ERP in Manufacturing Series – Product Cost

Managing an effective transition from legacy product costs to ERP product costs will be the ultimate test of your change management effectiveness. On the highest possible level, the total costs are exactly the same, and on the lowest possible level, the skus being manufactured are exactly the same, but in between, be prepared for the possibility that everything but the raw material cost is changing.

Agents of Change

If you wonder why that would be so, there are two primary reasons: (1) It is highly unlikely that your legacy cost system and your new ERP system have exactly the same methodology throughout. The closer the two methodologies are, the less the change management challenge. (2) Accounting and finance will use the occasion of the ERP implementation to adjust practices and procedures which are either no longer best practices, or could not be changed incrementally because of GAAP compliance issues.

Within the “different methodologies” category, the differences often appear to be benign in the ERP design phase, because at standard, the answer works out to be exactly the same. However, when variances begin accumulating, how those variances are accounted for probably changes. When you add in indirect labor - material handlers, maintenance, lab testing, - the picture becomes still more different. The bottom line is that when it comes to product costing methodologies, little changes can have a big effect.

Changing practices and procedures is typically done carefully and with a lot of transparency. Any change which materially affects the cost of a product might have a balance sheet impact if it results in a substantial change in inventory valuation. When making these kinds of changes as part of an ERP implementation, err on the side of over-communication with the financial community, because you do not want to find out at the eleventh hour (or worse, after go-live) that you have inadvertently run afoul of the financial auditors.

Beware of Reconciliation

A word of warning: If you are asked to reconcile an individual product cost back to its legacy cost, you will (a) probably have to try it and (b) be wasting your time on a mathematically impossible task. End users understand intellectually that the product cost of every sku has changed - with some going up, and others going down - and that the total cost is neutral. But emotionally, they are certain there is an error on every cost that has gone up. Try as you will you can never fully reconcile these costs back to legacy; the inputs and the outputs are totally different.

How much attention this arena receives will depend on the culture of your company. Organizations which survive on razor thin margins by knowing their product costs are going to be more sensitive than someone with an advantaged product and patent protection. If you are closer to the former category, be prepared for a whole lot of questions after ERP go live.