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Unit 6.5

How ERP Systems Support Business Processes: The Order-to-Cash Cycle

IT 233: Business Information Systems

Learning Objectives 🎯

By the end of this session, you will be able to:

  • ✅ Explain how an ERP system supports a cross-functional business process.
  • ✅ Describe the steps of the Order-to-Cash (O2C) business process.
  • ✅ Identify how different ERP modules (Sales, SCM, Finance) interact during the O2C cycle.
  • ✅ Understand the power of integration in reducing errors and providing real-time visibility.

The Challenge: Information Silos

Traditional (Siloed) Approach

  • Sales has its own system.
  • Warehouse has a separate inventory list.
  • Accounting uses different software.
  • ❌ Manual data re-entry
  • ❌ High chance of errors
  • ❌ No real-time visibility

Integrated ERP Approach

  • One central database.
  • All departments use the same system.
  • Data entered once is available to everyone.
  • ⚡ Automated workflows
  • ⚡ Single source of truth
  • ⚡ Real-time visibility

The Order-to-Cash (O2C) Cycle

Definition: The Order-to-Cash (O2C) cycle is the complete set of business processes covering the receipt and processing of a customer order, its fulfillment, and the receipt of payment.

It's the core process of how a company makes money from its sales.

Let's see how an ERP makes this seamless.

The O2C Journey: An Overview 🗺️

  1. Step 1: Create Sales Order (Sales Dept)
  2. Step 2: Fulfill Order (Warehouse/Operations)
  3. Step 3: Ship Order (Logistics/Shipping)
  4. Step 4: Create Invoice (Accounting)
  5. Step 5: Receive Payment (Accounting)

In an ERP, each step automatically triggers the next, creating a smooth, integrated flow.

Step 1: Create Sales Order (Sales Dept)

A salesperson receives a new order from a customer.

  • They access the CRM or Sales module to create the order.
  • ⚡ Integration in Action: The ERP instantly...
    • Checks customer credit limit (Financial Module).
    • Verifies and reserves inventory (SCM Module).
  • Once confirmed, the order automatically moves to the next stage.

Steps 2 & 3: Fulfill & Ship (Operations)

Step 2: Fulfill Order (Warehouse)

  • Confirmed order appears as a "pick list" in the SCM module.
  • Staff picks and scans items.
  • 📊 Inventory levels are updated in real-time across the entire system.

Step 3: Ship Order (Logistics)

  • SCM module generates shipping documents (packing slip, etc.).
  • System can integrate with carriers (e.g., Aramex, local couriers).
  • Shipping the order updates its status and triggers invoicing.

Steps 4 & 5: Invoice & Payment (Accounting)

Step 4: Create Invoice

  • Shipping the order automatically triggers the Financial module.
  • An invoice is generated and sent to the customer.
  • An entry is created in Accounts Receivable (A/R).

Step 5: Receive Payment

  • Clerk records payment in the Financial module.
  • ⚡ Integration in Action: This single entry...
    • Clears the A/R invoice.
    • Updates the cash balance.
    • Updates the customer's credit status.

Visualizing the Integrated Flow 🔄

Sales Module

Sales Order Created

⬇️

Triggers...

SCM Module

Pick List Generated

Inventory Updated

Order Shipped

⬇️

Triggers...

Financial Module

Invoice Generated

Payment Recorded

General Ledger Updated

The ERP acts as the central nervous system, ensuring seamless communication between departments.

Practical Application: O2C in Nepal

Scenario: A Kathmandu-based electronics distributor (e.g., a supplier for Daraz) uses an ERP system.

  • Order: A customer in Pokhara orders a laptop via their website (integrated with the ERP's Sales module).
  • Integration: The ERP checks the Kathmandu warehouse stock (SCM) and the customer's payment status via an integrated gateway like eSewa or Khalti (Finance).
  • Fulfillment: The warehouse team gets the pick order. The ERP suggests the best local courier based on delivery time to Pokhara.
  • Visibility 🔍: The sales team in Kathmandu can see the exact moment the laptop is shipped and when the payment is cleared, without making a single phone call to the warehouse or accounting.

Key Takeaways recap

What have we learned about ERPs and the O2C cycle?

  • ERPs streamline cross-functional processes by integrating departments onto a single platform.
  • The Order-to-Cash (O2C) cycle is a perfect example of an end-to-end process supported by an ERP.
  • An action in one module (Sales) automatically triggers actions in others (SCM, Finance).
  • This integration provides a single source of truth and real-time visibility across the entire organization.

Discussion Questions 💬

  1. What problems could occur in the O2C process if a company used separate, non-integrated systems (information silos)?
  2. Besides Order-to-Cash, what is another cross-functional process that would benefit from an ERP system? (Hint: Think about buying materials).
  3. How does real-time inventory visibility from an ERP specifically benefit the sales department?

Thank You

Any questions?

Next Topic: Unit 6.6 - The Procure-to-Pay Cycle

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