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ERP Systems and the ETO Manufacturing Market Part One: Event Summary

Written By: Predrag Jakovljevic
Published On: May 3 2004

Event Summary

In our relatively recent article about the still ongoing consolidation in the market, What Does Vendor Consolidation Mean To The End User? , we mentioned that the market will not stop short at the eventual "Big Five" or so of the largest leading vendors. Namely, we expect the market for application software to further segregate into two tiers.

The first group will be a limited number of very large vendors, while the second group will be a large number of small, highly focused vendors. The latter's business model will be focusing on a relatively small, tightly defined market with specific requirements that cannot be met with more generic products. Usually, these markets will be too small for the Big Five to want to compete, and will also have unique requirements that cannot easily be built into the more generic products offered by the Big Five. These specialists, boutique or niche vendors (whereby neither of these terms is meant in a derogatory manner) will compete by having in-depth product functions and intimate knowledge of their market place or by offering services (content or location wise) not available from the Big Five or large independent service providers. Example of these markets can be industrial (e.g., fresh meats, dentist offices, machine tools manufacturers, etc.) or regional (e.g., Chicago, New Orleans, Columbus, etc.) focus.

This is Part One of a three-part tutorial.

Part Two will discuss repetitive versus ETO differences, while

Part Three will make user recommendations.

Vertical Focus Is Key

While competitive costs (i.e., ever lower and more flexible software license pricing with shorter implementations) and outstanding global service (i.e., proven implementations' payback benefits and subsequent customer loyalty) will remain important requirements for success, particularly in the lower end of the market; vertical focus will still be the key factor for survival.

Vendors that weather the ongoing carnage will have focused their business and product on a few particular, manageable industries (possibly only a single one for the smallest vendors), preferably those with a current low penetration, instead of a more generic, horizontal approach. There is a general consensus in a number of diverse industries that generic solutions require longer implementation timeframes, more customizations (or, possibly even worse, workarounds, and related dreaded backdoor knowledge just to keep the system running), and the complication of add-on solutions. Winning enterprise resource planning (ERP) and other enterprise applications products will thus demonstrate deep industry functionality and tight integration with best-of-bread "bolt-on" products in a particular vertical, which also means adding sector-specific, fine-grained capabilities.

As a matter of fact, verticalization can be seen as part of a larger effort by most enterprise applications vendors to ease the implementation of their products. By now, almost everyone in the IT industry has heard horror stories of enterprise applications implementations that took two or three years and cost tens of millions of dollars, sometimes only to be eventually abandoned (see The 'Joy' Of Enterprise Systems Implementations). That happens, in part, because the larger, generic ERP packages usually arrive needing to be configured for the business and the industry entirely from scratch. At least by configuring parts of the package in advance for a given industry and circumventing functions not required in that industry, these vendors can shorten and ease the implementation process.

In fact, software implementation time reduction is a key element of success in any enterprise-wide technology project. Users have thus increasingly looked for an ERP system designed for a specific business, since software that combines industry-specific functionality with the flexibility to accommodate each company's unique processes goes a long way toward improving the functional fit and the speed of implementation.

Closely related to the above need for vertical focus would be the inherent adequacies that traditional ERP systems have commonly exhibited owing to their genesis (see Enterprise Applications—The Genesis and Future, Revisited), and which have left enterprises struggling with a system that does not mesh with their manufacturing operations. Although, as possible remedies of these shortcomings, the lean, flow and demand-pull manufacturing philosophies have lately been getting an increased interest. Namely, the ERP systems of the 1990s have been burdened with the liability of carrying on some well-known manufacturing resource planning (MRP) problems like unnecessarily complex multilevel bills of material (BOMs), infinite capacity assumption, inefficient workflows and unnecessary (i.e., no value-adding) transactions, activities and data collections, which have not been amenable to mass-customization but rather to traditional push-demand, mass production and inventory building trends. For more details, see Pull versus Push: a Discussion of Lean, JIT, Flow, and Traditional MRP.

Still, while some tout that regardless of the industry, type of manufacturing environment, or product volumes, flow manufacturing principles can be implemented successfully, the concept has not been all things to all people so far. It is still challenging or even unsuitable to deploy in a jobbing shop that does highly configure-to-order (CTO) or unique engineer-to-order (ETO) products having high setup times and long lead times, although it has been occasionally deployed there with almost as much success as within high-volume, more repetitive make-to-demand environments. Namely, lean manufacturing and just-in-time (JIT) concepts, which emphasize continuous improvement of processes that lead to, for example reduced inventory throughout the supply chain, shorter lead times, and faster cycle times, all enabling improved response to customer demands, are indeed universal across the board and cannot be debated.

Vendors' Meager Support for ETO Environment

However, the fact is also that only a minority of all ERP vendors properly support the ETO environments, let alone with flow manufacturing concepts. Glovia would be one possible honorable exception. Although it originated in the US market, owing to its current parent Fujitsu's involvement since the 1990s, it has enjoyed its greatest success with Japanese companies. The support for the kanban (loosely translated means card, billboard, or sign, and is often used for the specific JIT scheduling system developed and used by the Toyota Corporation in Japan) and the seiban (an identifying number or label attached to all parts, materials, purchase orders, and manufacturing orders that identify them as belonging to a particular customer, job, product or product line, resulting in having separate MRPs within the overall materials requirement planning process) lean or JIT manufacturing approaches enable manufacturers to handle configured items even in batches of one. All these functions are aimed at inventory optimization and waste management, streamlined planning and control for specific products, models, and sequenced production.

Cincom Systems would be another honorable exception amongst vendors with strong ETO capabilities, given its Flow Manager product handles kanban replenishment and demand smoothing, but not line design and operation method sheets (OMS) since these features would not bring much benefit to ETO manufacturers. These customers often specify product families that include products that require one or two unique and expensive components with distinctly long lead times, in addition of the fair share of common parts (stocked items), which could benefit from flow methods of smoothing spikes in demand. Further, for any organization, that lean orientation feat will not happen overnight, since achieving it takes more than moving equipment around into product family production lines, creating flexible workstation teams, establishing quick changeovers, and introducing kanban signals. It also requires specific flow manufacturing training and continually maintained disciplines and process improvement mindsets (e.g., zero defects, zero setup, the use of standardized components, zero inventory, etc.). IFS and SSA Global Baan would be other tier 2 ERP products with solid ETO orientation and certain features of the support for lean manufacturing.

Background

A number of articles on the TEC site have astutely depicted the peculiar traits of ETO and project-based manufacturing, such as Project-Oriented Versus Generic GL-Oriented ERP/Accounting Systems; CRM For Complex Manufacturers Revolves Around Configuration Software ; and Caution! Will A Traditional ERP System Help You Deliver Projects?.

APICS Dictionary defines ETO as "products whose customer specifications require unique engineering design, significant customization, or new purchased materials. Each customer order results in a unique set of part numbers, bills of material, and routings". Closely related term to ETO is project manufacturing, which is defined as "a type of manufacturing process used for large, often unique, items or structures that require a custom design capability (ETO). This type of process is highly flexible and can cope with a broad range of product designs and design changes".

As already stated, a vast majority of manufacturing-oriented ERP systems have been largely amenable to repetitive, volume-based manufacturing environments that rely on the movement of materials either through functionally-oriented work centers or product-oriented production lines, and are designed to maximize efficiencies and lower unit cost by producing products in large lots.

Standard products with similar routings are therefore made using virtually the same process, while production is planned, scheduled, and managed to meet a combination of actual sales orders and forecast demand. As a result, production orders stemming from the MPS (master production schedule) and MRP planned orders are "pushed" out to the factory floor and into stock. External suppliers also work to support planned production, while materials management often relies on maintaining sufficient inventory, using a make-to-stock (MTS) as well as a make-to-order (MTO) or assemble-to-order (ATO) approach of keeping standard items or sub-assemblies in stock.

In these manufacturing environments, the time and cost of changeover to produce different products is high, as are the costs of inventory, planning, and expediting. The focus is thus on efficient scheduling of production lines rather than on managing individual orders, while minimal necessary reporting points are used to determine average or standard costs, occasionally variances to standard costs. Consequently, goods are pushed through production at levels determined by (often inaccurate) scheduling and forecasting tools common in MRP/ERP systems. These levels then often exceed demand, resulting in building excess finished inventory, although in a flow/lean/JIT environment orders are pulled through the process based on actual demand, which may alleviate the above inventory conundrum. Also typical of repetitive environments would be that they purchase material for inventory and issue material to work-in-process (WIP), while, upon the completion of manufacturing, finished goods are moved from WIP to finished goods inventory before the shipment to the customer.

Based on the above analysis and our familiarity with most leading vendors' capabilities, there is a strong feeling that only a minority of all ERP vendors properly support the ETO and project-based manufacturing environments. This brings us to so called "fatal flaws", which are missing functions that may make it extremely difficult if not impossible for the application software to run the physical business. For more details, see Find The Software's Fatal Flaws To Avoid Failure.

To that end, there are a number of possible potential showstoppers or ETO fatal flaws. These include close engineering, manufacturing, and purchasing collaboration and management to collapse product lifecycles; project management and scheduling capability; the ability to compare actual and estimated costs; and revenue recognition and progressive billing by milestones. Management of an immense number of engineering changes; strong estimating and quotation capabilities that include freight and duty; support for subcontracting (or nowadays less popular word "outsourcing"); and part numbering flexibility (to such a degree that BOMs can be created even without part numbers) are also apart of this grouping. Handling shipment straight from WIP and without posting to inventory; ability to attribute costs to projects to financially quantify modifications due to, for example a customer request that varies from the original specification; visibility of proposals, open orders and materials (including the estimated-to-complete) and so on.

In other words, not many enterprise products will support the following project-based processes: "job costing", "managing the sub-contactor", "financial reporting", "managing the workforce", "process time and expense", "winning new business", "purchasing goods and services", "managing the project", and "build to order". If these high-level processes sound too ordinary, then digging a level deeper might reveal their true intricacy and attention to detail such as employee time, billing rates, budgeting, collections, or project proposals, which are supported by only a few vendors.

For example, the "job costing" process can be broken down into the following steps: setup project work breakdown structure (WBS), pay suppliers, pay employees, accrue purchase orders, allocate indirect costs, calculate estimated time to completion, calculate contract ceilings, compute revenue, bill customer, and report project status, while the "process time and expense" cycle would have the following steps: create project, create project workforce, enter timesheets by project, enter labor adjustments, enter travel expenses, apply project business rules, approve time and expenses, pay expenses and payroll, bill expenses and payroll, revenue recognition and PSR (i.e., Project Status Reports, which are used for period reporting on a project/task/phase level, and which can be regarded as the financial statement for the project).

The "managing the project" process would feature the following detailed steps: create opportunity plan, establish detailed scope of services, create project plan with WBS, establish task schedules, search and add resources to plan, establish budget at resource level, add consultant and expenses to project plan, add direct costs for plan, establish profit performance, save baseline budget, monitor time and expense costs, monitor schedule projected profit and revenue, and submit project deliverables and closeout project. A "build to order" process would involve ERP materials management functionality, through the support for the following steps: customer demand; BOM or routings; engineering change notice (ECN); project requirement planning (PRP); capacity planning; purchase requisition or order; receiving and quality assurance; fill inventory; issue manufacturing orders; final sub-assembly and finished goods; customer delivery; and billing; revenue recognition, and PSR.

This concludes Part One of a three-part tutorial.

Part Two will discuss ETO versus repetitive differences.

Part Three will give users recommendations.

 
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