7 Strategies for Growth

Eva on September 13, 2022

NetSuite

7 Strategies for Growth

September 13, 2022
3:41 pm

It’s been 60 years since U.S. business leaders have had the chance to ride a 6% GDP expansion. Grabbing more than your share of new business requires innovative pricing, supply chain and customer acquisition actions. Our 7 strategic pillars range from fulfill inventory anywhere to making metric-driven decisions and capturing new revenue streams.

By Art Wittmann

We are in the midst of the biggest single-year economic expansion since the 1960s. That’s the consensus from the International Monetary Fund, various U.S. government agencies, the Federal Reserve and most leading economists. The Conference Board predicts 6% U.S. GDP growth for 2021 after a 3.5% decline in 2020, and the Bureau of Labor Statistics confirms that, in the first quarter of 2021, the country topped that 6% annualized figure.

With almost no institutional memory of those halcyon days of the 1960s remaining in C-suites, however, optimizing for success is uncharted territory for business leaders. Capitalizing on this opportunity will come down to planning, positioning and a careful reading of — and quick reaction to — incoming data.

To drive thinking about how to capitalize on the boom now underway, we’ve identified seven areas that warrant strategic consideration. We’ll discuss each briefly here, with links to some deeper dives, and continue to provide best practices as the year progresses.

As with any forecast, that 6% projection from The Conference Board comes with risk factors — both downside and upside. Keeping these in mind will help temper expectations and shape your own best practices.

Of all of these, the only risk that business leaders directly control is a productivity boost driven by digitalization. We will therefore recommend best practices for technology use throughout our discussion. Still, upside risks are more likely than downside, with the exception of unstable worldwide supply chains. In other words, if you aren’t already, treat this boom as fact, not forecast.

It’s time to move fast and make money.

Supply Chain Responsiveness

Many supply chains will remain unsettled through 2021, and some of the biggest, most sophisticated global manufacturers are affected. It’s been headline news that most automakers are slowing production because they can’t get the microchips they need. In the worst cases, some manufacturers will produce only half of their capacity in the coming months.

And yet, at least one Japanese automaker says its production won’t be affected because it has a four-month supply of these critical components on hand.

Clairvoyance, a fluke or exceptionally good luck?

None of the above, actually. These critical parts come from only a few foundries in Hong Kong and Taiwan, and this automaker understands the threats endemic to that region. It also calculated that the carrying costs of a four-month supply of chips isn’t all that high. So it stocked up, just in case.

The company didn’t take the same approach with other components, ranging from glass and leather to the myriad subassemblies that go into cars. It had multiple sources for these materials, and the risk of those supplies failing to appear on time was low.

Granted, that simplified explanation belies the intense statistical analysis that carmakers apply to their supply chains. But it is a useful anecdote to illustrate the need for differentiated supplier management.

Point is, when a necessary component is available from only a limited number of suppliers in a small geographic area, companies should carry more safety stock. That is, unless that supply chain hadn’t been substantially disrupted in decades, as was more or less the case for chips and other raw materials and finished goods coming from Pacific Rim countries.

A tanker blocking the Suez Canal. Brexit. A ransomware attack shutting down a major petroleum pipeline. Nobody would blame a supply chain manager for dismissing risks not seen in years, or ever. And if you had foreseen and presented a case to buy a few months’ worth of chips, leaders in the throes of the just-in-time craze would likely have dismissed your concerns as improbable — in which case, Scarlett Johansson or Morgan Freeman will play you in the upcoming sci-fi blockbuster about the one lone manager who knew a disaster was looming.

Action Items

Diversify — no matter your company size: Big manufacturers know all about supply chain In our example above, Hong Kong and Taiwan are just 450 miles apart in the South China Sea. The political environment alone should be cause for significant concern. Whether you take a highly rigorous statistical approach or rely on your teams’ understanding of your supply chain, there’s a clear mandate to diversify if you can, hold more safety stock if you can’t. Geographic diversification is a first line of defense for critical supplies, and the time to develop those relationships is before there’s a crisis.
Adopt a hybrid JIT/JIC inventory approach: An obsession with just-in-time inventory — getting components in the door just before they’re needed on the line — is both ingrained and increasingly old school. When critical items are not available from multiple suppliers in geographically diverse parts of the world, carrying a larger stock of those items — a hybridized just-in-case model — is now the norm. Of course, you need to weigh carrying costs. A few months’ supply of microchips could probably fit in the automaker CEO’s conference room. Not so with most of the components it takes to make a car. And for most companies, carrying months of inventory of anything will impact cash flow. CFOs will want to bring a careful analysis to bear, but going forward, we expect a hybrid JIC/JIT inventory management strategy to become the norm. In the real world, it’s not one or the other.
Hone supply chain visibility and demand planning: If critical stock is an issue and carrying costs threaten margins, it’s time to The 80/20 rule states that 80% of results — sales, and more importantly, profits — come from 20% of efforts, customers or another unit of measurement, often a comparatively small set of products or services. An ABC inventory analysis exercise, where you group SKUs based on demand, cost and risk data, will typically reveal production priorities. Companies with a good grasp of unit economics tend to gain significant clarity. Hopefully, implementing systems and gathering data to better manage demand planning and supply chains, create forecasts and understand unit economics were part of your work in 2020. If not, now is the time.

Capturing New Revenue Streams

As we’ve discussed, the opportunity for substantial growth should extend into 2022, especially for businesses poised to capitalize on the opportunities that emerged in 2020. There are some challenges — disrupted supply chains, skills gaps, distribution and customer acquisition costs — we know will remain as headwinds. It’s less certain whether inflation and policies to manage it from central banks around the world will be a factor.

While the Fed increased its U.S. inflation forecast for 2021 from 1.8% in December to 2.2% in March, officials have long predicted “transitory inflation” as the economy reopens. With spiking demand for everything from rental cars to lumber, most experts don’t expect reactionary tightening of monetary policy as of now. But those March Fed numbers are way too optimistic. The U.S. Bureau of Economic Analysis says Q1 inflation clocked in at 6.4%. So unless we see some deflation in coming quarters, 2.2% for the year is a virtual impossibility.

CFOs need to chart a range of inflation scenarios and have plans in place for pricing strategy, supply chain diversification and how raising the cost of your goods and services might affect customer acquisition and retention. Standard customer churn analysis can shed light on the latter two factors.

One thing is for sure: Finance teams will have their hands full as they determine risks and margins with new revenue streams.

Action Items

Make that “temporary” new revenue channel permanent: Many companies planned for or opened new revenue channels in 2020, and that experience is a huge It may be tempting to look at those moves as temporary. Some owners of high-end restaurants, for instance, have talked about ending their takeout programs. They don’t want to compete in that market with what they consider to be inferior versions of their products. That’s a fair point. But most businesses, like manufacturers that stood up direct-to-consumer ecommerce sites or firms that dabbled in the subscription economy, will be happy to continue nurturing new revenue streams as long as the customer experience and margins remain acceptable.
Overcome the pricing challenge: Pricing may be one of the trickier factors to get right during the recovery, so it’s well worth adopting an analytical approach. Consumers with cash and pent-up demand don’t seem to be highly price conscious — at this point, simply being able to deliver goods and services that are in demand is a strong differentiator. At the same time, workers aren’t rushing back to jobs that both paid low wages and put them in harm’s way, whether from the virus or belligerent customers, so labor costs may rise. Want to get really serious about revamping your pricing? Consider adding a chief revenue officer to focus not just on price but on overall customer happiness and revenue optimization.
Make scenario planning part of your DNA: Everything from unit costs to customer satisfaction will likely be in flux over the next 12 to 18 Price hikes acceptable to the market could get chewed up by increases in other areas. 2020 required fine-tuned financial analysis to survive; 2021 and 2022 will require that level of analysis to thrive. Those scenario planning skills you gained in 2020? Refine and refocus plans as the level of unevenness in the recovery becomes apparent. Didn’t get started? There are a number of templates and formalized frameworks. What’s important is choosing a method that works for your team.

Flexible Fulfillment

This past year saw a number of customer engagement trends accelerate. Ecommerce took off as consumers became comfortable shopping for more, and more types of, goods from their homes. Manufacturers learned how to sell directly to consumers, and many traditional retailers doubled down on their already effective omnichannel approaches.

In service of those new channels, marketers are pushing hard on their own new ways to attract attention, from engaging social media influencers to flooding consumers with retargeted ads. And it’s working. Those efforts are bringing in new business that helps offset losses due to restricted in-person selling. And, in many cases, those new sales are via new fulfillment channels.

This year, the challenge is keeping customers happy with fast and predictable fulfillment. Success is bound to your ability to manage inventory holistically.

Action Items

Connect inventory, fulfillment and ecommerce: Managing customer expectations as delivery services struggle to keep up is perhaps the most challenging part of opening and maintaining new sales channels. Businesses with storefronts can fulfill many orders and ease returns using existing facilities, leading to the rise of BOPIS. But success with “buy online, pick up in store” requires centralized inventory management, ideally connected to your order fulfillment system. Further, since ecommerce often accounts for a significant share of sales, those systems should connect to the ecommerce engine so that customers can see what’s in stock and when orders will be ready. Whether or not your business has a network of stores, it’s smart to think about alternate fulfillment channels. If business is brisk and getting serious about new channels will make it more so, using third-party logistics (3PL) companies for fulfillment is a good short-term strategy — and potentially long term as well, depending on your profit margin target and current fulfillment capabilities. If your operation is geared to fulfilling orders in pallet volumes, 3PL companies can help with smaller orders.
Beef up new ecommerce systems: In some cases, the ecommerce sites businesses stood up last year showed a fraction of available inventory or offered only rudimentary ecommerce functionality. For some, these sites were a first, quick foray into selling direct to consumers (D2C); for others, it was a way to sell unique goods, like PPE, that required a different channel than a direct sales team. Now it’s time to refine websites to offer more products, take better advantage of data for personalization programs and improve the ecommerce customer experience, including adding the ability to track shipments, estimate when orders will be fulfilled and accurately show available inventory. Success with every bit of this requires tying fulfillment management to the ecommerce site as well as tracking new order fulfillment and inventory KPIs.
Automate fulfillment: It’s a theme we’ll return to repeatedly. Automation is the next logical step once you’ve implemented cloud-based business and fulfillment/order management systems. A primary task when automating any process is to build in your business rules so that the system handles new transactions properly, minus the inefficient, legacy processes that are likely slowing you down now. Some rules are fairly generic. Say a customer pays for two-day delivery; that order goes toward the head of the FedEx or DHL queue. Other rules may be highly specific to your business. Perhaps long-term or high-value customers get full shipments of popular products, while smaller or newer retailers may receive only partial orders. Without automation, managing complex business fulfillment rules is an error-prone and confusing matter for staff. With automation initiatives to fine-tune business rules are more likely to come off without a hitch.

Automation for Scale

Automation, like exercising and reading more, always makes the annual resolutions list but never quite bubbles to the top. 2020 likely changed that. Whether it was to better support remote work, enable scenario planning or remote closes, get serious about ecommerce, improve supply chain management or all of the above, lots of companies at least laid the groundwork for automation.

So, unlike using the treadmill that’s now draped in clothes and shame, the automation resolution is one you can and should keep.

Adding better digital systems, or finally fully using existing capabilities, helped lots companies get through 2020. Now, many are looking at taking the next steps toward eliminating the rote, slow, error-prone, human-based processes that suck the life out of staffers and leave decision- makers with incomplete or suspect data. Once digitalization happens, leaders not only get more timely and accurate insights, they have more staff resources to devote to interpreting and acting on them.

Capturing that 6% expected growth for the second half of the year requires a fresh look at automation — it can be the difference between winning new business versus ceding ground to competitors because you’re too busy reading spreadsheets.

Action Items

Plan automation holistically: Automation by its nature needs to be a holistic exercise — develop a vision of your perfect system, then chip away at making it reality. Think about self-driving cars. Automating steering, acceleration and braking separately without a plan of how you’ll tie them together won’t get you a vehicle that safely drives itself. In business, operations groups want automatic visibility into activities across the company. Sales wants to acquire new customers and sell more to existing Marketing wants to understand the results of its campaigns. Production wants to automatically monitor supply chains, stock levels and output. And finally, finance wants to automate closes, AP and AR and get more timely data to improve its ability to provide financial planning and analysis for the company. But to really grow in a scalable way, sales needs to know about inventory and production. Marketing needs to know which products produce the most revenue and profit, and production needs to track sales forecasts so that it’s churning out items that are in demand. And finance needs a high-level understanding of how all these functions are performing so that it can guide the business toward growth and profit. That sort of powerful integrated business planning starts with a vision of data sharing as a means of empowering each part of the company to be better and more efficient at what it does.
Define processes, set business rules, repeat: As with automating fulfillment, a customer might get discounts if it maintains a $10,000-per-month spend, for example, while in another company that threshold might be $25,000. With automation, you define these rules in the applications you’re using and let the system implement them consistently and automatically. Rules can define how you recognize revenue, when you order more stock, how you set production quotas — whatever makes your company tick. What was once manual now happens according to defined policies, including requirements for approvals of various actions. Automated tasks happen faster and with fewer errors. Fraud is minimized. KPIs and dashboards are created automatically for executives, freeing up managers’ time to pay more attention to the business. In the end, you get more consistency, more timely data and more effective use of staff. All of which are needed to capitalize on current growth opportunities.
Drive payoffs in efficiency and productivity: On average, larger businesses drive more revenue on a per-employee basis than smaller ones, and automation is a big reason With automation, marketers can manage more campaigns, sales teams can deal with more customers and finance teams need fewer resources to close the books. This efficiency accrues with time, so it can be difficult — though not impossible — to lower your headcount through automation. Instead, a growing company shouldn’t need to add employees as rapidly as it would if it hadn’t automated its processes. That’s a critical competitive edge as you compete for talent. And, staff time moves from the tactical job of entering and verifying data to the strategic job of using that data to deliver better products and services. In other words, the ROI should be apparent early on, and break even on the investment should follow fast.

Operate from Anywhere

Of the practices that got businesses through 2020, “work from home” was paramount. For those employees able to function remotely, productivity turned out to be surprisingly high, and morale often flourished as work got done, and done well. Various business leaders have expressed a full range of opinions on whether and how the practice should continue, and CFOs likely have their own thoughts on the matter in light of the tangle of tax implications that come with a geographically dispersed workforce.

Still, workers whose jobs allow are clearly for either a work-from-anywhere policy or a flexible arrangement, with some days in the office and others at home. In 2021, a strict “back to the cube farm” stance may cost you talent.

Whether you can, and/or intend to, allow remote work once restrictions are fully lifted, it’s smart to at least retain the muscle memory because things happen: Pipes break, hiring accelerates faster than you can add space, blizzards close schools. Coping is easier with remote-work capabilities and protocols in place.

Because employees favor it and productivity seems to benefit, we advocate flexibility. First, talent doesn’t have a zip code. If you find a perfect marketer or data analyst in Montana, it’s worth considering a fully remote arrangement. That same worker in San Francisco or Boston is likely going to cost a lot more, and some highly talented people are longing for more open spaces.

Adopt a cloud-centric policy for software systems: Assuming a hybrid or fully remote schedule works for your company, several actions taken in 2020 should now be made permanent. Primary among them is providing the tools workers need, preferably delivered from the cloud. Cloud providers live and die by the reliability and security of their products. Even the largest companies will be challenged to implement in-house versions of collaboration, productivity and core business systems that perform as well and reliably as cloud-based alternatives. Software delivered in an as-a-service model performs no matter where people are working and often costs less to boot.
Rethink your real estate: There are savings to be gained by providing employees with the flexibility they First, losing the commute increases hours worked, surveys show. Flexible schedules also give employers the opportunity to rethink how they use office space, including whether they need as much as they have. But don’t limit your thinking to simply number of workstations or square footage. Tuning for collaboration without the need to give everyone a desk can be a game changer. For example, an emerging trend is tracking work output versus hours logged. In a recent survey, only 36% of employees at organizations with standard, 9-to-5, 40-hour workweeks were classified as high performers compared with 55% at companies that offer employees choice in when and where they work. Maybe some people want to come back more or less full time, while others want to drop in on an irregular schedule to sit in on meetings. As with software, when thinking about office design, focus on flexibility.
Rethink core HR processes: All that sounds But some of you are thinking, “In the real world, there are challenges with remote workers, particularly new ones.” Getting them going on the technology kit is tricky, as is integrating new hires into the company and work team’s culture. That’s where HR comes in. Remote onboarding is its own discipline, all about bringing new employees up to speed so they’re productive, engaged and working toward company goals no matter where that work is done. This begins with the hiring process and continues with orientation, training and ongoing bi-directional feedback. Rethinking onboarding with a nod toward simplification and coworker mentoring will go a long way.

Metric-Driven Decisions

March 2020 demanded we make business decisions without much to back them up. There simply wasn’t data about how a once-in-a-century pandemic would impact global business and when to expect a recovery. Over in a few months? Years? Nobody could predict the extent of lockdowns. Hitting the brakes hard was a common first instinct, but for some it was an overreaction that left room for more daring competitors to take market share.

The sharp spike followed by a recovery in the unemployment rate is a good primary indicator of this overreaction.

Bottom line: There is a boom, but it’s a lumpy one, and if you expect workers to come back for less than $10 per hour, that’s probably not going to happen. On the other hand, consumer spending is also booming. Airports are packed. Many service-sector businesses simply can’t meet demand. If there was ever a time for careful data analysis, this is it.

But now, entering into what appears to be a V-shaped recovery, we do have data. Much of it is good, but not all of it. We’ve already talked about the worldwide supply chain issues that are likely to persist. Housing stock is below demand, building material prices are spiking, rental cars are impossible to get and summer gas shortages are predicted. Unemployment remains high even as companies are plagued by skills shortages. In March 2021, there were more unfilled job openings than during any month since we began recording that data more than 20 years ago.

Action Items

Expand your data view: Analysis needs to consider internal and external data sources. If that hasn’t been part of your approach, this is a good time to fix that. It’s also a good time for B2B companies to reach out to customers to gauge their own business outlooks and expected demand for your goods and services. They’ll be eager to hear how confident you are in terms of fulfilling their orders. Most B2C companies are seeing the result of pent-up demand. However, goods from appliances to furniture are currently in short supply, and so are the parts to make them. So your analysis needs to broaden to include the economic forces at hand. Demand planning is a cross-functional, data-driven process that helps businesses meet their customers’ needs without overshooting on inventory.
Instrument your operations: Do you have systems in place to report on operations throughout the business, from sales engagements to marketing lead generation to raw materials costs? How about traditional finance metrics ranging from the big three — cash flow, revenue and profits — to more tactical but still highly important measures that provide insights on efficiency and progress? For instance, customer acquisition costs are rising for many sectors and, in some cases, threaten to substantially reduce margins. But CAC is only one factor in customer lifetime value, and only one of many critical financial metrics to track. Your challenges may be around rising supply or shipping costs, or higher wage demands. In the current red-hot market, choosing the right KPIs is more important than ever.
Make financial analysis continuous: Whether or not your business had the right data to support scenario planning in 2020, most found a way to make plans for various contingencies. For finance teams, that often meant 55-hour-plus workweeks as they labored to understand cash flows, unit economics and other critical metrics that they’d never studied at the frequency or detail now required. Teams that had ERP systems in place, or that implemented them in 2020, have an automated way to gather data for ongoing financial analysis. As the volume and velocity of business increases in 2021, manual methods of analyzing data will be a strategic disadvantage.

Raising Capital

Is now the time to seek funding? A merger or acquisition target? Take your company public? There’s a lot of money out there looking for a home in a strong market. Many firms believe they could achieve growth, if they can just get some cash to seize the moment.

Attracting the attention of equity investors will require demonstrated growth and a clear path to profit for young companies — this was a loud trend heading into 2020, following a few years of perhaps irrational exuberance, and it’s here to stay.

If that sounds like you and your Rolodex doesn’t include many venture capitalists, get yourself to a pitch contest and make the case. Otherwise, consider other options.

Action Items

Don’t count on bank loans, which are likely to be more scarce after post-relief funding: Last year saw the federal government loan or grant hundreds of billions of dollars to businesses in the form of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans. Some of that continued in this year’s pandemic relief bill, including targeted funds for the businesses most impacted, like restaurants and entertainment venues. Some money is still out there, but prospects for future government stimulus remain uncertain. As loan and grant programs wind down, regular bank loans will pick up again. However, if trends continue, total loan pools will slowly shrink. In 2007, banks held $721 billion in loans of $1 million or less, according to The Wall Street Journal. In 2019, that was down to $680 billion. Meanwhile, bigger business loans more than doubled during that period to $2.82 trillion. So, while loans to smaller businesses aren’t unheard of, the underwriting standards are historically tight.
If you’re angling for private equity funding, get your Rolodex out: Private equity is a path between conservative banks and high-growth-focused VCs. Last year as a group, PE funds raised over $200 billion, with much of it going to help stabilize companies that PEs already owned. Beyond that, tech/ IT deals grew by over 72%, according to PitchBook. Still, that’s only about one-third of PE investing — and an anemic number compared with the $2.9 trillion that’s sitting with PE companies uninvested.
The M&A market looks promising, so be bold: If fast growth and/or diversification are on your agenda, a merger or acquisition may make sense in 2021. Private equity plays here too, backing over one-quarter of last year’s M&A activity in 2020. Particularly for established businesses that have solid customer bases but aren’t up for making the technology investments seen as critical for success in 2021 and beyond, selling to, or buying, a company with tech chops may be the best course. For many such deals, you just need a few lawyers, an idea of your valuation and an interested buyer. In some sectors, that may be a SPAC or PE firm, or more commonly, you may have a complementary business in mind to sell to or buy. If yours is one of the sectors that’s turning sharply up, creating a win/win scenario should be very possible. As with a valuation exercise, stress your assets: historically strong cash flow, a healthy profit margin, high customer lifetime value, low employee churn, bookings for the near future. Larger firms can position themselves for acquisition by increasing margins or adopting key technologies popular within their sectors, but unless that’s been a work in progress, it’s likely your books will do most of the talking. Finally, while there is VC money up for grabs right now, historically this has been a small, albeit extremely visible, niche within the financing market. Venture investments hit $125 billion in the first quarter of 2021. That’s up 50% from the previous quarter and a 94% jump from a year ago. Crunchbase details how this money is distributed. The lion’s share goes to late-stage companies — that is, those that already have ties to VCs. Most, though certainly not all, early-stage investment also goes to companies familiar to VCs. If you believe you have a shot, here’s how to get some attention. But there are plenty of other funding sources. If you’re outside the tech hubs where VCs roam, a different finance route may be more doable.

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Understand Which ERP Modules Your Business Needs – And When

Eva on September 12, 2022

NetSuite

Understand Which ERP Modules Your Business Needs – And When

September 12, 2022
5:42 pm

What Are ERP Modules?

An Enterprise Resource Planning (ERP) system is like the central nervous system for a business, collecting and organizing key information to support lean, efficient operations, even as it expands. The ERP platform automates business processes and provides insights and internal

controls, drawing on a central database that collects inputs from various departments.

Once information is compiled in that central database, leaders gain cross-departmental visibility that empowers them to analyze various scenarios, discover process improvements and generate major efficiency gains. That translates to cost savings and better productivity as people spend less time digging for needed data or completing mundane tasks.

ERP systems typically come with several modules that are like building blocks for the software used to run the world’s businesses, whether they make hundreds of thousands or hundreds of billions of dollars in revenue every year. Each module brings a bundle of functionality that helps complete

a particular process, or a part of that process. These building blocks help various departments, from finance to supply chain to human resources to sales, perform their individual functions. The modules connect to the ERP’s common database and should easily integrate with one another to ensure every department has accurate, consistent

data and support interconnected business processes. The end game is that employees can access the information they need to answer questions about their department’s current performance, target areas for improvement, assist with future planning and collaborate with other teams.

Again, all of these modules interact with each other in a way that often augments their capabilities. For example, an ecommerce manager can find the original purchase order for a particular product

to ensure an upcoming promotion will still leave room for an acceptable profit margin. The finance department may review data that originates in the CRM about salespeople’s commission earnings to make sure they’re compensated appropriately.

Years ago, an on-premises ERP was the sole option, and privy only to the largest, most deep-pocketed companies. ERP implementations were extensive and extremely time-consuming projects, so many companies implemented everything at once, maybe never even “turning on” or under-using certain modules. They may not have needed that functionality right away but took a just-in-case approach to ensure they could leverage it,

if necessary, without enduring another lengthy project.

Then came the cloud, which revolutionized ERP by vastly simplifying the process of implementing a system and scaling its functionality.

For the first time, the promise of modular ERP was truly fulfilled—the company didn’t have to build out the hosting infrastructure and implement a bulky system, but rather could start with only the functionality it needed and add more as it evolved.

The cloud put the benefits of ERP within reach of the smallest businesses since it removed the long, painful implementations and high upfront costs of legacy systems. The subscription-based pricing of a cloud system played a part here, too. ERP could be taken off the balance sheet as a capital project, and put onto the books as an operating expense, meaning functionality could be implemented and paid for as the business actually needed it.

So what can these ERP modules do and how can your business start to put them together to build a competitive advantage?

Chapter 1
Chapter 2
Chapter 3
Chapter 4

12 Key ERP Modules and How to Use Them

A finance ERP module, which handles accounting, cash management, financial reporting and basic budgeting, is typically the first one a business implements, because getting accurate “numbers” is the basis for driving and measuring efficiency across the organization. More than half of small- to-midsize companies said they use some or only cloud-based software for finance and accounting in a recent survey by Robert Half. At the same time, the number of smaller businesses that report relying on Excel for budgeting and planning has dropped significantly over the last few years.

Modules that manage processes related to Human Capital Management (HCM), including workforce management, are often implemented alongside

or within quick succession of the finance module. This is software that manages everything related to your employees—from benefits, to personnel information for each member of your staff, to benefits—and payroll, a feature most businesses need early on.

As the business grows and needs to improve how it manages inventory, customer orders or purchase orders, it will bolt on new functionality, all of which draws information from and feeds information

into the same database to maintain a single source of accurate information. The data in one module drives information or outcomes in another—the true value of an ERP system.

Companies typically build their ERP landscape by adopting these modules first:

Finance. This module includes standard bookkeeping functionality, automatically updating the general ledger and tracking accounts receivable and accounts payable. It can handle account reconciliations to help the accounting department close the books in a timely manner. The finance module often has billing capabilities, as well as functionality to generate key financial statements like balance sheets, profit and loss statements and cash flow statements. Tools that automate complex calculations such as revenue recognition, consolidation of data from various subsidiaries or business units for reporting purposes and planning and budgeting may be grouped in here, as well. Companies typically adopt an ERP module to handle finance when their needs outgrow the limited functionality of accounting software designed for small organizations. For instance, a company may need this application when its transaction volume gets too high, and it can’t easily produce the financial statements required for statutory and regulatory compliance. Or perhaps it requires support for multiple currencies.The finance application enables a company to gain real-time visibility into its cash position and makes for a faster, easier month-end close.

Human Capital Management (HCM). Establishing strong control over data and processes related to people, such as payroll and employee records, is a must-have for any business with more than a few An HCM module stores employee data in a central location and tracks the basic information—like salary or hourly rate, reporting structure and paid time off—that’s needed to accurately calculate payroll. Organizations implement HCM functionality not only to track personnel information, but to afford employees basic self-service functionality to request time off or input time, track their accruals and maintain compliance with tax and labor laws. Payroll functionality is incredibly important in ensuring the latter, automating what can be a complex process of calculating tax withholdings, benefit contributions, overtime and more. As organizations seek to leverage more data to recruit, reward and engage employees, a broader category of HCM software now offers more support for talent management. This type of application can assist with recruiting, onboarding, performance management and succession management. In some cases, an HCM module may provide talent analytics to help track against key performance indicators (KPIs) for turnover, retention, training and more.

Once solid finance and HCM processes are in place, organizations often look to improve the efficiency and performance of their operations. This may involve adding all or some combination of the following modules:

Procurement. The procurement module, also known as the purchasing module, allows the organization to improve the processes involved in a company getting the goods, services and materials it needs to build or sell its own products or services. Companies can keep a list of approved vendors in this module and tie those suppliers to certain items. It can also automate requests for a quote, then track and analyze all those quotes in one place. By centralizing the purchase order process, the procurement application enables the company to better rationalize invoices, track purchase orders and prepare payments to suppliers. Functionality in the system often allows companies to categorize and analyze spend to identify areas for potential cost savings.

Inventory Mangement. For companies that sell products, automated inventory management is a must. You can’t sell what you don’t have—or don’t know you have. Inventory management software moves the tracking of individual SKUs from spreadsheets to a database that updates in real time to enable accurate and real-time tracking of quantities and location, including goods in transit. Implementing inventory management software is an essential first step in gaining a complete view of inventory, which is particularly valuable if items are stored across multiple locations, and helps companies find the right inventory balance. Reporting tools within the application can weigh sales trends against available product on a daily or weekly basis to help companies keep the right amount of inventory on hand. Better inventory management helps companies improve cash flow and increase inventory turn (a measure of how often inventory is sold over a certain period). They can also allocate inventory across online and physical channels and deliver new fulfillment options, such as buy online, pick up in store. An inventory management module, for instance, allows a company to set preferred stocking levels and lead times to determine reorder points and alert staff when it’s time to place replenishment orders.

Order Management. Tracking orders in spreadsheets can also quickly become a fool’s errand in a growing The order management module helps track orders from when they are first received, to when they are matched with available inventory in one of your facilities (whether a warehouse or retail store), to shipping and delivery. An order management solution integrated with your inventory management tool ensures that items ordered are actually in stock to prevent backorders and deliver a positive customer experience. This connection can also help improve demand forecasting. More innovative order management applications can help a company determine the most cost-effective option for fulfilling an order—a store vs. a distribution center vs. a third-party fulfillment partner, for example—based on available inventory and the buyer’s location. They can also prioritize orders on parameters like date received, shipping speed and more.

Warehouse Management. For any business that operates a warehouse—whether a distributor, manufacturer or retailer—a warehouse management module can lead to major efficiency gains by digitizing and automating put-away, fulfillment and shipping processes. A warehouse management module complements the features of inventory and order management modules. This application can support different picking strategies like batch picking, wave picking and zone picking depending on which is most efficient for a given business, to increase order fulfillment rates and the accuracy of orders. A warehouse management module can also boost customer satisfaction because more buyers receive the correct goods on-time and in the condition they expect.

Manufacturing. Manufacturers are typically looking for a tool that helps them build and execute against a bill of materials (BOM), which is like a recipe for the creation of a product. The BOM helps the company plan for production of its goods by ensuring that it has the correct parts or materials in the right amount to execute all work orders. In that way, the manufacturing module is tied directly to demand and supply planning, which the SCM module usually manages. There’s also functionality that ensures product quality, as well as operational efficiency on the plant floor. For instance, are all the workers and required machinery available to execute a production run next week? How does planned production for the next few months stack up to available materials, as well as what’s on order? How can the company adjust production if there are disruptions in supply, or spikes in demand? A manufacturing module can assist with all of these situations. Manufacturing ERP is one of the most exciting spaces to watch, as it’s a testing ground for the intersection of operational technology and information technology like the Internet of Things (IoT).

Supply Chain Management (SCM). Another module with a bucket-load of features that can help optimize operations is supply chain management (SCM). Some of the SCM module’s functionality overlaps with that of inventory, order and warehouse management, but its basic aim is to lend end-to-end visibility into the company’s supply chain and its partners, from sub-suppliers to distributors, in order to ensure business continuity and compliance and reduce supply chain risk. This application can look at purchase orders, inventory, current and planned production and expected demand to enhance supply chain planning. The SCM module also manages returns—when customers return products, an associate scans each item, records its condition and, if necessary, initiates an exchange. More advanced capabilities include demand forecasting and measuring supply chain sustainability. The latter category is becoming important not only to ensure and report on sustainability measures and targets for the company itself, but to provide customers with greater visibility into what’s in a product they purchase and how it was sustainably and safely sourced and made.

From there, businesses may add more specialized modules designed to meet the needs and challenges of certain industries and business models. Some of these support the customer- facing side of a business, rather than the back end.

Customer Relationship Management (CRM). A treasure trove of customer and prospect data is stored in the company’s CRM Leading CRM applications have three core capabilities: sales force automation, customer service management and marketing automation. The first helps sales reps manage leads and opportunities and put together quotes. More robust CRM modules can also forecast sales by leveraging historical data about transactions and buying behavior. The customer service piece tracks the company’s communication history with customers and prospects—the date and time of calls and emails, for example—and their purchase history. Finally, marketing automation capabilities help businesses manage campaigns and segment their audience to determine who should be targeted for certain promotions or cross-sell opportunities. When a customer or prospect fills out a form on a business’s website, that information flows into the CRM, which generates a notification so a sales rep can follow up promptly. Sales and marketing teams can also see where that customer is in the sales cycle to decide what to do next. When customers have questions about or issues with a product or service, a customer service agent can resolve the situation more quickly because he can see all previous interactions with the buyer.

Professional Service Automation (PSA). Also called a service resource management module, this application allows an organization to plan and manage The PSA module tracks the status of projects, managing human and capital resources throughout, and allows managers to approve expenses and timesheets. It facilitates collaboration between teams by keeping all related documents in a shared place. Additionally, the PSA module integrates with the finance module to automatically prepare and send bills to clients based on the agreed- upon billing schedule. Companies adopt PSA when tracking hours and billing individual clients becomes too time-consuming and difficult to track or when late and erroneous bills become common. The software shows project status, tracks consultants assigned, hours logged, travel expenses and communications with the client, and can use all of that information to automate billing.

Ecommerce. For businesses that want to sell products online, whether to consumers (B2C) or other businesses (B2B), an ecommerce module is vital. There’s a reason for the urgency to start selling online—the National Retail Federation reports that online sales grew nearly 24% year-over-year during the 2020 holiday shopping season. This module typically comes with user-friendly tools that empower non- technical employees to easily add new items, update product content (item descriptions, titles, specs, images, etc.) and change the look and feel of the website. Many ERP vendors offer an ecommerce application, with the primary benefit being native integrations with modules for inventory, order and warehouse management, so all order, customer and payment information seamlessly flows into the ERP.

Marketing Automation. Marketing While the CRM can often handle basic marketing automation, a module dedicated to this can offer more extensive capabilities. Data from the CRM system can feed into the marketing automation tool to drive targeted marketing campaigns across various channels, including social, email, video and more. A marketing automation module can also maintain various contact lists. It can measure the performance of various campaigns in detail, as well, to shape future marketing plans and spend. Ultimately, a marketing automation module should help a business grow revenue across all sales channels and increase the loyalty of existing customers.

Popular Modules By Industry

Every company, regardless of the industry in which it operates, will need to manage its revenue, its people and its customers. For this reason, many companies share a need for the basic functionality offered by finance, human resources and CRM modules once they reach a certain size. But a professional services company will not need inventory management, just as a wholesale distributor will probably not require a PSA module. There are many modules that provide capabilities more specific to certain industries, but here are what companies in several major sectors typically need:

Retail

The coronavirus pandemic accelerated a shift already in motion for retailers already grappling with changing business models and an increasing need to support customer-centric buying experiences. At the very least, retailers must be able to sell online and should be prepared to deliver on new channels customers now seek, such as buy online, pick up in store. For that reason, retailers need ecommerce functionality. On the back-end, most retailers will also require robust procurement, inventory management and order management modules to lay the foundation for multi-channel order management and fulfillment that meets customers’ soaring expectations. Retailers that operate their own warehouses may need a warehouse management module to ensure orders are shipped and delivered quickly while keeping costs down. Finally, as customers seek increasingly personalized experiences, retailers should invest in marketing automation applications that can tailor messages to specific shoppers.

Manufacturing and Wholesale Distribution Companies that run their own manufacturing processes need strong SCM functionality in order to efficiently and effectively manage work orders, make and/or build items, track inventory at various stages and ensure strong quality assurance processes. ERP modules for procurement, manufacturing and inventory management can bring all of this data together and make it consumable in the form of a dashboard. That makes it easier to proactively alert the general manager of issues in production, allow them to identify new opportunities and become a stronger partner in business strategy.

For wholesale distributors, it’s also crucial to have similar SCM capabilities, including warehouse management and order management modules, to streamline manual, error-prone and time- consuming pick, pack and ship processes. Ideally, warehouse workers use handheld barcode scanners connected to the warehouse management module to maximize the speed and accuracy of fulfillment. A CRM could be especially valuable for distributors by helping them provide customers with a higher level of service in an industry that’s become intensely competitive.

Food and Beverage

Many food and beverage companies function like manufacturers—their processes necessitate rich manufacturing and supply chain functionality.

Assembling a food or drink recipe has a lot in common with a BOM, and there are the same needs for quality management and visibility into their supply chain to ensure the right ingredients for the product will be there in the right quantities, at the right time. Other food and beverage companies take on the characteristics of retailers— sometimes in addition to manufacturing—requiring ecommerce and marketing automation systems that integrate with back-end finance, manufacturing and inventory management systems. Together, these systems enable the organization to consistently measure profitability and learn what’s selling and what isn’t so it can adjust its strategy accordingly.

Software and Technology

Most companies in the software and technology space are adopting the cloud in some way, and may be using the subscription pricing model that has grown in popularity over the last decade. This business model requires companies adopt some specific practices for recognizing revenue that

are made much easier with a feature-rich finance module—or in some cases, a separate billing module—that can automate forecasting, allocation, recognition, reclassification and auditing through a rule-based event-handling framework. Functionality specific to these requirements will make it much easier to schedule, calculate and present revenue on financial statements for financial reporting.

Technology businesses often need a PSA module, as well, to handle the implementation and consulting work they offer for their products.

Professional Services

As you would expect, companies in the professional services space will benefit from a PSA module that facilitates project collaboration, resource allocation and accurate costing and billing. Software that automates the complete bid-to-bill process and integrates project activities with the company’s financials will help services businesses strike the right balance between project resources and profitability. A services company in rapid-growth mode may decide a marketing automation tool is a worthwhile investment to acquire new clients and earn more work from existing ones, as well.

Which ERP Modules Does My Business Need?

Your business’s ERP strategy and which modules you invest in will depend on not only your industry, but your business strategy and goals.

Are you looking to add new customers or drive additional value from existing ones? Launch a new line of services or products? Cut costs or drive inefficiencies out of a certain process?

Technology can also be deployed to solve specific business problems. Is too much cash tied up in stock sitting in your warehouse? Are suppliers or contract manufacturers unable to keep up with customer demand? Above all: Are customers able to solve their problems when they turn to you?

As you try to determine the ERP modules your company needs right away, and ones it might add in the future, keep this framework in mind:

Look at the books. If the business is struggling with inefficient accounting processes, has little visibility into cash flow and its current financial position or is constantly receiving late payments from customers, it’s time to look at automating accounting and financial processes. A finance module will streamline the processes associated with accounts payable and accounts receivable and make sure that everything in the general ledger is accurate to simplify the complexities of financial reporting and compliance.

Look to the people. If the business isn’t accurately keeping track of data on and finding new ways to engage with its employees, it’s not going to have the talent it needs to accomplish key business objectives or be able to tell when and where it needs to hire new people that will help it make progress toward new goals. Taking care of the people that work for you will pay dividends in how they do their jobs and ultimately translate to happier customers and growth. Strong payroll and HR tools will build the foundation for business- differentiating talent management.

Find out what’s bugging customers. Focus on what’s causing friction for the customer and let that guide you to the issues with the underlying processes. Can customers get the items they want in the manner they expect? Are there too many items on backorder? How can the business better predict and meet demand? Look to inventory management and the planning tools within. Are shipping costs leading customers to look to competitors? Look to warehouse management and other supply chain modules. Are certain projects and customers becoming too costly and time- consuming to manage because of the number of people involved? Look to the capabilities of a PSA tool.

Establish a clear plan for growth. For most companies, the growth strategy revolves around adding new customers and keeping existing ones happy to convince them to buy more items and services. Does the business have the information it needs to create targeted marketing campaigns that resonate with customers? How is your company generating sales leads, and do reps spend most of their time on the most valuable ones? And how are you measuring everything, including the effectiveness of different sales and marketing strategies? Strong CRM and marketing automation solutions enable these capabilities for all companies, whether B2C or B2B.

NetSuite offers each of the ERP modules covered here, and connects them all on a unified platform that provides invaluable visibility across your business. NetSuite offers dedicated modules for finance, inventory management, order management, procurement, warehouse management, manufacturing, CRM, HCM, PSA, ecommerce and email marketing.

Additionally, NetSuite has other modules designed to handle industry-specific processes or challenges.

Customers who choose NetSuite can realize the benefits of a modular approach with a vendor that can support all of their current and future needs. That often starts with the basics like financials, CRM and tax management. As businesses grow and expand into other countries, they might add procurement, planning and budgeting and HCM modules. That growth leads to increasing complexity, and companies often add functionality for upgraded billing and revenue, analytics and multi-book accounting. From there, organization can add whatever else they need to expand their reach and fuel their success.

In helping more than 24,000 customers across more than a dozen industries improve their back- end operations and build exceptional customer experiences, NetSuite has gathered industry- leading practices over more than two decades. That experience forms the foundation of its SuiteSuccess methodology. SuiteSuccess offers a tailored approach to implementation and beyond based on industry and business size (with four different market segments). That leads to not only faster deployments, but an ERP that comes pre-configured with KPIs, reports, dashboards and reminders that allow your company to hit the ground running. SuiteSuccess drives faster time- to-value, greater user adoption and sets up your business to establish itself as an industry leader.

Value of ERP

The true value of ERP is in the integrated organization that it enables, unifying siloed functions and ensuring that accurate, consistent data is driving processes and decision-making. Some businesses will adopt functionality piecemeal, and others will need a number of different modules from the start. The best ERP systems will allow the organization to scale functionality as needed, adding capabilities to meet their business needs and future initiatives. Leading ERP software providers allow business strategy to dictate technology strategy—not the other way around.

While every organization will need certain ERP modules, how it configures each module will be unique to its specific business processes. It’s important to partner with a vendor capable not just of delivering out-of-the-box functionality, but that can tailor the software to the particular needs of your business in a way that won’t disrupt operations or require extensive retraining. Cloud-based ERP software gives companies that flexibility, and top vendors have modules that can support each business’s journey every step of the way.

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What to Look for in Your Next ERP

Eva on September 12, 2022

NetSuite

What to Look for in Your Next ERP

September 12, 2022
5:17 pm

Looking for a new Enterprise Resource Planning (ERP) solution is not something you do every day. According to the Mint Jutras 2019 Enterprise Solution Study, the average age of ERP implementations today is approximately 7.75 years. If you’ve implemented a new solution within the last five years, hopefully you are not looking again quite so soon.

Therefore, it is safe to say that (unless you’ve recently changed jobs), anyone looking today hasn’t done so in the past eight to ten years, or even longer. And a lot has changed.

Whereas fit and functionality once drove most decisions, basic and even not so basic features and functions are table stakes today. While an 80% fit used to be acceptable, today’s flexible and technology-enabled solutions should get you much closer to 100% than ever before, without the need for invasive customization. Of course, you still need to perform due diligence and confirm robust functionality, including industry-specific features and functions, but if you haven’t looked around for awhile, expect to be pleasantly surprised.

Also equally important today is the whole user experience, including easy navigation, visual appearance and personalization. And don’t forget integration capabilities and the quality of built in reporting and analytics. Any evaluation today requires you to raise the bar in terms of your search. Read on for some inspiration and tips on what to look for.

WHERE TO START

In the early days of ERP, in searching for solutions, companies would start by creating a long list of vendors, sometimes on their own, but more often with the aid of an independent consultant. They might also create a feature check list and send that out as a request for proposal (RFP) to those vendors. That would start the long and arduous process of whittling that long list down to a short list of two to three (maybe up to five) vendors, usually after a first round of presentations and demonstrations. Of course, if you look back far enough, before the Internet and web-enabled solutions, this often meant traveling to the vendors’ offices or hosting them at your own office and dialing in over a phone line on a (very) slow connection. No wonder it took so long and thank goodness for the Internet and virtual meetings today!

Fast forward to 2019 and chances are your search starts online and you have your short list before you ever reach out and contact a single vendor. We asked our 2019 Enterprise Solution Study participants…

The different sources shown in Table 1 are sequenced (top-down) from most valuable to least valuable, although even those at the very bottom of the list are perceived to be very valuable. Industry analyst reports, inquiries and rankings are most often cited as the place where participants look first and foremost. Note that different industry analyst firms offer a wide range of different “products” ranging from educational reports (like this one you are reading now), to consulting and advisory services, to reports that stack rank and rate vendors and their products. When looking at these rating reports, bear in mind there is always a degree of subjectivity to these rankings. And often times viable vendors and solutions are excluded because of the size of their installed bases or the vendor’s willingness to participate. Some (not all) of these research/analyst firms require a vendor to pay a fee to be included. The larger, more reputable analyst firms do not, but they may have quite stringent requirements for inclusion.

All of these sources of information can be quite useful both in terms of providing a place to start, as well as narrowing down your search. But ultimately you will need to engage directly with the vendors on your short list.

TRADITIONAL CRITERIA IS STILL IMPORTANT

One of the reasons (perhaps the biggest reason) why so much has changed in terms of searching for a new ERP is the underlying technology. Today’s component-based architectures and development platforms make solutions more extensible, providing you with the ability to add or change functionality with less disruption to the core. They provide the ability to configure, personalize and tailor your solution with little or no invasive code changes.

The best platforms today allow you to add features with low code or even no code.

While early ERP solutions were rigid, monolithic structures, today’s modern solutions are more component-based. Every technologist in our audience knows a microservice architecture is defined as an architectural style that structures an application as a collection of loosely coupled services. For those nontechnical readers, think of it as constructing a solution from a set of Lego building blocks. In other words, agile ERP is no longer an oxymoron.

Yet, while it is very important to look under the covers of any new enterprise solution, we can’t forget some of the more traditional criteria for evaluation. We asked our study participants to stack rank six of those more traditional evaluation criteria from most important to least important. Since number one was most important, the lower the number, the more important the factor.

The first thing we notice is that we don’t have a very wide spread from the top of the list to the bottom – less than a single ranking point separates the most important from the least important. This means there is quite a bit of variability in perspective even in our sample of 464 study participants. And we can conclude all of these are very important. That comes as no surprise because we selected what we had found over the years to be the most important to the most survey respondents.

But we do see the widest gap separating the top-ranked criteria from the rest. We’ve been observing the selection process for years, asking this or similar questions, just in slightly different ways. For many years fit and functionality was clearly at the top of the list, but the user experience has been steadily rising in importance and this year it rose to claim the definitive top spot.

USER EXPERIENCE IS MOST IMPORTANT

This didn’t surprise us either. We are all spoiled by easy-to-use, intuitive consumer technology. Some of our millennial workers today have never used software that came with a user manual.

But there is another reason for this jump. In the early days of ERP very few of your employees ever put their hands directly on ERP. That privilege was reserved for data entry staff and select super users, who became a conduit (bottleneck?) to answers. Of course, the information technology (IT) staff also ran and distributed paper-based reports. Back then the look and feel had a more limited impact on your success.

Luckily those days are long gone. Today expect at least 40% of your employees to be regular ERP users and even more will have some access through self- service functions such as purchase requisitions, paid time off or expense reimbursement requests. And make no mistake, these self-service functions can be a significant source of productivity leakage if not well-supported with intuitive and easy-to-use software.

THE USER INTERFACE (UI)

Over the past decade, solution providers have applied significant resources to improving the whole user experience. New software is developed with an entirely different paradigm than in the days of “green screens.” And many vendors have completely redesigned and rewritten user interfaces. You might hear them talk about “beautiful software,” but tastes vary, and “beauty” is in the eye of the beholder. Look for a user interface that looks familiar, one that mimics your interaction with your favorite consumer app. You should be able to tailor it to your needs and personalize it to your preferences and your particular role in your organization.

THE DIGITAL ASSISTANT

Not only have user interfaces become more intuitive, making systems easier to use, some have even learned to “listen” and “speak.” Several different solution providers have introduced digital assistants to the market, changing the way users interact with solutions. While they vary in function, these virtual assistants tend to have one common element. You can speak to them and they understand what you are saying – for the most part. And they can even answer you. These solutions make use of natural language processing (NLP), a form of artificial intelligence (AI). While not long ago these were considered pretty far-fetched, they are no longer the stuff of science fiction. They have become quite pervasive in consumer technology. We regularly “speak” to our smart phones and even our televisions. It’s time to start talking to your ERP.

ROBOTIC PROCESS AUTOMATION (RPA)

Also look for automation. Sometimes the best user interface is no user interface at all. Can you automate your bank reconciliation process? Can you capture an RFID tag with a reader, and have it initiate an inventory transaction? Can you take a picture of a receipt and have it automatically attached to your expense report? And can the software tell the difference between a receipt for parking and one for lunch? Can you readily import customer purchase orders transmitted electronically directly into your ERP?

This last question is indicative of the impact of the digital economy on business applications like ERP. We asked our Enterprise Solution Study participants how they captured orders today and also whether that was changing. Thirty-seven percent (37%) said, yes, it would change over the next two years and another 45% said it might. Only 18% expect no change. As you can see from Figure 2, the percentage that will be manually entered is expected to drop while the percentages created electronically are rising. This all impacts the overall ERP customer experience and your solution must be able to accept these transmissions.

EXPECT A BETTER FIT AND MORE FUNCTIONALITY

While fit and functionality dropped to second place this year, make no mistake, it is even more crucial than ever. In fact, it is time to start breaking the 80/20 rule.

Where did this 80/20 rule of software come from? With many of the early versions of ERP, software vendors tried hard to be all things to all businesses. With few exceptions, most early solution providers cast a wide net. Unwilling to turn any potential business away without a try, they came to market with very broad solutions. By trying to please everyone, they never had a complete solution for anyone. The 80/20 rule prevailed. Nobody expected a solution to satisfy all their needs (an 80% fit was often the goal), resulting in invasive (and sometimes expensive) customizations that built barriers to further innovation. It also resulted in a proliferation of disparate systems that may or may not (still) be integrated today.

But a “one size fits all” solution is not the most effective approach to meeting the needs of a wide range of businesses. No software vendor can be successful in trying to be all things to all businesses. But it is still possible to get “last mile” functionality today with a strong platform and microservices to make ERP more “extensible.” In the context of ERP: to make it easier for the vendor (and possibly its partners with deep domain expertise) to add specialized features and functions to a solid code base, with minimal disruption.

This is really the (not so) secret sauce behind any solution provider’s ability to deliver “last mile” functionality, not just for major industries like manufacturing, or even verticals like food and beverage, but also micro- verticals like dairy, beverage, bakeries, prepared/chilled foods and meat/poultry/fish. While some features and functions might be the same across all manufacturing, food and beverage manufacturers and distributors also must deal with lot and sub-lot traceability and recall. Many within food and beverage must also deal with catch weights.

AN EXAMPLE: CATCH WEIGHT IN MICRO-VERTICALS

Catch Weight is a food industry term that means “approximate weight” because unprocessed food products (particularly meats) naturally vary in size. A retailer might order a case of 12 turkeys. The manufacturer (food processor) will estimate the price of the order by the approximate weight (e.g. 15 pounds per turkey) but will then invoice for the exact weight shipped. This can wreak havoc in an ERP solution not well-prepared to handle it.

But catch weight doesn’t affect all food industries in the same way in. It is also used in the cheese industry to manage shrinkage as the cheese ages. So, handling catch weight varies for different types of food. By handling all the different types of catch weights in a single line of programming code, you add a level of complexity that adds little or no value to the customer beyond the single problem it is facing. A cheese processor doesn’t care if you can satisfy the needs of a butcher. A butcher doesn’t care about shrinkage of cheese.

This is just one example of specialized features that represent “last mile” functionality – different components of code to insert depending on the needs of the specific micro-vertical, preserving simplicity without sacrificing very specific functionality. This is what produces a more “complete” solution, which was stack-ranked third in priority for our traditional criteria.

AFFORDABILITY

Affordability has always been a key consideration in selecting a new ERP, but the better question today would be: Can you afford not to be running a modern, technology-enabled ERP? Of course, there will be some up-front costs associated with a new implementation, but savings in efficiency and productivity, in addition to hard cash savings, can help defray those short-term costs. More than half (54%) of our survey respondents achieved 100% of their return on investment (ROI) within two years with an overall average time of just under 20 months.

New ERP solutions used to always require capital investment, putting a hard stop on buying something out of your price range. But cloud options,

subscription-based pricing and solutions that are delivered as Software as a Service (SaaS) provide more options today. Capital investments (CapEx) in hardware and software can often now be replaced with operating expense (OpEx). In a SaaS environment you are removing the hardware costs, including maintenance and repair, along with the cost of obsolescence. And you need to look beyond the up-front costs and look at the recurring costs in order to determine total cost of ownership. A purchase of a license up-front does not mean you won’t have recurring maintenance costs.

INTEGRATION CAPABILITIES

Regardless of how complete your solution is, you still need to consider integration capabilities. Even with a suite that is intended to be a complete end-to-end solution, running a single application throughout your enterprise is very rare. And even if you could, how well can you inter-operate with your trading partners (customers and suppliers)? If any applications other than your ERP create transactions or touch any of the assets managed by your ERP, data must be synchronized, and connections must be made. As mentioned earlier, component-based architectures and standardized data models can simplify integration between applications, making the platform on which any new ERP is built of paramount importance.

BUILT IN REPORTING AND ANALYTICS

Reports are quite basic to enterprise applications, but they provide a historical and quite static perspective. While you should expect any enterprise application to provide some minimal reporting, you should also recognize that no matter how extensive the reporting is, it probably won’t provide exactly what you want. There are simply too many variables to consider. Therefore, a good report-writer or the ability to easily tailor reports and inquiries, without invasive code changes, is a pre-requisite for any application. Look for one that does not require a lot of technical (programming) skills or expert knowledge of how the data is stored. Otherwise your business users will likely be placed in the queue, waiting for IT to deliver what you need. And they will grow impatient and turn to spreadsheets instead.

Also, nobody can anticipate everything you will actually need to see in your inquiries and reports. Reports are intended to answer questions you already have. But once you have those answers, you are likely to have more questions. You don’t really know the next question to ask until you start digging into the data. That’s why it is called “analysis.”

For this you need good analytics. Basic analytical tools make use of data cubes, which are multidimensional arrays of data. An example of a three-dimensional array might be sales by product, region and time. Any array that requires more than three dimensions is called a hypercube. Most analytical tools today have some sort of “visualization” capabilities, which allow you to present the data,

not just in tabular format, but also with more visually intuitive charts and graphs. Of course, visualizing more than two dimensions becomes harder.

The use of analytical tools generally requires special skills, especially in the creation of cubes. Therefore, they remain in the hands of a few power users or information technology (IT) staff. Some vendors will seek to put the power of these tools in the hands of the business users. They will ship products with preconfigured cubes and construct purpose-built apps that exploit the tools.

While this empowers the business users, it also imposes limitations similar to those associated with reporting. Yes, a vendor can deliver them “out of the box” but must make some assumptions in terms of which dimensions are most likely to meet the needs of their users and what questions they might ask. So, there are some trade-offs between empowering the business users and constraining the power of the tool itself.

In building these analytical applications, either as embedded modules or extensions to the enterprise applications where the business data is housed, some solution providers are adding powerful new features, like the ability to connect from different data sources, in addition to the data in the application itself. Others are adding “data discovery” mechanisms that will point you in the direction of looking at the data from different angles, including some you have not thought of yourself. They are also adding predictive elements.

Predictive analytics is all about detecting patterns and scoring probability, most typically in terms of measuring risk or opportunity (think predicting equipment failures or forecasting demand). Algorithms are created that can make suggestions and/or automate decision-making processes. In this regard, it is artificial intelligence (AI) because it does not require human interaction.

The earliest AI to which most consumers were exposed was Amazon’s suggested reading list. It was in fact pretty rudimentary. If you read that, then surely you would enjoy this. The fewer purchases made, the lower the probability Amazon would discover your real interests and preferences; the more historical data available, the better the accuracy. The same is true for pattern recognition and predictive modeling in an enterprise setting. If you are using predictive models to forecast demand for a product, the more historical data available, the higher the scored probability.

This is really what machine learning (ML) is all about – getting smarter over time without a human directing the learning process. Indeed, machine learning is computing capability that learns without being explicitly programmed. A travel and expense application that can detect a previous destination and imply a pattern in your travel is a very simplistic application of machine learning. But there is a huge potential for far more complex uses.

Consider for example how you might forecast demand for a product you have never sold. In this case, the predictive analytics might seek and detect similarities with other products for which you do have data, similarities that might not be immediately obvious to a human.

These types of predictive and cognitive analytics, powered by technologies like machine learning, image recognition and natural language processing are finding their way into digital assistants, forecasting applications, and more. As automation frees us up from simple, repetitive tasks… as we shore up productivity leakage, now is the time to empower knowledge workers with analytic tools.

KEY TAKEAWAYS AND CONCLUSION

If you are currently shopping for a new ERP, chances are it has been a long time since your last evaluation. A lot has changed in recent years. Or perhaps this is your first experience in being on the selection committee. Fit and functionality are (still) important, and an 80% fit should no longer be the goal. Look for that last mile of functionality to be delivered without costly and invasive customizations that build barriers to innovation and lead to stagnation.

But there is also danger in making a decision based solely on what you need today. We live in disruptive times and the pace of change is truly accelerating beyond anyone’s expectations. Change and disruption can have a cascading effect on your business applications requirements, making agility – the ability to innovate, evolve and change – equally, if not more important. For that you need the right approach to innovation and the right architecture and platform to support it.

But even as you look carefully under the covers, don’t forget some of the traditional basics. Do your due diligence on fit and functionality, but also closely examine the user experience. Will it feel comfortable to all your employees, from the millennials that grew up using technology, to the baby boomers that might not be quite as tech-savvy? The interface should be intuitive and easily personalized. But don’t make the mistake of thinking your employees won’t need training. This is the software that is running your business.

Also look carefully at integration capabilities. Even with a suite that is intended to be a complete end-to-end solution, running a single application throughout your enterprise is very rare. And even if you could, how well can you inter- operate with your trading partners (customers and suppliers)?

Early ERP solutions were rigid and inflexible, hard to install and implement and even harder to use. Functionality was limited (and limiting) and implementations were not for the faint of heart. Horror stories of failed implementations costing millions of dollars were fairly common. For many, those perceptions live on, in spite of the fact that solutions today are far more technology-enabled, provide many more features and functions, and are easier to install, easier to implement and easier to use.

Yes, ERP implementation is difficult and potentially disruptive to your business during the project. You really must expect this. After all, it is the software you use to run your business. And implementing ERP requires a different skill set than running your business. So secure top management commitment and create a plan. Don’t be afraid to seek guidance and assistance from those that do this for a living. ERP experts can help you identify goals, set a realistic schedule and budget and keep you on track. These experts will not be distracted by the day-to-day firefighting intrinsic to any business.

Selecting a new ERP is an adventure. Set the bar high in terms of expectations and prepare yourself well.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

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Looking Beyond QuickBooks

Eva on September 9, 2022

NetSuite

Looking Beyond QuickBooks

September 9, 2022
7:20 pm

What’s Next? The Short Answer: ERP.

Even the smallest of businesses must balance its books and meet government compliance and regulatory financial reporting requirements. Early on, many small businesses turn to QuickBooks as an easy-to-use, affordable accounting solution. But there is more to your business than just debits and credits, paying bills and collecting cash. At the very minimum, you need to manage those operations that directly or indirectly generate your cash flow. In the beginning you might be able to control these operations with a series of spreadsheets, but sooner or later you will need more.

If your business is successful, eventually you will need to look beyond spreadsheets and QuickBooks. You will need a broader solution, something that helps rather than hinders your business. You might first try tacking on point solutions to address individual needs as they arise, but if these don’t talk to each other, before you know it, your “back office solution” is held together with the software equivalent of baling wire and duct tape.

So, what’s the alternative? The short answer is ERP. ERP is short for Enterprise Resource Planning, a convenient label for the software that runs your business. Yet many companies delay this next step, fearing implementation will take too long and be too costly. They also fear change and disruption.

While the perception that implementing ERP must be an expensive, scary ordeal lives on, research shows this is a myth that lingers from early days when ERP was rigid, limited in functionality, hard to implement and even harder to use. Today’s flexible, technology-enabled ERP solutions are nothing like those of the past. They provide many more features and functions, and are easier to implement and easier to use. And while ERP requires careful evaluation, selection, planning and commitment, it can indeed provide very significant returns on your investment.

Still not convinced? Read on to better understand how to recognize when the time is right for taking that next step, and what you can expect if indeed you do.

BUT FIRST… DEFINE ERP

Mint Jutras defines ERP as an integrated suite of modules that provides the operational and transactional system of record for your business. However most ERP solutions today do much more. And yet most small companies settle for something less, leaving them with little control and even less visibility into how best to grow most profitably.

Integrated is a key word in our definition and perhaps the biggest reason why, if you are small company, you can’t afford not to invest in ERP. You need most, if not all the key components required by large enterprises, and yet you don’t have the deep pockets to stitch different pieces of the puzzle together to make it a cohesive solution. And the alternative – manually transferring data between applications – is inefficient and error-prone.

Furthermore, while our definition represents the minimum requirements, most ERP solutions today can do much more. And yet many small companies settle for something less, leaving them with little control and even less visibility into the data needed for effective management and data-driven decision-making.

If you are running QuickBooks today, you essentially have a bookkeeping system. Yes, there are different versions of the solution, so you may have progressed beyond basic bookkeeping tools, adding on automated billing and/or tools to manage projects, inventory and contractors. But this still leaves a lot of the operations of your business underserved.

Today there are very affordable ERP offerings that not only support your accounting functions, but your operations as well, through a complete and integrated solution. And a lot of the old barriers preventing you from implementing a full solution, like lack of capital or lack of technical expertise, have been eliminated with the cloud, particularly those that are offered as software as a service (SaaS). A SaaS solution enables you to manage both your accounting and your operations without building out a data center, hiring a huge information technology (IT) staff or consuming a lot of capital.

Why… and When Do You Need ERP?

QuickBooks was designed with a small business in mind. While over time Intuit, its creator, has expanded its features and functions, and offers different versions of the product, even when you bought it, you probably knew (hoped) that you would eventually outgrow it. As you grow, you start to find areas that QuickBooks doesn’t handle, and perhaps your first response is to start filling gaps. But in doing so, you are also creating extra work and inefficiencies.

For example: Your sales team needs to manage contacts, opportunities and pipeline. So, you invest in a sales force automation tool, usually under the guise of customer relationship management (CRM). Now you have a customer master file in CRM, in addition to the one you use in QuickBooks. Are they the same? Synchronized? And, even though you might be able to create a quote in CRM or an estimate in QuickBooks, you still don’t have an order as part of your digital system of record. Do you still manage those in spreadsheets?

This is just one example of how data and processes can become clumsy and disjointed. How do you really manage your inventory, your warehouses, your workforce, your production? These are often the gaps QuickBooks leaves. If you start to solve these problems departmentally, applications can proliferate and pretty soon each department has its own version of the truth, and you start to lose sight of the forest for the trees.

Sometimes it is necessary to pull back and take a good hard look at the forest. Here are some “tell-tale” signs you need much more than a bookkeeping system, even if it is surrounded by other applications. These signs are all pointing you in the direction of a fully integrated ERP solution.

Redundant Data

You have multiple “master” files. Customers are stored in QuickBooks for invoicing, accounts receivable and cash collection. But they might also exist in CRM and in whatever application (or spreadsheet) that captures actual orders. You might have an item master defined in QuickBooks in order to value inventory assets, but is that the same item master that defines your product catalogue and drives warehouse operations and shipments? You might pay your employees through QuickBooks but where and how are skills inventoried and performance reviews managed? Is data scattered in file cabinets, offline spreadsheets and across applications? Can you guarantee all this redundant data is synchronized? Are you manually transferring it from QuickBooks to other applications? If you are, then you are almost certainly introducing errors and inconsistencies.

You’re Wasting Time

With scattered data, are you wasting time pulling together inconsistent and incomplete information? Do the various departments in your organization collaborate effectively to make data driven decisions or do they spend more time exchanging reports or waiting for data? And what happens when you can’t easily find the data? In addition to wasting time looking for it, are you wasting time working on the wrong tasks? Are you still performing manual tasks that could be easily automated? Even worse, are uninformed decisions misdirecting your efforts?

You Don’t Trust The Data You Do Have

When financial and operational data is not synchronized in real time you can get conflicting information. All it takes is one occurrence of this and people start to mistrust the data, causing them to second guess it, along with the decisions others are making. They wind up either wasting more time trying to reconcile it, or they ignore it completely, replacing it with their own data and observations, from what could be a very limited view. And yes, that means a proliferation of spreadsheets, which is another tell-tale sign that you need a complete and integrated solution. You need ERP.

You Can’t Meet Customer Demand

Your inventory levels are rising, yet you still can’t seem to meet customer requested ship dates. All the financial reporting and planning in the world won’t tell you how to meet demand. How do you better forecast demand, lean out your inventory, and produce product just-in-time when your financials and operational data are not integrated?

You Are Expanding Globally

It used to be that only large companies could establish a global presence. But the Internet has forever changed the world and leveled the playing field.

Today it is possible for even small companies to create a global brand, and this may mean you need to start operating as a multi-entity corporation. The 2019 Mint Jutras Enterprise Solution Study found even small companies (those with annual revenues below $25 million) operated from an average of 4.91 locations and 39% of them operate as a multi-national enterprise with multiple legal entities. This brings a new level of complexity to your business that can’t be managed from a desktop, or multiple desktops. Yes, there are online versions, but do they really go far enough?

Listen To The Signals, Reap The Rewards

These are just a few of the signals your business might be sending you, trying to tell you it is time to look beyond QuickBooks.

Switching from QuickBooks to an integrated suite of modules that forms the complete operational and transactional system of record – or in simpler terms, implementing ERP – can bring many benefits, not the least of which are:

Eliminating manual data transfers across applications to speed processes and get everyone on the same page, in order to…
Make informed, data-driven decisions from integrated financial and operational data
Improve productivity and operational efficiency with a single integrated solution; putting that solution in the cloud brings added benefits
Support growth and expansion, even when that includes multiple subsidiaries in multiple countries

In spite of all these potential benefits, many ignore the warning signs and delay looking beyond QuickBooks, fearing ERP. They assume implementation will take too long and be too costly. They also fear change and disruption. And while the perception that implementing ERP must be an expensive, scary ordeal lives on, it is indeed a myth. Today’s flexible, technology-enabled ERP solutions are nothing like those of the past. While ERP requires careful evaluation, selection, planning and commitment, it can indeed provide very significant returns on your investment, very often in a shorter period of time than you might imagine.

“Top 3” Goals of ERP

In our 2019 Enterprise Solution study, we asked participants to select their top 3 goals for implementing ERP. The most often selected were:

38% Support Growth
30% Improve customer responsiveness and fulfillment
30% Improve selected performance metrics
26% Gain more control and visibility
26% Gain a competitive advantage
26% Reduce frustration and improve efficiencies in transacting business

Debunking The Myths

In the past, ERP implementation admittedly was not for the faint of heart. Today however, it is neither the scary ordeal that it once was, nor is it doomed to fail. While past disasters provide good fodder for sensationalized headlines, failure rates are generally overstated. A recent Mint Jutras study of ERP implementation success found 67% rate their implementations as successful or very successful. Those who reported only partial success still realized benefits, although the results “could have been better.” However, those were most likely to be aging solutions with functionality limited by older technology. Even so, a scant 2% said they were “not very successful” and only one out of the 315 surveyed described their implementation as a failure.

Have A Plan – Set Goals – Experts Are Here To Help

That doesn’t mean it is a trivial task. Yes, ERP implementation is challenging and demanding, and potentially disruptive to your business during the project. You really must expect this. After all, it will be the software you will use to run your business – your whole business, not just the accounting functions. Unlike your implementation of QuickBooks, which primarily impacted your finance and accounting folks, ERP should involve all the different departments and functions in the organization. But the benefits are definitely worth it. So secure top management commitment and create a plan.

An ERP implementation is too important to embark upon without first setting goals. Goals are useful in setting expectations and driving return on investment (ROI). Our research shows goals are most likely centered around growth, improving performance and creating more efficiency.

Implementing ERP requires a different skill set than running your business. Don’t be afraid to seek guidance and assistance from those that do this for a living. ERP experts can help you identify goals, set a realistic schedule and budget and keep you on track. These experts will not be distracted by the day- to-day firefighting intrinsic to any business.

Setting A Good Pace

Your schedule should be aggressive enough to establish and maintain momentum throughout, but it must also be achievable. Putting together a schedule that is impossible to meet, regardless of how hard you work, adds additional stress on top of the stress introduced by any kind of change.

Typically the best people to involve in the project are those you can least afford to distract from their current responsibilities. But assign them anyway. Many, if not all members of the implementation team will still be required to do their “day jobs” during the implementation. These are the folks that will get it done.

So, what is aggressive enough, but still reasonable? The specific answer to that question will vary based on many factors, including the solution itself, the prior experience of the team, size of company, complexity of the business, and other factors. It is very important to work with your solution provider in this respect. Some, but not all, will have developed tools, templates and methodologies to speed implementation and improve your experience.

For decades, the “normal” implementation was thought to take nine to twelve months. But new, next generation software has been designed to be easier to implement and far easier to use and timeframes are shrinking. Our 2018 study showed the average time to a first “go live” was just over nine months (9.28) but our latest results from 2019 shaved about six weeks off that time for an average of 7.85 months. But even this reduction in time doesn’t tell the whole story.

First of all, we also saw a high rate of variability, and this variability was most dramatic in terms of expectations. Those with more aggressive plans achieved this milestone far ahead of those who allowed work to expand to fill the time allowed.

The important lesson here: While those who were most aggressive were a bit overly optimistic, they still managed to go live much faster than those who allocated more time. Don’t over-pad your schedule. Perhaps you can be overly aggressive, but it is better to err on the side of too fast than too slow.

Secondly, this year we found a few very long implementations skewed the overall average. Note that almost one in four (23%) achieved their first “go live” in less than three months and almost half (46%) did so within six months.

Expect & Achieve Results

A recent Mint Jutras report, The Real Facts About ERP Implementation, went into great detail in order to debunk the myth that ERP failure was more common than success. While limited to studying implementations in manufacturing and wholesale distribution, we find the overall results applicable to virtually any business today. Two thirds (67%) of those surveyed rated their ERP implementations as successful or very successful, and we found only one out of the 315 participants described it as a failure.

But the key question any small business has in moving from QuickBooks to ERP is, “How long will it take for it to pay dividends in terms of ROI?” In our surveys we specify ROI to be the length of time it takes to recoup 100% of the initial cost of ERP through cost savings or added revenue. We also ask for both the projected and actual time. While we have been observing both expectations and realized timelines shrinking for several years, we noticed a dramatic drop off between our 2018 ERP Implementation Study and our 2019 Enterprise Solution Study. For the first time ever we’re seeing both projected and actual time to be (significantly) less than two years.

We also find that company size is a contributing factor. While the overall average of the actual timeline for achieving ROI in 2019 was 1.63 years (about 19 months), if we look at the average for small companies only, the timespan is reduced to 1.33 years (about 16 months). But it increases steadily as the company grows. The sooner you recognize the need to look beyond QuickBooks, the faster you will realize the benefits. This actually makes a lot of sense, considering the complexity of the business typically grows along with revenues.

ROI is most likely to be directly attributed to cost savings, but can also come from increased revenue, especially when that increase comes without an offsetting and comparable cost increase. In moving from QuickBooks, the most obvious cost savings come from the operational side of the business. For product-centric businesses, that most often means a reduction in inventory, a result of having greater visibility and accuracy and better planning. But it can also come from better supplier management and even an increase in production capacity without adding headcount or capital investment (think machines and equipment), also through better planning and greater visibility than even the best financial reporting can ever provide.

But in moving from a combination of QuickBooks and other tools like spreadsheets and individual point solutions to fill operational gaps, non-cost related improvements are perhaps even more important. Figure 4 provides you with a list of possible improvements and the likelihood of you experiencing them.

Summary & Recommendations

QuickBooks provides a great start for many small companies. It is an easy-to- use, affordable accounting solution. But there is more to your business than just debits and credits, paying bills and collecting cash. At the very minimum, you need to manage those operations that directly or indirectly generate your cash flow. In the beginning you might be able to control these operations with a series of spreadsheets, but sooner or later you will need more.

If you have started to fill those gaps with add-on point solutions, you have likely created an environment that is increasingly difficult to manage. If you have multiple copies of the same data (e.g. customers, products, employees, suppliers, etc.), are they fully synchronized? Are you manually transferring data between those applications or entering the same master file or transactional data in two or more systems? If so, you are almost certainly introducing errors. As soon as you find one of these errors, you begin to mistrust the data and potentially even start working around it, and also working around (not with) the applications that are intended to make you more efficient and more productive.

How do you get this less-than-ideal situation under control? The answer is in replacing your bookkeeping system, and those other individual, disconnected applications with an integrated suite of modules that forms the operational and transactional system of record. That’s the definition of ERP.

Yes, early ERP solutions were rigid and inflexible, limited in functionality, hard to implement and even harder to use. Today’s new ERP solutions are an entirely different animal. Solutions today can be more flexible and technology- enabled. They can provide many more features and functions to support, not just your finance department, but all your operational needs. They can be easier to install and with SaaS solutions, you even skip this step entirely. The best solutions are easier to implement and most importantly, easier to use.

As a growing company, you will outgrow QuickBooks. Plan your next step carefully. Evaluate solutions carefully. While technology has truly changed the ERP game, some vendors will have embraced this new technology more aggressively than others. It definitely pays to choose wisely.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

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Driving Inventory ROI: How CFOs Can Maximize Cash Flow and Minimize Loss

Eva on September 9, 2022

NetSuite

Driving Inventory ROI: How CFOs Can Maximize Cash Flow and Minimize Loss

September 9, 2022
5:27 pm

With Better Visibility Into the Connection Between Inventory and Financials, CFOs Can Increase Profitability.

Any finance professional working at a products-based company knows that inventory represents one of its biggest assets—and investments. The problem is that CFOs and controllers often lack a way to easily view and monitor the relationship between inventory and financial data. This prevents them from aligning cash flow with inventory needs to ensure the company has money when it needs it to make smart inventory investments.

And that’s especially troublesome as prices rise due to inflation and global supply chain disruptions have made it more difficult to acquire products, making cash flow tighter in a growing number of markets. Purchasing decisions must be intentional and backed by data to ensure the money you do have is put toward materials, supplies and finished goods that will generate strong returns. While inventory is considered an asset, CFOs know all too well that it also represents cash. Each shelf of inventory is essentially a small pile of money, and the longer it sits there, the more those stacks of cash shrink.

The right plan and the right technology can go a long way toward improving inventory decisions in a way that boosts cash flow. Finance chiefs need systems that provide a real-time picture of inventory and financials to create comprehensive, detailed forecasts and corresponding plans. Only then can a business maximize its chances of buying more of the products that will sell quickly and fewer of the slow movers, in turn increasing available cash.

We’ll explain the step-by-step approach that can help you optimize inventory purchases and the tools you need to do so efficiently and effectively. An integrated plan can help bring your business closer to the ideal inventory levels that lift revenue and profit.

How Inventory Affects Your Cash Position

Too often, purchasing decisions aren’t made with the organization’s financial position in mind. CFOs and other financial leaders often have a rough idea of their company’s inventory position. They may know the approximate dollar value of all the products they’re holding and be able to name the bestsellers, but they’re not closely tracking the movement of goods. Perhaps they have access to additional inventory information in spreadsheets or a basic inventory management system, but it’s not up to date.

Without detailed information about the location of products, their turnover rate and exact status—on order, in transit, allocated to an existing order—it’s all but impossible to know how long on-hand stock should last and when it will be time to reorder. Without reorder dates in mind, it’s extremely difficult to predict future cash needs. When will the procurement team need this money, and how much will it need? When might the company have more free cash flow than usual that the CFO can invest elsewhere?

At the heart of the problem are issues that plague many growing businesses using manual methods or an entry-level inventory management system:

Items cannot be tracked across multiple locations, like stores, warehouses and 3PL facilities.
Inventory levels don’t update in real time and are instead refreshed every few hours, at the end of each day or, worse yet, manually.
Data on available stock, purchase orders and sales orders is spread across a confusing web of spreadsheets and applications that make it challenging to get a complete picture of inventory.

This means there’s no one place CFOs can check for a quick overview of the current inventory situation and expected needs in the coming months.

This limited view of inventory results in a predictable issue: too much or too little of certain products. In many cases, that means an oversupply of less popular items and too few of the fastest movers.

Both situations reduce available cash—overstocks eat up money that would be better spent elsewhere, and out-of-stocks kill potential sales. Excess inventory is usually offloaded at a discounted price and the company is lucky if it’s even able to recoup its initial investment.

Finance is another key piece of this equation. These same companies often lack a system to easily and accurately forecast future sales and expenses. In their early years, companies often get by with spreadsheets and a spreadsheet wizard on staff, but that quickly becomes unsustainable as they grow. They need a more efficient, reliable way to track sales and costs so they can see expected cash flow on a weekly or monthly basis. Without a cash flow forecast, businesses are flying blind and will realize they don’t have money to purchase new inventory when they need it. They’re forced to either seek financing to cover inventory purchases or absorb the financial hit of missed sales.

CFOs missing any of these components are left without the information they need to both maximize cash flow and make the best use of the money they have available.

How Does Safety Stock Impact Cash Flow?

Recent supply chain problems have highlighted the importance of safety stock, the inventory a business carries to cover demand beyond what it anticipated. Although it may be easier to overlook, safety stock can also impact cash flow.

This extra stock could have a negative effect on cash flow by tying up more money in inventory that would be better spent elsewhere. On the other hand, safety stock can boost cash flow by capturing sales you would’ve otherwise missed due to delays in the supply chain. So how can you strike the right balance? Monitor safety stock and update the appropriate levels for different products regularly. Too often, safety stock levels go unchecked and are no longer reflective of the daily use figures in the safety stock formula. In some cases, inventory needs change frequently.\

Safety stock = (Maximum daily usage × Maximum lead time) − (Average daily usage × Average lead time)

Optimizing safety stock levels will ensure you don’t have too much backup inventory for an average seller and too little of something that is seeing a steady uptick in sales. Ultimately that should give the CFO more money to invest back into the business.

Visibility Enables Smarter Purchasing Decisions

When it comes to inventory, a finance executive has two goals: buy the right products to increase the sell-through rate and minimize inventory-related losses. When that happens, the organization has more money to pursue initiatives that will fuel future growth. Accomplishing that can be boiled down to answering these five questions:

Here’s how you address each of these questions to build a more calculated, effective inventory plan:

When will I have money to spend on inventory? (Budgeting)
What products should I buy, and what am I running out of? (Merchandise planning)
Where do I need the inventory? (Inventory allocation)
What items will I run out of, and when? (Supply planning)
How can I buy more fast-moving and less slow-moving inventory? (Open-to-buy plan)

Budgeting

Before a company can create a purchasing plan, it first must know how much money it has to spend and how those funds will be distributed over the course of the year. That budget is of course based on a sales forecast, as revenue enables the procurement team to spend on additional inventory. Forecasted expenses and revenue can be broken down week-by-week or month-by-month to estimate cash flow.

Spreadsheets won’t cut it when you’re trying to create these detailed budgets and forecasts—and keep them up to date. You need a robust planning solution that can pull operational and financial data from your ERP system to create forecasts.

These projections should include base-case, best-case and worst-case scenarios that the user defines. Those alternative scenarios could affect the forecast you ultimately use as the basis for the budget.

Merchandise Planning

Once you’ve mapped out demand and how it’s spread across a certain period of time, you can establish a merchandise plan. A merchandise plan lays out what the business must buy or build in order to meet expected demand. What specific items does it need and in what quantities to satisfy sales projections?

This is where an inventory management system shows its value. It tells you what products you already have available, which affects the amount you need to order. An inventory system should also monitor stock at every stage before it reaches you, from pending purchase order to fulfilled to in-transit to delivered.

Inventory Allocation

Once a products business knows what it needs, the next objective is figuring out how that inventory should be allocated across different locations. These locations could be stores, warehouses, distribution centers or facilities managed by partners (like an Amazon or 3PL warehouse). A number of factors could go into allocation decisions. Product assortment and demand for certain items could vary greatly depending on the specifics like location, season, size, color or a host of other attributes.

Look for an inventory management system that will display current levels across all inventory locations. This solution should also track KPIs like turnover rate, sell-through rate, days on hand and whatever other metrics matter most to your company. All of this information helps get the right inventory in the right location, increasing cash flow by minimizing the chances of running out in one place and having too much stock in another.

Supply Planning

The next step is supply planning, which brings together projected cash flow and inventory needs. At this point, you know what you need and how much you need, so you can begin to think about the timing of purchase orders. Compare forecasted sales to projected cash flow to manage timing. Consider lead times, favorable volume discounts and payment terms as you build the supply plan. This allows you to foresee any cash shortfalls. It’s far better to realize there’s a problem in advance than scrambling for a quick fix at the last minute.

The combined power of inventory management and planning software makes it possible to time purchases appropriately. In addition, an inventory or procurement system makes it easier to schedule out purchase orders and keep them organized with all order and vendor information in one place. This tool makes it easier to keep track of what inventory is coming when.

Open-to-Buy Plan

The final piece of this approach is an open-to-buy plan. Your purchasing team should use this plan to make sure it’s spending available cash on the right items by uniting the financial forecast, demand plan and supply plan. Open-to-buy establishes a budget for purchases based on inventory turns (i.e. how quickly it’s selling) and the ideal amount of stock to carry. Here’s the formula for open-to-buy:

Open-to-buy = Planned sales + Planned markdowns + Planned end-of-month inventory − Planned beginning of month inventory

Although open-to-buy can be calculated in units, it’s more common to input everything in this formula in dollars. Figures are usually monthly, but could be adjusted for another time period like weeks.

Is the Price Right?

As you think about maximizing the return on inventory investments, pricing is another aspect CFOs should pay attention to. The right price point maximizes margins without curbing demand, thus increasing available cash. Optimal price points also increase the chances of selling through inventory at full price and limit the need for clearance discounts that eat away at margins. That boosts gross profit and ultimately cash.

In other words, it’s valuable to dedicate time and resources to determining the right price point for the goods you sell. Data can be revealing, and it may make sense to test different prices to see how they affect demand. If one item has taken up too much valuable warehouse space for too long, try a price cut. If something else is flying off the shelves, a modest price increase might make sense.

Price optimization should be an ongoing exercise rather than a set-it-and-forget-it activity. This is especially true as more companies face price increases from suppliers and must decide how much of that can be passed onto customers before it hurts demand.

For clarity, let’s walk through an example. A retailer has forecasted sales of $20,000 for footwear in June, will run promotions worth $800 on those items, wants $30,000 worth of this inventory at the end of June and expects to start June with $35,000 worth of inventory. The open-to-buy formula would look like this: $20,000 + 800 + $30,000 – $35,000 = $15,800. That means the purchasing department should spend no more than $15,800 o n footwear that month.

Open-to-buy plans can be as broad or as specific as you need them to be, which is part of what makes them so valuable. For instance, the entire company could have a total open-to-buy budget for the month that’s then broken into departments and product categories within those departments.

An open-to-buy plan acts as a check on purchasing managers by giving them specific spending limits for each product category or item. The reality is most buyers don’t know the details of your financial position in any given week or month, and some will buy items that, based on simply a hunch, they think will take off. This plan mitigates that risk by ensuring inventory dollars are spread in a logical manner, maximizing investment in hot sellers and minimizing investment in slow movers.

There is always room for adjustment within an open-to-buy plan. If sales overperform in one department and underperform in another, the former may take a portion of the latter’s budget to make sure it doesn’t run out of product. That type of flexibility can make a big difference to the bottom line.

Planning software can help build open-to-buy plans and can be configured to automate these calculations. Leading systems can connect inventory and financials to show how sales of various goods contribute to the bottom line with just a few clicks.

A Superior Approach to Inventory Planning

It’s not hard to see the link between inventory and financial performance, yet it doesn’t always earn the attention it should. Inventory management may not be the first place a CFO would look when trying to ramp up profitability or determine the cause of disappointing results. Yet inventory and cash flow go hand-in-hand, and businesses that understand the two are mutually dependent set themselves up for success.

Optimizing inventory has become far more difficult since COVID-19 broke the just-in-time supply chain. Many companies can no longer wait until the last minute to order goods and now carry more items as a buffer in light of the constant delays and disruptions. This need to purchase and hold more inventory, combined with rising costs, has made cash scarcer for many midsized companies. But that is all the more reason for CFOs to ensure their employees are making the most of the cash they do have.

Better purchasing decisions require a strategic plan, but it’s impossible to create that without comprehensive data in hand.

This is where the value of NetSuite’s unified ERP system truly shines because it provides accurate, detailed and accessible data. It keeps all information related to financials, inventory and orders in one place so it’s easy to find what you need.

Companies can use this data to first create detailed forecasts and budgets with NetSuite Planning and Budgeting to start planning future purchases. NetSuite Planning and Budgeting pulls information directly from NetSuite ERP to eliminate concerns about whether it’s accurate or up to date. From there, NetSuite Inventory Management monitors inventory levels and location in real time, down to the SKU level. It can track products across multiple locations and incoming orders, providing all the details necessary to build a merchandise plan and effectively allocate inventory. The information provided by these two NetSuite applications allows the business to build a supply plan that ensures it has money available for purchase orders when it needs products. NetSuite Inventory Management and Planning and Budgeting can also give you all the numbers needed to calculate open-to-buy.

Inventory must be carefully managed for the business to have the money it needs, when it needs it, so it can make the most of opportunities to grow. While CFOs may not oversee operations in most organizations, they still must realize the impact purchasing and inventory management have on increasing, maintaining and protecting cash flow. Remember, inventory is money in a different form, so items that don’t generate a positive return represent missed opportunity.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

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CFO Guide: 4 Inflation Metrics to Watch Now

Eva on September 9, 2022

NetSuite

CFO Guide: 4 Inflation Metrics to Watch Now

September 9, 2022
3:23 pm

Inflation is here, and unless you were managing a business in 1982, you’re not used to planning for it. Inflation averaged just 1.7% in the 10 years prior to 2020 – that is below the Fed’s 2% objective and was a key factor in its loose monetary policy. Inflation jumped to a four-decade high of 7% at the end of 2021, and now the Fed is re-evaluating its policies. It has business leaders worried. Nearly 60% of respondents ranked inflation as their top concern in CBIZ’s Main Street Index survey, conducted between Nov. 30 and Dec. 31, 2021. And in The Conference Board research group’s survey of 900 CEOs, more than half said they expect price pressures to persist until at least mid-2023.

For business leaders, this means that tracking external inflation metrics is now a priority, as it allows them to ensure the company is adjusting appropriately to swings in prices of goods and services. Here, we’ll outline the three main measures for tracking the inflation rate provided by the federal government, as well as supplemental indicators that could prove helpful in predicting trends and guiding decisions.

Chapter 1
Chapter 2
Chapter 3
Chapter 4

Consumer Price Index

Overview

The most widely-quoted measurement of inflation, the Consumer Price Index, or CPI, is published by

the Bureau of Labor Statistics (BLS) monthly. It measures the average change of prices paid for a basket of consumer goods and services, gauging inflation as experienced by consumers in their dayto- day living expenses.

The CPI is especially notable because it’s used to adjust Social Security payments and as the reference rate for some financial contracts such as Treasury Inflation-Protected Securities (TIPS) and inflation swaps. For consumer-facing companies, it provides guidance on what the market will bear in terms of price increases and can therefore be an important part of scenario planning. Raising prices significantly more than the inflation rate will most likely result in consumers cutting back on or cutting out your product.

Data Source

The BLS uses a survey of American families called the Consumer Expenditure Survey to determine which items go into the basket and how much weight to assign to each item.

Calculation

The CPI is based on the fixed-weight Laspeyres price index and calculated using this formula:

CPI = Cost of Market Basket in Given Year / Cost of Market Basket in Base Year x 100

What Is the “Basket”?

Inflation measures often use the term “basket” to refer to a select mix of goods and services. Also called a market basket, consumer basket, representative basket or commodity bundle, this is a rarely changed list of items whose prices are tracked over time to measure inflation in a given economy or market.

The CPI basket includes over 200 categories of goods and services, which the BLS classifies into eight major groups: food and beverages, transportation, housing, medical care, apparel, recreation, education and communications and other goods and services. While the CPI includes taxes that are included with the purchase of specific goods and services, it does not include unrelated taxes like income and Social Security taxes. It also does not include investment items like stocks, bonds and real estate.

Population

The CPI reflects the spending patterns of two population groups: urban consumers and urban wage earners/clerical workers.

The BLS defines “urban consumers” as people in households in all areas of the United States except those in rural nonmetropolitan areas, in farm households, on military installations and in institutions such as prisons and mental hospitals. This represents about 94% of the total US population.

“Urban wage earners and clerical workers” refers to households in which more than half of the income comes from clerical or wage occupations, or those paid an hourly wage, and at least one of the household’s earners has been employed for at least 37 weeks during the previous 12 months. This group represents approximately 28% of the total US population and is a subset of urban consumers. This calculation is used annually to set the Social Security cost-of-living adjustment.

Variations

There are several variations of the CPI, most notably the Core CPI, CPI-U and CPI-W.

Core CPI: Excludes food and energy due to their volatility.
CPI-U: Takes into account only urban consumers.
CPI-W: Reflects only urban wage earners and clerical workers.

The BLS also provides a seasonally adjusted CPI, which removes the effects of seasonal factors such as weather, the school year, production cycles and holidays.

Supplemental Indicator: Treasury Inflation- Protected Securities (TIPS)

When tracking longer-term inflation trends, Treasury Inflation-Protected Securities, orTIPS, can provide valuable insights. TIPS are U.S. Treasury-issued bonds whose value moves with inflation as measured by the CPI and are available with 5-, 10- and 30-year maturities. If inflation doesn’t materialize while TIPS are held, the utility of holding TIPS decreases. Tracking investor sentiment and activity around TIPS indicates the anticipated duration of inflation. If investors expect inflation to die down, activity around TIPS will decrease in turn.

Headline vs Core Inflation

Headline inflation measures the total inflation within an economy, including the prices of commodities such as food and energy.

Core inflation excludes highly volatile components, primarily food and energy.

While it is the most common economic measure of inflation, the CPI has its limitations. The standard version of the CPI is the most all-encompassing but still isn’t reflective of the entire population since it’s based on urban consumers.

It also fails to reflect substitution bias, the phenomenon in which price changes drive changes in consumer buying behavior. For example, a consumer might choose to buy lower-priced clothes or shift purchases away from clothes and toward food as inflation picks up. Because expenditure weights are held constant for 24 months, the CPI doesn’t immediately reflect these shifts in consumer behavior.

The CPI also takes time to account for any new innovation. So even if a newer product represents a considerable portion of consumer expenditures, it may be years before it is included in the economic indicator.

Personal Consumption Expenditures Price Index

Overview

Another commonly used indicator of inflation is the Personal Consumption Expenditures Price Index or PCEPI, also referred to as the PCE Price Index. It serves as a measure of the prices that people living in the US, or those buying on their behalf, pay for goods and services. Released monthly by the U.S. Bureau of Economic Analysis (BEA) in its Personal Income and Outlays report, the PCEPI is the Federal Reserve’s preferred inflation indicator when setting monetary policy.

Data Source

The PCEPI is based on BEA data around personal consumption expenditures collected from a wide

range of sources including the U.S. Census Bureau, administrative and regulatory agencies and private organizations such as trade associations. The BEA determines the PCEPI by adding up dollars spent on all goods and services in its basket and comparing the total to the last month’s figures.

Scope

The PCEPI includes spending by and on behalf of people living in the US. “Spending on behalf of a consumer” can include relevant spending by the government, employers or nonprofits. For instance, whereas the CPI only includes consumer health spending, the PCEPI includes money spent by health insurance organizations.

Calculation

The PCEPI is calculated by adding up the current dollar value of PCEs in the BEA’s basket and comparing that to the total from the prior period’s figures. The BEA uses a price deflator to compare the value of all goods and services produced in the current period to the prices in the base period. The result is a measure of the change in consumers’ economic activity.

The PCEPI is based on the Fisher-ideal formula, which allows for changes in consumer behavior and changes that occur in the short term, preventing substitution bias.

The PCEPI is considered to more accurately reflect how prices affect consumer behavior. The modified Laspeyres formula used for the CPI is updated only every two years, so it assumes people continue buying the same items for a longer time period. As a result, the CPI’s reported inflation rate is often higher than the PCEPI’s. For example, the CPI-U increased an average 1.7% per year from 2010 to 2020, while the PCEPI increased an average 1.5% per year.

Population

Unlike the CPI, which only accounts for urban consumers, the PCEPI is considered representative of the entire US population as it covers both urban and rural consumers.

Versions

The PCEPI too has several versions, most notably the PCE Price Index, Excluding Food and Energy, also known as the Core Personal Expenditures Price Index (CPCE). The Federal Reserve tends to direct the majority of its focus here.

Limitations

The PCEPI is released monthly. However, some of the data sources used, like the GDP, are only released quarterly. In order to fill the gap, the BEA makes estimates based on other data sources like retail sales reports.

Unlike the CPI, which uses data reported straight from consumers, the PCEPI uses a range of data from households, nonprofits, corporations and the government. Depending on what you want to know, that additional data may not make the numbers more accurate for your purposes.

The PCEPI can also be substantially revised to adjust for factors like substitution bias. While beneficial in some scenarios, it gives an edge to the CPI for some purposes like contract indexation and TIPS.

More Resources

How to Increase Prices Without Losing Customers. If your team is deciding whether to pass inflation-related costs on to customers, then you’re not alone. Get the guide to raising prices while keeping your client base.
3 Action Items for More Data-Driven Business Decisions. A mass of data from the economy’s wild two years should be fueling your business decisions. If not, now’s the time to make it happen.
Scenario Planning for What Comes Next. In this free on-demand recording, other business leaders discuss how they’re using scenario planning models to better work through short-term challenges and plan for an unpredictable future.

Producer Price Index

Overview

Released monthly by the BLS, the Producer Price Index, referred to as the PPI, measures the average changes in prices that domestic producers receive for their goods and services. Unlike other indicators, the PPI gauges inflation from the viewpoint of the industries that make the products, instead of the consumer viewpoint. Unlike the CPI or PCEPI, which are both lagging indicators, the PPI is a leading indicator of inflation. As such, it’s a great aid to scenario planning. In recognition of the value in planning, the BLS gets very granular in its calculations so that business analysts have data specific to their industry and need.

Data Source

The BLS collects PPI data. It typically selects producers by systematically sampling a listing which all firms file with the Federal-State Unemployment Insurance Program.

Once a business is selected, a field economist narrows the scope to specific goods or services for which prices will be reported. The selected businesses then report prices monthly until a new sample is selected for the industry, usually after seven to eight years. Each month, the BLS receives over 100,000 prices from 25,000 reporting companies.

Supplemental Indicator: Commodity Costs

If the PPI is a leading indicator, then commodity costs are the lead-in to the leading indicator. As prices for materials rise, costs for producers rise. These costs tend to get passed down to the consumer, raising both CPI and PCEPI.

By tracking commodity costs, particularly around oil, companies can get a sense of where inflation is headed. However, narrowing the scope to the relevant materials for the business is of course a better gauge of industry-specific inflation. Numerous sources provide commodity cost tracking, including Bloomberg, the St. Louis Federal Reserve and, on a global basis, the IMF. Also, lots of exchanges trade futures for most every commodity used in business. In the US, the Chicago Mercantile Exchange Group comprises the largest set of exchanges including the Chicago Board of Trade and the New York Mercantile Exchange.

Scope

The BLS produces approximately 10,000 PPIs for individual products and groups of products each month, covering about 535 individual industries and over 4,000 specific products. That data is divided into three categories:

Industry Level Classification: Measures the cost of production at an industry level. Published in accordance with the North American Industry Classification System (NAICS).
Commodity Classification: Measures the cost of production based on product similarity, end use or material composition. Industry of origin does not play a role. The classification system used is unique to PPI and publishes more than 3,800 commodity price indexes for goods and about 900 for services.
Commodity-Based Final Demand-Intermediate Demand (FD-ID): Regroups commodity indexes into sub-product classes that look at the buyer of the products. Final demand measures price change for commodities sold for personal consumption, capital investment, government purchases and exports. In contrast, intermediate demand measures the price change for goods, services and construction products sold to businesses as the elements of production.

Calculation

Like the CPI, the PPI uses a modified Laspeyres formula, which compares the base period of revenue for a set of products to the current period revenue for the same set of products.

Mathematicians and economists will delight in the PPI formula:

Ii = [(ΣQOPO (Pi /PO)) / ΣQOPO] x 100

Po shows base year commodity price; Pi is current commodity year price; and Qo is quantity of commodity sold during the base year. Currently, some PPIs have an index base set at 1982 = 100, while the remainder have an index base that corresponds with the month prior to the month that the index was introduced.

Boiled down, the formula divides a representative basket of goods by a base price for the same basket. A result of more than 100 shows how much the price has increased since the base price was set. A number below 100 indicates the price has declined.

Sample items are also weighted by size and importance in two steps. First, individual items are weighted by the producing establishment’s revenue for the product line. Then, when the individual goods and services are combined to create aggregate indexes, the method for weighting can depend on whether they’re classified by industry, commodity or FD-ID. However, the data used to establish weighting comes primarily from the Census Bureau’s Economic Census and are updated every five years.

Population

PPIs are published for the output of almost all industries in the goods-producing sectors of the US economy. While more indexes for the services sector are gradually being introduced, the PPI program currently covers approximately 72% of the service sector’s output, according to the BLS.

Variations

The BLS publishes some seasonally adjusted indexes in addition to the unadjusted versions.

Seasonally adjusted versions include:

All FD-ID indexes
Certain three, four and six-digit commodity classification series, should they show seasonality that is supported by economic rationale Indexes for two-digit commodity groupings and eight-digit individual commodities, as well as industry classified indexes, do not have seasonally adjusted versions.

There is also the Core PPI, which excludes the more volatile components of food and energy.

As noted previously, the PPI only accounts for about 72% of services. It also doesn’t cover imports.

The Employment Cost Index

Overview

To this point, we’ve discussed measures of goods and services, as well as the pricing of both finished goods and materials that go into finished goods, as lagging and leading indicators of inflation. The cost of labor for the sampled goods and services is obviously baked into the prices discovered in creating the indexes. But as every business leader can attest, the effect of labor costs on the price charged is not an efficient factor to analyze. Most businesses do their best to absorb some labor costs, often opting to pay more to fill certain roles instead of raising prices.

That makes the BLS’s Employment Cost Index a very good leading indicator of inflation pressure, particularly now as the available workforce isn’t meeting the demand for workers. BLS provides a detailed explanation of ECI, covering its methodology and scope. The index is formulated to look well beyond hourly rates paid to workers and into benefits that include health care, paid leave, retirement savings, severance, stock plans and more.

The Fed also creates measures that go beyond the BLS’s average hourly earnings (AHE) metrics with its own index called common wage inflation (CWI). CWI shows lower quarter-to-quarter variability and tends to predict wage inflation to be a bit higher than other indexes. CWI is truly a macroeconomic indicator intended for policymakers’ use. For business leaders, that makes it a good index to watch, but likely not as useful as ECI, which shows quarterly fluctuations pertinent to business planning.

Data Source

As the name indicates, collecting data for the Employment Cost Index is a primary function of the BLS. The BLS’s National Compensation Survey is an ongoing effort that involves surveying thousands of organizations about their labor costs in tens of thousands of job categories.

Aggregate indexes like ECI and the related Employer Costs for Employee Compensation are calculated quarterly and released about two months after the subject quarter ended.

Scope

As mentioned, the National Compensation Survey informs BLS data down to fairly precise job titles. Interested in compensation data on accountants and auditors in your area? Find that job category in the Standard Occupational Classification system, and you’ll see that the job code is 13-2011. Put that into the BLS search tool, and you’ll get a number of resources. The top one offers a page of rich information on that job title in various industries and geographies. The challenge is that the data is from 2020, so you’ll need to combine it with other data sources to understand movement in compensation for that job. The BLS releases new data 10-12 months after the date of estimate. So, 2021 data will be released in the spring of 2022.

The State of Play

That other data will be hard to find. Job sites and HR organizations have some, but as it stands, at least now in the US, finding accurate and current salary data is very difficult since that data isn’t regularly disclosed.

The US has seen a shift in practices on salary transparency over the past three years. At one time, discussing pay with colleagues was often forbidden by employers. The National Labor Relations Act made the practice illegal. Now, Colorado, Rhode Island, Connecticut and Nevada are requiring that salary ranges accompany job posting in their states. New York City joined the club in 2022, requiring that postings from any company with more than four employees list a salary range. Other states have laws requiring that employers disclose pay ranges when prospective employees ask.

Informing Strategy

While it would be great to know the movement in compensation for precise job titles over the past year when you’re hiring into vacancies, that level of precision is not always required for planning purposes. You can find BLS employment cost trends data on an industry-by-industry basis, which typically lags by a quarter. The chart below shows the sharp increase in total compensation for hospitality workers in the past 18 months.

The Bottom Line

This bout of inflation will be with us for a while. However, by tracking the right indicators, businesses can take action to battle its effects.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

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Unifying Financials & Inventory

Eva on September 8, 2022

NetSuite

Unifying Financials & Inventory

September 8, 2022
6:51 pm

We have all heard the phrase “cash is king.” It is the mantra most companies live by. It is also why purchasing an application to manage money is usually the first business software investment companies make.

As a starter system, QuickBooks is a logical and economical choice. At a high level, QuickBooks provides the basic functionality any business needs in a financial management system: enabling the management of a company’s chart of accounts, along with a systematic method of managing its relationships with vendors and customers through accounts payable and accounts receivable respectively. Providing this core functionality at a reasonable price point has made QuickBooks the system norm across many industries.

“To run QuickBooks and Fishbowl at the same time is a nightmare for logistics and it’s a nightmare for my accountant.” – WINGTASTIC

However, as innovation evolves faster than ever, heightened customer expectations and increased competition mean manufacturing companies can no longer rely on the business models or business management systems of the past. The reality is that times have changed. The internet has provided a platform upon which to build entirely new business models. Inefficiencies and wasted time on routine tasks, such as the monthly close, are no longer accepted. Business decisions are now driven by key performance data, not historical practices or best guesses. Real-time visibility and insight can now be the difference between thriving and barely surviving.

Though most recognize these changes and the need to innovate to keep pace, companies are reluctant to connect their business systems to that vital innovation. Some are daunted by the task of overhauling existing systems. Others are convinced they will not be able to find a solution that can meet their needs in an affordable way, choosing to instead make do. Those decisions can turn out even more costly in the long run.

Here are four signs that QuickBooks might be failing your business:

It’s too hard to find out what’s happening across your organization in real-time.
Limited visibility into key metrics.
Limited functionality won’t keep pace with modern requirements.
Inability to scale as you expand to multiple locations.

FISHBOWL: AN INVENTORY MANAGEMENT ADD-ON OR A TEMPORARY BAND-AID?

For companies in start-up mode or for those who, despite their growth or maturation, choose to make do with QuickBooks, the next technology investment after financials is most often inventory management.

An Intuit Gold Level partner boasting thousands of customers, Fishbowl is an inventory management add-on solution for QuickBooks users. Claiming to provide advanced inventory capabilities through a seamless integration to the QuickBooks system, Fishbowl has become common across all product industries. However, Fishbowl users quickly realize that an add-on inventory management solution does not make an ERP system.

Here are four signs Fishbowl might be limiting your manufacturing business:

Frequent and time-consuming IT support required for system updates and QuickBooks integration.
Reporting is limited and not in real-time.
Inability to customize the system to your business model.
No supply chain forecasting or budgeting capabilities.

If your company is struggling with these challenges as a result of its QuickBooks and Fishbowl systems, it may be time to consider an integrated business management suite.

NETSUITE: A SUITE APPROACH

NetSuite believes in the power of a unified suite of applications that spans the whole of the business, linking key business processes together on the same platform. A suite approach allows the whole company to view operations as a single version of the truth. Furthermore, predefined roles and dashboards that are oriented around a user’s day-to-day tasks allow for the most efficient consumption of information throughout the entire organization.

Having inventory and financial data on the same platform provides manufacturing companies with a competitive edge with the ability to plan effectively, execute predictably with customers and minimize labor costs and errors associated with manual reconciliation.

THE BENEFITS OF A CLOUD SOLUTION

In addition to our suite approach, NetSuite is a true cloud platform. It is important for companies to understand that a cloud-based vendor doesn’t just offer software, but also a service. This means that NetSuite takes responsibility for not only the software it supplies, but the underlying technical infrastructure needed to access the solution.

That includes the server hardware and database maintenance and administration, document storage, technical upgrades, and the ongoing enhancements customers need. That is an entirely different way of providing a system than what has been traditionally offered where, for all practical purposes, it is the customer’s responsibility to upkeep their systems on an infrastructure they must initially purchase, but also maintain.

A vendor offering Software-as-a-Service is on the hook for all aspects of that service, which in turn means the vendor must continuously earn the trust of its buyers, backed by meaningful service level agreements. It doesn’t serve a modern cloud provider’s interests to do anything other than assure customer success. That is a win-win in anyone’s book, but again, fundamentally different than the old way of acquiring and using software.

A well-implemented cloud-based system means that financial activities appear as soon as they are triggered. That, coupled with ‘anywhere-anytime’ access means that decision makers can quickly act upon both adverse and favorable performance indicators. In that sense, decision-making becomes an activity where those tasked with executing on the company’s goals and strategy are able to do so with information that is akin to looking through the front windshield of a car, rather than constantly worrying about what is in the rearview mirror.

The combination of these demonstrable benefits means that a well-executed move to cloud results in a much better and predictable cost of operation than is possible with on-premise systems.

LEADING COMPANIES HAVE MADE THE SWITCH TO NETSUITE— WILL YOU?

Industry leading manufacturers are making the move from QuickBooks and Fishbowl to NetSuite and are seeing demonstrable benefits as a result.

For example, in 2017, Ron Dickison aka “Rockin’ Ronnie,” a professional drummer for 40 years and a serial entrepreneur with nine companies to his name, was determined not to make the same mistake with Wingtastic, a wing nut manufacturer, that he did with a previous company. The QuickBooks and Fishbowl systems he used at this lighting company led to logistics nightmares and expensive accounting services. A rigorous inspection of more than 30 different software evaluations led Dickison to NetSuite. Its ability to get up and running quickly to support Wingtastic but also continue to meet the company’s needs as it grew made NetSuite the top choice.

“Every day I have to deal with stuff in my business— factories, customers, suppliers. NetSuite is just in the background doing what I need so I don’t have to worry about it.”- WINGTASTIC

With NetSuite in place managing Wingtastic’s financials and inventory, Dickison is now focusing on adding new Wingtastic products to the mix. In the near future, he has plans to extend NetSuite’s cloud ERP to support 3,000 SKUs at his lighting company and to provide a unified view of all operations at three new ventures he’s launching.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

The Business Alignment Model: How to Make it Work for Your Company In 2023

June 21, 2023

In the early stages of a company, a common pitfall is a vague or ambiguous mission. A plethora of ideas, initiatives, and projects can pull

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Easing the Pain of Physical Inventory Counts

Eva on September 8, 2022

NetSuite

Easing the Pain of Physical Inventory Counts

September 8, 2022
5:19 pm

A Practical Guide to Physical Inventory Counting and Cycle Counting.

Every company that buys, sells and/or uses physical products deals with the pains of keeping accurate inventory records. The recent uptick in ecommerce sales, evolving customer preferences and unanticipated supply chain disruptions have converged to make inventory counts especially critical for manufacturers, distributors, wholesalers, retailers and ecommerce companies.

Inventory counts are an integral part of any organization’s internal control environment and tend to be an all-hands-on-deck, manually-intensive affair that take place once a year. The process often extends a week or more, requires operational shutdowns and interrupts fulfillment processes as employees work to count one of the business’ most valuable assets: its physical inventory.

In order to make accurate budgeting, operating and financial decisions, managers and other stakeholders need accurate inventory count data to work with. Publicly-traded companies, for example, must ensure their financial reports are accurate. That means auditors and corporations must perform physical inventory checks before the last day of the company’s fiscal year.

Physical inventory counts are conducted manually, and are therefore both time-consuming and error-prone. When someone has to physically touch or scan inventory during the put-away, inventory check or pick processes, for example, errors are bound to surface. Finding, counting and recording each item is time consuming enough, but the fact that those items might be stored in multiple places throughout the warehouse or storeroom adds even more time to the process. Even when the physical count is completed, rectifying any discrepancies, figuring out what went wrong and then implementing procedures to avoid repeat mistakes takes even more time.

While physical inventory counts are a necessary evil, they needn’t be so significant a burden. This white paper will explore the key inventory count challenges that companies are dealing with now, show how regular, scheduled cycle counting year-round can ease these pains, and discuss how a unified, cloud enterprise resource planning (ERP) solution enables high inventory accuracy year-round.

Why Companies Need Physical Inventory Counts

Any company with a product-centric supply chain likely has anywhere from 20% to 30% of its assets tied up in inventory holding costs (depending on the specific industry). Those holding costs include not only the value of the products themselves, but also the cost of warehousing, controlling and insuring those goods. Ineffective inventory control processes can inflate this percentage, but good inventory management processes can help to minimize these costs.

Physical inventory counts are an essential part of keeping inventory records accurate and current.

Up-to-date inventory records provide for better forecasts of sales and purchases and ensure that organizations have the right amount of product on hand to be able to fulfill customer orders, make their own products or both.

Performing a physical inventory count ultimately benefits customers who don’t want to deal with uncertain stock levels in this era of instant gratification. With updated inventory data in hand, companies can fulfill orders promptly, replenish as needed and avoid costly overstock situations. They can also more effectively plan for losses (i.e. due to theft or breakage).

Every day that an item remains in inventory, its value decreases. Over time, the cost to stock the item begins to outweigh its actual value. By using scanners (or other stock-counting technology tools), immediately addressing inventory discrepancies and using inventory management software, companies can improve their counting accuracy and significantly reduce the amount of time required to conduct this vital project.

Other important reasons to perform regular inventory counts include:

To check and balance inventory levels. The physical inventory counts, which serve as a check and balance on cycle counting, help managers identify any discrepancies between cycle count reports and what items are actually in storage.
For theft monitoring and management. The difference between what appears in the inventory management system and what is present can be due to missing, stolen or broken items. Unless staff manually enter the items when these scenarios occur, the system can’t recognize them.
To develop an accurate business budget. Companies with precise inventory counts can better plan their budget for the coming year’s orders.
For accurate earnings reports. Inaccurate inventory means a company will report an incorrect amount for the cost of goods sold, the gross profit and net income. Public companies are accountable for providing correct figures in their annual reporting to their stakeholders.

Challenges With Physical Inventory Counts

Tracking the volume of goods purchased and sold is straightforward in theory but not always easy to master. It also includes inventory turnover rates and actual product purchase costs, both of which can inflate a company’s total inventory investment. Organizations must have enough inventory on hand—and in the right locations—to be able to meet demand while avoiding both stockout and overstock situations.

The biggest headaches of physical inventory counting include the need to manually count inventory—a process that typically requires paper count cards, sheets and pencils. What’s more, some businesses may have limited staff and may need to bring in temporary or part time staff to help deal with the count, adding people unfamiliar with the business and driving up costs. While the required materials may be cheap enough, this approach takes a lot of time, introduces errors and requires a shutdown of the physical facility. Companies can reduce some of this complexity by adding RFID, barcodes or mobile devices to the mix, but even the electronic approach to physical inventory counting requires additional time and resources to complete and is not entirely error free.

And, if not done properly, physical inventory counting not only eats up time, it can introduce errors. Once they’re transferred to the company’s annual financial report and other important statements, these errors can impact the organization’s bottom-line profitability and cast doubt over its stated financial results.

Comparing the Inventorying Options

Businesses usually perform their annual physical inventory count before compiling their annual financial reports, but the problem is that performing an inventory count once a year doesn’t always yield the most accurate results. The best way to ease the pain of physical counts is by conducting regular, scheduled cycle counting throughout the year and at predetermined frequencies. These counts can be conducted manually or electronically, using cycle counting or by conducting a full inventory count.

What is Cycle Counting?

Physical counts can’t be avoided, but there are ways to offset the burden of this annual exercise while saving companies time and allowing them to allocate labor resources to more important tasks. One way businesses can ease the pain of physical inventory counts is by using a process known as cycle counting. Cycle counting is systematic method for counting portions of a company’s stock. As an inventory management option, cycle counting focuses on counting items in a designated area of the warehouse without stopping operations to perform a complete physical inventory. Because of this, cycle counting has become a popular inventory management strategy for companies across all industries. It is often automated and performed at least once per quarter.

Benefits of Cycle Counting

With cycle counting, issues can be identified and addressed quickly as they surface, versus just once a year during (or after) a physical inventory count. This helps organizations significantly reduce the amount of time spent on those annual counts—a major competitive advantage in an environment where customers expect orders to ship same-day and arrive within shorter and shorter timeframes.

Businesses that automate cycle counting typically drive faster, more accurate counting. Using RFID and barcodes, for example, is much easier than jotting down stock numbers and/or scanning inventory sheets to find the right item number. Other key benefits of automation include simplified shipping and receiving processes, better visibility over on-hand inventory, better management of missing or stolen merchandise and overall improved inventory management (i.e. less need for “just in case” overstock since your current inventory levels are always right at your fingertips).

Other key benefits of cycle counting include:

Higher order fulfillment rates
Better customer service levels
More accurate inventory assessments
Higher sales
More time between physical counts
Fewer errors
Less inventory write-offs and obsolescent inventory
A more efficient operation overall
Possible elimination of annual counts
Improvement of the closing process
Decreased audit fees
No employee overtime costs
Ability to quickly detect product thefts

Adopting Perpetual Inventory Systems to Limit Freezes and Shutdowns

Companies with large amounts of stock (e.g. wholesalers, distributors nd that “freezing” stock in order to count inventory to be quite disruptive. As a supplement to these annual inventory counts, organizations can implement perpetual inventory systems that both appease their auditors and effectively reconcile their inventory numbers. While it doesn’t remove the need for a physical inventory county entirely, perpetual inventory systems use point of sale devices and scanners to record inventory changes in real time, making the physical count far simpler. This is important because the operation that shuts down completely for a week in order to count its inventory can find itself behind the competitive curve when it gets back up and running.

Which Industries Need Inventory Counting?

Retailers, manufacturers, wholesale distributors and ecommerce companies all have to count their inventory. Whether they use full, annual inventory counts or cycle counting, even companies with small amounts of stock need to know how much they have, which SKUs are languishing on the shelves and which ones need more frequent replenishment.

For example, stock-heavy companies like distributors would benefit from a perpetual inventory system that not only appeases their auditors, but also ensures products are in the right place, and at the right time, when companies need them. Where a periodic inventory system relies on occasional physical counts, a perpetual system continuously tracks inventory balances and automatically updates inventory records when items are sold or received.

An apparel company that has to accommodate frequent consumer preference shifts also needs a robust inventory counting approach, lest it get stuck with too many of “last season’s” garments. Using an upgraded inventory management system, apparel companies can make faster changes to their product mix, track the movements of new items and create space for them on the warehouse or retail floor.

Food and beverage companies and restaurant operators also need good physical counting processes. Dealing with a high volume of perishable goods, these companies have to take regular stock of the goods that are sitting in storerooms and warehouses—specifically those items whose shelf life may be coming down to the wire and ready to spoil.

Cycle Counting Best Practices

Even the most organized companies can run into inventory cycle counting challenges. For example, they might unknowingly introduce inventory errors when dealing with multiple locations, or run into issues like paperwork lags and outstanding transactions. When they’re not updated in real time, the counts can also generate false variances that will need to be addressed. To avoid these challenges, companies should clearly define their process, track their inventory accuracy and then aspire to a high degree of accuracy during the process.

When developing a cycle counting program, companies should factor in these three main inputs:

Number of SKUs. Determine how many products or stock-keeping units you want to count at a time. Base what you choose to count on your overall number of SKUs, the number of high-value products, and what is reasonable to count in intervals.
Available counting resources. Determine the number of available employees and how much time they can dedicate to counting stock. For example, some companies suggest employees use the time before shift end to count SKUs in their assigned areas. This timing takes advantage of the natural lull in employee productivity with relatively easy work. These employees should not have a stake in the accuracy of the numbers
Counting Frequency. How often you count inventory depends on how many SKUs you want to cycle count in the year. For example, if you wish to count 1,000 SKUs per year, then count 83 per month, 21 per week and three per day, assuming you are only counting each SKU once annually. You may want to count high-value items more often, and don’t forget to factor in the time it will take for counters to record their daily SKUs.

With these inputs in place, companies can use these best practices to create a successful cycle counting approach:

Close all transactions for inventory items before the cycle count.
If using the ABC method—whereby companies classify inventory items based on the items’ consumption values—be sure to classify those items into the respective counting groups using specified, documented processes.
Count all products for all SKUs listed.
Decide what to count when. For example, it may make sense to count items that are of a high-value or that move quickly through the warehouse weekly. Count all other stock quarterly.
Identify the fastest moving items in the warehouse. Mark them as fastest to slowest to figure out how to classify items for future counts.
Dedicate specific personnel to counting teams, and ensure that those teams count all products at least once quarterly.
Immediately investigate any errors or discrepancies that may crop up (don’t wait until the end of the year to deal with these issues).
At least initially, perform counts twice to ensure that the numbers are correct, and have a supervisor check the counts against the inventory in the system.
Document everything, including the process itself, the changes and the results.

While physical counting once a year may seem like a viable option, cycle counting is less disruptive, provides more visibility into stock daily and can ease the stress of the physical count. By combining an inventory management system and warehouse management system (WMS) with regular cycle counts, organizations benefit from more accurate inventory levels, automatic prompts for items that need to be counted, the ability to categorize items based on volumes or value, improved quality assurance, and higher customer satisfaction rates.

Ready, Set, Go!

Counting inventory is a requirement for doing business. Regardless of how effective their replenishment, tracking and management systems are, companies must conduct regular checks of actual inventory levels for key items. Keeping an accurate item count can help reduce required safety stock, lower overhead costs and give companies more control over their assets.

Thanks to advanced technology, physical inventory counts have become easier, less intrusive and require less manpower. By replacing Excel spreadsheets or other manual inventory control systems with inventory control software, companies can more efficiently track their stock while reducing human error and saving time and money.

Using an inventory management system also ensures that companies always have the right amount of stock at the right locations to meet customer demand. NetSuite’s inventory and warehouse management solution helps inventory managers track and locate stock at a moment’s notice. The system also includes features such as artificial intelligence (AI), vendor managed inventory (VMI) and mobile device integration. The cloud ERP platform’s inventory count feature, for example, improves inventory tracking and provides increased control over key assets. It also allows companies to categorize inventory based on the volume of transactions and/or value, and enter regular periodic counts of on-hand item quantities to maintain inventory accuracy.

With its standard functionality, NetSuite not only helps organizations gain better control of their inventory, but it also extends those activities to its warehouse management solution (WMS) and mobile radio frequency (RF) devices.

With the mobile app, users can scan bins and items, automatically recording the cycle counts without leaving the floor. This makes auditing inventory less intrusive to daily work and reduces manual errors due to incorrect keying and lag time.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

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7 Ways Cloud ERP Helps Organizations Build Resilience and Agility

Eva on September 8, 2022

NetSuite

7 Ways Cloud ERP Helps Organizations Build Resilience and Agility

September 8, 2022
4:46 pm

Delivering organizational visibility, mission- critical data on a single platform and supporting collaboration across remote workforces, cloud enterprise resource planning platforms help companies make quick decisions in today’s unpredictable business environment.

When an unprecedented 10-year economic expansion came to a grinding halt in early 2020, a lot of companies were left scrambling to adjust their business processes, workforces and supply chains. Disruptive forces like trade wars, Brexit, global labor shortages and rising tariffs were already impacting multiple industries before COVID-19.

Yet, it doesn’t take a global pandemic to turn a company on its head and force it to rethink its business model, processes and the technology that supports its operations. Supply chain interruptions, catastrophic weather events and natural disasters can all exact a toll on organizational productivity and profitability.

In other words, companies can’t afford to get complacent about their business strategies. This white paper explores the key challenges that organizations are confronting right now and shows how a cloud enterprise resource planning (ERP) system can help them transform their companies into resilient organizations that can weather any storm.

Uncertainty is the Nature of Business

As you sit in the cockpit of your business, turbulent winds and unpredictable conditions are forcing quick and precise decisions that challenge your team’s collective wisdom and experience. Uncertainty is, after all, the nature of business. For example, a company may be expanding rapidly or facing market contractions; experiencing social, consumer and demographic shifts; traversing government regulations; or managing another force that promises to reshape its entire business landscape.

These shifts have been especially difficult for companies forced to rely on aging technology, poorly-integrated systems or software that doesn’t fully support their operations. Businesses with entry level accounting, spreadsheets and other point solutions likely spend valuable time and resources entering, aggregating and analyzing data with cumbersome manual processes. Companies running an older, on-premises ERP system are likely paying high annual software maintenance costs and in house IT salaries, but don’t even have access to the latest features and functionalities. That’s because most on-premises ERP vendors also have cloud offerings, the latter of which consume most of their R&D dollars and efforts. As a result, older ERP systems aren’t getting the same level of enhancement and modernization that their cloudbased counterparts receive.

Meanwhile, businesses running on-premises ERP systems are often reluctant to undertake upgrades because the disruption caused by broken integrations and customizations being overwritten, combined with the added demands on IT, mean the costs outweigh the benefits. With fewer resources to devote to enhancements and businesses reluctant to perform upgrades, users are left to their own devices to figure out how to achieve their strategic objectives with aging technology. These gaps may be hidden during prosperous economic times, when everyone is happy with their company’s performance and things are going well but come to the surface pretty quickly when disruption rears its head and begins to impact the bottom line.

For example, when mandatory office closings and shelter-in-place orders forced people to work from home, companies scrambled to find ways to support their suddenly-remote employees.

Those using traditional, on-premises software faced the greatest challenge, as demand for remote access to these systems put a strain on network capacity, introduced new security concerns and created a need for better access controls. Sluggish system performance and lack of effective collaboration tools led to a decline in productivity, as completing tasks that were relatively easy to perform while in the office became much more difficult. Lack of integrated solutions and difficulty penetrating departmental data silos made it harder to know what was happening in the business right when companies needed visibility the most. Cloud ERP overcomes these issues by allowing remote users to access the functionality and data they need to do their jobs from anywhere with an internet connection.

7 Ways ERP Helps Organizations Build Resilience and Agility

Meeting the challenges posed by economic upheaval, political instability, natural disasters and other disruptive events isn’t easy. Companies that succeed in these conditions, those that are able to adapt when others can’t, have built-in resilience. They have the ability to innovate new products and services quickly, modify business processes—or their entire business model—and respond to new opportunities as they emerge. These organizations recognize the importance of supporting their customers and team members during a crisis, communicating with stakeholders, and making decisions based on the most accurate, up-to-date information available.

While operating effectively in dynamic situations takes leadership, management ability and the right corporate culture, it also requires systems that provide a solid foundation and have the flexibility to adjust as business needs change.

By putting finance and accounting, customer service, procurement, inventory, supply chain management, warehouse management and order fulfillment on a single platform, ERP unifies core business operations, improves internal controls and enhances visibility into organizational performance.

Here’s how these capabilities help support more intelligent, resilient organizations and why companies need to begin evaluating their need for ERP now rather than later:

Enables remote workforce management and collaboration.

The shift to remote work was already underway when the coronavirus pandemic forced a rapid acceleration of those plans for many businesses. With state and local shutdowns looming, companies had to quickly find ways to transition their workforces to comply with stay-at-home rules. Reality hit hard when organizations began to have difficulty managing critical process with a remote workforce. Closing the books is just one example. Companies using basic accounting software, like QuickBooks, or an outdated ERP system, learned quickly that their standard approach wasn’t feasible with the entire accounting team working from home.

Using NetSuite’s cloud ERP, the same accounting team can confidently review the data, make any changes and close the books remotely without having to be in the same physical location. The system’s checklist functionality lets users know exactly what steps need to be taken and ensures a smooth close process.

Complies with accounting standards and regulatory requirements.

Complying with changing rules and regulations is a major headache for both public and private companies. Recent revisions to Generally Accepted Accounting Principles (GAAP) have pushed many organizations to reconsider processes typically handled with spreadsheets. Both ASC 606, the new GAAP standard for revenue recognition, and ASC 842, which changes the way companies report lease-related expenses, are already impacting public companies and will take effect for private companies soon.

Focused on eliminating off-balance sheet operating leases, the new lease accounting rules require companies to have leases lasting 12 months or longer listed on their balance sheets. This creates complications for companies that now must separate out the presumed interest expense of the asset and the lease expense and amortize them over the duration of the lease. Managing this process in a spreadsheet risks data integrity and data entry issues when moving that data into an accounting system. Modern ERP systems can factor in all of the variables and automate the process.

New revenue recognition rules present similar challenges and require companies to recognize revenue in a consistent manner, based on achieving defined performance objectives. This is something older accounting systems and older, on-premises systems weren’t set up to handle.

Cloud ERP solutions receive regular feature and capability updates that are automatically passed on to the user and can better handle these types of changes to accounting rules than older on-premises systems or entry-level accounting software, which typically issue less frequent updates. The potential for new rules and regulations always exist, but over the next several years as the global economy weaves and adapts, organizations should prepare for the possibility of greater regulation. Cloud-based ERP systems offer a clearer pathway to adapting to the new regulations.

Gives all organizational departments a unified and accurate picture of the business.

As companies evolve, they tend to purchase software as a need arises. This leaves them with multiple systems from different vendors, each designed to perform a specific function or support a single department. Without complex and costly integrations, the data in those systems can only be accessed by a limited group of people. When critical information about customers, orders, inventory, capacity and more is spread across multiple solutions, aggregating it for analysis and decision-making is complicated and time-consuming.

Also, it’s nearly impossible to get a complete picture of what’s happening in the business. Turf battles often emerge over who has the more accurate data set. As a result, teams can’t work together efficiently, and both productivity and profitability suffer. For example, if sales wants to promote a product but leadership can’t see that there isn’t enough inventory to support the promotion, then orders will go unfilled and customers will be unhappy.

Cloud ERP solutions provide accurate, real-time data that helps teams collaborate more effectively. Using real-time inventory data, sales and marketing can develop promotions for products that are actually in stock, leading to increased revenue and happier customers.

Drives quick reaction times.

Companies that are using disparate systems can’t react fast enough to changes in their environments. With a unified system, reports deliver insights in real-time Businesses with disparate systems often rely on IT or finance teams to gather and produce reports, which is often outdated by the time leadership sees it. Modern ERP systems feature rolebased dashboards that give employees immediate access to the data they need to do their jobs and the ability to drill down for further analysis without the need to call on IT for support. As a result, employees can make more informed, faster decisions and take advantage of new opportunities or realize and correct inefficiencies.

Reduces operational risk.

Without proper accounting and procurement controls in place, organizations can easily fall prey to dishonest practices, including the abuse of power by employees or struggle to provide accurate details to investors, auditors or regulatory agencies. ERP helps limit these risks by embedding approval workflows into procurement, accounts payable and other financial processes, as well as by controlling access to system features and data based on user roles and individual permissions.

Tracks unit economics, customer and project profitability.

A measure of profitability on a per-unit basis, unit economics are helping companies manage the current economic uncertainty while also helping them prepare for future success. Through a process of regularly evaluating the direct revenues and costs on a per-unit basis, unit economics help companies understand the profitability potential of product lines and adjust accordingly. Without integrated systems, manufacturers struggle to accurately answer these questions and determine how many resource are being allocated to product X versus product Y— visibility gaps that can impact margins.

Using cloud ERP, companies have the visibility they need to know which products are posting positive versus negative margins and make projections around business development and profitability.

Similarly, without a unified system that tracks customer and financial data, businesses can struggle to determine who their most profitable customers are. Customer profitability requires insight into data across areas like average order volume, discounting and customer service requirements, which only a unified ERP system can provide.

Many services-based businesses also struggle to accurately quantify project profitability. An ERP system with a professional services automation component allows a business to allocate staff to projects based on their skill sets and project requirements, minimizing “bench time” for consultants and delivering the greatest profitability.

Helps companies scale and adapt.

Companies that initially rely on QuickBooks, spreadsheets or another basic accounting system generally outgrow those solutions as they scale and add complexity. When these organizations open additional locations, add subsidiaries and/or start handling multiple currencies, the need for a more robust, enterprise system increases exponentially. Additionally, any attempt to venture into new lines of business, such as services or new products demands the visibility and adaptability that ERP provides.

While smaller firms may be able to run on basic systems and spreadsheets, those that adopt cloud ERP not only improve their existing business management processes, they’re also well positioned to scale up in the future.

Is Your Company Prepared to Navigate the Unknown?

Companies that continue to rely on spreadsheets, poorly-integrated best-of-breed software and/or on-premises ERP to manage their operations face an uphill battle to overcome today’s business challenges.

ERP has come a long way in the nearly three decades since the term was originally coined. Used mostly by large corporations, early systems required significant customization and took years to implement. The cloud has put the power of ERP into the hands of startup, midsized and large companies that need all of the benefits outlined in this white paper

The cloud not only makes ERP more affordable, but also makes the systems easier to implement and manage. Cloud ERP also provides high levels of visibility into processes and performance with anytime, anywhere access to tools and data.

It makes it easier for companies to scale or add functionality as they scale and new business opportunities arise, lowers operating costs, and minimizes the need for upfront capital expenditures and dedicated IT resources.

By making data readily available, automating core processes and ensuring proper controls, ERP solutions allow business leaders to react more quickly to changing conditions. Instead of getting bogged down by manual tasks or a lack of information, they can focus on improving the business, leading to faster, more informed decisions and a more agile organization.

With a cloud ERP solution, both remote and onsite employees have accurate information that enables them to analyze data, spot trends and make better decisions faster. This is critical for identifying new opportunities and getting ahead of the competition. Not only that, but ERP helps eliminate time-consuming, repetitive tasks, dramatically lowers the cost of doing business and allows team members to spend more time on strategic initiatives.

Want to know more?

Our experts are more than happy to listen to your enquires and provide you with the information you need.

Book a consultation

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The 15 Customer Success Metrics That Actually Matter

Eva on September 6, 2022

NetSuite

The 15 Customer Success Metrics That Actually Matter

September 6, 2022
7:34 pm

How many tickets are reps closing? How many emails are they sending? How many product demos have they booked? These metrics help managers determine whether a rep was doing their job well or falling short. But what if instead of tracking activity, we measured something totally different?

The old customer success playbook is no longer enough to keep customers happy and coming back. An entirely new school of thought is emerging. It’s one that’s focused less on making the maximum amount of calls or closing as many tickets as possible, and more on developing, maintaining, and strengthening relationships with customers.

And this means measuring success is changing, too. Here are some customer success metrics that will matter more than ever this year — and in years to come.

1. Customer Health Score

This might sound obvious, but hear me out: You’ve got to look at the big picture — beyond just individual tickets and emails. Are customers actually seeing value from your product or service?

How often is your customer using the product? How successful is your customer after they purchase your product? What type of impact does it have on their business? Has their pain point been eliminated?

Customer support is no longer about getting someone to sign on the dotted line, setting up their new service, and answering their emails and calls. Instead, reps need to ensure that their customers are not only surviving but thriving after their purchase. They must follow up with clients, offer assistance with problems, and help them proactively strategize for the future.

As Forrester’s Kate Leggett points out in a blog post, customer success is the driving force behind increasing existing revenue and influencing new sales. One customer’s success can prompt another person to try your product or service in hopes of attaining a similar, successful outcome … but this virtuous cycle only happens when you actively foster and track customer success.

How to Calculate Customer Health Score

To measure customer success, formulate a customer “health” score. What do their finances look like? How many customers do they have? Get a handle on their business’ health as it pertains to your product, then monitor the metric over time.

You can develop a customer health score by compiling all of these factors and using an index as the actual score metric to keep things consistent and easy to track.

You can also measure your customers’ growth. After all, the best sign of business success is growth. Ask if the company is hiring, taking on more business, or improving customer retention rates for a qualitative idea of how successful a customer is becoming.

2. Net Promoter Score

Customer satisfaction is not only about the customer’s feelings towards the support rep, but also about their feelings towards the brand and the product itself. When you measure customer satisfaction, you’re determining how content your customers are when they’re interacting with your business. It should be no surprise that customers who are happier with their experience will be more likely to make repeat purchases.

One of the more popular ways to measure customer satisfaction is through Net Promoter Score. A Net Promoter Score, or NPS®, simply asks whether someone is likely to recommend your company to someone else. The rep and their relationship with the customer play a major role in this rating because they’re probably the person the customer has interacted with most frequently.

The benefit of an NPS is that it provides both quantitative and qualitative data about your customers. Not only does it ask participants to rate their experience on a numeric scale, but it also asks them to provide an explanation for their score. That way, your business can analyze feedback based on the scores, then examine the customer experiences if you come across abnormal or outlying results.

How to Measure Net Promoter Score

Measuring NPS is relatively easy. You just need access to a form tool that can generate a rating scale response.

Your eNPS survey form should only ask one question, “On a scale of 1 to 10, how likely are you to recommend this product or service?” Then, add an open-ended section below it and ask participants to explain their score.

At the end, your form should look something like this.

Two-Step-in-app-NPS-Survey

Image Source

3. Qualitative Customer Feedback

Another important thing to measure is your customers’ feedback. What are they saying about you and the service you provide? What do they like about their connection to the company, and what do they dislike?

Customers need to feel that they have a voice. Offering them a chance to give feedback and provide insights is a great way to build a long-lasting and meaningful relationship.

Customer success managers can determine from qualitative feedback — like a survey responses — how well their reps are working with clients. It might be unpleasant to hear where your onboarding or customer service process is failing, but getting the chance to right a wrong before a customer jumps ship is invaluable.

How to Calculate Qualitative Customer Feedback

The simplest way to collect customer feedback is to send out a survey. Pose a few questions to your customer base and determine how they feel about your customer support reps.

You could also hold a “customer day.” Invite some folks to your office or headquarters for lunch or a meeting, and talk to them one-on-one. Note their facial expressions and body language when they reflect on the service they receive and how they would improve their experience.

Remember: Customer feedback shouldn’t be solely about the product — it should also cover how clients feel about the brand and company, as a whole.

4. Customer Churn Rate

Customer churn is a great metric to measure, especially on a rep-to-rep basis. A customer support rep who maintains a healthy relationship with their clients is likely to have a lower churn or cancellation rate. After all, customer support is about relationships, and building rapport makes a huge difference.

How to Calculate Customer Churn Rate

customer churn rate formula

To calculate churn rate, follow these steps:

Step 1: First, determine the timeframe that you’ll consider when measuring your data. This can be a week, month, quarter, year, etc.

Step 2: Next, determine how many existing customers there were at the start of this time period as well as the number of customers that churned during the same timeframe.

Step 3: Finally, divide the number of churned customers by the total number of existing customers to find your churn rate.

For example, let’s say we wanted to measure the monthly churn rate for my business. At the start of May, I had 1,000 customers, but by the end of the month, 64 customers churned. In this case, my churn rate for May would be 6.4% (64/1000=.064=6.4%).

When measuring churn rate, remember to exclude the new customers that you acquired during the month from your existing total. These customers will count towards your existing customer total during the next assessment that you perform.

Additionally, be sure to include any new customers who did churn during the time period with your overall churn total. Since the churn for these customers occurred during the assessment period, you should include them when measuring for churn rate.

5. Monthly Recurring Revenue

Monthly recurring revenue, or MRR, is a great metric to use to determine how much your customer base — or their spending — have grown since working with your business. This metric outlines the amount of money that your customers are spending on your products and services for each given month. You can compare this value over time to determine whether your customers are succeeding with your products or not. This is particularly helpful for SaaS businesses that operate on a subscription model.

One additional MRR metric that can be calculated is your expansion MRR. Expansion MRR shows you how much additional revenue you’re generating from customers outside of their monthly subscriptions. This can give you a good idea of how effective your upgrades and customer loyalty programs are.

How to Calculate Monthly Recurring Revenue

To calculate monthly recurring revenue, you just need to multiply your total number of monthly active customers by your average revenue per user. This should give you an idea of how much money you’re generating each month.

For example, if I have 1,000 monthly active customers and my average revenue per customer is $750, my monthly recurring revenue would be $750,000 ($1,000 x $750 = $750,000 MRR).

To calculate expansion MRR, you’ll need to add up all revenue that was generated from non-recurring purchases. These would be things like upsells and cross-sells, loyalty programs, and add-on purchases that are made by customers on a one-off basis.

By adding these values together, you see how much your customers are actually spending on your premium offers. If you’re doing well, then you know that customers are not only enjoying your product or service but are thriving because of it.

6. Customer Lifetime Value

Customer lifetime value (CLV) is one of the most fundamental customer success metrics that you can measure for your business. It shows you the total revenue that you can expect a single customer to generate over the course of their relationship with your company.

Businesses can use CLV to determine the value of their customers over time. If their value increases, then your company knows that your products and services are contributing to your customers’ success. If it’s decreasing, then your business may need to re-evaluate its offers and look for flaws in the customer experience.

How to Calculate Customer Lifetime Value

CLV takes a customer’s revenue value and compares that number to the customer’s predicted lifespan. It can be calculated in two steps.

Step 1: Multiply your average purchase value by your average purchase frequency rate.

Step 2: Take that value and multiply it by your average customer lifespan. This should leave you with the estimated amount of revenue that one customer will spend on your business.

Let’s say my customers spend an average of $50 every time they shop at my store. My customers also visit my store about 3 times every month. Additionally, my average customer lifespan is typically two years before they stop purchasing from my stores. From this we can determine that my CLV is $3,600 ($50 x 3 visits x 24 months=$3,600).

7. Customer Retention Cost

While it’s great to know that your customers are succeeding with your brand, how can you prove that your customer success efforts are cost-effective? Customer retention cost, or CRC, outlines the total cost of your customer success program and compares it to your total number of customers. This shows you how much money you are spending on each customer to retain them.

CRC helps businesses invest in their customer success programs. While you may be excited to roll out new initiatives, you want to make sure that you’re spending your money in a cost-effective way. By measuring CRC, your business can make smart investment calls by comparing the potential cost of retaining customers versus the potential revenue you’ll generate from a new feature or service.

How to Calculate Customer Retention Cost

To calculate CRC, you’ll need to audit the expenses of all of your customer success efforts. This includes expenses spent on payroll for your customer success and service teams, engagement and adoption programs, professional services and training, and customer marketing.

Once you add all of these expenses up into one sum, you can divide that value by your total number of customers to get your average customer retention cost (sum of all expenses / total number of customers = average customer retention cost).

8. Customer Effort Score

How difficult is it for your customers to get help? As customers ourselves, we understand the frustrations that come with navigating through pre-recorded menu options, repeating ourselves as we’re transferred from agent to agent, and struggling to find a contact option in the first place. In fact, 96% of customers who are faced with these types of high-effort experiences report being disloyal in the future.

So how can you ensure your customer support team isn’t unintentionally creating these barriers that frustrate customers and ultimately make them disloyal to your business?

You can measure customer effort score (CES) to measure how easy it is for your customers to get the help they want and need. The metric also helps you predict customer loyalty — Gartner found that CES is 40% more effective at predicting customer loyalty than customer satisfaction.

CES is measured by surveying customers, often once their issue is resolved. Here’s an example:

By tracking CES, you can determine where you’re unintentionally making things difficult for your customers and adjust as needed to make it easier for them to get support. As a result, you’ll create delightful customer experiences that increase loyalty.

9. First Contact Resolution Rate

One of the most common customer needs is time. Customers want their problems resolved quickly, so they can get back to pursuing their goals. If they’re constantly waiting for your support team, this adds a great deal of friction to the customer experience.

With this in mind, it’s important to measure your first contact resolution rate. This is the percentage of customer service cases that are resolved within the first interaction. If this number is high, that means your team is not only responding to customers but addressing their needs promptly as well.

How to Measure First Contact Resolution Rate

To calculate first contact resolution rate, you’ll need to divide the number of service tickets that are closed after the first interaction by the total number of service cases your team received.

To do this, you’ll need customer service tools to help you keep track of your incoming cases. For example, a ticketing system can set up digital records of your cases that are easily categorized and stored. And, a help desk can provide the reporting tools you need to calculate first contact resolution rate without having to manually crunch the numbers.

10. Customer Satisfaction Score

Customer satisfaction score, or CSAT, is similar to NPS, but it has one major difference. Instead of asking participants to rate their likelihood of recommending the brand to others, CSAT asks them to simply rate their experience with the company. This gives businesses a snapshot idea of how customers feel after completing an interaction with the support or success team.

How to Measure Customer Satisfaction Score

Like NPS, customer satisfaction score requires a survey to measure it. But, you’ll need to trigger this survey after a customer interaction, so you can get the most accurate response from your participant. Remember, this metric should analyze the customer’s immediate reaction to an individual experience, not their overall perception of your brand.

Step 1: Once you have your form set up, you can calculate CSAT by dividing the number of positive scores (scores six to 10) by the total number of scores you captured.

Step 2: Then, if you multiply your result by 100, you’ll have the percentage of customers who are happy with their brand experience.

For example, if we received 50 responses and 40 of them were positive, then our CSAT would be 80% (40/50 = .80 x 100 = 80%).

11. Renewal Rate

If you’re a SaaS business, this may be one of your most important metrics. After all, most SaaS businesses operate on a subscription model, so it’s no wonder that customer success would be determined by the number of people who keep signing up and using your product.

If your renewal rate is high, this means that your team or product is succeeding in driving customer success. So much so, that customers are willing to commit to your business for another year/contract so they can continue gaining benefits from your company.

If your renewal rate is low, this is an excellent indicator that customers aren’t succeeding when using your product. This presents an opportunity for you to invest in customer success programs as well as product development, to create a more delightful, long-term experience for your users.

How to Measure Renewal Rate

Renewal rate can be calculated like this:

Step 1: Divide the number of customers who renewed their subscription by the number of users who were up for renewal.

Step 2: Multiply your result by 100 to determine your renewal rate.

If you’re not a SaaS company, you can look at product expiration dates. Use your CRM to see when a customer bought a product, then set a reminder to review the customer’s account when their product should be replaced. If they purchased from you again, you know they “renewed” with your business.

Instead of making calls for the sake of making calls, customer support reps are instead turning their attention to relationships and what happens after they make a sale. The metrics that matter have shifted, and the customer success organization is adjusting accordingly. These metrics are worth watching as you help your customer success team ramp up.

SaaS Customer Success Metrics

SaaS customer success metrics are more specific and focus on data that is specific to the software industry. Several of the metrics listed above like renewal rate and MRR do apply to SaaS specifically, but we’ve added a few more that will provide a more holistic view of this business model.

12. Product Usage Rate

The more customers use your product, the more valuable it is to them. That is unless your product is similar to Hinge, where the customer’s goal is to delete the app as quickly as possible.

With just about every SaaS product, your customer service team will be able to track how often each user accesses it. Ideally, you want your overall product usage rate to progress over time until it reaches your ideal usage frequency.

To calculate this metric, decide which intervals you want to measure, i.e. daily, weekly, monthly, etc. Then identify what percentage of your customers are achieving each one.

13. Average Time on Platform/ Average Time in Application

Understanding how much time your customers spend using your software can tell a detailed story about how the product is integrating into their activity. This metric not only helps you understand the customer’s behavior, but it’ll also help you set a benchmark for how long a typical customer should spend using your product. That way, you can make improvements to your software over time.

14. Active Users

If your company is focused on growth, this SaaS customer success metric will be critical to your growth strategy. You can measure active users by adding the number of customers who use the product at a particular frequency — daily, weekly, and monthly are some of the most common.

15. Free Trial Conversion Rate

Freemium options are a staple in the SaaS industry as they drive user adoption quickly, but how can you measure their success? Free trial conversion rate is a must-have measurement for any SaaS company. This metric reveals how well customers are switching from the free version of your product to the version that generates revenue for the business.

You can measure free trial conversion rate by dividing the number of customers using the free trial by the number of customers who converted to a paid subscription. You can measure this data point on a monthly, quarterly, or annual basis.

Success Metrics Dashboard

After deciding which metrics to use as you measure customer success, you’ll need to find a place to track and view all of this data. A customer success metrics dashboard is the ideal solution. There are several types of dashboards available, and we’ve listed a few below, like HubSpot’s Dashboard and Reporting software.

Customer Support Dashboard Example

example of HubSpot's success metrics dashboard showing email sent and customer names

Image Source

HubSpot’s Dashboard and Reporting software is both powerful and accessible. Everyone who needs to keep track of customer success, from analysts to senior leaders, can look to this tool as a single source of truth. The best part about this dashboard is you’re not limited to just one instance — create up to 300 of them to give every team a customized peek into the customer experience.

Customer Success KPI Dashboard Example

Example of a customer success metrics dashboard showing total number of support cases and number of escalations

Image Source

Keep your customer service and support team on target each quarter with a customer success KPI dashboard like this one. It displays relevant metrics like average response time, first call resolution, and NPS scores. You can even track top-performing reps and celebrate their wins.

Customer Experience Dashboard Example

Example of customer success dashboard showing the number of customer support requests and year to date requests

Image Source

This dashboard example by Tableau presents several metrics at once, like the number of support requests received and how that compares year-over-year. If your team is making decisions about customer success strategy, try a dashboard like this to get a broad overview of your company’s progress.

A Successful Business Depends on Customer Success

Whether you’re in a B2B or B2C industry, customer success is a key determinant of how far your company will go. Revenue and even market share are dependent upon whether or not your customers are satisfied with the value they receive from your products. The only way to know if they are is to measure their success. Use the metrics, dashboards, and tips I’ve shared here to kick your customer success strategy into gear and reach new heights within your business.

Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.

Editor’s note: This post was originally published in January 2020 and has been updated for comprehensiveness.

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