|Multiple surveys conducted by Gartner among C-level executives highlight “digital transformation” as a top priority – even among manufacturing firms. And rightly so, because investing in IT systems that bring every aspect of your business together under one roof is one of the most effective ways to create business value. Optimizing Enterprise Resource Planning (ERP) can provide more value by making ERP an effective foundation for more efficient processes to support digital transformation. While implementing a new ERP system is often one of the most difficult and challenging endeavors any manufacturing organization will ever undertake, it is just the first step in the ERP journey. Maintaining or increasing competitive advantage requires continued investment.|
The overriding consideration in almost every ERP modernization discussion is whether the organization should consider upgrading its current system or implementing a new system. The final decision is often driven by factors such as:
- a precipitating business event like a merger or acquisition
- an announcement from the ERP vendor that your version is about to go out of support
- your existing ERP system simply fails to perform as well as those of your competitors
Irrespective of the reason, you will first need to define your new system requirements clearly.
Two critical assumptions that all ERP systems make are that data is correct, and that agreed plans will actually be executed. Manufacturing organizations that understand and meet these requirements will flourish in an ERP environment. Those who do not will struggle significantly.
Five warning signs of process inefficiency
One fundamental truth about all ERP systems is that they’re only as good as the underlying data and business processes that support it. In fact, two of the most common reasons cited for the high rate of implementation failures are inadequate organizational change management and poor master data quality.
To determine if your ERP system is limited by your data and processes, look out for these five warning signs:
Meeting deadlines is the essence of successfully conducting modern business. In this increasingly competitive world, companies that do not meet delivery deadlines risk their continuity.
If there is one thing that ERP systems are inherently good at, it is planning resources across the entire enterprise to deliver goods to customers in a reliable and predictable manner. This capability is at the very heart of all mainstream ERP systems.
A red flag, however, is when your organization has been using an ERP system for several years and is still struggling to achieve acceptable customer service levels. There could be some underlying business process issues that need addressing. To understand if that is the case, it is helpful to look at a KPI like perfect order performance, which is widely regarded as the single most important KPI for measuring overall supply chain performance.
Understanding what’s keeping your organization from achieving higher perfect order performance is a critical first step in determining if an ERP system change can help. But to drill down to the proper level of detail, requires a thorough root cause analysis of your perfect order failures. For example, determining that a large portion of your perfect order failures is caused by an inability to produce to schedule is too vague to determine if the issues are process- or system-related. You need to dig even deeper.
If the deeper analysis reveals that the issues are caused by poor equipment reliability and/or quality, then focusing on continuous process improvement stands a far better chance of improving perfect order performance than any ERP system upgrade. Conversely, if the issues are more on the scheduling side, then it could indicate a training issue or a true system shortcoming. If it’s the latter, then the next logical question you must ask is: “Does a system upgrade fix this issue, or does it require a new system?”
By following a similar line of logic for each major perfect order failure, it is possible to create a scorecard matrix to define what issues can be solved by:
- focused process improvements
- ERP system upgrade
- ERP system reimplementation
A fundamental requirement for successful operation in an ERP system is having accurate inventory. The ability to maintain accurate inventory records will increase order fulfillment capability, reduce costs and improve customer satisfaction. Timely access to this information can therefore be a strategic differentiator.
Some best practices to implement prior to going live with a new ERP system are to:
- Put in place cycle counting to track and report inventory record accuracy (IRA) routinely
- Conduct root cause analysis of IRA failures
- Implement appropriate corrective actions to prevent recurrence of failures
But even if all these practices are in place, it’s still useful to analyze the manual inventory adjustments in the system as a secondary means to verify that good inventory practices are operational. (See the case study below.)
Case study: Why it’s important to track manual inventory adjustments
A manufacturing site was struggling with filling sales orders due to inventory-related issues. As a result, they implemented a rigorous cycle counting process to help improve inventory record accuracy. Having done their homework, the team included many “best practices” in their cycle counting process, such as:
- conducting cycle counts on a routine and frequent basis
- establishing a trained, dedicated team to perform the cycle counts
- scheduling the cycle counting such that each inventory location got counted at least once a quarter
In relatively short order, the inventory record accuracy began to improve, but despite this improvement the organization continued to struggle with customer order fulfillment. Increasingly, the situation started to look like a warehouse management system (WMS) issue. Soon several members of management began to believe that the only fix was to upgrade or replace the WMS.
Fortunately, before that talk gained too much traction, the mystery was solved. It turned out the warehouse staff was a little too zealous in their desire to improve the inventory record accuracy (IRA). Since the goal of improving IRA was well publicized, the warehouse staff thought they were doing the right thing by “cleaning up” the inventory to be cycle counted ahead of the count. This was done by making manual inventory adjustments. However well-intentioned these efforts were, they simply masked the problems and prevented any real root cause analysis and corrective actions from being performed.
Although there are several lessons to be learned from the case study, the main point is that, irrespective of how good your inventory record accuracy is, checking the number and size of write-ons and write-offs is a good way to verify the effectiveness of your processes independently. When performing this analysis, be sure to measure both the number of adjustments and the magnitude of each adjustment in terms of absolute value.
The reason for doing the latter is because write-ons and write-offs have a tendency to balance themselves out over time, unless there is some systemic bias. So, if you have a situation where there are $1.21 million of write-ons and $1.19 million of write-offs, a simple arithmetic analysis would show a net impact of only $20 000 which would, in all likelihood, fly under the radar. Conversely, when looked at in terms of absolute value, the total combined write-on plus write-off quantity would be $2.4 million, which would almost certainly draw attention.
One of the key benefits of an ERP system is that it provides real-time access to costing data which enables improved decision-making. Of course, the quality of the decisions that can be made is dependent upon the quality of the costing data itself. So to get the most out of your ERP system, it is important to take the proper actions to maintain good cost data integrity.
Since ERP systems are based on standard cost accounting, managers must understand when and how to react to variances. For manufacturers, the most important variances are production order variances, of which the two main categories are:
- over / under consumption of materials
- over / under consumption of resources (line time)
The use of standard costs naturally promotes a management by exception process. As long as variances remain below some reasonable threshold, no intervention is required. Conversely, if variances surpass that threshold — either above or below — management must quickly investigate and decide on the required actions. Although it is common to have high production order variances when an organization first implements an ERP system, these variances should come down over time if management responds to them appropriately.
The primary mechanism for reducing production order variances is to adjust the bill of materials (BOMs) and routings to more accurately reflect actual demonstrated performance. If your organization has been on an ERP system for several years and continues to see frequent, high production order variances, it’s a sign that the underlying business process for responding to production order variances must be improved.
Carrying the appropriate amount of inventory can be a bit of a delicate balance. Too much inventory results in unnecessary capital spend and potentially more waste associated with over-age and obsolete inventory, whereas too little inventory can lead to stockouts and missed sales opportunities.
Maintaining appropriate inventory levels hinges on several factors. Understanding what is causing your organization to struggle in that regard is a key step in determining whether a system upgrade can help. For instance, if BOMs are not reflected accurately, it could lead to either over or under purchase of components.
Another item that is critical for setting appropriate stock levels is an accurate demand forecast. But before looking for a system solution, first ask the following questions about the organizational structure and business processes:
- Is the demand planning manager viewed as an important role in the sales and marketing organization and staffed accordingly?
- Is the demand plan reviewed and updated at least monthly?
- Are time fences and decision points established and honored?
In other words, is the organization doing all it can to develop an accurate demand forecast? A system upgrade may go some way in providing access to improved forecasting algorithms, but it can only work well if the right organizational structure and processes are in place.
Tremendous advances have been made in recent years in the reporting and business intelligence capability of most ERP systems. In fact, if your ERP system is more than a few years old, there’s a good chance that your organization can benefit significantly from these recent advancements. Do not assume though that all your reporting issues can be solved by upgrading alone.
Consider the seemingly simple task of running monthly KPI reports. Intuitively, it would appear that this type of routine, repetitive report should be easily automated. But what if month-end happens over a weekend and your organization has the habit of waiting until Monday morning to finalize the production postings from the weekend? The reports must then either be delayed or manually adjusted to account for end-of-month timing issues.
Another common cause of manual manipulation of reports is incomplete or inconsistent population of fields used in the report. When this occurs, someone must either massage the input data, or review the output and adjust as necessary to account for field inconsistencies. No matter how many advances your ERP vendor has made in their latest version, it is highly unlikely that an upgrade is going to resolve either of these reporting issues.
It’s therefore important to review all routine reports and ask the question: “What is keeping us from automating this report today?” Upgrading will likely help if the answer relates primarily to technology. If the answer leans more towards organizational behavior, then upgrading won’t help. The focus must then be directed toward fixing the organizational behavior instead.
Deciding when and how to update your ERP system is a major decision for any organization. No matter what you opt for, the choice is ultimately a business decision based on a cost and benefit analysis with a 10-20 year outlook.
According to an Aberdeen study, those manufacturers that best-leverage their ERP technologies reduce inventory by an average of 20%, cut both manufacturing and administrative costs by 14% each, increase manufacturing compliance by 20% and improve on-time shipments by 21%.
So make sure you can deliver the cost of entry before diving into the latest innovation. Consider external advice when it’s required, such as gauging your organization’s readiness for a new ERP system implementation. Then take advantage of the emerging technologies to place you on the road to success.
|Dave Beldyk is the President and Founder of DABCO Consulting, LLC. He has 30 years of Chemical Industry experience with DuPont, 15 of which were spent in an ERP environment. Dave has played an active role in several large-scale projects, the most rewarding of which was leading a highly successful, US$80 million global ERP implementation. Throughout his time in the ERP space, he has gained a deep appreciation and understanding of the critical role business processes play in the overall success of any ERP operation. In 2016, Dave and his company partnered with Competitive Capabilities International (CCi) to develop a product to help manufacturers prepare for, and get the most out of, their ERP implementations. Blending his real-life ERP experience with CCI’s integrative improvement methodology and tools, the two partners created ERP Optimization TRACC — a truly unique and innovative product aimed at instilling the kinds of behaviors and mindsets to help manufacturers excel in their ERP environment.|
For many manufacturing organizations, an optimized ERP system is a key enabler of digital transformation. Watch this webinar to find out how you can avoid common ERP pitfalls by getting a head start on the core ERP building blocks that drive manufacturing success.
This resource has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained herein without obtaining specific professional advice. Competitive Capabilities International (CCi) does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this resource or for any decision based on it.