Tracking the Manufacturing Journey with ERP Systems

[00:00:00.120] Well, Isaiah, it’s the end of the week. Welcome.

[00:00:02.850] I miss the days when we used to do this with tequila. I don’t know what happened.

[00:00:06.570] That will get edited out, but. No, it’s great to see you here.

[00:00:14.130] It’s great to be here.

[00:00:14.930] Everyone who doesn’t remember you’re a manager on our Netsuite team.

[00:00:18.810] That’s right.

[00:00:19.610] You lead people, companies through massive transformations by implementing what netsuite calls business management software. And what is more universally understood as an ERP.

[00:00:32.740] An ERP.

[00:00:33.580] Even though ERP is really not a great.

[00:00:37.370] Also meaningless.

[00:00:38.430] Yeah, also meaningless.

[00:00:39.850] At the end of the day, ERP is accounting software, which is central to basically everything that a business does.

[00:00:47.250] Absolutely.

[00:00:47.740] At any scale, no matter what business you’re in, whether you have physical goods or not. And because accounting is so central to what every business does, it naturally followed through the development of ERP software like Netsuite that you would grow your software functionality around the accounting process. And where we are at today is where the software suite built around this cloud based accounting infrastructure does everything from inventory management to payroll. Payroll to. Yeah, everything.

[00:01:24.410] And yet that, of course, would be a huge topic if we wanted to get into all of that. That would be an eight hour podcast.

[00:01:32.160] Yeah. And it is the end of the week, and I don’t want to sit around for that.

[00:01:35.060] No one will barely listen to this one, even if we keep it at 20 minutes. But there is something interesting that I want to talk about with you today.

[00:01:42.710] Yes.

[00:01:43.530] That I know has a lot to do with some of the recent projects you’ve been on. And we always like to narrow in and we want to focus on something. And so the premise of this is going to be, I’m a client. I manufacture things. But of course, I actually, in my manufacturing process, rely on outside subcontractors or, you know, to perform sub manufacturing processes for me. And the example we’re going to give, just to set an image in everyone’s head because it’s relevant, is, let’s say I make jeans for a living, right?

[00:02:23.730] Yes. And for now, are we talking about one size and color of jeans, or are we talking about.

[00:02:28.070] I only want to talk about one size and color.

[00:02:30.010] One size and color.

[00:02:30.670] And then we’ll get into the complexities, the pink unicorn ness of size and color. So I’m a jeans manufacturer and I’m implementing. I hire Isaiah. I say, isaiah, save me. I want Netsuite’s ERP.

[00:02:50.270] Yeah.

[00:02:51.060] What is complicated about the fact that I have an outsourced solution when it comes to actually manufacturing jeans?

[00:02:58.920] Yeah, absolutely. So from an actual manufacturing standpoint, it’s way more complicated to manufacture jeans in house than it is to hire someone to manufacture them. And that’s not.

[00:03:10.900] Why do you say that?

[00:03:12.420] It’s not my area of expertise. But I assume it’s harder to make jeans in your own plant than it is to call somebody up and have them make more jeans.

[00:03:19.360] Expensive?

[00:03:20.300] Yes. Yeah. Probably upfront costs way more. Anyway, from a software and accounting standpoint, which is what we’re here to talk about, it actually becomes a little bit more complicated when you are leveraging a vendor to do part of your manufacturing. And the reason is because the ownership and costs associated with the inputs and the outputs, the raw materials and the finished goods are more complicated depending on what your requirements are. So I might, as a client, like you’re describing, own the raw materials, ship them to my vendor. That vendor then turns them into something else, and then I own the finished goods. And I need to incorporate the raw materials cost and the fees associated with my vendors, the charges that I’m incurring from my vendors into the cost of goods sold, the inventory, asset valuation of the things that are being built. So I’m tracking inventory. I’m potentially tracking inventory value and I’m tracking turning raw materials into finished goods. But it’s all happening kind of outside of my view. I need to account for it and I need to be able to track it.

[00:04:28.250] So let’s, first of all, let’s pretend very simple example, okay? Let’s say I’m a retailer and everyone knows that Charles Jeans, they’re the most fashionable jeans. Everybody’s dying to get a pair of Charles jeans that are just cut so brilliantly. But I don’t make the jeans, right? I design them. I go to sleep at night and I dream jeans.

[00:04:54.940] The ip is yours, the branding is yours, everything’s mine.

[00:04:58.560] But then I go and I outsource the entire thing to one factory, right? Acme jeans makers. And they’re the ones who, I’m going to buy the fabric because I control that. Like, it’s very important for me to have the quality control of the fabric. And then physically what I’m going to do, I’m going to ship it to Acme jeans. I’m going to say, go make me 1000 pairs of jeans size 32, because that’s my waist. Of course, as everyone knows, size 32 have been for years.

[00:05:31.870] It’s on the walls here. It’s on the walls, just in case you forget.

[00:05:34.450] Yeah, it’s a verified accurate measurement.

[00:05:38.730] We’re all about data driven.

[00:05:40.060] We’re all about integrity and data. And my waist size is certainly going to be the most integral a number I give out. No, but. So I say, make a thousand jeans.

[00:05:49.140] Yep.

[00:05:49.600] They’re going to receive the fabric, they’re going to cut the jeans, they’re going to do the sewing, they’re going to put the zipper on, they’re going to do the buttons, they’re going to do the little rivets.

[00:05:59.760] They’re going to send you a couple weeks later, they’re going to send you a truck with a thousand jeans.

[00:06:05.420] Okay. Physically, that seems obvious.

[00:06:07.400] Obvious, yeah.

[00:06:08.410] And then from a, like, from a payment perspective, not, let’s not even get into the accounting at Erp yet. Just on a, like a caveman. Caveman payment perspective. Well, what is acne jeans charging me? They’re charging me for the labor and everything that went into the manufacture of the jeans.

[00:06:33.440] Right. And you’ve hit the nail on the.

[00:06:35.320] They’re a service provider.

[00:06:36.680] Exactly. And you hit the nail on the, on the, the biggest complexity, which is that you are buying jeans from a vendor, but you aren’t paying them for jeans, you’re paying them for the labor associated with making the jeans.

[00:06:49.320] That is exactly why. And that’s the crux of the thing we want to get to, which is in another environment. Typical wholesaler. If I was just a retailer and I went to a wholesaler, I would buy 1000 pairs of jeans and I’d buy the actual jeans.

[00:07:06.340] And you’re paying for jeans.

[00:07:07.770] What does this invoice represent? The invoice represents the cost of acquiring physical, durable. Well, let’s hope durable assets. Right? Yeah. But in this case, like, I, the designer, I bought the fabric, I shipped it over to them. Right. And let’s say I went and I bought the zippers like I provided in arguments, all the raw materials required because I wanted to specify them. Right. I wanted to control that, and I’m just paying for the service. Which brings up this really interesting question. Who owns the inventory when it’s at Acme Brick? What’s the answer?

[00:07:49.440] Well, Acme brick.

[00:07:50.790] Sorry. That’s a real company. Acme jeans.

[00:07:52.730] Right, right. The really annoying consulting answer is, it depends. But in this case, we’re.

[00:07:57.130] Okay. Fair enough.

[00:07:57.690] In this case, we’re assuming, I think, that you purchased the raw material. If there’s leftover fabric, at the end of the day, I have it. They’re going to send it back to you with 1000 jeans. So that fabric belongs to you. It might be proprietary. They can keep the scraps, whatever. So you have to, on your balance sheet, you have to have the inventory asset value of the fabric. And that inventory value needs to go away when that fabric gets turned into jeans and be incorporated alongside the fees you’re paying your vendor into the asset value of the jeans that you own at the contract manufacturer’s location in transit, whatever.

[00:08:34.290] The fabric cost of 1000 jeans is not that big. Right. So I should have chosen a bigger number to make this more exciting.

[00:08:40.260] Yeah, probably.

[00:08:41.410] But the point is, let’s say the fabric cost for that thousand jeans is about $100. Let’s just say argument’s sake. The point you’re making, I think that’s really interesting from an ERP perspective is or how to handle outsourced manufacturing is that when I send the asset, the inventory of fabric, to acme jeans, I don’t erase it from my balance sheet. It’s still a $100 on my balance sheet. And I, especially if I’m an audited company, you know, I have to provide a level of assurance that my books are accurate. I have to know where that hundred dollars of asset is. So now we’re starting to get into it. And then when it comes back as jeans, I no longer recognize it as fabric. It is transformed into a different asset with different costs.

[00:09:41.770] Yep.

[00:09:42.530] Now tell me the story.

[00:09:44.250] Well, so if you had one contract manufacturer that you used to make 1000 jeans, and that’s how many jeans you made a monthly, you wouldn’t necessarily need to do anything more complicated than keep very careful track of this in a spreadsheet and do your division and your multiplication as needed. We’re talking about situations where you have many products, many contract manufacturers, many different contract manufacturer locations. All of this stuff is happening simultaneously.

[00:10:08.880] Well, I see two axes of complication that I would like you to. We don’t have to delve into them, but to illustrate axis, one is the size color thing.

[00:10:19.740] Right.

[00:10:20.310] So Acme jeans makes all my jeans.

[00:10:22.230] And I think we’ll get there.

[00:10:23.410] We’ll get there. Just gonna state it now. Yeah, now that hundred that buy me a thousand. I’m gonna make a thousand pairs of jeans. Now I’m gonna say, actually, I’ve just bought you three colors of fabric, and from each, you’re going to make a specific number of size 32. Size 34. Size 36. There’s some people I’ve seen. I know it’s hard to believe that we’re size 38. I don’t know anyone, but I’ve seen them in the stores.

[00:10:52.020] Right? Yeah.

[00:10:52.670] You know, and even bigger. So now I’m sending this, let’s say, three fabric inventories over to Acme. Jeans. Still got to keep it accounted for. And it’s going to. They’re all going to come back. Each one of them of those fabric inventories are going to return to me as six different skus. Twelve or 20 different skus.

[00:11:14.530] Right. You have a many to many relationship between the raw materials, the manufacturers, and the outputs.

[00:11:20.020] That one axis of complexity. The other axis of complexity is, I’m not just making jeans, I’m making hats. I’m making a bunch of. I’m making handbags. I make all sorts of cool, hip stuff that everybody wants from me because I’m a brilliant designer. And that involves now many manufacturers. So picture from that 100 pairs of jeans. It’s an asset on your books. $100 of fabric. It is now at the manufacturer. It’s still your asset. And then it comes back transformed. And you need to account for that transformation.

[00:11:53.210] And potentially, I’m just gonna introduce one other small thing and potentially send that product that has been manufactured out again to do another step in the manufacturing process with a different contract. Manufacturing.

[00:12:06.670] Acid washing.

[00:12:07.500] Acid washing jeans is a great dressing. Exactly.

[00:12:10.230] Yeah. I cannot. But, you know, I have children. They. When we were young, you only wear.

[00:12:17.060] 32 dark blue, non acid wash jeans.

[00:12:19.640] 32 no belt required jeans. That has been for 25 years now. It’s pretty amazing. So now, okay, so we’ve pictured that we have all this inventory sitting outside across multiple manufacturers who are not, who are providing services to me, and then they return transformed products, finished goods. Products.

[00:12:44.810] Yeah.

[00:12:45.700] But potentially, as you just said, finished goods or whip that will actually be going worked in progress. Or progress progress that will actually be going back out for yet another transformation or modification. And each time I own whatever the inventory is, I must value the inventory and keep a track of where everything. Okay?

[00:13:11.500] Yeah.

[00:13:11.850] So now.

[00:13:12.600] Yeah. Well, there’s good news and bad news in the world of ERP. The good news with outsourced manufacturing is that this is, by and large, a solved problem.

[00:13:22.430] Right. Cause it’s common.

[00:13:23.910] If I were purchasing the jeans from a vendor and I didn’t have to track any of the inputs to that manufacturing process, and I only owned the inventory once I received it, it would be a purchase order and an item receipt. Those are the words that we use in our world. And if I were manufacturing it in house and I wasn’t using an outsourced manufacturer, I was doing everything myself. It would be a work order and a assembly build those are the kind of transaction flows that would represent if these things were separate.

[00:13:48.130] And wait just on that second case, because I think the second case is good to just focus on if it’s a work order with some sort of assembly or bill of materials or something associated to the work order. What happens is when I go from my raw material inputs to my finished goods output, the output, and you tell me if I’m wrong because I, you know, I’m just guessing at this, but I think I’ve got it. The output gets caught. No, no. Yeah, the output gets costed as, just to keep it simple, raw materials, labor, some sort of depreciation for the equipment used and things like that. Right? Like some other.

[00:14:28.870] If you want. Sure.

[00:14:30.440] Yeah. So you have all, you have that. But now if instead of me doing the jeans, I send it to Acme jeans, they come back with an invoice saying, hey, you owe me x amount of dollars.

[00:14:43.300] Right.

[00:14:44.450] So how would that get.

[00:14:46.290] Right. The tools available at our disposal in the netsuite world, in the ERP world, allow us to do this with, with incredible ease. You take this concept of the purchase order and the charges associated with dealing with a vendor and a work order, where you’re turning something into something else or many things into something else, and you marry them together. And what the accounting system and what the transactional system is able to do is say, I know that this is a fee on this purchase order, but it’s associated with a work order at an outsourced location. When I receive this purchase order and eventually get a vendor bill from my vendor for the fees in tandem with that transaction flow, which is part of what we call procure to pay. I’m also executing a work order, work order completion, or an assembly build to say the inventory value of the raw materials has gone down in addition to the inventory quantity, the balance of those raw materials and the inventory value and quantity has gone up on the finished good side or the wip side. So at its most basic, this is a totally solved problem and one of the many, many benefits of moving to a, a mature system like Netsuite.

[00:15:54.190] And that this thing that’s very difficult to account for and has many moving parts is something that you can capture out of the box with basic transaction features in the system and at a.

[00:16:07.380] Certain scale, you just have to do it that way.

[00:16:10.090] You have to.

[00:16:10.630] And it’s a beautiful thing.

[00:16:11.960] Yes.

[00:16:12.320] Right. Because that is how you’re going to keep control of your business.

[00:16:16.210] Otherwise, you’re adjusting in and out inventory at $0 and then assigning value to it only once you get vendor bills in and you. You can add those invoices to your system, and it’s a nightmare.

[00:16:26.330] Nightmare.

[00:16:26.760] And it’s a nightmare we solve on a very regular basis.

[00:16:29.350] Right now, let me ask you this, though. Let’s just say the bad news, okay?

[00:16:35.140] Yeah, I was going to say the bad news here is that that requires maintenance of data where the execution is very simple because the tools are at your disposal. But the maintenance of data can be very complex. My outsourced manufacturing locations need to be in the system. If I have, let’s say, a ten step manufacturing process with different vendors. Each of the items in my, each of the WiP stages of that development of that manufacturing process needs to be captured by a different item in the system so that I can say, here’s my fabric. It gets turned into cut fabric, that cut fabric gets turned into sewn fabric. Now they’re jeans. So at the cutting stage, they might not have sizes, but now at the sewing stage, they do have sizes. So the good news is, from a transactional, from a what happens? Perspective, it’s very, very simple and a solved problem. But when you’re talking about teams of people that don’t necessarily have somebody who can learn and own that process as, like, a full time job, you need to find easier and more simple ways to capture that.

[00:17:41.030] So let’s just, again, not again, but let’s paint this picture so everyone understands, mostly me. If I am Airbus or Boeing, some of the most complex manufacturing on planet Earth, I have a human infrastructure teams who are so devoted to this problem as I shrink down in company size, as I get to a smaller company who’s on the cusp of needing an ERP. And they’re only successful because they have a relatively complex manufacturing process. Cause, you know, it’s not everybody. No one’s gonna make a business just bottling tap water, unless you’re Coca Cola.

[00:18:29.000] And by the way, sorry not to talk about it. I think you’ve just described every burgeoning Shopify apparel brand 100% in the world right now.

[00:18:37.630] Apparel brand, Kombucha, functional soda. I mean, you think about across all the consumer goods, all of these emerging brands are generally doing something extra complicated, extra complicated in order to find space in the consumer’s mind.

[00:18:57.340] And it’s a fantastic thing that we live in a world in which the costs associated with doing those very, very complex things have, or the upfront costs at least, have gone down to the point where there are people all over the place doing really, really interesting and complex things with brands online.

[00:19:11.180] That’s a great point. It’s on both ends, though. It’s the cost of getting into the business, but it’s also now access to consumers where shelf space is digital. So these brands can get to you. It is a beautiful.

[00:19:24.740] And warehousing and manufacturing is now something that you can. You don’t have to buy a manufacturing plan in order to make jeans. You can hire somebody, but.

[00:19:31.460] But you do need to, because you’re going to have investors regardless of what. You still need to be able to track costs somehow. And you’re not going to be able to necessarily. You’re not going to want or be able to necessarily absolutely capture exactly that manufacturing process. So that if I want to make a beautiful pair of jeans and I to do that, I need it to go through four different WIP processes. Do I really want to create work order one, work order two, work order three, work order four? I don’t have the staff to do that.

[00:20:10.150] And in the case of sizes and colors, do you want to create four work orders, one for each part of the process, and then 20 in each of those columns for each combination of your inseam and your color?

[00:20:20.570] Right. And it seems like overkill. So what do I do then, Isaiah?

[00:20:23.680] Well, that’s where you need somebody really creative. Not to be doing too much of a sales picture, but you need somebody really creative and who knows, but also who understands what is doable and not doable within a system for a given team size and a given set of expertise and a given level of skill to adapt the tools that exist in the system, that make something like outsourced manufacturing a solved problem, but also help to, with customization, with a reduction in complexity of transaction flow. Get there in a couple of button clicks. And it’s about understanding the exact requirements, making assumptions that are valid and that are validated with the client and with the users themselves, not just necessarily the people on the accounting side who have embarked upon the ERP implementation. And in the case of a recent project, which I think is what we want to talk about, what I want to share is we treated the color, size, inseam, apparel complexity the way that it’s supposed to be treated. And we embarked upon the master data project of getting all of that stuff in the system with its complexity. But we were not willing to then say, for every in between stage in the process, build me a whip item for every combination of color, inseam, whatever your attributes are.

[00:21:53.820] What did you do?

[00:21:54.990] Well, what we ended up doing is we ended up capturing the costs associated with those manufacturing stages as we would capture freight or tariffs in the netsuite world at least it’s called landed costs. So what that allowed us to do is to create these purchase orders for the fees, again, not for the finished goods purchase orders for the fees associated with the contract manufacturing. And then by quantity dividing those total fees by the quantities on our eventual finished good receipts, apply automatically the percentage of that fee to the asset value of the thing that you are building that you received eventually into your warehouse or your three plus.

[00:22:44.960] So just let me think about this. If I’m in stage two.

[00:22:49.740] Yeah.

[00:22:52.740] Is that product still essentially just a raw material?

[00:22:56.780] It can be.

[00:22:58.500] And then it’s only once it becomes a finished good that I take the charges of all four stages and then up charge the costs that way. Is that a fair way of saying it?

[00:23:10.740] Absolutely. Ultimately, what you, what you are responsible for is tracking your inventory, especially when it exists in your warehouse and is sellable to your customers. And that the value of that inventory, both for your inventory asset account and for the eventual cost of a good sold associated with those sales, is accurate and is based on actually how much it costs to get that pair of jeans or whatever it is into your warehouse.

[00:23:36.140] You know, because I’m. Well, we’ve already spent our time. I’m telling you, it goes by fast. You have to do when you’re talking.

[00:23:46.900] About something sexy is that there’s two.

[00:23:49.400] Great things that I want to just remind everyone as conclusions to this. The first, I think for the average person, the average person who would be inclined to listen to this, understanding how outsourced manufacturing gets costed in an ERP, I think is a very, very excellent, just primer and baseless. And I’ve learned a lot just in preparing for this and going through this conversation. So that’s wonderful. The other thing though, sort of implicit, I’ll say it implicit in this, is that this is actually something you’ve said before. And in all hands, you know, there’s a lot of judgment when implementing an ERP system. I think the analogy you were using once or was around a map and how so much information could be represented on a map, and that there’s a point at which too much information represented on the map eventually means you have no information because you can’t decipher what is going on. And when you’re making business choices about what to implement with your ERP or how to implement your ERP, you’ve got to understand what is the view you need in order for you to make proper business decisions. And that is not a technical thing.

[00:25:14.110] That is a judgment call based on a lot of experience. As you said in this podcast, it helps to have a deep understanding of the system you’re implementing to know what’s possible. Possible. And then to make the right judgment call of am I going overboard? And therefore will actually render, create too much noise in the system and render.

[00:25:36.430] The system, or just create too much work.

[00:25:38.750] Right.

[00:25:39.140] And a given team, at their current scale and level of skill, they’re just not going to be able to use the system and they’re going to reject the project.

[00:25:47.390] Reject the project. You’re exactly right.

[00:25:49.430] All too often we as software implementers make the mistake of implementing the software rather than implementing the processes.

[00:25:55.460] Not at Lynn, but it happens in.

[00:25:58.120] The world of software.

[00:25:59.120] In the world of software, yes.

[00:26:00.520] And making sure that you are introducing exactly the right level of complexity such that the project is achievable and you can grow with a scalable tool is as important as choosing the right tool, if not 100%. Way more important than choosing.

[00:26:16.020] I think it’s way more important. It’s, it’s, it’s way more important.

[00:26:19.950] Yeah.

[00:26:20.740] This was great conversation. I appreciate it. I thank you. I hope you have a wonderful day. Enjoy your weekend. Yeah. You’re gonna go to your running club.

[00:26:29.720] That’s during the week.

[00:26:30.940] Oh, that’s. Maybe, maybe you get, maybe you’ll squeeze in a pleasure run.

[00:26:34.460] Yeah, yeah, yeah. For fun.

[00:26:35.870] Yeah, that’s great.

[00:26:37.670] Thanks.

[00:26:38.060] All right, take care.