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Caution! Will A Traditional ERP System Help You Deliver Projects?

Written By: GDBS BEng(hons) AMIEE
Published On: March 12 2003

Introduction

It's more important than ever to select the right ERP system; the search for competitive advantage is so fierce that anything less than the most optimum solution should not be considered. As Olin Thomspon- a regular contributor to TEC - points out in his articles on ERP in the process industry, different manufacturing styles have different needs.

This article looks at companies who build specifically for a customer: call them "project manufacturers" or, in my opinion the discourteous term, "jobbing shops": call the style of manufacturing "engineering to order" or "make to order". Under any name they have unique requirements that are often not understood or dealt with well by some ERP vendors, particularly in the mid-market, who think that systems designed around volume manufacturing fit everywhere.

Scope

The most glaring omission from some ERP systems- and a real bugbear for project manufacturers- is what they fail to manage and assume.

We all know that upfront of any manufacture, there is extensive work in product definition (i.e., estimation, design, and engineering) before anything can be made or bought. In volume manufacturing the product definition work will be amortised over the items' life- possibly thousands of items. Whilst overrun here will effect the time-to-market of the product, it has no effect on the lead-time of any one order, and is therefore not planned in the same way. Moreover, the extensive costs of product definition are absorbed into company overhead or product costing, so an overrun of costs can be managed in the context of a long term pricing strategy.

Project manufacturing is very different. Since most projects have unique requirements, lead time of the product definition processes will directly impact on the delivery of the project, and will affect the contract. The company will go through it all over again on the next project, so there's effectively nothing to amortise the costs over. Far from being ignored, these "up front" processes need to be carefully planned and accounted for.

Then there's commissioning and installation post manufacture. Project manufacturers may have to put extensive planning and effort in to what happens after work in the factory is finished. A manufacturer of boilers, say, may have to involve contractors, testing agencies, hauliers, and extensive labour, all to commission the project. Yet volume manufacturers- once more- see things in a different light. They presume that product is commoditised; that it can be distributed to users, re-sellers and other manufacturers who know what to do with it. Their traditional lead-time calculation only counts up to final assembly.

So in scope, those companies who recognise that they are project manufacturers have to seek out ERP systems that will plan and account for activities before and after the "factory" activity. Despite advancements such as Advanced Planning Systems (APS), ERP systems designed around volume manufacture- all limit the scope of their calculations to the remit of the factory floor.

Bill Of Material

The bill of material (BOM)- and the way it's handled- is different for project manufacture to that of volume manufacture. Why? Well for one thing, a BOM in a project environment is not limited to factory items, or even items used to make the product. In order to commission a project, tools, jigs and fixtures may well be required. This may appear to be no different than a volume ERP system that recognises that a certain tool must be available to run a machine in the factory. So, to remove any doubt, let me use an example- lets say you make machine tools. If you are to commission the machine, you may well require a cement mixer and cement in order to bed the machine down- but only after the machine is already "made"- and of course these items are required at the customer's site, not the factory floor.

Planning

As already stated, a simple count of the purchasing and manufacturing lead times will not determine the time-to-deliver a project, since projects often have product definition activities and /or commissioning and installation to arrange. However it's not simply the scope of the planning that differs in volume and project manufacturing; there are another three key differences in the way that they approach planning.

1. Project manufacturers do not think in elapsed time- they calculate effort.
Case in point, if the project has 100 hours worth of installation- it could mean one person for 100 hours, or it could be deployed quicker with a larger crew. Losses in one area may be made up in another. For example, if the design is budgeted to take a team of five people, and one falls ill and can't be replaced the design over-run will be inevitable. However a project organization may decide to make up the time by increasing applied effort in downstream activities in order to hit the overall deadline.

2. Project manufacturers know that they can't always be in control of the lead-time.
All sorts of issues can impact the plan to deliver even a simple project. Customer is late with the design approval? Can't get access to the site on the day you need it? Wide load needs a police escort? Welding can't be inspected on time? All of these have an impact on delivering the plan. Some you may have no direct control over, but all must be accounted for, since they can profoundly affect the overall plan.

3. Traditional volume systems work without priorities
MRPI and MRPII work on "oldest order first". APS and Optimised Production Technology (OPT) use more advanced algorithms, but don't recognise a "rush job". The way volume ERP system use planning algorithms to aggregate demand (pull like demand together from different orders, or looking ahead to the future for economic batches) and possibly break down requirements into smaller batches (to make the plant more flexible) it is often difficult to see "why" any one job on the factory floor is needed or "where" its going to go. Since their business is often more cyclic, project manufactures want clarity and simplicity to be able to juggle priorities. They demand that everyone knows what's important to the plan today.

So, in volume manufacture, planning and re-planning can be amazingly complex, looking at maximum utilization of plant, equipment and absorption of overheads. Project manufacturers have just as complex- but an entirely different- planning problem. As such they need a system that thinks in applied effort, can plan for items outside the control of the company, is clear to understand, and is flexible enough to cope with rapidly changing priorities and circumstances.

Financials

The differences between volume manufacture and project manufacture appear, even in the accountancy and financial processes.

In accounting, project based manufacturers are more concerned with the profitability and cash flow of the project than the departmental or organizational accounts. In fact, project manufacturers are fanatical about spend versus achievement. For each separate project, and at any point in time, they need to know exactly what they have committed in terms of purchases, WIP, billable hours, material etc. Equally important, they need to know "cost to complete"- what's left to spend in order to deliver the project.

In project manufacture, the received payments may be staggered over the life of the project- including retention for acceptance of the job a long time after its completion. These receipts- also known as "stage payments" - may happen at any time in the project, and depending on the contract, may be based on committed purchases or major events in manufacturing. Note that the effect of stage payments on cash flow may even drive the priorities in the production sequence.

Flexibility is required in commercials also. Whereas in volume manufacture, the work in progress becomes stock when the build is complete, project manufacturers may want to control when and if work in progress moves to the cost of sale of the project- which may be well after shipment.

So once more, project manufactures have subtly different needs which can make all the difference in the pursuit of "world class": they need flexible project accounting.

Concurrency & Change Management

In volume manufacturing, concurrency means getting teams together. Call it integrated product development, quality circles or design for manufacture, concurrency is mostly about teamwork and the sharing of knowledge. In project manufacture concurrency means running design, manufacturing and commissioning simultaneously- since it's often the only way satisfy the customer's deadline.

ERP buyers should therefore ask pointed questions about how the systems they are evaluating handle concurrency. For example, can design release a partial bill of material for manufacturing to work on. then add to it or modify it later?

In rigid systems for volume manufacture, implementing a change to a bill or routing would require cancelling all the effected open, closed, and in-progress orders and re-creating them with the new information. This in itself can create countless hours in administering the ERP system. Often project manufacturers have changes imposed upon them and, if the ERP system can cope at all, the next questions to be addressed are "what is the cost differences between the designs?", "what is lost and unusable?" and "what is still good or reworkable?".

Conclusion

Companies who are project manufacturers, engineer to order, manufacture to order, jobbing shops or contract manufacturers should think carefully about an ERP system. Like the difference between process manufacturing and discrete manufacturing "one-size" does not fit all. Given the maturity of the ERP market, and that fact that competitive advantage is hard enough for manufacturers to find, they should not compromise on their requirements. Rather- particularly in the mid-market- they should ask hard questions about the scope of an ERP system, and how it supports project based operations and financial control.

About The Author

David Smith works for Open Business Solutions. Open Business Solutions is the master affiliate in EMEA for the Jobscope ERP system for project manufacturers, engineer to order and maintenance repair and overhaul.

He can be contacted at d.a.smith@openbusinesssolutions.com
or you can find further information at www.openbusinesssolutions.com.

 
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