Mar 25, 2018

What is Industry 4.0? Power Point Slideshow

This is a presentation on Industry 4.0, focusing on the following:
Definition, Design Principles, Challenges, Opportunities, Benefits and India Potential...

Mar 16, 2018

What is Industry 4.0?: A primar


The idea of Industry 4.0 (I4.0), that started in Germany in 2013, has quickly caught the imagination of the manufacturing industry across the world. Called a new paradigm shift in manufacturing process, I4.0 envisages the integration of cyber-physical systems, big data, modern technologies and cloud computing, supported by reliable internet access, to transform the manufacturing industry globally.

This article starts of by explaining I4.0, its evolution, principles and major benefits. Then we  look at the integration of three elements, IIoT, Cloud Computing and Cyber-physical systems and discuss some of the challenges related to I4.0.

Since this blog focus on ERP, we also look at the features that an ERP Application should have to ensure a smooth transition to I4.0. We round of this article by looking at the role of Big Data and Analytics (5C Systems) in facilitating and benefiting from I4.0.


Consulting firm McKinsey defines Industry 4.0 as the next phase in the digitization of the manufacturing sector, driven by four disruptions: 

  1. the astonishing rise in data volumes, computational power, and connectivity, especially new low-power wide-area networks; 
  2. the emergence of analytics and business-intelligence capabilities; 
  3. new forms of human-machine interaction such as touch interfaces and augmented-reality systems; 
  4. improvements in transferring digital instructions to the physical world, such as advanced robotics and 3-D printing. 
Evolution of Industry 4.0

Manufacturing Industry has gone through four phases. Industry 1.0 was characterised by the use of steam & water power and manual labour. The use of electricity and assembly lines to help mass production in manufacturing plants signalled the arrival of Industry 2.0. Starting from about '70s, the use of computers and CNC machines for precision manufacturing and automation of production heralded the arrival of Industry 3.0

With use of technology expanding rapidly, Big Data supporting sophisticated and complex analytics, IIoT helping interactions between man and machines and also between machines, Cloud Computing supporting huge data storage and fast retrieval of data and finally, new Cyber - physical technologies like 3D Printing and Collaborative Robots (Cobots) that support rapid prototyping and faster roll out of complex designs, time has come to initiate the new phase, what can be called as Industry 4.0 (I4.0).

At a broad level, I4.0 refers to the change in production and manufacturing techniques that become possible because of the power of modern communication networks.

The following diagram illustrates this evolution.

At its starting point, I4.0 it’s all about networking, between enterprises, factories, machines and individual components so that information can be automatically collected, communicated, analysed, compared and used to improve manufacturing performance and efficiency.

The idea of Industry 4.0 was started in Germany and has quickly caught the fancy of the world. Every country is trying to move quickly to Industry 4.0. With its huge technology talent pool and a facilitating government policies, Indian manufacturing industry has a once in a lifetime opportunity to capitalize on the new trend and establish global competitive advantage.

I4.0 is a strategic initiative of the German Government with the objective of optimizing production across the country. Four companies, Festo, SAP, Siemens and T-Mobile has been included in the steering board. These four companies are responsible for identifying the most effective technologies for the practical aspects of Industry 4.0: enterprise and manufacturing management systems and big data analytics; the electronics, control systems and software; the communication and connectivity; and the physical actuation devices.

Germany has developed a long-term road map for Industry 4.0 covering the next 20 years, covering the short-term priorities and the long term goals. Over the next two or three years, standardisation with respect to communication protocols, CAD, visualisation and simulation platforms have been identified.

There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact. The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.

Comparison between factory of today versus factory of I4.0
Principles of Industry 4.0

There are four design principles in Industry 4.0. These principles support companies in identifying and implementing Industry 4.0 scenarios.
  1. Inter-operability: The ability of machines, devices, sensors, and people to connect and communicate with each other via the Internet of Things (IoT) or the Internet of People (IoP)
  2. Information transparency: The ability of information systems to create a virtual copy of the physical world by enriching digital plant models with sensor data. This requires the aggregation of raw sensor data to higher-value context information.
  3. Decentralised decisions: The ability of cyber physical systems to make decisions on their own and to perform their tasks as autonomously as possible. Only in the case of exceptions, interference, or conflicting goals, are tasks delegated to a higher level.
  4. Technical assistance: First, the ability of assistance systems to support humans by aggregating and visualizing information comprehensibly for making informed decisions and solving urgent problems on short notice. Second, the ability of cyber physical systems to physically support humans by conducting a range of tasks that are unpleasant, too exhausting, or unsafe for their human co-workers.

Major Benefits
  1. Optimized factories: Using technology at the design stage to optimize space utilization and smoothen material flow
  2. Improved productivity: Using technology to ensure resource movement within the shop floor to ensure minimal movement. Optimization of material flow leads to cycle time reduction.
  3. Cost savings: Optimum usage of resources ensures reduction in conversion costs.
  4. Analytics based insights lead to better and informed decision making.
  5. Decentralised decision making ensures quick decision making leading to improved turnaround time.
  6. Improvement in employee health and safety by proper design of man machine interaction. In addition, optimum floor design can ensure quick response during emergencies.
  7. Faster response to Job / Configured / Made to Orders, leading to improved customer satisfaction.
  8. Creation of new opportunity sectors, especially in the high technology area.
As per McKinsey, Organizations are already reaping significant benefits through effective use of Big Data, Advanced Analytics, Human Machine Interfaces, Digital to physical transfer etc.

Impact on the business

On the whole, there are four main effects that the Fourth Industrial Revolution has on business—on customer expectations, on product enhancement, on collaborative innovation, and on organizational forms. Whether consumers or businesses, customers are increasingly at the epicentre of the economy, which is all about improving how customers are served. Physical products and services, moreover, can now be enhanced with digital capabilities that increase their value. New technologies make assets more durable and resilient, while data and analytics are transforming how they are maintained. A world of customer experiences, data-based services, and asset performance through analytics, meanwhile, requires new forms of collaboration, particularly given the speed at which innovation and disruption are taking place. And the emergence of global platforms and other new business models, finally, means that talent, culture, and organizational forms will have to be rethought.

With production data available for the asking (through big data), the key tasks for companies will be to structure their data so as to eke out business intelligence out of it. 'Digital Compass', as proposed by McKinsey can help the organizations to do exactly that. The compass consists of 8 value drivers and 26 practical industry levers. Companies can identify the levers that are best suited to solve their specific problems.

Opportunities presented by Industry 4.0

These are a few possible areas where I4.0 could deliver customer value:
  1. Flexible production with 'Plug and Produce' capabilities that deliver smaller lot sizes at competitive prices and quick turnaround times. This will bring 'Assembly Line' to 'Configure / Make to Order' industry. To achieve this, the production systems must be able to make these individualised products directly from Online Order Instruction, without any human input.
  2. Process standardization across various platforms
  3. Energy management: Effective production planning and scheduling to avoid peak energy consumption, energy efficient production processes, optimal loading of machines based on real time information are some of the ways I4.0 can help to conserve energy.
  4. Logistical process: By effective production planning, production can be matched to demand. This reduces wastage and buffer stock. In addition, integration with GPS tracking devices help organizations plan their logistics operations more accurately and provide accurate delivery information to the customer to plan their operations more effectively.
  5. Predictive Maintenance: Sensors linked to machines can communicate any impending operational issues and machine to machine communication can help down a production line and reroute the production to another available line, thereby reducing the downtime.
  6. Transportation and communication costs will drop, logistics and global supply chains will become more effective, and the cost of trade will diminish, all of which will open new markets and drive economic growth.
  7. For Indian IT companies, providing 'Smart Factory', or 'Factory in a Box' as a SAAS offering can be a huge opportunity. 
Facilitating Technologies

Some of the advanced technologies being used currently in manufacturing include:
  1. Artificial Intelligence: The theory and development of computer systems able to perform tasks normally requiring human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.
  2. Composite Materials: A material made from two or more constituent materials with significantly different physical or chemical properties that, when combined, produce a material with characteristics different from the individual components. The individual components remain separate and distinct within the finished structure.
  3. Quantum Engineering: Uses the field of Quantum Technology for Engineering Applications.
  4. 3D Printing (Additive Manufacturing)
  5. Collaborative Robots (Cobots): These are light weight robots that can do mundane and precision tasks more efficiently than human beings.
  6. Cloud Computing is the delivery of computing services—servers, storage, databases, networking, software, analytics and more—over the Internet (“the cloud”). 
  7. Big Data and Analytics
  8. Industrial Internet of Things (IIOT) is a term for all of the various sets of hardware pieces that work together through internet of things connectivity to help enhance manufacturing and industrial processes. The term includes sensors, devices and machines that contribute to physical business processes in industrial settings.
  9. Digital Twin: A digital replica of every physical machine, that will help the managers to perform Scenario Analysis.
Most of these technologies are already available as islands of expensive technology. I4.0 will use the power of Internet and communication networks to integrate these disparate technologies to help smooth deployment.

  1. An over reliance on automation could shrink job creation, a risk especially for a highly populous and young nation like India.
  2. Increase in social inequality between 'low skill / low pay' and 'high skill / high pay' jobs.
  3. Data security on the cloud is a huge challenge. Many companies have patented manufacturing technologies and will be wary of moving the processes to the cloud.
  4. Lack of a clear definition of I4.0. At present, even a simple use of mobile app to perform approvals is being included under the current broad definition.
  5. Availability and access to talent, eg. data scientists
  6. Availability of a strong technology provider ecosystem
  7. Infrastructure to re-skill and up-skill existing workforce
  8. Ability to adapt business processes and systems to embed technology
  9. For SMEs, even getting access to the new technologies and identifying business use cases are a challenge
  10. Different legal requirement in different countries will pose a challenge to global rollout of I4.0 by companies. For example, Indonesia do not allow data to be shared outside the country. 
  11. Disparate system to handle different business challenges (One system to handle predictive maintenance, another to handle production etc) will end up negating the benefits of the technology integration.
How ERP Systems can become ready for Industry 4.0

It is important that the ERP System, being the central information hub, support I4.0 technologies. Globally 7/10 ERP Vendors are developing I4.0 ready solutions. I4.0 demands digitization of products as well as processes. Since transactions generated by IIOT creates a lot of information, it is important that ERP system is capable of quickly processing this information and take correct decisions.

Any ERP System, to be I4.0 compatible, should, in the minimum, have the following features.
  1. Simple and scalable core application architecture: The world of I4.0 is dynamic and new technologies and processes get quickly added. The ERP system architecture should be flexible and should quickly adapt to the new requirements without significant changes to the core architecture. Any new patches should not significantly impact the current processes. Architecture should also allow extensions without impacting the program code. SOA architecture is a good example.
  2. ERP System should make real time data available to all department: ERP System should be the single source of truth. ERP System should be able to easily integrate with other applications like MES for accurate real time information to be available from it. This will enable intelligent decision making based on real time data.
  3. Should provide a 'Networked View' of the business: In addition to Production data, the ERP System should also be able to capture Customer Data, Market Data and should have the analytic capability to make sense of the data. In this way, while your CRM systems can portend a change in customer tastes, the same can be communicated to the ERP system to make the necessary process changes as required. 
  4. Integrated data model for Cloud and On Premise: One of the pillars of I4.0 is cloud computing. This means that your ERP System should be cloud enabled. One of the challenges in Cloud enabling is the 'Either / Or' binary. Since the data models are different between On-premise and Cloud, Organizations are forced to take a binary decision. If your ERP system has the same architecture and data model for both On-premise and cloud, Organizations can seamlessly toggle between On-premise and cloud, HQ being On-premise with subsidiaries being on cloud, for example. Information from Machine Sensors can flow to the cloud servers from where they can be easily updated on your On-premise ERP System / Data Warehouse and the notification can flow to the tablets. 
  5. ERP System should be IIOT Compliant: When a machine needs a maintenance, it can send information to the ERP System, which in turn can raise a maintenance work order, run MRP Planning Engine to check for spare parts availability, raise purchase requisitions and send the same for approval etc. In addition, ERP System should also do real time analysis of the available information from the machine sensors and help in tactical decision making like capacity scheduling, sales planning etc.
ERP System is the backbone of I4.0 architecture. Since manufacturing world is rapidly moving to advanced technology, ensure that the ERP System is in lock step with these changes. 

Role of Big Data and Analytics (5C Systems)

From the perspective of I4.0, Manufacturing can be considered as a 5M system consisting of Materials (properties and functions), Machines (precision and capabilities), Methods (efficiency and productivity), Measurements (sensing and improvement) and Modelling (prediction, optimization and prevention).  Additive manufacturing integrates the 5M approach to create new products. 
I4.0 envisages the integration of Cyber-Physical systems and Cloud Computing in Big Data environment. While collecting the data is important, it is far more important that these data provide the right information for the right purpose at the right time. Connecting sensors to machines and machines with each other is only a first step. A good MIS should be enhanced with 5C functions. These are:
  1. Connection (sensor and networks)
  2. Cloud (data on demand and any time)
  3. Content (correlation and meaning)
  4. Community (sharing and social)
  5. Customization (personalization and value add)
An NIST (National Institute of Standards and Technology) sponsored workshop has defined cyber-physical systems as consisting of computational and physical components, seamlessly and closely integrated to perceive changes in the real system. For example, (a) future machines will have a twin (an Avatar) integrated in both the physical and cyber spaces; (b) self-aware sensors can perceive changes in machine behavior with precision meaning; and (c) machines can form communities to enable peer-to-peer comparison. This will help create value in the manufacturing of future.


Industry 4.0 as an idea that started around 2014, has gained momentum over the last 3 years. The advance has been facilitated by growth of new technologies including cyber-physical systems, big data and analytics and cloud computing. While these technologies even prior to 2014, what makes them Industry 4.0 compliant is the networked nature of deployment.

As with any paradigm shift, there are bound to be challenges, however, as the various demonstrable examples show, companies that have adopted these technologies have reaped rich rewards in form of cost reduction and improvement in productivity and efficiency.

Any initiative of this nature will not be successful without strong back office support with a strong ERP application. Industry 4.0 places lot of demand on the ERP system to be comply with the standards. Any ERP system that can meet the critical requirements will be the winner in the future. 

  1. India must try to profit from ‘Industry 4.0: Karan Billimoria, The Hindu, Feb 18,2016
  2. The India Potential: Bosch India Blog: Dr.Andreas Wolf - Feb 12,2017
  3. Are Manufacturers in India Ready to Adopt Smart Manufacturing? Apr 25,2017
  4. Industry 4.0 / IOT - Products and Solutions: Festo India: 
  5. Industry 4.0 and the Retrofit Opportunity: Festo Global
  6. Industry 4.0: A world of new business models and markets: Festo Global
  7. India and Germany must collaborate to take Industry 4.0 to the next level
  8. Industry 4.0: The future of Indo German Collaboration
  9. Industry 4.0 as a service for digital manufacturing: Forbes India: Jan 10,2017
  10. What is the prospect and future of Industry 4.0 in India? : Quora
  11. What is Industry 4.0?: Quora
  12. 10 Questions and answers about Industry 4.0: Georgio Stergiou: Nov 28,2017
  13. What the Fourth Industrial Revolution means for India: Prajal Sharma: Oct 03,2017
  14. Do countries benefit from I4.0?: Gary Coleman: Jun 21,2017
  15. Industry 4.0 should be India's battle cry: Akash Gupta: Livemint: Jun 09,2017
  16. Industry 4.0 can transform India's manufacturing: ET GBS: Feb 13,2018
  17. Towards smart manufacturing: Industry 4.0 and India:
  18. How to respond to Industry 4.0: Klaus Schwab: Jan 14,2016
  19. Manufacturing's next act: McKinsey: June 2015
  20. Is your ERP ready for IIOT Challenge?: Terri Hiskey: Epicor
  21. Recent Advances and Trends of Cyber Physical Systems and Big Data Analytics

Mar 6, 2018

ERP Markets in India


An enterprise resources planning (ERP) solution allows companies to integrate their business transactions across the organization. ERP software enables both upstream (vendors) and downstream (customers) integration. This helps the organization to manage their inventory, reduce customer and vendor disputes, reduce working capital requirements, and quickly and accurately report on their financial position to the shareholders.
This article starts off with a focus on the ERP market in India covering the local historical growth in ERP investments starting from around 2012. Since GST has become a critical requirement in India, we look at what GST features must be available in an ERP solution. Next we take a quick look at the trends in the ERP market in India for 2018 and beyond.
Finally we have an overview of the Epicor ERP solution and how it can help companies in India become competitive.
Obtaining the latest data relating to the ERP market in India has been a challenge. To overcome it, I have tried to factor in the data covering the last five years starting from 2012.

The ERP market in India

According to a study by worldwide the ERP applications market (including cloud based ERP) is projected to reach$84.1 billion by 2021. This will include licenses, subscription, and maintenance revenues. New license revenue will account for about 50% of this. Cloud applications will show a robust growth of about 8% CAGR from 2016 to 2021, from $17.6 billion to $25.9 billion.
As per estimates by Gartner, the enterprise application spending in India (including ERP) will reach$2.39 billion in 2017. According to Infoholic Research, the cloud ERP market in India was valued at $97.8 million in 2015 and is expected to grow at a CAGR of 25.4% between 2015 and 2020. While this is still a small percentage of the overall ERP market in India, it is growing at a terrific pace, mostly driven by Government initiatives and SMEs. 
Among the SME sector, automotive, engineering, manufacturing, steel and consumer durables have shown a very high penetration of ERP solutions. These industries could represent significant potential in the coming years.
SAP, Oracle, and Microsoft continue to be the key players in the ERP market in India. However, the market is very competitive with players including Epicor, Tally, Sage, and Ramco competing for the customer pie. In addition, there is a strong appetite for low cost, open source ERP software, especially in the SME segment. In this segment, cost and customer support continue to be the key factors in the purchasing decision. In addition, availability of cloud offering could become a shortlist criteria.

Critical drivers for the ERP purchase

There are multiple drivers for organizations to turn to ERP solutions. Firstly, companies are turning to ERP solutions to improve their operating efficiency and integrate various application silos. Secondly, to catch up with competition who has achieved a quick ROI on their ERP investments. Thirdly, to increase shareholder value. Markets tend to value companies that use ERP applications higher than those that are not. Fourthly, in recent times, the lower cost of moving to cloud ERP is becoming an attractive option for many companies, especially the SME segment. 

GST support

The immediate challenge in India (and hence the critical purchase criteria for 2018 and beyond) is how an ERP application supports GST requirements. The following are the broad business functionalities relating to GST that any ERP application should handle.
1. Configuration flexibility—the application should handle the critical configurations related to GST including different taxes, rates, HSN (Harmonized System of Nomenclature: An International Product Naming Convention developed by World Customs Organization) codes etc.
2. Seamless transactions—the transactions should easily capture GST related information and calculate the tax impact accurately
3. Versatile reporting—including internal transaction reports, reconciliation reports, external statutory reports, and historical and exception reports
4. Intuitive accounting including GST Receivables/Payable/Paid accounting
5. Integration with the GST portal for GSTR uploads (
6. Quick and accurate input for credit calculations
7. End to end integration including inventory valuation and financial reporting
Receiving high quality proactive support from the application vendor via patches that are released to handle statutory changes will be a key differentiator.

ERP trends for 2018 and beyond

1. Core ERP solution: India is still an under penetrated market when it comes to ERP. Significant potential exists in the SME segment for core ERP applications to handle inventory management, production scheduling, and order fulfilment. However, in this market, simplicity and ease of use are the top critical success factors. 
2. SaaS: The SaaS (cloud) ERP market in India is still in its infancy. The model is still hybrid, with core applications being on-premise and satellite applications like HCM, CRM, procurement etc. in the cloud. The cloud market in India will be dominated by existing on-premises customers who want to expand to the cloud while new customers could be predominantly SMEs. According to research done by Infoholic Research, the cloud ERP market in India, which stood at $98 Million in 2015 is expected to grow at a CAGR of 25.4% from 2015 to 2020.  A complex taxation system and data security issues remain the major bottlenecks for full fledged cloud adoption in India.
3. Analytics: Getting ERP solutions to support strategic decision making remains a challenge in India. For most customers their ERP system still remains as an excellent OLTP (Online Transaction Processing) system. The focus will shift from descriptive and diagnostic analytics to predictive analytics that can anticipate potential challenges. More companies will use analytics to achieve continuous process improvements.
4. Warehouse and logistics: With the advent of GST, companies will need to look differently at their warehouse and logistics operations. The trend will be to wind down their extensive and complex inter-state operations and move to logistics service providers. This will call for investment in warehouse and transportation management solutions. The companies that can provide simple cloud solutions will have the first mover advantage.
5. Mobility: ERP on the go, mobile first and mobile only will be the mantras going forward. Using ERP systems on mobile phones and tablets will become the de facto features. Mobile will move from being used for notification and approval to end-to-end transactions and reporting.
6. Internet of Things (IoT): Companies will start focusing on integrating their ERP systems with IoT. The manufacturing sector will lead the demand and will use IoT for materials and spares planning as a first step. This opens the market for ERP products with embedded IoT features.

About Epicor ERP

Epicor Software Corporation ( is a leading global ERP vendor that has been providing best of breed, industry-specific ERP solutions for over 45 years. Globally the company operates in over 150 countries and has more than 20,000 customers worldwide. In India, the company has aggressive plans. Epicor recently partnered with Redington India to focus on the manufacturing industry and capitalize on the opportunities created by the ‘Make in India’ and ‘Digital India’ programs.
As per the Top 10 ERP Systems Report 2017 by Panorama Consulting, Epicor is considered a leading ERP solution for the mid-market segment. It is ranked three for ‘ERP System Functional Score (Breadth of functionality)’ and two for the ‘Time to realize business benefits’. At 3.4% market share, it takes the fifth position in terms of market share in the report
The powerful electronic compliance engines embedded in the Epicor applications enable companies in India to quickly and seamlessly deliver the statutory reports related to GST. The application also enables direct interface with the GST portal to upload and download reports. 
Epicor Electronic Compliance Engine

The compliance engine allows content to be delivered dynamically as and when needed. This, in turn, enables the customer to be future ready today.
Epicor solutions are designed around the unique operational needs of each industry and are available in the cloud, hosted, or on premises. They help customers to better manage business complexity and focus on core growth activities. Epicor solutions support the smallest start-up to the largest multinational, as well as the differing complexities in specific industries. With multitude of deployment options, Epicor is well suited to meet the needs of the customer.
Epicor solutions deliver the choice, flexibility, and agility needed to support strategic initiatives and remove redundant processes. The Epicor ERP system offers a modular approach with robust capabilities focused on reducing costs, streamlining processes, and improving customer responsiveness across the enterprise—all top priorities toward achieving continued growth and profitability.
Epicor provides tailor made ERP solutions for manufacturing, distribution, retail, and services industries. The end to end integrated applications cover business functions including procurement, inventory management, manufacturing, order fulfilment, financials, budgeting, costing, accounting, and financial reporting. 
By implementing a global ERP solution such as Epicor ERP customers can take advantage of modern technologies like artificial intelligence (AI), data analytics, predictive analytics, robotics, Internet of Things (IoT), augmented reality (AR) and others. These technologies can help customers improve their business performance as well as support future growth.
The Epicor ERP solution comes with a single line of code which means that the cloud and on-premises versions are same so the customer doesn’t have to go through a cumbersome time consuming migration process if they decide to switch from one option to the other.

Note: This article is sponsored by Epicor. The information in the related section is provided by the company. All the remaining information is culled from publicly available information in the web, the links to which are mentioned in the 'References' section below.  I do not have any special relation with the company and am not endorsing the ERP product in anyway. This blog continues to be application agnostic.


Aug 26, 2017

India Goods and Services Tax (GST): Implications for ERP Supply Chain

Taxes Subsumed Under GST

Taxes Outside the Purview of GST

Modules Impacted by GST

1. Inventory: For Item Tax Configuration
2. Purchasing: For capturing Input Tax Payment
3. Sales Order: For capturing Input Tax Collection
4. Accounts Payable: For Capturing Input Tax Payment (In case Purchasing Module is not implemented or in case of Service Purchases)
5. Accounts Receivable: For capturing Input Tax Collection (In case Sales Order module is not implemented or when selling services)
6. India Localization Application: For Tax Settlement and statutory reporting

New Interfaces required
1. An interface with GST Network (GSTN) to upload returns and settlements

Prerequisites before going live in GST
1. Calculate the Opening GST Balances
2. Review all the interfaces with third party applications3. 

1. Four types of GST (SGST, IGST, UTGST and CGST)
2. Some items out of GST. So there could be a possibility of different taxes running together
3. Some taxes like Customs duty out of GST
4. Continuation of Cess and Surcharges will make tax settlement complex.
5. Complex Reporting

Mar 28, 2017

GST in ERP: Preparation

If your company is running on ERP, a smooth transition to GST will be the most important challenge that you could face in the coming quarter. With GST expected to roll-out as on 1st July 2017, the date act as a rigid constraint that you have to adhere to.

It is important to plan for the transition. The first step is to understand the implication of ERP and enumerate the key aspects that you should consider.

Here are a few of them.

1. Are you on the latest version? Every ERP Vendor has upgraded their applications to become compatible with GST. So the first step is to review with your ERP Vendor and ensure that you are on the correct version that is adaptable to GST. The information below may be dated. Please check up with the Product Vendor for the latest information.

2. Impact on Registration (Master Update 15 digit GST Registration Number), Returns (Monthly, Quarterly, Annual), Granularity (more details about type of invoices, HSN Codes), Payments, Refunds, Integration with GST Network (GSTN)

3. Impact on Transaction: How to handle Available Stock, Available input credit, Open Transactions like POs, SOs etc, How to handle partial receipts and partial shipments, how to handle Sales Agreements, purchase agreements, long term contracts, Blanket Purchase Orders, Blanket Sales Orders etc

4. Impact on Pricing

5. Impact on Special Transaction Cases: Sales Returns where Shipment made before GST and stocks returned after GST, Goods In Transit etc

6. How to prepare for the transition
  • Impact analysis
  • Version readiness
  • Report readiness
  • Data readiness (ensure correct and complete master data)
  • Transactions assessment and fitment to GST
7. 10 Changes required in ERP
  1. Ensure that the transactions process comply with GST. Some process might need detailed review. These include Interstate Stock Transfer, Outsourcing / Subcontracting etc. In addition, month end process will need to be reviewed to ensure accurate calculation and returns submission
  2. Ensure that Chart of accounts are updated with the required account codes and setups
  3. Ensure that RICE / CEMLI (Reports, Interfaces, Conversions and Extensions / Configuration, Extension, Modification, Localization, and Integration) components are properly updated
  4. Ensure that master data (Organization, Item, Vendor, Customer, Price List) etc are correctly and completely updated
  5. Reduce the number of Open Transactions / Documents (Open PO, Open SO, WIP etc) by closing / Cancelling them
  6. Complete partial transactions like Partial receipt (Receive in full or cancel) and Partial Shipments (Ship fully or cancel), Partial Production Orders (Complete the same, no WIP)
  7. Revalue Stocks if required
  8. Migrate existing tax credit from VAT and CENVAT and transfer them to correct accounts as per GST Law.
  9. Test the standard reports available in your ERP application
  10. Integrate with the GSTN

Feb 26, 2017

ERP For SMEs in India: A Presentation

Here is a presentation that I made to IMCI Bangalore on 'ERP for SMEs in India: Critical Success Factors, Risks, Challenges and Benefits'. This presentation will autorun with Slides Changing every 10 seconds.

Feb 12, 2017

Mr.ERP Consultant, are you Tiger Woods or PV Sindhu?

As all of us know, Tiger Woods plays golf

Some of you may not know Sindhu. She is the Indian badminton player who won the silver medal in the women's singles in the just concluded Rio Olympics.

With regard to the criteria for winning, these two games are philosophically different. In golf, you win by holding the ball in your  possession for as long as possible. In badminton, on the other hand, your success depends on how quickly you can transfer the shuttle to the opponent's court.

In golf, you keep the ball, you win. In badminton, you release the shuttle, you win.

Based on their approach to resolving issues, I categorize ERP consultants into two groups, Golfer and Badminton Player aka Woods and Sindhu

Woods keep the issues with himself. Most of the time, these issues are beyond his control, but he does not do a clean transfer of the issue to the relevant team that can get the issue resolved..

A typical conversation between me and Woods will go as follows.

Me: That issue, which had been open for the last three months, has it been resolved and closed?

Woods: No Ram, it is still pending. 

Me: Why this delay? What is the problem?

Woods: I do not have the required resources. In addition, I need infrastructure to test the solution.

Me: Have you asked the resourcing team for resources?

Woods: There is no use informing the resourcing team. They can't (won't) do anything. They do not help projects. 

Me: How are you planning for resources?

Woods:I am trying to talk to different project managers to get the resources.

Me: Why don't you escalate the issue? 

Woods: Ram, shall I tell you something? This is a bureaucracy, this Organization. Here you do not get any help, only mails get exchanged. You only have to manage to resolve your issues. Same is the problem with Infrastructure. The infra team cannot or do not help.

Me: Have you informed Infra team?

Woods: I sent a couple of mails. No response. Now I am trying to get the infra.

Me: Why have you not informed me yet?

Woods (looking peeved): Ram, this is not fair. I have been marking you in all the mails.

While Woods is the owner of the issue, he is holding on to challenges over which he has no control. 

He neither transfers, informs, escalates nor seek help.

Upshot? The issue (the golf ball) is stuck with him.

Sindhu thrives on transfer. She will only work on the items over which she has control. She will transfer all the obstacles to relevant teams and then follow up. She will use all means of communication, both formal and informal. She will not only transfer obstacles, but will receive formal acknowledgement that the other team has received the issue and are looking into. She will seek clarification from customer, escalate internally,  seek help and do everything till the obstacles are removed and the issue comes back under her control where she can take action. Her communication is action oriented, issue specific, explains the urgency of the information and sets the right context.
Sindhu, almost never, has anything pending with her that she is not working on.

Now you tell me....

Who can close issues faster? Woods or Sindhu?
Who gets better customer satisfaction ratings? Woods or Sindhu?
Who keeps complaining? Woods or Sindhu
Who is a problem solver? Woods or Sindhu?

What kind of consultant are you? Woods or Sindhu?
You tell me.....

Jun 21, 2016

IFRS15 / ASC606: Revenue Recognition Standards: Challenges and Opportunities

What is IFRS15 / ASC606?
The converged standards for revenue recognition released jointly by FASB and IFRS brings about significant changes to the way Organizations recognize revenue from contracts. These changes aim to standardize the revenue recognition processes across industries and jurisdictions and will impact most of  the industries in about 85% of the countries worldwide which follow either US GAAP and IFRS reporting standards. 

The core principle of the new standard is that "an entity should recognize revenue in an amount that reflects the consideration that the entity expects to be entitled to in exchange for goods or services." There are five steps to revenue recognition under the standards

1.  Identify the contract(s) with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when each performance obligation is satisfied.

The new standards are a departure from the existing standards in four ways.

1. Unit of accounting for contracts is Performance Obligation and not Deferred Revenue. Each PO creates a Liability in the books of accounts as soon as either party 'performs'. PO liability is expressed in monetary terms as against deferred revenue which is non-monetary liability
2. Revenue schedules have been replaced by performance obligations.
3. Revenue and billing follow separate accounting paths. A receivable is generated when nothing other than passage of time exists between satisfaction of PO and the consideration due to the entity.
4. The first four steps in the five step process above must be completed at inception of the contract and should be reviewed on a regular basis.

Challenges to business
The new standards pose significant challenges to the business in terms of adoption and maintenance. 

Some of the challenges are:

1. Restatement of the prior years financial statements: The new standards require the retrospective adjustments of the the financial statements. One of the adoption approaches is the Full Retrospective Method, where Organizations need to restate their revenue, based on the new standards, for the two fiscal years preceding the date of inception. This means that they should restate their financial reports for Fiscal Year 2016-17 and 2017-18 and go live on the new standards from FY 2018-19. Since this restatement will have revenue implications, the Organizations will need to disclose the changes in advance to the investors. 
2. All the existing open contracts will need to be revisited and modified to adopt to the new standards. This will be challenging for some companies that have long-term contracts spanning a number of previous years. 
3. The new standards expects the Organization to make a significant number of judgements while deciding on various aspects related to the contracts. It is expected that they make these judgement based on auditable and transparent processes and information.  Organizations will need to make significant investments in implementing appropriate analytic solutions that can provide supporting data for their decisions.
4. The revenue information for contracts could be lying in multiple applications. It will need  technical effort to bring them on to a single location for analysis purposes. 
5. Since about 25 key process of the business is impacted by the new changes, Organization will face challenges related to process change and stabilization
6. There will be challenges related to talent acquisition, training and retention of the talent (especially IT and Accounting Talent).
6. Even during post adoption steady state phase, the contracts will have to be reviewed and modified based on updated information. This will call for further IT and Finance Support.

For the customer these changes provide an opportunity to revisit their current business processes and put in place systems and processes that will improve the business effectiveness.

Product vendors could look for significant jump in demand for their solutions as customers look for COTS products that can handle the challenges.

For implementations consultants this is a big opportunity to review and re-engineer an Organization's current business processes to support the new standards.  

Business requirements
Any solution to support the new standards should have the following minimum features.

1. Rule based, Automatic generation of contracts from elements lying in disparate applications
2. Rule based, automatic identification of performance obligations
3. Ability to seamlessly integrate (360 degrees) with multiple applications
4. Audit trail, approval processes and processes for review and oversight of contracts
5. Role based access control
6. Ability to calculate standalone selling price from existing sales transactions
7. Ability to manually upload standalone selling price or estimated selling price when historical information is not available
8. Ability to modify the interfaced information to support additional analytical requirements
9. Rule based, automatic allocation of transaction prices
10. Automatic / manual recording of satisfactions of performance obligations
11. Rule based, automatic revenue recognition and its accounting reflection 
12. Ability to iterate the process above by modifying the rules till Organization is satisfied with the outcome. Ability to freeze the approved solution.
13. Ease of generating analytical and operational reports for process review, audit and decision support requirements.

The new converged revenue recognition standards (IFRS15 / ASC 606) while challenging to the Organization, also creates opportunity to revisit the existing processes and implement process changes to improve business effectiveness. While the adoption date is fiscal year starting 1 January 2018, Organizations will have to start planning and preparing for the changes from about now. This will give them time to put in place proper systems and processes to prepare for the transition to new standards. In addition, an early start will also help Organizations to execute the talent acquisition and retention strategies required to handle the new standards.

Organization will require IT support to adopt to the new standards. Many vendors are coming out with COTS products that will handle the requirements. I have noted down bare minimum feature list that any such product should contain. Customer can evaluate the products based on the feature list discussed here.

Jun 8, 2016

Three types of Cost Adjustments in OPM Financials...

There are three types of cost adjustments possible in OPM (Oracle Process Manufacturing) Financials. These are:
  1. Average Cost Adjustment
  2. Value Adjustment
  3. Unit Cost Adjustment
Average Cost Adjustment is like a logical inventory transaction. In this you enter the unit cost of the item to be adjusted as well as the quantity of items. This adjustment will work like any regular material transaction as far as cost is concerned. 

OPM Actual Cost Process Engine uses the following formula to calculate the cost of the item in case of an Average Cost Adjustment.

The following two examples will illustrate the concept of Average Cost Adjustment.

Example 1: (Transactions in the current period)
Prior Period Quantity = 1000
Prior Period Cost        = 12
Current Period Receipt Quantity = 500
Current Period Receipt Unit Cost = 10
Current Period Cost Adjustment Quantity = 200
Current Period Adjusted Cost / Unit = 3 (Increase)
Current Period PMAC Cost = ([1000 X 12] + [500 X 10] + [200 X 3]) / (1000 + 500 + 200) = 13.53

Example 2: (No transactions in the current period)
Prior Period Quantity = 300
Prior Period Cost = 3
Current Period Adjustment Quantity = 50
Current Period Adjustment Unit Cost = 0.75
Current Period PMAC Cost = ([300 X 3] + [50 X .75]) / (300 + 50) = 2.68

Value Adjustment is used in cases where you want to adjust the value of the entire inventory at a particular amount. In this case you do not enter any quantity in the transaction since the entire inventory is adjusted. 

OPM Actual Cost Process Engine uses the following formula to calculate the cost of the item in case of an Value Adjustment.

The following two examples will illustrate the concept of Value Adjustment.

Example 1: (Transactions in the current period)
Prior Period Quantity = 1000
Prior Period Cost        = 12
Current Period Receipt Quantity = 500
Current Period Receipt Unit Cost = 10
Value Adjustment = 7000
Current Period PMAC Cost = ([1000 X 12] + [500 X 10] + 7000) / (1000 + 500) =16

Example 2: (No transactions in the current period)
Prior Period Quantity = 300
Prior Period Cost = 3
Value Adjustment = 100
Current Period PMAC Cost = ([300 X 3] + 100) / (300) =3.33

In case of Unit Cost Adjustments, the system uses a two step process to calculate the unit cost of the item. 

In step 1, the system calculates the unit cost of item without considering the Unit Cost Adjustments. In the step 2, the cost calculated in step 1 is added to the unit cost adjustment to calculate the final cost of the item. The formula to calculate the item cost is shown in the diagram below.

The following example will illustrate the concept of Unit Cost Adjustment.

Example 1: (Transactions in the current period)
Prior Period Quantity = 1000
Prior Period Cost        = 14
Current Period Receipt Quantity = 500
Current Period Receipt Unit Cost = 11
Current period adjustment quantity = 300
Current period adjustment cost = 4 (Increase)
Value Adjustment = -7000 (Decrease)
Unit Cost Adjustment = 2.5
Step 1: Current Period PMAC Cost (Without Unit Cost Adjustment) = ([1000 X 14] + [500 X 11] + [300 X 4] - 7000) / (1000 + 500 + 300) = 7.61
Step 2: Current Period PMAC Cost (With Unit Cost Adjustment) = 7.61 + 2.5 = 10.11

May 30, 2016

Framework for Inventory to GL Reconciliation in Oracle Apps

Mr.Amar Sharma, CFO of Prime Agro Foods Limited (PAF) was a worried man.

PAF had implemented Oracle Applications in his company recently. Production Go Live was done with a lot of fanfare but post go live, the implementation was beset with a lot of problems. Most of the issues could be tracked to errors in the intake of opening balances and sub-optimal user training. 

Post Implementation, PAF requested my services for stabilizing their ERP Implementation. In my first meeting with Mr.Sharma, I asked him what is one area that I should focus on.

"One of my key requirements from ERP was that I should get the correct profitability figures from the system. This means that I will need the Product Group wise revenue and breakup of costs  component wise. ", he told me.

While I understood his expectations, I asked him to clarify what he meant by the term 'Breakup of Costs Component Wise'.

"The Cost of Good Sold will contain the following components. One is the cost of materials consumed. This is the cost of the materials consumed in the production process. Two, is the direct overheads. This is also known as Factory Overheads. This includes cost of machine usage, cost of direct labour used in the production process etc. Component three is the cost of indirect overheads, which include rent on premises, cost of cleaning and sanitation of premises, cost of electricity, water etc that is used in the factory. The cost of goods sold is the sum of the three components above, vis. COGS = Cost of Materials Sold + Direct Overheads + Indirect Overheads"

"What is the current status? Are you getting these information?" I asked Mr.Sharma

"No, currently I am neither getting the correct consumption figures nor is my inventory balances tallying with the GL Inventory Value. This means that I neither have a realistic number about my inventory nor do I get a correct figure of my consumption. I am not able to give a profitability number to my management, my MD is very irritated with me and the whole ERP Implementation."

I nodded my understanding. Sadly, this was the case in many of the implementations that I had opportunity to work on an advisory capacity. These two aspects, Inventory Reconciliation and Consumption Valuation are inter-related. Once you get one part right, the other part will automatically fall in place. 
Inventory to GL reconciliation is one of the most difficult challenges facing the ERP Implementation Consultant (during the implementation phase) and the Inventory Accountant post go live. There are three reasons why Inventory to GL Reconciliation is challenging.
One, the 'perpetual accounting method' that ERP use to account for Inventory Transactions. Traditionally inventory is accounted through a method called 'Periodic Accounting'. In this method, Purchase Account is debited at the time of purchase of an item. At the end of the month, the closing physical inventory is taken. The cost of materials sold is calculated by the formula, Cost of Materials Sold = Opening Inventory + Purchases - Closing Inventory. 
Why do the Organizations use 'Period Inventory Accounting'? This method is used because, the inventory transactions are large in number and are more frequent and is done a the store by a store clerk who is not an expert in accounting. Period Inventory accounting lets Organizations segregate inventory transactions from inventory accounting.
ERP Applications use 'Perpetual Inventory Accounting'. In this method, the inventory transactions and inventory accounting are tightly coupled. In this method, for every inventory transactions, Inventory GL Account is debited or credited (Debit for inventory receipt and credit for inventory issue). The only P&L impact is when the material is issued. For each material issue and expense account is debited and the inventory account (a balance sheet account) is credited.
Ideally this is the better approach, but it is fraught with many challenges. Configuration could be wrong-Some inventory transactions could be going to a different account than anticipated, unaccounted transactions, transaction errors, timing differences.. All could lead to reconciliation mismatches.
Two, lack of conceptual clarity (by the user) of the costing method and reconciliation concepts. The second reason is essentially a lack of understanding of 'What information to look for' and 'Where to look for it'. Material costing / valuation is concept oriented. Each costing method works in a different way and provide different output. For example, FIFO, FEFO, WAC, PMAC, Lot Costing and Standard Costing all work differently and provide different valuations for the same inventory. (If you do not know what each of them are, read (THIS). So a consultant, not only should know the costing method used, but also should know why that particular method is used in the first place.
When it comes to reconciliation concepts, there is internal reconciliation (within the sub-ledger) and then there is external (GL) reconciliation.
Three, large number of transactions. This is self-explanatory. Due to huge number of inventory transactions, identification of reconciliation issues is very challenging. One needs a structured approach to process the reconciliation and identify and resolve reconciliation issues.

"Sadly the problem that you are facing is not new. This is the case in many ERP Implementations that I have reviewed. It has come to a stage where I can review any implementation and ask a question, how are you reconciling inventory with GL and be responded with blank stares". I told Mr.Sharma

"So what is the solution to the issue? Are we to live with this mess for the rest of my tenure here? If this goes on, I can be sure that it is going to be a short one", mused Mr.Sharma bitterly.

"Don't you worry, you are in expert hands", I tried to pacify him, "I will help you resolve the issue. In my line of work, you can't become an expert without handling such challenges"

"How will you do it?", Mr.Sharma looked up, perhaps the first time, with hope in his eyes.

"First of all, I have to explain to you some concepts", I replied, "There are four data points to be considered while trying to reconcile Inventory to GL. Two of them are in GL and two of them are in Sub-ledger. The four data points are:
  1. GL YTD Balances for Inventory group of accounts
  2. GL Period balances for the Inventory group of accounts. 
  3. Inventory Period End Balances in Inventory Sub-ledger
  4. Inventory Transactions in Inventory Sub-ledger.
All of the four data points are linked together by the cost of inventory.

The four data points are shown in the diagram below.

Inventory closing balances should tally with GL YTD Balances and Inventory Transactions should tally with GL Period Balances", I concluded

"I am impressed", said Mr.Sharma. Coming from a CFO, it is a huge compliment. They are not normally given to expressing their emotions. Normally they are dour and acerbic and morose. (I am joking Mr.CFO, I am sure that there are pleasant CFOs out there, like Unicorns or something)

"Thank you Mr.Sharma", I replied graciously. "Coming to the reconciliation process, and here I am using reports in Oracle EBS as a reference, there are four reconciliation points that you have to consider. One could call them the 'Four Pillars of Reconciliation'. While one of them is the internal reconciliation (Within the sub-ledger), the remaining three are a part of external reconciliation (Sub-ledger to GL). These are:

1. Net Value of Inventory Transactions for the period = Inventory Valuation Report for the current period - Inventory Valuation Report for the previous period. (Internal Reconciliation)

2. Net Value Inventory Transactions for the period = GL Period Balances in Inventory Account for that period (GL Reconciliation 1)

3.  Closing Value of Inventory as per Inventory Valuation Report = GL Inventory YTD Balance in Inventory Account (GL Reconciliation 2)

4. COGS Value from OM Subledger = PTD Value of Material Consumption Account + PTD Value of Direct Overheads + PTD Value of Indirect Overheads (GL Reconciliation 3)

The above processes are shown in the diagram below.

"I see that in GL Reconciliation 3 above, you have an item called 'PTD Value of Material Consumption Account'. That should be my material consumption, correct?", asked Mr.Sharma

"Consumption is value of materials consumed in the process. Ideally it should be the PTD Value of Material Consumption Account as shown in point four above. However, in case you also have 'Miscellaneous Inventory Issue' transactions, you have to add value of those transactions to the above to get the consumption numbers.", I replied

"The formula is: Consumption for the Period = PTD Value of Material Consumption Account + PTD Value of Miscellaneous Issue Account", I continued

"You mentioned earlier about a structured approach to inventory reconciliation? What do you mean by that?", queried Mr.Sharma.

"Yes, I did mention 'structured approach'. In my opinion, there are various aspects to this. The approach starts at the time of solution design itself. User should have a clear view of various inventory transactions - Miscellaneous receipt, miscellaneous issue, PO receipt, Sales Issue, PO Returns, PO Corrections, Sales Returns, Physical Inventory Adjustment, Cycle Count Adjustments, Issue to Production, Production Yield, Material Transfer (to name a few) - how they should be accounted and how they are accounted. In addition user should be aware of additional cost generating transactions (without any material transactions) including cost adjustments, cost allocations and cost revaluations and how these impact Inventory Accounting. All these impacts should be tested thoroughly and documented clearly.

The next aspect is to build in adequate controls in the system so that Inventory account are not impacted by manual intervention. Most ERPs provide a whole host of system features to prevent manual interventions to the 'Control Accounts'. These controls should be tested, documented and implemented. In addition, the access to material transactions should be limited to Store Keepers and Store Managers. There are additional control features that the user can implement regarding the system configuration accounts.

Another aspect to the structured approach is to start reconciling from top down. This is something that I have found useful. Normally you should start reconciling at the global level and down through the individual warehouse level an through the transaction sources level. It is very easy to get overwhelmed by the volume of transactions and the hugeness of the effort required to reconcile the same.", I concluded.

"Wow ! that is a lot of information for me to handle", said Mr.Sharma. "I am very happy that you are here to support us. We SMEs do not have the capability to review the caliber of the consultants. We are fortunate that we found you. I am sure that with your expertise, we will be able to stabilize our ERP System much more quickly than normal". 

"Thank you sir. I will try my best. May I say that I may be a bit expensive, but I am the best insurance you have against delay in stabilization of your application and the delay in getting ROI on your ERP Investment.", I concluded.

Post Script: You can also read THIS POST

About me: I am a senior ERP Consultant / Expert / Advisor. I can be contacted at or Twitter @vkrama01