Choosing the Right Enterprise Resource
Planning (ERP) System:
How to Avoid the 7 Fatal Flaws
For process manufacturers like Chemicals, Pharmaceuticals and Food & Beverage,production and inventory control, planning, scheduling, product costing applications improve productivity and reduce costs at production sites throughout the world. For many, however, their applications are either original homegrown systems which fit them to a “T” at the time they were built or discreet based systems lacking core process manufacturing functionality. Because of growth and changing industry requirements, many process manufacturers are coming to the realization that these systems are no longer adequate to support their business objectives.
If you are going to replace existing systems, how do you get started, particularly if you have no experience in selecting and buying packaged software? The problem is that the things that could spell trouble for you are buried deep within the very foundation of the software - its initial design. Buyers in process manufacturers are most vulnerable since the vast majority of the software offered in the marketplace has been designed for discrete manufacturing (automotive, electronics, machine tools, etc.). These vendors have added functions to their software to accommodate process requirements. As you might expect there are compromises. As such, there are limitations. Will these limitations be a problem for your production site? This paper should help you find the answers.
Enterprise Resource Planning is a Tool
Having a cohesive information system to cover all business needs from financial controls and reporting, the management of our relationships with and sales to our customers, long range planning of capacity requirements and short range production scheduling, supply chain management, inventory management and cost controls is a worthy goal. Enterprise esource Planning(ERP), in short, should provide all employees in the corporation with information to support them in performing their jobs. Since everyone will be dependent upon the data from this pervasive information system, everyone is dependent upon everyone else in the organization to input accurate and timely data. The tool is really everyone’s - ERP serves many ‘masters’ in the organization. Process manufacturers have followed the historic pattern of other industries in choosing information systems such as ERP. The initial packages were selected by the finance areas of the organization. And the financial groups within these companies have done an excellent job of choosing their tool. They have typically chosen the best financial tool available today. But manufacturing products like chemicals, pharmaceuticals, or even foods is a very complicated business. The complications of balancing preferred sequencing in production against customer demands (which never match that sequence!) against the need to keep this high fixed cost facility running to drive unit costs down is just one example of pressures that will be placed upon an ERP system. Balancing fluctuating quality parameters and controlling processes with strict set points, producing end products to specifications using different technologies, understanding the cost ramifications of new product introductions or product abandonment, these are just some of the complications of managing the production site. Why point out the obvious? After all, you live with and manage these complications every day. The whole point here is that your tools for managing this complicated business - your ERP system - must have enough robust functions to mirror your information requirements, however complicated they might be. Without these functions you will have to either (a) change the way you do business, (b) use another tool to manage that part of the business, or (c)change your ERP system. While no packaged ERP solution will meet anyone’s requirements perfectly, finding the closest fit to your requirements means that the ERP tool will leverage everyone’s productivity and improve the company’s overall performance.
Looks Good To Me
Selecting software from all of the choices in the marketplace is a bewildering experience. So many details, so many presentations, so much the same. If you have never selected and implemented an ERP package before, there are some lessons others have learned that you need to watch out for.
The first step is to determine what you really need in a system in order to provide the best fitting tool possible. The definition must have the same scope as your ERP implementation - and everyone who will be using the ERP tool should be represented in defining the total requirements. This is a tedious task, but there are some tools which can help you in this effort. Remember that you need to identify those information requirements which are unique to your particular business. For example, you might need to report inventory cycle counts by height of the liquid in a tank and have the system convert this to the inventory unit of measure. This is a relatively unique requirement.(The electronics manufacturer does not need this function, for example.) On the other hand, making sure that the system will balance both the debits and the credits when posting to the General Ledger is a universal requirement. For the process manufacturer, missing either of those functions used as examples (tank measurements and balanced entries) would mean that the ERP system was not a proper tool for their needs. The problem, of course, is to find out if there are any of these holes in the system before buying.And that’s the rub. One can never know everything there is to know about the complex details of an ERP system before purchasing that system. So one must know which questions to ask the vendors. Sometimes we don’t ask a question because it seems too detailed. But sometimes we don’t ask a question because it seems too obvious and we end up sadly surprised when learning to use the ERP tool! For example, every business in the world requires that a General Ledger has an ability to check for a balance between the debits and the credits before posting the entry. This is clearly an obvious question which does not need to be asked. So what are the obvious questions which SHOULD be asked?
Far Beneath the Surface, Lurks...
You need to ask the questions about parts of the ERP system which are critical to your success as a process manufacturer, but which are not universally required around the world by every industry. Remember that the majority of ERP suppliers are selling their systems to many industries - automotive, aerospace & defense, electronics, banking, insurance, health care and chemical companies. The General Ledger requirements are all the same, but there are significant differences in other segments of the ERP offering. Here is a real conundrum. Most of you have not worked in these other industries. Therefore it is not possible for you to know the differences in how they manage their businesses and what unique requirements they would have on an ERP system. So how do you know which requirements you have as say, a chemical producer, which are different than the requirements of, say, a machine tool maker?
“For want of a nail the shoe was lost”
Fatal Flaw #1: Unit of Measure Conversions
At an industry conference,, an executive from a well known chemical company was describing their ERP implementation. His stunning news was that Witco in the United States will convert all of its plant operations to the metric system. The immediate question should be “Why?” Why such drastic action? “Going Metric” has drastic and has wide reaching ramifications. You see such a seemingly little, bitsy detail as a Unit of Measure is all pervasive. Just as you need units of measure to describe your formulations, to record your purchases and their receipts, to measure volume of production, to meter out shipments to your customers, to calculate performance measurements, the unit of measure is all pervasive in an ERP system. It is so pervasive that, like the air, you don’t think about it! It is so critical you might not even think to ask an ERP vendor if they can do unit of measure conversions and how - ALWAYS ask them how! - they do it. So, if your ERP system does not provide you with a sufficiently robust tool in the area of unit of measure conversion, and you want to have a universally consistent information system,, then you will be forced into a difficult decision. The chemical company mentioned above chose to change the way they do business in a significant part of the world. And one can only imagine the additional burden this will place upon the business. They believe that linking up Manufacturing Exection Systems (MES) will assist their operators in verifying their inputs, but what about other areas of the business? Will they ask their vendors to label their products in metric units? What about their customers? Will they change pricing to metric units and ask their customers to work in metric? What about historic data? Will it all be converted? Even the general ledger - the universal tool for everyone - could present them with a problem because some accounts carry not only dollar values but quantities. And those quantities have an IMPLIED unit of measure, not a recorded unit of measure. One can only guess at how many mistakes will be innocently made over time. Unit of Measure (UOM) is a single field on any screen in an ERP system, but not having robust enough function to support UOM and its conversion could be a fatal flaw.
“...What is essential is invisible to the eye”
Fatal Flaw #2: Quality is Just For Inspectors
While the Unit of Measure is pervasive and so common as to be almost taken for granted, quality is another critical factor for most process manufacturers, and it is completely invisible. What the process ERP system must do is to make the quality parameters visible to those who need to know. Since the ‘need to know’ personnel are throughout the whole business, the ERP system must treat quality as an intrinsic part of the whole, not just an “add on” module used only by laboratory personnel or quality inspectors.There are many places where quality is critical to the management of the operations. If mistakes are made in these areas, the results could range from a small cost problem to a lost customer to real safety hazards. The personnel who are receiving raw materials need to know about the quality. They might store a shipment in a different location. They might have to take new samples from the storage location so that tests can be run to determine the quality parameters of the blended lots in the tank. The quality might affect the price paid to the supplier.Once received raw materials of differing qualities may actually be allocated to the production of different products if the quality of the raw materials can affect the quality of the produced product. They might be routed to different processing lines if the quality of the raw materials requires more precise control over the operating parameters in order to meet the output specifications. Quality information is needed by the scheduling personnel who may be able to blend off some slightly off-spec materials in the next production run of that product. And quality information is required by your customers. They need to know the quality parameters of what they are buying. Indeed, a chemical producer may be offering a “sell-to-specification” service wherein the producer is supplying a product which meets their customer’s specifications for the customer’s own end use needs. In this case, if the quality information is not made available to the customer service representative taking the customer order, how will they be able to provide the customer with assurances about delivery?
“...But which never seems to fit”
Fatal Flaw #3: Lot Number = Serial Number
Tracking various quantities of products with different qualities requires some reference number in the ERP system. For some suppliers, the need for ‘‘lot control’ is translated by them to mean the same as serial number control for their machine tool manufacturers. This is another example of a tool which is not up to the job. CDC Software | White Paper 4 There are really two problems with this “serial number” approach. One is the tracking of materials themselves especially if there are fluctuations in quality during the actual production run. The second has to do with control over the use and sale of the materials with various quality parameters. First of all a serial number assumes that only a quantity of one is produced. The one item may have been produced along with others, but they are all identical. Same parts making up the machine; same quality. If the serial number approach is to work for a process manufacturer,then they must be operating in a batching mode where the lot number will represent one quality specification for that batch. There can be no fluctuations in quality within the batch. But for other producers who run campaigns there will be a problem. During the campaign quality parameters may change slightly. Transition (or twilight) materials between various grades made during the campaign need to be identified. The lot number might represent a day’s production, but there are sub-lot requirements to track the varying quality outputs during the day. Without an ability to work with sub-lots a continuous flow producer will be ‘playing tricks’ on the system to get it to support their information needs. The second problem is not the identification of the various lots, but the need to control the use and sale of the lots. Once the product is produced we may not know the quality disposition of that lot until later. Some physical testing may take several days. Yet the materials are in inventory, using up valuable storage space while the lab works through their testing routines. The process ERP system should be able to simultaneously track the materials from an accounting point of view - you do own the products that you have just made - while also preventing unauthorized use or sale of the product until disposition has been made. This implies that there is a layering of information within the process ERP system which separates the financial implications of actions (producing goods, receiving goods) from the physical realities (goods in storage awaiting disposition, available in 3 days; goods in storage approved for immediate sale; etc.). Yet the ERP system must make sure that the two views (financial and operational) are inextricably tied together under the covers. This design approach is not very obvious to the person trying to select the ERP system which will best fit their needs, but it is a fundamental requirement. After all, the ERP system is for multiple masters - finance and operations. And the ERP system must be the unifying force which keeps the financial picture exactly parallel to the physical picture of the operations.
The danger is, of course, that in looking at the surface of ERP systems they all seem to be doing a good job. And sometimes the fatal flaw is not sitting on the surface of the system waiting to be easily seen. The flaws are typically down deep in the system, far beneath the surface, to be found only when you actually go to use the tool. This paper will describe some of these fatal flaws so that you can, if you need these features in your ERP tool, ask the various ERP suppliers how they will support your need.
“To hold, as ‘t were, the mirror up to nature”
Fatal Flaw #4: Only One Way to Make a Product
The complications of the ‘physical picture’ mirrored in the ERP system do not stop with how lots are tracked.Another complication comes from the evolution of process manufacturing itself. Within the chemical enterprise,if not within a single production site, there are various technologies which can be used to produce the same end item This is a reality in the chemical world and the same holds true for manufacturers of pharmaceuticals and food & beverage products, but is not typically accommodated in the traditional ERP systems design. For the machine tool maker there is only one way to assemble their machines. The systems originally designed for these types of manufacturers went so far as to force the manufacturer to decide THE one way in which assembly worked, and THE one list of materials. For a process manufacturer, having only one statement of how product is made is not sufficient. If there are old processing lines and new processing lines which make the same end item, then both are valid. Their differences are, however, critical and significant. Their cost structures are different. The yields may be different. The run rates may be different. The formulation may be different.
If the ERP system is to fit a process manufacturer’s requirements, there needs to be an ability to state all methods of production. If processing times and formulations vary from one process to another, then these must be clearly delineated, visible and available to planners, schedulers, operators, and cost accountants. The planners and schedulers will need to know what capacity will be used to produce the required end items. Without this visibility they will be looking at the so-called standard capacity as overloaded, and the so-called alternative capacity as idle. They will also need to know if there are different material inputs required from one process to the next. As they plan to load production on various processes, the planning results will then drive the procurement of the right materials based upon the correct formulation for those lines. The basis for performance measurement will be set as the ‘standard’ for the scheduled process. Thus yields and run rates will be properly measured against the right basis. But these easurements need to be augmented by the cost analysis of the actual production run. One of the ‘hard-to-see’ but essential requirements of the process ERP system is to be able to develop a weighted average cost for a product when there are multiple valid processes which produce the product. With this information, the company can measure its performance against the projected run rates and usage, as well as against financial standards. The system must be able to calculate the weighted average actual cost (actual cost of each process during the accounting period, averaged according to the relative volumes produced from each process). The system must also be able to calculate a projected weighted average cost. This means that the calculation will be driven from the stated volume of production, and also how the planner predicts to load that total demand upon the various processes available to them.
“...Fervor with measure, passion with correctness”
Fatal Flaw #5: No Fixed Cost Analysis
The process manufacturing enterprise is one of very high capital costs. The plant and equipment are a significant part of the cost of any product produced. The most important measures which top management uses have to do with these assets: Return on Assets (ROA), Evaluated Value Added (EVA), Utilization and Yield. Not to put too much of a negative spin on this, but downward shifts in yield mean that the plant was being utilized but the output of good (saleable) product was less than projected. A downward shift in utilization means that the time available to produce product has been lost forever, and the cost of that time must be borne by all other products which are produced.Typical ERP systems provide very meager tools for a cost analyst at a process manufacturer. This is because the typical ERP system is a job costing system. The machine tool maker costs the assembly done on a particular job order. That configuration of machine tool may not be made again for months. The cost of that machine tool is primarily materials and labor. Adding up those costs and collecting them against the job order provides their management with the performance measurements which they are looking for.No so, for producers of chemicals, pharmaceuticals, and food. You might have made the same product many times during the month. Using different processes because of fluctuations in raw material quality; availability of one technology over another. If you are going to get your arms around performance in an operating environment like this, you need specialized costing tools. Some ERP vendors will entice you with their costing power derived from data in the General Ledger. This so-called cost-center costing works with allocation logic which parallels the movement of materials from one cost center to the next in the manufacturing process. This tool will be sufficient for you if you have only one, or a very few products flowing through these cost centers. If you are introducing more and more products and their variants into your processing facilities you will soon outstrip the power of the G/L based costing system. The ideal process manufacturing costing system will allow you to understand the impact of not only volume throughput changes, but the changes in product mix as well. Some process manufacturers have departments which do nothing but work with the ‘what-ifs’ of changes in volume and mix at specific plants as well as shifts in production volume and mix from plant to plant within the enterprise. Given the volumes of production coming through some of these facilities, small improvements in the unit costs mean big differences to the bottom line.
“...Observe degree, priority, and place”
Fatal Flaw #6: Manage Materials Above All Else
The make up of costs, however, is not just dependent upon the absorption of fixed costs by the volume of production. Each product’s cost has other elements which may be significant to see when analyzing the performance of various operations. Certainly there are material costs. But the typical ERP system places too high a priority on understanding, managing and controlling materials. In fact, they place materials as the top priority in the system, and with good reason. There are thousands of parts in a machine tool or an automobile. The majority of the money in the business is tied up in the material costs of the products they are making. Their primary concern should be the smoothing out of the flow of materials. Typically, the material costs for the process manufacturer are not the most significant cost. The cost of capacity is usually the highest cost. Therefore the prime driver of the business is the optimization of the utilization of the capacity. The process manufacturer’s ERP system should not force them to plan materials prior to planning capacity. But capacity is not the only significant cost element in process manufacturing. Producing products like chemicals for example, typically entails very high energy consumption. Whether the energy is electrical, natural gas, fuel oil or steam, whether the energy is procured from external sources or produced on site, the cost is significant and sometimes the supply of the energy is a limiting factor on one’s ability to produce. Another limiting factor on the production facility’s ability to produce may be the authorized volume of waste production in any given period of time. And responsible manufacturers are not only searching for ways to be more energy efficient, they are also working to reduce hazardous waste production. If energy and waste are not as visible as materials and capacity in the system, then they are not optimally managing all of the resources which are critical to the successful operation of their business. If the ERP tool is to fit a process manufacturer’s requirements there needs to be an ability to track all consumption and production, to plan for, track and cost all inputs and outputs of the processes which take place in their operations.
“From All Things One, And From One All Things”
Fatal Flaw #7: Only One Output
A bill of material based ERP system has one architectural assumption which cannot be changed: the manufacturing process takes many things and makes ONLY one thing. From this architectural foundation grows the total system. If your manufacturing processes are essentially ‘assembly’ processes (blending operations, for example), then this model of your process will suffice. However, if your manufacturing processes are complex producing by-products, co-products and recycle streams, a bill of material based ERP system will fail you in the end. Of course the typical ERP supplier has tried to adapt their systems to accommodate your ‘multiple outputs’ reality. They have fallen back on the roots of computing - mathematics. What they would have you do is to enter your output as an input but with a negative quantity required. And mathematically this will work since a negative multiplied by a negative will result in a positive. In other words, if you negatively add something to the process of producing something else, then the negative add is really a produced not a consumed quantity. Confusing? Do you think any of your operators will have trouble with this concept? But, it must be admitted, the
arithmetic does work. The problem, of course, is that there are other limitations which are - like all the fatal flaws - beneath the surface. First of all when will this negative/negative be produced? The bill of material system has only two possible answers. It will be ‘produced’ at the same time as all other ingredients are consumed, or it will be ‘produced’ at the end of the process. The first is the logic of the system without the ERP supplier modifying any of the logic. The second will require the ERP supplier to change the logic of the programs to understand that a ‘negative quantity per’ will mean that the ‘lead time’ for the negative/negative is really zero (i.e., equal to the due date of the produced item). Remember that every time the ERP vendor adds additional logic to the system to play a trick on the original logic processing time is used. Eventually too many tricks will impact the performance of the overall computer system. But what if your by-product is really produced after the first processing stage several hours before the finished goods are produced and several hours after production starts? There is no answer for this in the typical ERP system. And if you are doing Just-In-Time scheduling anticipating this by-product’s availability for other processes (even as a fuel source for your energy plant) this imprecision in the ERP planning and scheduling logic is burdensome if not unacceptable. And what about the cost of by-products and co-products? With the negative/negative approach you must enter a value for these items into their master records. This will work if there is a set value (Net Realizable Value) for the item which will credit the cost of production. Remember, however, that if the by-product is actually a waste stream which will require additional expense to clean and dispose of then the value you enter will be a negative - yes another negative!
If the output is not a by-product, however, but a co-product the cost calculations from a typical ERP system will not assist you in understanding the relative cost of the various co-products. What you really need is a system which will allow you to direct the system to calculate processing costs up to the point of the co-product’s production (it may come out of the process before the last processing stage) and to apportion costs based upon some % distribution. Alternatively you might want to use a volume or a weight distribution factor. Either way, the ideal system will follow your rules. Co-products present another problem for the typical ERP system. Since they are managed by the system as a negatively consumed material, there is no ability to forecast or master schedule the co-product. Depending upon your products and processes, this may be a severe limitation of the bill of material based ERP tool. And, by the way, you will have to forget about recycle streams. Bill of material systems will not allow them.
Little by Little, It All Adds Up
The selection of the right tool is not easy. But knowing what you need is the first step. These ‘fatal flaws’ are just some of the areas where little things which don’t quite match the way you run your process manufacturing operations can begin to spell big trouble for your company. The power of an ERP system is the easy access to, and interchange of, information through all parts of the organization. If a group has to play tricks on the system to get it to work, if they are making mistakes because they don’t understand how to use the system, or - worst case - they develop their own ‘side systems’ which work better and then half heartedly fill in the blanks for the accountants in the ERP system, your hard work and investment in your ERP system will be a wasted effort. It does not have to be like that. Spend a little time studying what you need and what the ERP vendors have to offer. There is the right tool out there for you.
About CDC Software
CDC Software, The Customer-Driven Company,™ is a provider of enterprise software applications designed to help organizations deliver a superior customer experience while increasing efficiencies and profitability. CDC Software’s product suite includes CDC Factory (manufacturing operations management); Ross ERP (enterprise resource planning) and SCM (supply chain management); IMI warehouse management and order management; Pivotal CRM and Saratoga CRM (customer relationship management); Respond (customer complaint and feedback management); c360 CRM add-on products, industry solutions, and development tools for the Microsoft Dynamics CRM platform; Platinum HRM (human resources); and business analytics solutions.
These industry-specific solutions are used by more than 6,000 customers worldwide within the manufacturing, financial services, health care, home building, real estate, and wholesale and retail distribution industries. The company completes its offerings with a full continuum of services that span the lifecycle of technology and software applications, including implementation, project consulting, outsourced business services, application management, and offshore development. CDC Software is the enterprise software unit of CDC Corporation and is ranked number 2 on the Manufacturing Business Technology 2007 Global 00 List of Enterprise and Supply Chain Management Application vendors. For more information, please visit the following: www.CDCsoftware.com www.rossinc.com