Systematic thinking: Enterprise resource planning

Even small shops need an ERP system.

The steel comes in late, the shop’s overloaded, due dates are regularly missed and the last quote was blown because no one has a clue about actual operating costs. These are just a few of the daily problems encountered by shops that manage their businesses through Excel spreadsheets and low-cost accounting software. There is a better way.

Manufacturers have used MRP (Material Requirements Planning) software to manage supply and demand since the days of mainframe computers and paper punch cards. MRP compares production requirements against available inventory to make planning recommendations. The software has since evolved into an integrated, all-encompassing suite of business software known as ERP (Enterprise Resource Planning).

ERP manages everything from quoting parts to receiving cash, paying bills and ordering material. A typical ERP cycle begins by entering a customer purchase order into the system. Credit limits are verified and an order acknowledgment is returned to the customer. From there, the ERP system checks for available inventory and creates a job suggestion to make the product if needed. This triggers ERP to look for raw material, netting off available stocks and creating purchase order suggestions when materials are short. ERP also analyzes manufacturing times and recommends due dates for jobs and purchase orders accordingly.

Once the job is released to the floor, scheduling and inventory control take over. Materials are issued to the job or back-flushed from inventory, if desired. Job costs are accumulated and the schedule is constantly updated as operators clock in to jobs for setup and production operations. Some systems collect inspection information and allow for scrap or rework to be performed. When the job is completed it is sent to inventory or shipped directly to the customer. An invoice is generated, cash is collected, and the vendors and employees get paid.

For Big and Small Businesses

If you think ERP is just for enormous companies like Ford and General Electric, think again. A range of ERP systems are available, with ballpark prices from $20,000 for a handful of users to $500,000 or more—and sometimes way more—for a medium-sized, single-plant system. And, contrary to popular belief, not all ERP systems require an army of expensive consultants to implement.

Still, ERP systems are far from plug and play and the manufacturing world is filled with horror stories of failed implementations. It takes careful planning and a close look at how a business operates to make ERP work in a job shop.

The Tipping Point

At some point, many shop owners reach an “ah-ha” moment where they say, “We can’t operate like this any longer!” This is usually just after the shop foreman’s super-scheduling-spreadsheet crashes and the bar of 316 stainless needed to run a hot job has disappeared. Danna Nelson, vice president of product management at ERP service provider Aptean, Atlanta, explained that shops reach this critical mass when outdated manual methods become too cumbersome and the business can no longer accommodate additional growth.

“Historically, many smaller manufacturers manage things offline,” Nelson said. “For example, they analyze job costs by compiling questionable job cost data into a spreadsheet. Or a new order comes in and they have to go count what’s on the shelf so they know how much material to order, something that becomes very complicated when multiple jobs are vying for the same stock. It gets to a point where you don’t know what you don’t know.”

Worse, even the shop that does everything right operationally can fail due to poor data. “Say there’s a rush job where everyone pulls together to get it out on time, only to discover 2 weeks after the parts have shipped that overtime costs killed any profit margin,” Nelson said. “That’s the sort of thing that makes shops realize they need to do something.”

At that point, many of those beleaguered owners, presidents and CEOs might start calling ERP vendors. They’ll find that shop ERP systems are available that provide automated job costing, real-time shop scheduling and capacity planning. Excited that all their problems are about to be solved, they sign on the dotted line with the one that seems most impressive.

Bad idea. Buying a system without buy-in from your team is a recipe for disaster. “Everyone needs some skin in the game,” Nelson said. “But what often happens is there’s a manager’s meeting and somebody says, ‘Hey, we need to do something about the software.’ Everyone agrees, so they tell the IT guy to go select an ERP system. That’s a mistake. Without the leaders of the business involved in the selection process, it becomes someone else’s project.”

Skip the Mandate

Paul Ventura, vice president of marketing for Shoptech Software Corp., Glastonbury, Conn., agreed: “Obviously, buy-in from owners isn’t the problem. There must be a perceived need from up top or we wouldn’t be there in the first place. The real challenge is getting the middle managers and end users involved. You have to sell this to the purchasing person, the production planner and the finance folks.”

It’s not enough for the shop owner to tell everyone they’d better get on board by working more overtime, and that statement could be counterproductive. Unless your employees are like the slackers from the movie “Office Space,” everyone is already putting in 40-plus hours. Demanding they work another 20 hours a week (or more) on software implementation might lead to the captain of the ship being strung to the yardarm. A better approach is to convince the users that, in a properly implemented ERP system, their lives will become easier.

Ventura said two things—job costing and capacity planning—are the key drivers for an ERP purchase. Ironically, they’re also the most challenging to achieve. “It’s not easy. You need accurate BOMs [bills of material] and job routings as well as consistent data collection on the shop floor. Materials must be issued correctly. If you’re not used to operating like that, it can be hard work at first. Before long, though, the everyday discipline needed to make your ERP system hum becomes the normal way of life.”

High Cost of ERP

As previously noted, one of the misconceptions about ERP is that it is extremely costly. “You’ll see the ‘high cost of ERP’ everywhere on the Internet,” said Adam Grabowski, director of marketing at The Woodlands, Texas-based Global Shop Solutions Inc. “To me, it’s a misnomer. Certainly there are some very expensive systems out there and others that are either very low-cost or even pay as you go. Regardless of the investment, your ERP vendor should be able to provide a tangible ROI and lay out a plan for how your company will achieve it.”

Courtesy of Global Shop Solutions

Consistent data collection on the shop floor job is one of the keys to accurate job costing and capacity planning when using ERP software.

Grabowski explained that software justification is a matter of perspective, and one shouldn’t look at ERP as just another business cost. Companies with successful implementations boast a laundry list of benefits: reduced administrative overhead, lower labor and material costs, increased productivity and superior customer service. “Bundle all this up and you deliver better quality parts, on time, every time, leading to increased sales and better margins.”

That doesn’t mean throw caution to the wind and buy every bell and whistle. A knowledgeable software vendor will help determine which features are essential. Before calling the vendor, however, interview the people in your company—talk to old Joe, the guy who sweeps the floor and takes too many smoke breaks. Talk to Mary Beth, the miracle worker who somehow gets the parts to the plater on time. Talk to Ed, the EDM operator who always manages to clock in late. Find out what’s broken and what those people think can be done to fix it. This approach may seem unorthodox, but it yields valuable insights into the inner workings of your organization. It also garners widespread acceptance of the new system, a priceless commodity in the months ahead. Remember, software isn’t a cure-all, but it is a golden opportunity to develop robust internal processes and reinvent the company.

Apples to Apples

Once this is done, prepare your needs list into must-haves, should-haves and nice-to-haves before the first salesperson arrives. Talk to other companies using those systems. Prepare demonstration scripts, so that you don’t get lost in the salesman’s descriptions of sleek functionality—focus instead on how each vendor will best address business concerns A, B and C. At all costs, avoid software customizations. As a rule, it’s better to change your business processes than it is to change the software—not only are modifications costly, but they tend to impact other parts of the system, leading to an avalanche of customizations.