Cost Savings Using SAP Business One – Part 1 (Material Costs)

By Dattatrey R.Kulkarni Posted August 20, 2016 In Benefits of SAP Business One
Business Organizations incur costs in regular operations. They could be in the form of material cost, labour cost, salary and employee welfare cost, infrastructure related overhead cost, external services cost, expenses of different types etc.
The efficiency with which the operations are conducted determines has a direct impact on the profitability. Depending on the nature of business every company may have different focus areas to affect cost savings. For example, a business that relies more on human expertise (say services) may target to focus on overall salary cost since it contributes the most to cost.
A manufacturing on the other hand may target material costs since it is usually the biggest cost element. This cost saving could be achieved by improving component design or deploying efficient manufacturing processes or identifying alternative materials that may cost or less and so on. However, these methods may take more time to yield results. In contrast there are methods which have a potential to impact the operational cost on a daily basis. Let us have a look at some of them.
Accurate Planning
If the procurement of materials and production of components or goods inside the company are not tuned with the sales pattern, it is likely that the company may end up either in high inventory thus blocking working capital and increasing inventory carrying cost or they may fall short of finished products this incurring an opportunity cost (of missed sales).
SAP Business One offers a robust MRP (Material Requirement Planning) functionality that helps in accurate planning of procurement and production activities ensuring that the company maintains the right quantities of inventory. It aligns the operations with the projected sales or demand and in turn helps the company in managing the inventory efficiently, thus reducing cost.
Control on Material Consumption during production
Material stored in the company is nothing less than cash in hand. Every small usage of material needs to be accounted for. Finished goods need a defined quantity of raw materials (& sometime sub-assemblies). If the actual material consumed is more than the planned quantities, it usually indicates inefficiencies, which ultimately results in the company incurring a business loss.
SAP Business One allows to maintain a bill of material of finished goods (or interim stages). When production orders are created they clearly indicate the quantities of materials that need to be issued (or consumed) to produce the stated number of finished goods. Not just this, SAP Business One has the capability to prevent issue of material in excess of BOM quantities. In case, the process has production loss by design, SAP Business One keeps a track of the planned and actual usage of material and reports the variances. This is very critical information that can help companies take decisions leading to cost savings on account of excess material consumption.
Control on material issue from Stores
As mentioned in the section above, system facilitates in tracking material consumed during production. However, a step before actual production is to requisition material from stores. Here too,
SAP Business One helps in controlling the material issued by stores. Controls can be set-up easily that will allow issue (or transfer) of only as much quantity required for the production order (or a group of orders in a particular shift). Issue of items that are not included in the BOM (say consumables) is also tracked by the Goods Issue process and controls can be set to prevent issue of certain material all together or control ‘untoward’ quantities of material issue.
Control on material issued to sub contractor
Many manufacturing companies resort to sub contracting some of the operations to third party vendors. This calls for keeping meticulous record of materials issued to a vendor versus material delivered by them and for reconciling the stocks lying with the vendor from time to time. This process can be tedious and is prone to human errors in calculation, if done manually.
SAP Business One allows the user to carry out the actual transactions in the system (like issuing material, receiving processed goods or receiving unprocessed material etc.). Further it also throws up various reports which disseminate required information for keeping track of transactions and enabling faster stock reconciliation (item wise, challan wise etc.). Thus SAP Business One helps implementing tighter controls with least efforts making it easier for preventing any inadvertent loss of material.
Other material transactions
There are other transactions associated with materials like returns by customer, rejection of vendor’s material, line rejection, scrap generation which are likely to go unattended in manual systems.
SAP Business One provides a robust mechanism to track each of the above transactions (& possibly more) and increase accountability of concerned departments towards material consumption.
SAP Business One provides several tools and methods that help companies manage their material more efficiently and reduce the costs associated with them which can have a solid impact on the bottom line. Usually, manufacturers start to see the benefits of these controls within a few week of implementing the solution.
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