Internal Controls and ERP Systems

Internal Controls and ERP Systems

Organizations are increasingly turning to their ERP systems to coordinate, manage and control their supply chain systems and strategies globally. One of the primary catalysts of this is the fact that ERP systems are now most commonly integrated to business strategies so that real-time data can be used to make entire organizations more customer-centric and demand-driven. The greater the level of coordination and control through data and process integration between an organizations' supply chains and ERP systems, the greater the potential for increased revenue and profitability (Bhagwat, Sharma, 669, 670). It is the intent of this analysis to explain how organizations that rely on their ERP systems to generate supply chain metrics of performance are able to stay more customer-centric, more demand-driven and therefore attain greater levels of financial and operational performance as a result. The supply chain metrics used as part of the internal controls within organizations are also presented and analyzed.

How Organizations Are Using Supply Chain Metrics as Internal Controls

In addition to the financial reporting functions that ERP systems provide, they play a critical role in synchronizing suppliers, logistics providers and manufacturing operations to get customers' orders built to their specifications and delivered on time (Forslund, 351). Of the many internal controls as represented by key performance indicators (KPIs) shown in Figure 1, AMR Research Hierarchy of Supply Chain Metrics (Barrett, et.al.) studies indicate that three are the most critical for assessing the health of an ERP systems' impact on supply chain performance. These three metrics are demand forecast accuracy, perfect order fulfillment and supply chain cost. Organizations are attaining quantifiable levels of demand forecast accuracy improvement as a result of using the metrics shown in Figure 1. The entire range of metrics shown in Figure 1 is often included in Balanced Scorecards (BSC) that are used for internal controls of supply chain costs, determining supply chain collaboration investments, and defining corrective action for supply chain strategies that may be lagging in performance (Meade, Kumar, White, 879, 880). The Perfect Order metric is widely used in manufacturing organizations whose business models rely on tight synchronization of suppliers, manufacturing capacity and logistics to deliver products and services to customers on the delivery date needed (Barrett, 16, 17). ERP systems are the data and systems intelligence hubs or catalysts making the measurement and optimization of The Perfect Order possible. As a result, inventory turns can be optimized, costs per unit can be reduced and Days Sales Outstanding (DSO) reduced as customer pay their invoices faster as they receive their products on time or early. This level of operational performance would not be possible without ERP systems acting as the data intelligence hub of the organization, using KPIs shown in Figure 1 as the internal controls.

Internal controls measured and orchestrated by ERP systems are also segmented by operational effectiveness strategies, including root cause analysis and specific strategies aimed at increasing supplier quality, managing purchasing costs, managing Work-in-Process (WIP) and Finished Goods (FG) inventories to optimal levels. ERP systems are used for orchestrating internal costs to supplier costs to mitigate the risk of cost overruns in managing the supplier network. Internal controls for managing the cash-to-cash process include Days Payable Outstanding (DPO), Inventory Totals Including Inventory Turns, and Days Sales Outstanding (DSO). ERP systems are used for continually managing these as internal controls as they relate to supply chain efficiency and costs and are also reported on Balanced Scorecards to Chief Financial Officers, Accounting and Finance Directors, and supply chain managers (Yang, Su, et.al.). Financial managers in organizations are continually looking for how these internal controls or metrics can trim time from internal processes and costs. Findings from studies completed by AMR Research suggest that the greater the level of collaboration within a supply chain the greater the level of internal process improvement with the result being reduced costs (Barrett, 14 -- 20). Internal controls that track the business process improvements over time provide financial managers of organizations insights into how to better organize their cash-to-cash processes for maximum profitability for example. Figure 1, AMR Research Hierarchy of Supply Chain Metrics is shown below.

Figure 1: AMR Research Hierarchy of Supply Chain Metrics

Source: (Barrett, et.lal.)

Successes and Failures of ERP-based Internal Controls to Manage Supply Chains

The success or failure of global supply chains is a direct result of how well orchestrated internal reporting processes, systems and scorecards are emanating from the organization's ERP systems. Implicit in the use of these internal controls is keeping strategic plans and initiatives on track. This focus on continual alignment of strategies to their objectives through the use of internal controls is what separates those organizations attaining success with their supply chains or not.

One of the more successful organizations globally in orchestrating their supply chains through the use of internal ERP controls is PC and laptop manufacturer Lenovo (Barrett, et.al.). According to studies of their supply chain completed by AMR Research, Lenovo has been able to attain a 37% reduction in supply chain costs over three years (Barrett, et.al.). In addition Lenovo has been able to stay profitable while experiencing 42% growth during the 4th quarter of 2009, a time when many of its competitors were facing financial losses. Compare their growth to the overall market growth of 17% and the value of supply chain-based internal controls becomes clear. Experiencing this high rate of growth Lenovo also attained the highest customer satisfaction ratings in their segment of the market. All of these accomplishments occurred due to the tight integration of their supply chain, manufacturing operations and heavy reliance within Lenovo on internal controls from their global ERP system (Barrett, et.al.).

Contrast this success with the failures in China surrounding production and quality assurance management (Enderwick, et.al.). The lack of knowledge transfer within Mattel for example is a case in point, where no ERP system was used to unify quality management, manufacturing quality standards and worst of all, minimum acceptable quality levels for paint and components (Bapuji, Beamish, et.al.). The lack of internal controls as defined by key performance indicators or metrics on Balanced Scorecards (BSC) within Mattel and for that matter with many of the manufactures outsourcing segments of their operations to China (Enderwick, et.al.) led to a disaster of credibility and quality for manufacturing outsourced operations in this nation.