the ERP’s requirements help keep employees executing the structured processes they’ve been trained to carry out.
Under normal business conditions, your production process can be potentially the biggest sinkhole of profitability and waste in your entire operation. This potential is only amplified by the escalation of production during rapid growth.
Hopefully, your production managers are adopting the principles of lean manufacturing. In the lean approach, the production process aims to maximize productivity while at the same time reducing waste, which is defined as processes the customer is not willing to pay for. To work by these principles of efficiency, though, your production management needs real-time data and planning tools.
Your ERP system translates customer orders into the necessary requirements in materials, labour, and equipment time. Because your production management is working with a real-time snapshot of the manufacturing process, they can plan future production with greater precision and efficiency.
This planning for the future is further supported by your ERP’s forecasting capacity. Through its forecasting models, you can plan well in advance for stocking the materials you’ll need.
Every business needs to pay attention to its profit margins. In the food and beverage sector, which, historically, has relatively low margins, this attention is critical.
Let’s say your current growth stems from high-volume sales coming from a few big customers. In exchange for this volume, you’ve agreed to pricing that reduces your margins. Unless you monitor your profitability rigorously and thoroughly on these accounts, you may really hurt your bottom line. This kind of monitoring can’t be done efficiently with traditional spreadsheets and basic accounting software.
With the right ERP system, you can self-customize Key Performance Indicators (KPIs) to give you in a glance the metrics that are important to you.
Thus, you can set KPIs to inform you of your operating margin per product. That’s the profit you’ve made on your product after paying for its variable costs of production, such as labour and raw materials, but before you’ve paid interest and taxes.
Your ERP enables you to analyze any cost at a granular level, at any time. As a result, you can gain insight into the factors driving your numbers and can proactively make beneficial adjustments.
Your growing SME needs to engage in two forms of planning:
Without the right tools to supply data and insights, your leadership team will find it difficult to efficiently answer planning-related questions such as these:
Your ERP system’s analytics function can mine the entire history of business data you’ve collected to identify trends and patterns. This information will give you greater insight into your operation’s strengths and weaknesses, from sales and inventory to equipment productivity and downtime.
Furthermore, the forecasting capacity of your ERP enables you to model different outcomes based on the variables of interest.
Are you considering handing over the reins of the company to your children or to another party? In either case, you want the business to be running at its best in order to ensure a transfer of ownership that’s advantageous to you. A rapidly growing company that’s not supported by an ERP system would short-change either your children or the profit on the sale of the business.
A well-implemented ERP system sets up your company to take on the fast-coming changes of manufacturing in the world of Industry 4.0.
In this world, your computers and automation are connected to smart autonomous systems that are driven by data and machine learning. Ultimately, the goal of Industry 4.0 is even greater productivity and efficiency.
To learn more about how a growing company prepared for Industry 4.0, read our success story, “How Young Fast-Growing Gusta Foods Proactively Removed Obstacles to Growth With Fidelio Cloud ERP”.
As your sizeable SME looks across borders to expand its markets and production, your company will have to adapt to the new environment in numerous ways.
The managers you hire will have to possess increasingly sophisticated skills. As you add people to your workforce, the complexity of your organizational structure will also grow.
Furthermore, to support both your management team and employees with the right tools, you’ll need to invest in more powerful information and planning and control systems.
As we noted in our discussion of growth challenge number seven, having a sound ERP system opens the door to the emerging technology that will empower your business to take on new challenges.
Equally as important as your ERP is the vendor supporting your ERP system. During your selection process, ensure that their road map for the development of the system aligns with your business goals. Ask the questions that will assure you the vendor will be there as you grow.
Being a successful business owner means responding effectively to new challenges. Sustainable growth will constantly present you with these challenges, but equipped with the right ERP, you’ll take a giant step toward elevating your SME’s response to these challenges.
If you’d like to learn more about how your ERP system can help you overcome the challenges of growth, connect with us.