Integrating ABC and ERP Systems

The greatest benefit that an ERP system delivers to an organization, is its integration of many of the information systems into one enterprise-wide system. An ERP system provides access to timely information about many aspects of an organization, both financial and non-financial, in a common and consistent manner to the decision-maker. However not all ERP systems encompass the same amount of data as not all ERP systems integrate the same number of information systems that can reside within an organization.

This degree of integration within a given ERP system environment impacts the amount of benefit received from integrating ABC with an ERP system. The amount of data available to the ABC model from within an ERP system will vary depending upon how integrated the ERP system is with all the information systems of the organization. In some situations, the ERP system may only be at a stage where the general ledger and one or two other information systems, such as the human resources component, are integrated into the ERP system. Integration of the ERP system with other information systems such as the inventory system or service delivery system may not yet be completed. In this situation of a less encompassing or less integrated ERP system, the benefits of integrating ABC with ERP still exist but are not as significant. The ERP system would not provide all the necessary inputs to the ABC model. The ABC model would need inputs from non-ERP systems and thus integration of ABC with non-ERP systems would be advisable.

The benefits of integrating ABC with ERP are more profound in a situation where the ERP system includes more then just the financial and human resources components. These highly integrated or widely encompassing ERP systems will have integrated themselves with existing information systems, or will include their own modules, that record the details of transactions such as inventory movements, capital acquisitions & construction, service delivery orders, and sales contracts. These additional modules will provide many of the inputs related to resource driver and activity driver volumes for the ABC model. These inputs are key to the ABC model structure and the ability of ABC to deliver results by customer or product dimension.

The ability to integrate ABC with an ERP system can also streamline the process of introducing ABC to new sites or new business units of the organization. The mapping of the ERP system’s data to the ABC model inputs for one site or one business unit or one subsidiary can be used as a template for similar sites or subsidiaries who are in the process of developing their initial ABC model. Again this will minimize the costs of developing and delivering the ABC results and will encourage generally accepted standards within ABC models across the organization’s reporting units. The knowledge gained and reflected in initial ABC models will automatically be reflected within the template developed for future ABC champions within an organization.

Decision-makers use what they know

Integration is an opportunity to increase the availability of decision support information for operational managers.

In most situations, a decision support tool, such as ABC, is implemented with the plan that this tool will be used in an ongoing manner to provide timely, relevant, and reliable information. To successfully use ABC, on an ongoing basis, ABC should be widely used and understood by decision-makers within the organization. Otherwise the resulting information will not be considered during the decision-making process.

For decision-makers to widely use ABC and understand ABC they need to be able to access the ABC results and to have faith in the source of the data used by the ABC model. Linking ABC to the ERP system can do just that.

This involvement begins to give the decision-makers familiarity with the ERP system.

Admittedly, during early use of the ERP system, the decision-makers may encounter frustration with learning how to generate information from the ERP system. However, with the continual use of the ERP system and with the improvements from ongoing maintenance, the decision-makers gain comfort that all the other decision-makers are using and influencing their components of the ERP system in similar ways. Eventually the ERP system can become a key and respected source of information for most decision-makers within an organization.

Most decision-makers do not have the same interaction with the design, development, and early use of the ABC model. Thus the ABC champions need to ensure that they find ways to increase the credibility of the ABC results provided to decision-makers. One of the ways of doing this is to integrate the ABC model with the ERP system of the organization. This may increase the visibility of the ABC results and encourage the use of the ABC results.

Integrating the ABC model with the ERP system can furnish the ABC model with much of the data contained in the ERP system in an efficient and economical manner, as discussed previously. This will indicate to decision-makers that the ABC results are systematically generated from a serious or credible data source within the organization, the ERP system.

As well, the ABC results can then be made available using the ERP system’s reporting tools, which many decision-makers will already be familiar with. Cost savings may be realized if the ERP reporting tools are utilized to deliver ABC results. The investment to purchase or develop user-friendly ABC reporting tools would not be required. Education and training for decision-makers can focus on the “how to utilize ABC results”, rather then on the intricacies of a new reporting software application.

In this manner, many of the inputs and the outputs of the ABC model can be put into the context of the ERP system that is credible and familiar to decision-makers. The ERP system, as both a major data source to ABC and as a delivery vehicle for ABC results, will assist decision-makers in taking the step from viewing the ABC results to using the ABC results. The success of the ABC initiative is in the use of the results not just in the generation of the results.

In a situation where the ABC project has preceded the ERP system, the ABC results may be already widely used and understood by the decision-makers of the organization. This does not eliminate the benefits of integrating ABC with the ERP system once the ERP system is designed and implemented. The ERP system will eventually become a key source of information and, over time, it will be economical and efficient to use the ERP system as a data source for the ABC model. In fact, the ERP system may replace many of the ABC model’s earlier sources of information, such as the general ledger and the human resources system. Thus, using the ERP system as a data source will be a necessity. However, the use of the ERP system as the delivery vehicle for the ABC results may not be necessary if the decision-makers are already familiar with the pre-existing method of distributing the ABC results.

One of the advantages that ABC modeling software has over ERP system software is the ability for the ABC software to accommodate “what if” scenarios and ad hoc reporting requests quickly and effectively. It is common for decision support tools, such as ABC, to be used to answer questions that did not previously exist when the initial ABC model was designed or populated. The flexibility of a decision support tool such as ABC is very useful to decision-makers.

The ERP system environment does not provide this type of flexibility in a short time frame. The ERP system can be used to produce “budget” and “actual” results under different scenarios, but only using the same set of incoming transactions and the same set of reporting dimensions. The different scenarios require significant changes to established rules within the ERP system coding of the various transactions. Re-coding or re-assigning transactions within an ERP system can be a very complicated and time-consuming exercise. As well, due to the ERP systems’ integration of so many information systems, it cannot deliver results along different reporting dimensions, in a short time span. Re-defining reporting dimensions such as customers, products, or geographic regions would require changes in all the modules or integrated systems within the ERP environment.

Using the ERP system as a delivery mechanism for the ABC results does not preclude using the “what if” capabilities of the ABC software. It is advisable to use the ABC software for analyzing different scenarios separate from the routine delivery of periodic ABC results. The routine delivery of periodic ABC results can still be accomplished through the ERP reporting process. The ABC results from “what if” analysis only need to be delivered to limited decision-makers within the organization. Therefore, the delivery of ABC results under “what if” scenarios do not require the use of the ERP reporting process. Educating the organization’s decision-makers that “what if” capabilities and information are available should be part of the general ABC education provided to decision-makers.

There is an inherent problem with producing ABC results separate from the ERP reporting system, if the ERP system itself produces profitability information that does not utilize ABC methodology. The credibility of both the ERP costing results and the ABC results areis undermined if the information from both is not aligned. Without integration, a decision-maker may be faced with choosing between two sets of information that tell different stories about the profitability of customers, products, or distribution channels. The reconciliation of the two sets of information becomes a new decision support project on its own. This is not a value-adding task for any decision support team.

Sharing knowledge base between ABC and ERP system designs

Integration is an opportunity to improve the design and implementation of the ABC model and/or the ERP system. It is common for either the ABC project or the ERP system implementation to precede the other by months or even years. In these situations, there is an existing knowledge base among employees from the earlier undertaking that can be drawn upon by the later project.

The terminology given to the same concept or structure may differ among the ERP vendors’ software. As well, the terminology between generally accepted ABC methodology and ERP software may differ. However, many of the same concepts and structures must be addressed during both the ERP system design and the ABC model design.

Many of the inputs to and structures within an ABC model may have been identified and reviewed during the design and implementation of an ERP system that preceded the ABC project. Or during an ABC project, many of the required elements for the future ERP system may have been defined and agreed upon by the cross-functional ABC team as part of completing the ABC model.

Involving ABC internal experts on the ERP system design, or vice versa, provides access to a very valuable knowledge base already owned by the organization. Using this existing cumulative knowledge can save time on the analysis of design issues such as:

How to define the profit reporting categories for customer, product, and distribution channels.
How to structure the department or work group categories for time reporting or activity analysis.
How to define the activities or tasks performed by the various work groups.
How to define the resource drivers for each expense type within the ERP.
How to define the activity drivers for each activity performed within a department.

The design and implementation of the later project, whether it is the ABC or ERP system, will be streamlined by using existing common language that is part of the cumulative knowledge base of employees. This common language may be as basic as the customer segmentation by industry (financial services, mining, telecommunications, or food services) or the product segmentation by marketed product group (paper products, electronic equipment, office furniture, or computer software). If managers and employees from cross-functional groups already understand these segmentations of customers and products, already collect data by these segmentations, and think that these segmentations provide valuable, actionable information,; then it is efficient to maintain this common segmentation as part of the language of the ABC model or ERP system.

Common terminology and meanings will move employees along the learning curve more rapidly during design and implementation of the later project. Common language will also lend credibility to all the decision support information received by decision-makers. It will also ensure that decision-makers can focus on using the information received, rather then learning new terms and definitions.

Conclusion:

An ABC model that is slow to be updated or that cannot widely distribute its results is not going to be an effective decision support tool. The integration of ABC with an ERP system allows an organization to utilize an integrated technological solution, the ERP system, to populate and deliver the decision support information provided by ABC methodology in a more timely and cost effective manner.