Originally Published - September 26, 2008
The idea behind an enterprise resource planning (ERP) system is to give organizations the transparency and visibility they need to have into their business activities. But what if the ERP system in fact creates a "blind spot" for the business? How could this happen, you might ask? Well, before we answer this question, a little history is needed.
In developed nations, many manufacturing activities have moved offshore. Manufacturers have done this because the cost of labor is cheaper in developing nations. But offshore manufacturing has led to some key concerns:
How do you measure quality assurance?
Is it really cheaper to outsource production, given rising energy prices?
From an economic and an IT perspective, several negative factors about moving manufacturing offshore have become apparent:
Negative economic factors:
The manufacturer is subject to the stability of the local economy where their facilities are located, meaning that labor may be tougher to acquire.
The speed at which components and parts are acquired is subject to global—and potentially faulty—supply chains.
Offshore currency instability may make components more expensive to acquire or sell.
Tracking the cost of resources and reverse logistics can prove to be difficult.
Negative IT factors:
Access to critical, real-time data may be impeded by disparate enterprise applications in different regions.
Tracking components may be more difficult due to a low-quality IT infrastructure or minimal IT resources. Or perhaps the ERP software is too inflexible to service the entire organization.
Financial tracking can be difficult to maintain, due to the factors listed above.
Traditionally, ERP systems come with financials and human resources modules to track all costs throughout the organization. The system controls these processes through a manufacturing management module. The manufacturing management module of a typical ERP solution includes multi-level bills of materials (BOMs), advanced plant scheduling, shop floor control, field service and repair, production planning, project management, product data management, inventory management, purchasing management, quality management, and sales management.
This range of traditional functionality can be sufficient for most manufacturers, giving them the ability to manage their operations very well within the four walls of the manufacturing plant. However, if a manufacturer's business is carried out in multiple locations across continents, and if its supply chain involves complex activities, then a more robust ERP system is needed. This is because such a manufacturer is faced with changing economic, quality, and logistical problems, and its traditional ERP system can actually impede its growth and flexibility by not delivering what this manufacturer needs most: transparency and visibility into all manufacturing and supply chain activities. The manufacturer can develop a sort of "tunnel vision" with respect to their operations if nothing is done.
So what can a manufacturer do if the ERP system provides faulty vision? Can an ERP system really adapt to a fluctuating manufacturing environment?
The Economics of a Shifting Manufacturing Industry
To fully understand how an ERP system can create this tunnel vision for a manufacturer, shifts in the manufacturing sector in developed nations needs to be explained.
The trend of offshoring manufacturing processes has brought different economies together from countries that would not otherwise conduct business with one another. This has caused the manufacturing world in developed nations to shift its focus to distribution, which has led to supply chain management (SCM)—please refer to the article From Manufacturing to Distribution: The Evolution of ERP in Our New Global Economy.
However, there is a new trend to consider: manufacturing has started to revert back to developed nations due to the rise in the price of fuel and issues of quality control. Thus, even though the shift in developed nations is heading toward more distribution-type activities within the manufacturing sector, and even though discrete manufacturing is still a heavy economic sector, changes in the amount of products being produced can be difficult for manufacturers to deal with, as they need to accommodate both logistics and manufacturing activities.
The truth of the matter is that most industrialized nations have a large manufacturing base. And even though many manufacturers have outsourced their manufacturing to developing nations, these firms need to stay flexible if changes in either the local or international economies occur.
How can manufacturers deal with this ever-changing climate? How can ERP vendors help take the blinders off for manufacturers and allow them to become flexible enough to deal with these global challenges?
How to Free Yourself from Tunnel Vision!
Manufacturers must examine their business operations in the context of the global manufacturing environment and properly evaluate their software tools. Manufacturers faced with the complexities of manufacturing activities that are teetering back and forth from location to location must be able to track and manage the global business operations. This means that the enterprise software in place must be flexible enough to efficiently handle shifts in operations between heavier manufacturing to distribution, or vice versa.
To achieve this flexibility, something more than the traditional discrete ERP system is needed: a combination of SCM and business intelligence (BI) software, together with an ERP system.
SCM software is not only of benefit to global enterprises. It is also important for manufacturers that need to forecast demand for products; manage warehouse inventory, supplier relationships, and transportation vehicles; and track goods.
Integrating SCM software with an ERP system enables the manufacturer to have an "ERP for distribution" system. The main advantage of SCM software is that it gives discrete manufacturers the flexibility and visibility they need to know what is happening in terms of logistics. SCM software also helps manufacturing operations set up in multiple locations, through integrated warehouses and high-level demand planning. In addition, SCM software can pinpoint the nearest location to procure components for a lower cost, which can also help in terms of quality issues due to the proximity of the manufacturing plant.
Two other major issues need to be addressed for a manufacturer to become truly flexible: compliance and real-time information.
Compliance issues introduced by such regulations as the US Sarbanes-Oxley Act (SOX), import and export duties, international trading tariffs, etc., become even more complex when it comes to the business of offshoring. To handle these issues and standards properly and effectively, BI software can help a company get a grip on the amount of information passing through it, allowing improved visibility and transparency.
Many types of BI software are now Web-based. What this means for companies with in-house ERP applications is that they do not need to add much more IT infrastructure to their operations. Software as a service (SaaS) and service-oriented architecture (SOA) have been developed so that the BI enterprise application can "sit" on top of the ERP system, collect the necessary data, and make information available to managers so they are better able to make the right business decisions.
Along with compliance and real-time information, BI also provides analytics capabilities within the organization. Both manufacturing and supply chain analytics are very important to (a) improve internal business processes, and (b) provide workarounds when a potential problem is detected.
Three long-time ERP vendors that offer extensive supply chain modules have acquired large BI vendors: Oracle acquired Hyperion; SAP acquired Business Objects; and IBM acquired Cognos. These acquisitions have allowed these vendors to add to their solution offerings so that they can address manufacturers' problems of reduced transparency and visibility. Each of these vendors offers Web-based enterprise applications as well.
Vendors such as Infor, Exact Software, IFS, and Lawson all started with traditional ERP software. As these vendors grew out, they also built some of the functionality mentioned above, or bought out companies that provided SCM and BI capabilities. However, these ERP vendors (as well as other vendors not mentioned here) can now integrate such functionality through SOA-based software to provide an enterprise solution that gives the discrete manufacturer the flexibility it needs to conquer the challenges of changing manufacturing and economic clients as well as quality issues.
If the organization is a truly global manufacturer and has very large operations, it may want to consider a full BI solution to integrate with its ERP system. BI vendors such as Business Objects, Cognos, Information Builders, SAS, Oco, and Microstrategy offer very robust in-house applications. They offer hosted solutions as well, which can be advantageous for organizations that do not have additional capital to spend on more in-house enterprise applications. Web-enabled solutions offer the added benefit of allowing access to data from anywhere in the world via the Web. This delivers even greater flexibility and transparency for global manufacturing managers.
The Final Word
In order to provide insight into the blind spots that an ERP system may potentially lead to, a combination of enterprise software (specifically, BI and SCM) really is the key to freeing yourself from ERP tunnel vision. When used in the appropriate way, these applications can help the organization mitigate the negative economic and IT challenges mentioned in this article.
For discrete manufacturers to respond flexibly with the ever-changing manufacturing climate, an IT strategy needs to be set in place that allows them to judge which types of software applications can best help them. BI and SCM software applications have been developed to enable manufacturers to deal with such situations as bringing part of the manufacturing process back to their original plant, or focusing their operations more heavily on logistics and the supply chain.
Finally, establishing proper business requirements and aligning software selection to the needs of the business is a crucial element to having complete vision of what's happening in the organization, which will remove your "blinders"—and cure a nasty case of tunnel vision.