For many manufacturing organizations, an optimized enterprise resource planning (ERP) system is a key enabler for digital transformation. While implementing a new system is often one of the most difficult and challenging endeavors any organization will ever undertake, it’s 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 upgrade its current system or implement a new system. The final decision is often driven by factors such as:
- A precipitating business event, such as 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 clearly define your new system requirements.
All ERP systems make two critical assumptions: that data is correct, and agreed plans will actually be executed. Manufacturing organizations that understand and meet these requirements will flourish in an ERP environment. Those that 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 them. 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 for these five warning signs:
1. Customer order delivery promises are not reliable.
If there’s one thing that ERP systems are inherently good at, it’s planning resources across the entire enterprise to deliver goods to customers in a reliable and predictable manner. So if your organization has been using an ERP system for several years, and is still struggling to achieve acceptable customer service levels, that’s a clear indicator that there could be underlying business process issues that need addressing. Determining if that is the case requires a thorough root cause analysis of your service failures. In doing so, it’s critical that you drill down to the proper level to identify the true root causes. For example, determining that many of your service failures are caused by an inability to produce to schedule is too vague to determine whether 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 or quality, then focusing on continuous process improvement stands a far better chance of improving service 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 the latter, 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 service 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
2. Inventory adjustments are frequent.
A fundamental requirement for successful operation of 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 adopt prior to going live with a new ERP system are:
- Implement cycle counting to track and report inventory record accuracy (IRA) routinely
- Conduct root cause analysis of IRA failures
- Take corrective actions to prevent failure recurrence
Even if all these practices are in place, it’s still useful to verify their effectiveness independently. One very efficient way to do that is to analyze the system write-ons and write-offs. When performing this analysis, be sure to measure both the number of adjustments and their magnitude 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’s some systemic bias. So if you have a situation where there are $1.21m of write-ons and $1.19m of write-offs, a simple arithmetic analysis would show a net impact of only $20,000, which might fly under the radar. Conversely, when looked at in terms of absolute value, the total combined write-on plus write-off quantity would be $2.4m, which would almost certainly draw attention.
3. Production orders have large variance.
One of the key benefits of an ERP system is that is 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’s 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 variance must be improved.
4. Inventory levels are unbalanced.
Carrying the appropriate amount of inventory can be a delicate balance. Too much inventory ties up capital unnecessarily, and can lead to waste from over-age and obsolete inventory. Too little inventory can lead to stockouts and missed sales opportunities.
Maintaining appropriate inventory levels hinges on several factors. Understanding what’s 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 accurate, this 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:
- 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 might 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.
5. Reports require manual intervention.
Although tremendous advances have recently been made in the reporting and business intelligence capability of most ERP systems, do not assume that all of your reporting issues can be solved by upgrading alone.
Consider the seemingly simple task of running monthly key performance indicator (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 month-end 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 the latest version, it’s 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?” If the answer relates primarily to technology, upgrading may help. If it leans more toward organizational behavior, then the focus should instead be directed toward fixing that behavior.
The Best System
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- to 20-year outlook.
So make sure you can deliver the cost of entry before diving into the latest innovation. Consider external advice, 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.
By David Beldyk
