An Analyst's View of Process Industry SMB Challenges

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Originally Posted - April 23, 2008

The process industry provides many of the products we use in our daily lives for food, shelter, and health. Such products are created as materials and transformed through the use of energy resources and chemical products. In addition, the process industry manufactures products that are essential to advanced industries such as computing, biotechnology, telecommunications, automotive, scientific, and space exploration.

These industries are facing major pressures not only to meet the present needs of our global economy, but also to do so without compromising future generations by ensuring that processes

  • meet environmental guidelines

  • optimize energy resources efficiently

  • result in products that are safer, more reliable, and more functional

  • provide features that meet both industry and consumers needs

This article focuses on how enterprise resource planning (ERP) vendors are helping the process industry meet both the needs of today and deliver on anticipated functional requirements that will help meet the needs of tomorrow.

Process Industry Manufacturing Challenges

Manufacturers in the process industry are at a difficult crossroads. Although the industry is not facing any imminent substantial decrease in its overall profit margins, there is concern in the industry according to a recent study by the Canadian Manufacturers and Exporters Association, which cites the following issues:

  • increased global competition

  • foreign currency fluctuation

  • changing patterns of customer demand

  • escalating business costs

  • problems in implementing new technologies

  • competitive business pressures

  • shortage of skilled workers

To address these issues, process industry manufacturers and distributors must manage the following key activities, and ensure they use an enterprise system that supports these activities:

  • Planning production for both materials and capacity—to develop a production plan, manufacturers must ensure that there are sufficient available resources and materials, production capacity, and labor.

  • Inventory tracking and controlling work-in-process (WIP)—monitoring material consumption and tracking work order progress is the basis of manufacturers' being able to meet sales order, demand, and delivery dates.

  • Replenishment and demand planning—the ability to review variances between forecasted and actual sales is the basis of managing vendor lead times and raw material replenishment.

  • Managing the supply chain for order fulfillment—reviewing the global supply chain provides manufacturers with the ability to coordinate logistics and operational activity to meet customer order fulfillment expectations.

Specific Requirements of an ERP System for the Process Industry

Here's an overview of how some of the functionalities of an ERP system for process industries help manufacturers better perform the activities listed above.

1. Conversion process capability
In the process industry, the bill of materials (BOM) used in discrete manufacturing is replaced by the master product formula, or simply the formula. The formula requires a conversion table for measures, such as weights from grams to pounds, and must have the ability to record liquid units of measure, in both metric and US-standard. The formula must also record specific information related to product characteristics that can affect manufacturing processes. For example, in the blending process, the system can record product information such as percentage calculations of raw materials, and the effective specific gravity, potency, density, and number of reactives of those raw materials.

2. Interface to other modules
The master formula can also be linked to submodules like quality assurance (QA), procurement, inventory, and accounts payable (A/P) for government compliance and safety issues. Also, the manufacturer must be able to trace products in order to manage dating of inventory lot control and the amount of inventory available at the distribution level. Furthermore, there are government and regulatory concerns that deal with the nature of the materials, as there may be a controlled substance with specific shipping, handling, and storage regulations. Or, the manufacturing process may emit hazardous by-products. Or, there may be logistical concerns within the manufacturing process itself.

3. QA module and flexible formula adjustments
A process industry ERP system must also have a formulation-balancing operation based on the premise that the QA group tests random samplings of production batches. The system needs the ability to adjust, through a program logic control (PLC) interface, any variations in materials used and external factors such as humidity, temperature, cool-down speeds, etc. Also, the material flow and consumption is recorded back into the ERP system. The system's routing functionalities reflect those capabilities as a requirement or not, depending on the user's specifications.

4. Reworking all co-products and scrap materials
As a result of manufacturing processes, residual materials (by-products) may be created. These by-products can be collected as waste and reused. This is the case within the plastics industry, for which the collection and re-entry of materials into process creates very specific criteria. In the process industry, due to a continuous production flow operation, the production process generates a theoretical production yield, which may be calculated by the downstream packaging operation as units for case-pack quantities. The residual amount generated from the production process may vary within a percentage point, but in the downstream conversion process, the residual quantities may be aligned to complete full, case-size box quantities. By using flexible formulas, process ERP systems can demonstrate how the residual materials can be reworked from waste back into materials used in production.

5. Supply chain management (SCM)
Collaborative forecasting and planning are essential features of the process industry ERP system, especially for the automotive and consumer products industries. Some the most important functionalities include

  • visibility over inventory across the global supply chain

  • enterprise-wide planning in the areas of sales and marketing, procurement, and production

  • the ability to integrate planning for what-if scenarios

  • the ability to benchmark quality and vendor performance issues

  • detailed reporting that highlights areas where parameters may be out of scope

  • real-time available-to-promise (ATP) information for customer service

6. Process industry costing
The financial system for the process industry must also be able to provide for multiple-level formulas on the same production work order, and for outside processing at subcontract facilities. Given the nature of process industry products, most plants must operate on a continuous basis, which drives maintenance costs up. As a result, maintenance costs usually comprise 30 percent of a process industry plant's operating budget. Thus, an ERP system must integrate with some type of best-of-breed system to meet the requirements of the operation, and with some form of asset management system, which takes into account predictive and preventative maintenance.

ERP System Constraints in the Process Industry

For lack of an available solution designed for their needs, some process manufacturers have attempted to implement an ERP system for discrete manufacturing. As there are several fundamental differences between the operations and practices of process and discrete manufacturing, opting for such a stop-gap measure is not always effective. Process manufacturers have no doubt noted the constraints that are placed on their operations as a result of using a system that was not designed for their needs.

The nature of the process manufacturing business is such that it is difficult to manage inventories and profits. Process manufacturers experience large quantities of finished product in transit and of raw inventory. The products often have low yields with substantial scrap (fine chemicals, pharmaceuticals, or plastics).

Business dynamics is putting demands on ERP systems to help with

  • maintaining a lead over competition

  • simplifying the product lines

  • responding to shorter product life cycles

  • providing mass customizations (car options, computer system accessories, etc.)

  • complying with regulations compliances

In an attempt to meet these demands, many manufacturers have looked at ways to improve supply chain optimization by re-examining manufacturing processes, relocating closer to markets, and looking at cheaper energy, transportation, and labor. The businesses' needs are such that an ERP system must be powerful enough and diverse enough in functionality to do more than simple process manufacturing.

With ingenuity, many of the raw material manufacturers have turned to vertical market integration, moving from pure process manufacturing to mixed mode. Their factories now produce raw product for industry and sell finished goods by the item (counting). An example is toothpaste, where the finished good is sold by the pallet, case, or individual package. The ERP system must allow manufacturing processes to batch products in order to achieve product consistency (two examples are textiles, with "dye lots and finishing," and bakeries, with oven scheduling, and aerospace, with electroplating, etc.).

That some factors are out of the control of process manufacturing vendors is exemplified by the retail industry. In this industry, the vendor has a many-stop supply chain, and plays a role almost like that of the caboose at the end of a long train.

For example, chain stores track sales at the cash register, and use that information to replenish inventory from branch warehouses. The warehouses get their product from distributors. In the case of multilevel distribution networks, this explosion process percolates upward through the various levels from the retail store to regional warehouses (master warehouse, factory warehouse, etc.). The demand is input to the master production schedule at the level of the manufacturer. The process is not always real-time, meaning that a lot of product is out in the supply chain. This process of upward percolation is most common in the pharmaceutical and retail grocery industries. Since everyone in the supply chain strives to minimize and frequently turn inventory, any ERP system has to manage with these constraints.

As a side note, some manufacturers are trying to use real-time reporting to determine product consumption and demand. The information is more accurate and allows total reduction in the field, increased inventory turns, tailoring production to market preferences and better cash management.

Mixed-mode ERP systems are used by the processing industries for several reasons. First, there is no need to duplicate the data. For example, mature discrete ERP systems have well-optimized modules addressing finance, production planning, inventory management, sales, shipping, etc. The benefits of moving to a mixed-mode ERP product such as Syspro stem from the use of a common module to support production, sales, inventory, supply chain, finance, and analytics. These sophisticated discrete modules, adapted to accept process data, can go a long way toward helping the manufacturer reduce inventory, improve cash flow, and improve manufacturing yields.

The optimization of manufacturing and distribution processes for larger enterprises often involves business intelligence (BI) and business performance management (BPM) functions. These new ERP functions are typical of large manufacturers' systems, and are generally not affordable to SMBs.

Therefore, the SMB-oriented ERP system for process manufacturing needs to have extra capabilities that provide data for BI functionalities. The dynamics are such that this data is often industry-oriented (food versus chemical). ERP systems need to provide dashboards providing what-if scenarios to allow the manufacturer to improve competitiveness, while avoiding the cost of a full BI/BPM operational group.

Finally, a pure process ERP product has quantitative variables with large variations in values, leading to statistically large standard deviations. Statistical analysis for process optimization requires small standard deviations in order to make useful manufacturing recommendations. (Large standard deviations are indicative of large inventories in the pipeline, or variations in raw material quality.) Constraints on the quality of input data are essential to achieve any business improvements.

Following is a summary of constraint requirements of the ERP systems for process industries:

  • have sophisticated data conversion algorithms (liters, gallons, and weights of mixes), allowing packaging size variations to be accurately reflected in the calculation of production batch sizes

  • be real-time in execution on the production floor

  • quickly create a new production schedule from new orders, allowing for extra production runs of the same product

  • be responsive to changes in raw product concentrations

  • provide a dashboard that gives management real-time views of pertinent business processes

  • allow for varying manufacturing methods, such as continuous, make-to-order, make-to-forecast, and engineer-to-order

  • function equally well in discrete and process industry modes, with reliable software bridges between the two

The extremely specialized nature of the process industries means that, among other factors, their regulatory compliance issues, best-practice scenarios, and concomitant enterprise software needs can vary greatly. Further, there are great differences amongst these factors for process manufacturing and discrete manufacturing, which means that process manufacturers are getting short shrift if they choose a solution designed for discrete. Though perhaps these are some of the reasons why vendors have sometimes shied away from providing ERP systems for SMB process industries, it seems that change is not only on the horizon but is well underway. If vendors continue to offer solutions that are versatile enough to address the needs of process, discrete, and mixed-mode manufacturers, the benefits will surely be experienced by vendors and manufacturers alike.

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