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Why an ERP Is a Cost Control System in a Chinese Factory

March 24, 2017

 by Renaud Anjoran

Enterprise Resource Planning

One of the most common discussion topics of foreign factories’ GMs is the implementation of an ERP. While that subject was nearly closed 15 years ago in Europe and North America, it is still quite vivid in China.

Let’s look at 5 very expensive situations that are common in Chinese factories, and the way an ERP can help mitigate them.


1. Way too many people in offices

The ratio of indirect/direct labor is about 10% for world-class manufacturers. (And a bit more if they have a strategy of high R&D investments or if they subcontract important business lines.)

And what is a typical percentage in China? 30% to 100%!

Here are a few reasons for that:

  • Convoluted information and decision flows. We often see purchasing requests sit by the purchasers’ desk for days, then be poorly checked and transformed in POs, and cause issues that call for rework… Not a pretty sight. Another example is the need for 10 signatures on hundreds of documents – not only is it a waste of time, but it dilutes responsibility and makes mistakes more common.
  • A lot of double work – for example, QC technicians writing findings by hand, then writing them again in another registry… while underlying quality issues are not addressed.
  • Every manager has at least one assistant/secretary.
  • Production supervisors and technicians have a desk and read emails instead of working on the shop floor.

A good rule of thumb is that a good ERP implementation (aiming at automation but also at streamlining) will help get rid of about 30% of the office staff and other indirect labor. It is one of the most effective cost control systems!


2. Inefficient and bloated operations

inefficient operations

Here is a situation we often see in Chinese factories:

  • Very low inventory turns, many parts or semi-finished goods that wait for too long and have to be scrapped (or are used and cause quality issues). This is quite expensive!
  • Very immature material control and production planning systems. Decisions are taken on the basis of Excel files or a quick visual check. There is no objective basis for decisions and no convenient & overall view of the situation.

The MRP modules of an ERP will give their right data and alerts to improve on this front. Unfortunately, many ERPs are implemented solely for supporting the accounting, purchasing, and sales functions. Don’t stop there!

How CMC gained a cost reduction in a China factory without automation Case study 

3. Purchasers get money ‘under the table’ from suppliers

The purchasing agents, the purchasing manager, the operations director, and even the general manager frequently get a cut of most transactions. It is so common in China that suppliers’ salespeople always ask “how many % should we keep aside for you?”.

This is quite painful for the business at several levels:

  • Between 2% and 50% of the value of purchased goods go into the pockets of rogue employees.
  • Purchasers don’t choose suppliers for the right reasons (which usually leads to quality issues due to bad parts, or late deliveries from suppliers), and they tend to defend those suppliers instead of pushing them to improve.
  • Most people in the company suspect it is going on and it hurts morale.

How does an ERP help you fight this situation?

It tracks all transactions and includes information about all suppliers, SKUs, prices, and other critical data. Top management can audit random transactions and put pressure on purchasers, who are no longer holding key information in their hands. ‘Why are we paying twice the market price for screws?’

We wrote more on this subject in this video on the corruption of purchasers.


4. Other departments run their own games to take more money home

cost control system

What I described above can spread to other departments. Here are a few examples:

  • Incoming QC and warehouse staff can play a game whereby they prepare fake reports, and they pay suppliers for more than was delivered.
  • Production doesn’t declare scrap to the accounting department and sells it on the side.
  • We have seen countless other schemes, and the most common seem to involve the canteen operator, a travel agency, or some ‘miscellaneous’ and technical expenses that are not easy for accountants to question (e.g. tooling).
  • I just read a few other examples of “a China company within your company” in this article on the China Law Blog.

Again, an ERP helps in the sense that it brings transparency. But also, all the key data are in one central database. To take the example of over-declaring the quantity delivered by suppliers, a lot of people have to be accomplices (trucking company, supplier, warehouse, Incoming QC, purchasing, etc.). It is possible, but harder.


5. No follow up of the business cost drivers

Several benefits come with the ability to set budgets (and compare to actual spending) and to drill down into cost components:

  • Better awareness of the link between actions and costs spreads through the company. ‘Throwing away those 200 pieces cost us 20,000 rmb in materials and 8,000 rmb in processing.’
  • Department managers see when expenditures or sales deviate from budget and corrective actions can be implemented earlier to mitigate imbalances.
  • Proper analytical accounting becomes much easier. A cost control system can be set and evaluated quickly.

 Have you had experience implementing an ERP in a manufacturing organization? Was there significant resistance? Did everybody switch from Excel to the ERP quickly? Please share your experiences below by leaving a comment!

How CMC gained a cost reduction in a China factory without automation Case study


Topics: Cost Reduction, Management/Turnaround

Renaud Anjoran

Renaud Anjoran

15 years experience in China.
Partner, China Manufacturing Consultants.
Worked with hundreds of factories in China.
Certifications: ASQ CQE & CRE; ISO 9001 & 14001 lead auditor.
Author of well-read blog, Quality Inspection Tips.

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