Originally published - September 21, 2000
An enterprise resource planning (ERP) or supply chain management (SCM) solution has to be selected. The project holds significant value. One way not to deliver on that value is selecting a vendor whose product does not fit the needs of the business. This is common sense, but for process companies, it can be particularly challenging. Process companies, including food, chemical, pharmaceutical, forest products, and others, often have unique requirements not addressed by most technology providers.
Not all areas of technology reflect the uniqueness of a process business. While financial systems have few requirements not in common with all companies, operational systems often have many issues. The systems dealing with manufacturing, inventory, procurement, and customer order management systems are among the systems that often prove to be the hardest to acquire due to the unique issues of the process enterprise.
Although the list of unique requirements can be defined, what are the root causes of the differences … what makes process process? These root causes flow from a few characteristics of the business.
The Basic Nature of Material
Process materials are often powder, liquid, or gas on the raw material end—and either the same (industrial companies) or cases of product (consumer goods companies) on the finished product end. The system must allow you to measure and store these types of materials.
Measurement of process materials is often done differently at various locations across a single plant or supply chain. The units of measure (UOMs) used vary even when measuring a single material. Therefore, the product must allow any UOM to be used anytime, with the system automatically making all changes to the standard UOM. For example, tons have to be converted into pounds, gallons into kilograms, cubic feet into pounds, or (for a tank or silo) feet into gallons.
Process materials change with time. They may get worse, they may get better or they may become a different material. Discrete-oriented systems assume that materials do not change. A process solution must recognize and manage the change of the material over time. For example, if a material deteriorates over time, the available-to-promise (ATP) calculation should not consider the material available after the shelf life date. Conversely, if the material improves with time (aging), ATP should not start considering the material until after the aging date.
A discrete manufacturer experiences relatively few surprises. They order 500 part As from a vendor and he delivers 500, and parts either pass or fail to meet the spec. Since parts are all the same, they do not need to be segregated (no lot control requirement). Part A always fits with part B, and together they always make subassembly C. When they set out to make 100 Cs, they almost always get 100 Cs. If not, they have 98 Cs and 2 scrapped Cs.
Contrast this to the lack of predictability inherent in a process manufacturing company. You specify 5,000 pounds of material X with a range of acceptable specifications. The vendor delivers approximately 5,000 pounds, but usually not exactly that amount. You need to test the material to see if it meets your specifications, and record what that specification is so you can use it correctly in satisfying production or customer demand (maybe blending it off or standardizing it if it is at the extreme end of the range). Since each shipment is a slightly different quality, you need to segregate shipments (lot control) to allow you to manage these differences. The formula says 100 pounds of A plus 100 pounds of B makes 190 pounds of C. But each time you produce C, you get a slightly different amount (yield loss or gain). Sometimes, you do not get C—but you do get a product that is close to C that is called D. You cannot always predict all this, but you must react to it.
Your ERP system must allow you to plan for, react to, and account for this lack of predictability in both quality and quantity.
The Process—Bill Shape
The primary determinant of a system’s ability to meet the production management needs of a process company is in the model of the process. If the model, as represented in the database, is flawed, no amount of programming can make the system provide for these requirements. Where do these errors and problems surface? Typically, these problems arise in planning, scheduling, and costing.
The classic bill of material (BOM) application models a set of assumptions that are very valid for the discrete company. One of these assumptions is that many items (parts) make one end item. Since bills are always drawn with the consumed parts at the bottom and the produced part at the top, the BOM has a basic "A" shape. Outside of the discrete industries, other bill shapes exist. For example, a poultry processor or a refinery has a "V" shaped bill—one item is processed into many items (i.e., a chicken is cut up and sold in many parts: breast, legs, thighs, etc.).
Process manufacturers use multiple formulas for the same end item to account for differences in raw material specifications, availability, cost, or process variation (cooker one versus cooker two, for example.) Most BOM-based systems assume that the product is always made the same way, and therefore do not adequately address this issue.
If your realities match the assumptions inherent in a BOM, then many ERP systems can work for you. If your realities do not match, a system based upon a BOM (even if it is called a "formula" in the sales pitch) needs very close inspection to see if it meets your requirements.
How a software vendor addresses the needs of process companies falls into one of three categories:
- A few vendors never mention process. By default, they are stating that they do not address the needs of process companies.
- Many vendors started with a discrete ERP or SCM product, and later decided to market it as a product suitable for process industries. These vendors and products can easily be identified because they typically have a module that includes the word "process." This add-on module is where they attempt to address the characteristics and requirements that make their discrete product into one for process.
- A few vendors started with a strategy that focused exclusively on process. These vendors do not have a process module; the entire product is designed to address the particular requirements of process companies and only process companies.
How can you tell which vendor falls into which category? The first rule is, do not listen to the sales pitch about "process focus." A simple test is to look at the vendor's web page. This is a generalized message to the market that tells you what the vendor is really trying to accomplish. Where is process discussed? Is it the focus of the first page, or is it listed as one of many "areas of focus" on page 12 of the web site? Look at the annual report. What percentage of the customers listed are process? What industries does the company say it serves? When it talks about specific customers, does it mention companies that are in your business? If the vendor does have process customers, what did these customers install from that vendor? Perhaps a vendor has many process companies, but most or all of them installed financials. Few, if any, have installed the vendor's software for operational functions. This may mean that the vendor is an excellent financials vendor, but can it handle your operational needs?
What Do You Need?
If you are in the market for financials, many products can do the job. The industry focus of the vendor is not critical. If you are looking for operational functions or supply chain functions, then the focus and approach of the vendor is critical.
How process are you? Some process companies have relatively simple processes (receive bulk materials, mix, and package) and deal with materials that are very consistent. These companies can be called "simple process." For these companies, any process ERP system can be considered. Even the ERP products that have been extended from discrete products can often do the job.
Companies with more complex process business requirements have a different challenge. If they choose to look at the companies that have taken the add-on approach, they must look in detail at the process functions they need to run the business. Typical problem areas include the full management (planning, execution, and analysis/costing) of process with by-products, coproducts, and recycles, and management of inventories to solve customer and production requirements. A second area is the ability of the system to fully define your inventory at the level you need to achieve high levels of customer satisfaction.
For these complex process companies, the vendors that devote themselves exclusively to process bear a closer look. You should expect them to do a better job of modeling and managing your reality.
The Cost of Picking the Wrong Product
What is the cost of picking the wrong product? The cost of picking the wrong general ledger product is important to the chief financial officer’s (CFO's) office, and it hinders your ability to do a complete analysis of the financial side of the business. Picking operational systems that do not give operational management the tools they need means a choice. The first choice? You can “make do” with inferior management tools, resulting in potentially poor business decisions. The second choice? You can build work-arounds or custom solutions on top of the ERP solution, resulting in a large investment of both time and money—initially, and as part of your long-term cost of ownership.
About the Author
Olin Thompson is vice president of industry strategy with Lawson Software. As an independent analyst, he was a frequent contributor to TEC’s newsletter, providing articles on ERP and manufacturing management, as well as general interest pieces. Thompson has over 25 years of experience as an executive in the software industry, and has been called the “father of process ERP.” He 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 Olin.Thompson@us.lawson.com.