ERP for Manufacturing — The Big Picture

Manufacturing is where ERP was born, and it remains the domain where ERP delivers the greatest return. A factory is a complex system: raw materials arrive, machines transform them, labour adds value, quality checks verify standards, finished goods move to warehouses, and invoices flow to customers. Every one of these steps generates data that must be recorded, tracked, and reconciled. Without an integrated system, this data lives in fragments — a stock register here, a production log there, an accounts ledger somewhere else.

This chapter explains why manufacturing demands a specialized ERP, introduces the key concepts that drive manufacturing operations, and shows how an ERP connects the factory floor to the general ledger.

What You Will Learn

• Why generic business software falls short for manufacturing
• Core manufacturing concepts: BOM, MRP, production planning, shop floor control, WIP, and quality management
• How job work and subcontracting operate in the Indian manufacturing context
• How material and data flow from production through to accounting
• What distinguishes manufacturing ERP from general-purpose business tools

Prerequisites

Read Chapter 1: What is ERP and Why SMBs Need It for foundational ERP concepts.

Why Manufacturing Needs Specialized ERP

A trading company buys and sells finished goods. Its core ERP needs are inventory, invoicing, and accounting. A manufacturing company does all of that and more: it transforms raw materials into finished products through a series of planned, tracked, and quality-controlled operations. This transformation process introduces complexity that generic business software cannot handle.

Consider a steel fabrication shop. It purchases mild steel sheets, angles, and channels. It cuts, welds, drills, and finishes these materials into structural components. Each product has a specific bill of materials. Each production run consumes materials, uses machine time, and requires labour. Some operations are outsourced to job workers. Quality inspections happen at multiple stages. The finished product must be costed accurately — including material, labour, overhead, and job work charges — before it can be invoiced.

No spreadsheet or generic invoicing tool can manage this end-to-end. Manufacturing ERP exists precisely for this purpose.

Key Manufacturing Concepts

Bill of Materials (BOM)

A Bill of Materials is the recipe for a product. It lists every raw material, sub-assembly, and component required to manufacture one unit of a finished product, along with the quantity of each. For example, a BOM for a steel bracket might specify 2 kg of MS flat bar, 4 bolts, and 0.5 hours of welding time.

BOMs can be multi-level. A finished product may contain sub-assemblies, each of which has its own BOM. An ERP system maintains these hierarchies and uses them to calculate material requirements, production costs, and purchase needs.

Material Requirements Planning (MRP)

MRP is the process of determining what materials to procure and when, based on production plans and existing stock. Given a set of production orders and their BOMs, the MRP engine calculates the total material demand, subtracts what is already in stock or on order, and generates purchase requisitions for the shortfall.

For a food processing unit planning to produce 1,000 packets of a spice blend next week, MRP would check the BOM for each ingredient, compare requirements against current stock, account for materials already on order from vendors, and flag any shortages that require immediate procurement.

Production Planning and Shop Floor Control

Production planning determines what to produce, in what quantity, and by when. A production order is the central document — it specifies the product, quantity, BOM, target start date, and target completion date.

Shop floor control tracks the execution of production orders: which operations are in progress, which are complete, what materials have been consumed, and what output has been produced. In an ERP system, the production order moves through states — draft, released, in progress, completed — providing real-time visibility into factory operations.

Work-in-Progress (WIP)

At any given time, a factory has materials that have entered production but are not yet finished goods. This is Work-in-Progress. WIP has financial implications: the materials consumed are no longer raw material inventory, but they are not yet finished goods either. An ERP system tracks WIP to ensure accurate inventory valuation and costing.

Quality Management

Manufacturing requires quality checks at multiple points: incoming raw material inspection, in-process checks during production, and final inspection before dispatch. An ERP system records quality inspections, links them to production orders and batches, and can block dispatch of items that fail inspection.

For an auto parts manufacturer, a quality inspection might verify dimensional tolerances, surface finish, and hardness values against specification. The inspection record becomes part of the product's traceability chain.

Job Work and Subcontracting

Job work is a defining feature of Indian manufacturing. A company sends raw materials or semi-finished goods to an external contractor (job worker) for specific operations — heat treatment, plating, machining, embroidery — and receives the processed goods back. This is governed by specific GST provisions (challan-based movement under GST rules).

An ERP system tracks job work orders: what materials were sent, to which contractor, for what process, when they are due back, and at what cost. This is critical for both operational control and GST compliance, as job work movements require proper documentation.

How ERP Connects the Factory Floor to Accounting

The true power of manufacturing ERP lies in integration. Every physical event on the factory floor has a corresponding financial entry. Here is how data flows through the system:

Raw Material Purchase
    │
    ▼
Vendor Bill → Accounts Payable (Ledger Entry)
    │
    ▼
Stock Receipt → Inventory Increase (Stock Ledger Entry)
    │
    ▼
Production Order Created (BOM exploded)
    │
    ▼
Material Issued to Production → Inventory Decrease + WIP Increase
    │
    ▼
Job Work Order (if applicable) → Material Sent to Contractor
    │
    ▼
Job Work Receipt → Material Returned + Job Work Cost Recorded
    │
    ▼
Quality Inspection → Pass / Fail / Rework
    │
    ▼
Production Completed → WIP Decrease + Finished Goods Increase
    │
    ▼
Sales Order → Delivery → Inventory Decrease
    │
    ▼
Sales Invoice → Accounts Receivable (Ledger Entry) + GST Output
    │
    ▼
Payment Received → Bank Entry → Receivable Cleared

At every stage, the ERP system creates the appropriate stock ledger entries and journal entries automatically. The accountant does not need to manually post material consumption or production costs — the system handles it as a natural consequence of recording operational events.

Manufacturing ERP vs. Generic Business Software

The Indian Manufacturing Context

India's manufacturing sector is dominated by MSMEs (Micro, Small, and Medium Enterprises). According to government data, MSMEs contribute approximately 30% of India's GDP and nearly half of total exports. The Make in India initiative has further emphasized the importance of a strong domestic manufacturing base.

Yet most Indian manufacturing SMBs operate with minimal or no ERP. Common reasons include perceived high cost, complexity of implementation, and lack of software that understands Indian manufacturing workflows — including GST implications for job work, TDS on contractor payments, and statutory compliance for PF and ESIC.

A manufacturing ERP built for Indian SMBs must handle these realities natively, not as afterthoughts or add-on modules. It must understand that a 50-person factory in Rajkot or Ludhiana has different needs from a 5,000-person plant in Detroit, but its operational challenges are no less real.

Tips & Best Practices

Tip: Before evaluating any ERP, document your current manufacturing process from raw material receipt to finished goods dispatch. Include every handoff point, every register, and every approval. This map becomes your requirements document.

Tip: Pay special attention to job work processes. If your factory relies heavily on subcontracting, the ERP must support job work order tracking with proper GST challan management. This is a common gap in ERP systems not designed for Indian manufacturing.

Warning: Do not confuse a good invoicing tool with a manufacturing ERP. If the software cannot manage BOMs, production orders, and material consumption, it is not a manufacturing ERP — regardless of what the marketing says.

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