Fatal Flaws and Technology Choices
Written By: Predrag Jakovljevic
Published On: November 8 2006
Defining Application Requirements and Fatal Flaws
Following the analyses presented in prior notes, it is difficult to imagine a food and beverage manufacturer of any size meeting the demands of the business without some use of information technology (IT), since enterprise resource planning (ERP), supply chain management (SCM), warehouse management systems (WMS), and much more are required to compete.
Part Seven of the series Food and Beverage "Delights."
For more information, see prior notes in the series:
Some application requirements are universal across the entire food and beverage industry. For example, all food and beverage companies need product tracking and tracing, since product recalls are frequent occurrences, and food processors and distributors must have systems in place to track and trace products throughout the supply chain. To that end, batch control and date control, including manufacturing dates, sell-by dates, shelf life and best-by dates, are essential for many food products. Strict first in, first out (FIFO) batch rotation is essential if shelf life and best-by dates are to be maximized. Quality control and quality analysis of food products must take place at every exchange point in the food supply chain, so that most product defects or contaminations are detected well before the product reaches the consumer. All food and beverage players must deal with the demands of promotions, and so on. However, not all software products address these industry-wide issues.
Reality Check—Most Enterprise Software Is a Commodity
When it comes to application software, the concept of categories is critical, since application software requirements differ significantly by food category. These requirements do not differ in administrative applications (such as financial management applications), but they differ significantly in operational applications. Issues exist in the supply chain and in production, and the issues that make the difference are details; if prospective users get the details wrong, the system will not work for their business. If your business needs certain functions, and the software you select does not adequately provide these functions, the software has so-called "fatal flaws." Although a specific vendor's application software may fit 95 percent of your requirements, if the "tiny" 5 percent of other requirements that make up the fatal flaws are not provided, total business failure may result.
Food is certainly one market where the vast majority of general ERP products show a number of fatal flaws. So what makes the difference in ERP systems for food and beverage? Not the universal, "me too" commodity features, but rather those fatal flaws, or the features without which success is impossible. Ironically, these features typically entail 5 to 10 percent of the huge list of application capabilities, and are typically in the realm of operations management. For more information, see Fatal Flaws in ERP Software Create Opportunity for Niche Software in CPG Companies and Find the Software's Fatal Flaws to Avoid Failure.
Finding the Food Fatal Flaws and the Right ERP System
In the following paragraphs, we will try to identify some fatal flaws for prospective food and beverage ERP user enterprises. One example of a fatal flaw is the support for store-door delivery (SDD). Namely, for many dairy, bakery, salty snacks, and beverage companies, products must be delivered directly to the retail store, and this business demand is not addressed by most ERP or SCM systems. Furthermore, because such supermarkets typically have no warehouses, all finished goods (whether perishable or not) have to be collected from the manufacturer or from the supermarket's distribution center, and routed to the supermarket shelves within hours.
If a vehicle is going to collect a certain number of chilled apple pies or roasted chickens, at precisely 2 P.M., say, in order to meet a delivery slot at the distribution center, then everything in the manufacturing process must be geared to that deadline. And because there is no "finished goods" stock, the end of the production process often becomes the loading bay. Rather than conventionally handling products that are made in batches, for this market, enterprise systems should be able to deal capably with a combination of continuous processes and high volume, rate-based manufacturing (where one might manufacture to forecast, but package to order, in a mass customization manner). Indeed, an ERP system designed for these food category manufacturers has to support an order-less, rate-based manufacturing process, and still retain full traceability. Since SDD is an industry practice for these categories, it is a "must have" requirement, or a fatal flaw.
A further fatal flaw, deduction management, comes from food manufacturers generally having a national invoice price for each stock-keeping unit (SKU) they produce. The net price they ultimately receive for their product is reduced from the national invoice price via three mechanisms: 1) "invoice deviations," which are list price concessions that appear on the invoice; 2) "after invoice deviations," which are rebates set up as invoices from distributors, retailers, or foodservice end users for promotional programs tied to product sales; and 3) "trade promotion payments" tied to direct marketing expenses like retail slotting allowances, to get shelf space for a product, or entrance fees to trade shows. In the back-office operation, all reductions in the net price have to be planned, approved, and tracked to determine their impact on sales. Afterwards, invoice deviations and trade promotion commitments must also be accrued as liabilities to ensure that they are reflected in financial reporting.
The issue of deduction management comes up because the back-office process actually involves two payment streams—one from the customer to the manufacturer for product sales, and the other from the manufacturer to the customer for promotional activities. Often, customers deduct their claims for promotional activities directly from the manufacturers' product sales invoices. When the complexity of the pricing programs is combined with the complication of deductions, back-office operations for food companies can become a quagmire. For such companies, managing the process of tracking promotion planning to sales results is a critical area. They want to know how their promotional spending is impacting their sales results, but also need to keep ahead of short-paid invoices. For such requirements, software vendors need to have both promotional planning and deduction management functionality. It is this combination of functional depth that is often difficult to find outside of niche vendors.
Promotions also complicate (fatally flaw) the forecasting and planning process. For example, a product may occasionally be promoted that requires special packaging—as in the case where an extra 30 percent in volume is added to a product (say, mouthwash or toothpaste) in a non-standard package, but at a standard price. The forecast may expect 10 million units of this product to be sold over 3 weeks. But the true demand is actually determined by the success of the promotion. Perhaps the true demand is not 10 million units, but 3 million (in the case of poor promotion), or 14 million (for a good promotion). The manufacturer needs to be able to quickly detect the success of the promotion, alter the forecast, and adjust production to eliminate over- or under-production. Lo and behold, not many ERP and SCM products cater to this need.
A major fatal flaw example is catchweight, or the actual weight of units of goods that are sold or inventoried by quantity. Namely, some food products are prepackaged, but priced by weight, as in meats, cheeses, and some fruits and vegetables. Most poultry meat and fish products are also bought and sold in cartons or packages, and priced by weight, so that food distributors need to be able to accurately weigh and price by weight at the point of receipt and dispatch. For these items, records and calculations must be based upon two sets of figures with different units of measure ( UOMs): the number of units (cases, eaches, etc.); and the weight (pounds, kilograms, etc.). The retailer orders a number of cases, but the price is based on the poundage actually shipped. The manufacturer's inventory, costing, and planning, and other functions must thus reflect these two ways of accounting for the product. Some food distributors have a secondary requirement to be able to view quantities by location both in the stocking unit and by weight. In summary, the entire business is transacted using catchweight in these categories; it is simply the way these businesses work. Therefore, catchweight is an absolute requirement if an application product is to work in these businesses—it is a fatal flaw.
No support for catchweight in the software package means impeded ability to sell in these markets. Is catchweight a commonly supported feature in enterprise software? No—only a handful of vendors provide catchweight support (even fewer support variable weight-based costing and pricing throughout the supply chain), and therefore a company which needs catchweight has limited options for software.
In addition to catchweight, food products may differ in seasonal ingredient content, or equal batches may have varying item counts, from batch to batch. The software has to support dual weights and measures in multiple global metrics for accurate tracking of inventory, case, batch, and lot catchweight, so that customer invoices reflect true costs and accurate pricing. Industry-specific non-linear UOM calculations, including Brix, flour percentage, parts per, spray dry, milk solids, and active units, are other must-haves. The underlying system should also let food companies optimize profitable yields—such as butterfat in milk. For tracking co-products and by-products—an essential need for meat and poultry producers (since the United States Department of Agriculture [USDA] requires food processors to be able to trace any portion of, for instance, a processed chicken, from rendered materials to wings, legs, or breasts)—one needs tools for analyzing attributes and accurately comparing the costs and benefits of selling versus disposal.
Another fatal flaw is the need to model the disassembly of incoming products or "inverted" bills of materials (BOMs) entailing many by-products and co-products. For example, in the meat category, a slaughterhouse is the classic example of a disassemble business. It brings in one raw material (an animal) and then produces many finished products (various cuts of meat). These environments absolutely need the ability to model disassembly, and therefore need inverted (or V-shaped) BOMs. Again, few application software products can model the inverted bill, and even fewer can fully support the full operational and analytical needs stemming from this very basic requirement.
There is also a need for control of output material, which means defining complicated material process flows, including by-products, co-products, waste, scrap, yield, work-off, and feed-back and recurring materials, all of which can then be the input into inventory, or into other production stages for other processes. These inputs and outputs should be included in the costing process as positive or negative contributions, which would allow the definition of the production process to be a close description of the actual way products are manufactured.
Not all food categories have it as tough as meat. For example, a beverage bottler has a traditional BOM, works with discrete quantities, and has fewer fatal flaws. Bottlers have a wide selection of application software products that can support their needs, although some breweries require complex tank and volume-based environment support (including managing tank scheduling, complex piping networks, buffers, and bottlenecks and variable changeovers). A dairy falls between these two extremes. Diaries need to manage solids and fat, and they need to have excellent recall abilities, but few require catchweight (the exception being some cheese operations).
Impact of Underestimating Fatal Flaws
What are the results of underestimating the impact of fatal flaws? One meat processor (which will remain nameless) recently embarked on an application software project. Of course, catchweight was a must-have for its business. The company asked the software salesman if the software had catchweight, and after having to explain the concept at a great length to the salesman (a bad sign), the salesman said "no problem." It later transpired that the salesman thought that catchweight was only a simple pricing issue. The meat processor did not probe into the details, was satisfied that catchweight was "available," and signed a contract.
The result: the project overran the budget and missed the schedule significantly. When the true nature of catchweight was explored, the "no problem" reply took on new meaning. The meat processor had to write a significant amount of custom code just to get pricing working correctly. The company decided that it could not afford to do a complete job for inventory, costing, and planning—which had been the key objectives of the project. What was the result of not respecting the fatal flaw of catchweight? The company experienced exorbitantly higher cost and a longer implementation cycle, and now it will have a higher long-term total cost of ownership (TCO) to maintain the custom code. The company also cannot afford to take future releases from the vendor. Perhaps most importantly, many of the benefits it was hoping for cannot be achieved with the system.
How could this meat processor have avoided the fatal flaw trap? The answer is to ask about and check the details. Prospective customers should seek out the fatal flaws for their category and their business. This may be more difficult than it sounds, as people living day in and day out within a specific food and beverage category manufacturing and distribution business may not understand what makes them unique. To them, what they do is normal—doesn't every company need catchweight?
More Potential Fatal Flaws
Other typical must-have capabilities revolve around quality control and traceability. Consumer packaged goods (CPG) manufacturing is typically fast-moving, high-volume, and fairly simple, with relatively low-cost ingredients. Nevertheless, full quality control and lot traceability is essential, which means that it must be possible to use ingredients without the overhead of constantly having to record stock issues. Many ingredients will be fed from bulk tanks or silos, and the ERP system must therefore support vendor-managed inventory (VMI); shelf life management; inventory locations and zones (for example, to segregate organic materials from chemicals, or to accommodate differing ambiance temperature requirements); bulk stock handling; line side stock locations; and backflushing. Throughout the entire process, the system must maintain full product traceability, with minimum clerical intervention.
Traceability must also be preserved during value-added service management such as packaging and product bundling. In these situations, individual products are pulled from master lots to become part of a new group. For example, this could mean bundling a fruit, beverage, and sandwich into a lunch kit. The master lot number for each individual item should be recorded to maintain traceability as the new grouping moves through to the consumer. It is unnecessary to stress that food manufacturers need to have planning and execution systems that can adapt rapidly to changing circumstances—in minutes, if necessary. And they also need data logging capabilities, in order to provide real-time quality functionality that can track materials right through the production process and into finished goods.
About the Authors
Predrag Jakovljevic is a principal analyst with Technology Evaluation Centers (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP and related applications, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade (Serbia [the former Yugoslavia]), and has also been certified in production and inventory management (CPIM) and integrated resources management (CIRM) by APICS.
Olin Thompson is Lawson's vice-president of industry strategy. He has over twenty-five years of experience as an executive in the software industry, and has been called the "father of process ERP." Thompson is a frequent author and award-winning speaker on such topics as gaining value from ERP, supply chain planning (SCP), e-commerce, and the impact of technology on industry. He can be reached at firstname.lastname@example.org.