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ERP (Enterprise Resource Planning) Survival Guide

How to live with an MRPII (Manufacturing Resource Planning) or ERP (Enterprise Resource Planning) system and get real business benefits - by Phil Robinson

The success rate for implementing not just MRP and ERP systems but all large software packages has never been very good. In survey after survey, in the USA, Europe and elsewhere, less than one third meet the basic criteria set out at the start of the implementation. Too many software engineers know how the software works but do not know how to integrate it into the business in a way that delivers real business benefits. With enterprise resource planning (ERP) packages costing hundreds of thousands, many costing millions, this failure rate is frightening. The question is - how can you minimise the chance of failure or, more difficult, rescue a package that is not delivering sufficient business benefits to justify the cost of implementation? The good news is that, when properly implemented, an ERP package can be the most cost effective project a company has ever seen.

Jargon Warning - If you are not familiar with any of the terms used, you can look them up in the free Jargon Buster on this site or, for more details, purchase the book "Business Excellence". Business Excellence is available in e-book format in addition to the paperback and also as a component of the ERP Class "A" toolkit which you can download.

The History
To know how to get the best from an ERP package it is worth looking first at what went wrong in the past and then how to avoid those pitfalls in the future.

ERP does not have a good history. When it first became economic to use computers for business, companies looked around for appropriate applications. After the payroll, a repetitive calculation that computers are best at, the next obvious repetitive chore for manufacturing companies was the calculation of the materials they needed to buy.

In the early days companies would get software written for them to explode the bill of material. The first "package" material requirements planning (MRP) software was IBM’s RPS (Requirements Planning System). There were 2 main faults with Material Requirements Planning (MRP) systems :

erp1(1) Nobody could work out how to make the planning systems stable; every MRP run produced widely different results from the last, due to the normal fluctuations in demand and supply.

(2) The systems had the effect of driving up the inventory instead of reducing it as promised by the software salesmen. The reason for this was that every fluctuation upwards increased supply orders which could not be easily reduced, so ratcheting up stock.

These problems with the early planning systems meant that as people could not trust the messages the systems generated, they were not used as planning tools but, instead, became glorified (and expensive) typewriters.

In the early 70’s the idea of master production scheduling and capacity requirements planning were introduced into MRP systems to overcome the stability and inventory problems. The new packages were called MRP II (Manufacturing Resource Planning) to emphasise the improvement over the old MRP systems.

The main reasons for MRP II failures
In theory, MRP II should have overcome the old MRP problems. Unfortunately it seems that the majority of software implementers did not understand master scheduling very well so encouraged companies to implement MRP II packages in the old, flawed MRP way i.e. without proper master scheduling and capacity planning.

There were other problems with MRP II implementations:

* Inaccurate data - experience has shown that at least 98% of inventory records and bills of material must be correct to make the system usable to control the business. Other information must be similarly accurate such as the material descriptions, customers and supplier details, credit card processing data and so on. (you can buy our stock record accuracy course on cd - click here for more details)

* Software packages did not meet the needs of the business - packages were becoming so "feature rich" (i.e. complex) that people running the company did not understand them. Professional implementers who did not truly understand the business were therefore left to decide how the packages will be "mapped" to the business. This often meant automating the current methods giving rise to the phrase "digitising the dinosaur", resulting in a lot of cost but no business benefits. At the other end of the spectrum, there are some cheap packages that miss some essential business requirements, e.g. lot tracking in the aerospace industry or multi currency. Trying to modify the package leads to higher costs and extended implementation times which repeat at each upgrade. You cannot successfully purchase and implement a planning system unless the business managers understand the planning principles by attending suitable education courses at the outset.

* Some people felt excluded - MRPII offered the promise of helping everyone but frequently degenerated into a software implementation exercise dominated by IT. Anyone who felt left out would, intentionally or otherwise, undermine the success of the project.

* The longer term financial objectives of the company were not addressed - companies are judged by their financial success. If a planning system cannot be seen to connect to the financial needs of the business, there will be two, frequently competing agendas. Manufacturing, for instance, could be asked to hit monthly financial targets whilst also being expected to meet the customer requirements passed down through the planning process. In this environment it is often the financial objectives that dominate so undermining the validity of the plan.

* Departure of the sponsor - the average tenure of a Managing Director appears to be about 4 years. With implementations lasting 18 months on average, there is a high risk of a change of management during the implementation, seriously disrupting the implementation.

* Insufficient education - time and again people who have implemented MRPII systems, even those that were successful, say they did not have a sufficient level of understanding of either the software or the new business operating processes and procedures needed to work in an integrated environment. "Sufficient" means at least 3 whole days of software training on each module for all users of the system and education in the business planning principles for at least 20% of employees on courses such as those run by BPIC (see www.bpic.co.uk).

* Ineffective use of consultants - most people will only implement planning systems once or twice in their careers. Many companies try to implement systems without the help of people who have proven experience in implementing such systems (for BPIC experience see case studies). It is possible to get such help without losing "ownership" of the project.

Enterprise Resource Planning (ERP) was sold as the solution to the problems with MRPII but in practice ERP is just Manufacturing Resource Planning (MRPII) with some additional features. The additional features vary from system to system; typically they will include human resource management and salaries, document control and, sometimes, maintenance. Although the term Enterprise Resource Planning does help to get the important message across that more than just manufacturing people need to be involved, the additional features did nothing to alleviate any of the MRPII implementation problems listed above.

So much for what went wrong, now for how to get it right

What’s in it for me?
For the project to get the commitment of the Managing Director (or equivalent) and so have the best chance of success, the Managing Director must connect the ERP implementation to improving the achievement of his or her business objectives. Similarly, everyone else must see how their objectives will be easier to achieve if they take the trouble to understand and contribute to the successful implementation.

The old term Manufacturing Resource Planning was always a handicap when it came to getting sales people and technical people interested; ERP - Enterprise Resource Planning - breaks down this traditional barrier at least. For anyone to benefit from ERP, everyone has to contribute; this is the key to ERP survival.

There has to be a common agenda throughout the business. To get the commitment from everyone, everyone has to believe their needs and objectives are addressed by the plan. Learning the tools and techniques to accomplish this is then relatively easy.

Sales and Operations Planning
Companies generally have a business plan going out at least 3 years. As a minimum, there has to be a profit forecast at the start of each financial year for owners, shareholders etc.. An effective business planning process will convert the financial business plan into an operational plan that can be used to run the business. It is generally called a "sales and operations plan" (SOP or S&OP to distinguish it from sales order processing). The sales and operations plan will generally be broken down into months and, because we live in a world of change, it will need to be reviewed each month. Spreadsheets are usually used to produce the sales and operations plans although some ERP software, notably SAP R/3, does have sales and operations planning built in. The sales and operations plan must cover at least 12 months. Most plans cover 18 months so that the sales and operations plan can be used as a basis for the annual budgeting process which generally starts a few months before the start of the fiscal year.

If the sales and operation plan is to be a common plan, it has to have a common language. It is no good the sales department talking about the value of orders received when the factory want to know what product they have to produce and when. The common language is nearly always not value but the things the company produces and the customer buys.

It is not practical to plan 18 months into the future in very much detail, so it is necessary to divide the company’s product range into no more than, say, 20 convenient "families" but which have enough detail to enable sales and/or marketing to forecast, operations to check critical resources and finance to check against the budgets.

erp2The plan must be driven by the highest quality of information that is possible in your business. It is the Sales and/or Marketing departments that have the best knowledge of the external markets so it must be this department that inputs the forecast into the plan. It is not necessary to have a highly accurate forecast but if your forecast is not as good as your competitor's you will be at a competitive disadvantage.

The sales and operations plan becomes the starting point for master production scheduling on the ERP system, for marketing plans, for recruitment plans and for new product plans. In short it is the way to get everyone working together in synchronisation. Now you are ready to improve your control of the business using ERP as the tool. Click here for an overview of the sales and operations planning process.

Master Production Scheduling
The single biggest difference between MRP and either MRPII or ERP is the introduction of a properly managed Master Production Schedule. Master scheduling is neither obvious nor instinctive. Planners need to be taught how and what to master schedule. Unless your master schedulers understand that they need firm planned orders up to at least a week or two beyond the cumulative lead time, they are not master scheduling properly.

Once set up, the primary role of the Master Production Schedule is demand management. Demand management is a commercial process and, again, it is neither obvious nor instinctive so has to be taught to commercial people. Unless they use the master schedule’s available to promise values to make delivery promises, consume the forecast for forecast orders and always consult planning for unforecast (abnormal) demand, they are not properly using the power of the ERP tool. Proper demand management gives a higher level of customer service and more stable manufacturing with, in most cases, lower inventory, meeting everyone’s objectives (you can buy our Master Production Scheduling course on CD - click here for more details).

Making it happen
The mechanics for implementing an enterprise resource planning system are not difficult. You store the fixed information the company needs to run its business, bills of material, part number data (lead times, order quantities, safety stock etc.) and add some processes such as sales order processing, inventory control, works orders, purchase orders and a bill of material explosion. If your planning information was garbage before and all you do is computerise what you did before, you end up with the same garbage but now it is on-line, real time garbage; "same tune different piano". The question is - have you improved the business?

More specifically "have you improved customer service, reduced inventory, stabilised manufacturing, provided everyone with a better quality of information with more visibility to do their job and, last but by no means least, have you got your money back from the not inconsiderable investment in hardware, software and everyone’s time?"

Unless the answer to both of the above questions is a definite "yes", what is missing in this implementation of ERP is the change of culture needed to achieve the change of business performance. The ERP system is only the tool you need to facilitate the change.

You will achieve that improvement in business performance when :

* Sales and marketing realise they must provide the highest quality forecast of future demand they are reasonably able to in the form of a regularly updated forecast of the product they need to meet the market needs and when they need it.

* Planning realise their plans must be realistic and achievable (any plan with due dates in the past is neither realistic nor achievable) and they should only release orders when they have checked that the material is available.

* Operations recognise that it is in everyone’s best interests to follow the plan, advising planning in advance if they may miss the plan date.

* Customer service realise that orders must only be accepted on the basis of available, planned capacity (based on the sales forecast) unless agreed with operations.

It is easy to say all this is obvious, which it is, it is harder to admit that you do not do some or all of it as well as you could. Changing hardware and software is not the hardest part, it is the cultural change needed to make an integrated planning tool work that is difficult. Without the cultural change you will not change business behaviour.

If a sales manager’s performance is judged by whether he or she can beat the budget, the game becomes trying to get away with as low a budget as possible and then trying to stuff in as many orders on the shortest lead time as possible. This cannot be a recipe for accurate forecasts.

If a production manager has an overloaded schedule and is judged on output quantity or value rather that schedule adherence, it is not surprising if customers do not get what they want. If purchasing are judged on purchase price variance, you cannot be surprised if you get a store full of material that may be cheap but it is not what you need right now.

A key element in cultural change is a change in performance measures that support the new way of working and, more difficult, the abandoning of performance measures that support bad habits.

If the sales manager is judged on the accuracy of the forecast at, for instance, the point in time where you have to commit to a critical or long lead time material, you are more likely to get accurate forecasts. If a production manager is judged by schedule adherence and purchasing are judged by the cost of purchases not just the price, you will both increase customer satisfaction and reduce costs.

Before you can change performance measures, however, you need to have developed a shared vision of the new way of working. It is impossible for anyone to hold down a line function and keep up to date with current best practice. To develop best practice planning and control techniques for the company you have to get outside help in the form of articles (like this one), books (e.g. Business Excellence by me!), education courses and individual consulting. I do not believe you should get outsiders (e.g. consultants) to tell you the best way to plan your business. It is not only much cheaper but also more effective for you to learn best practice techniques and then get a strictly limited amount of help from consultants to help you apply the generic ideas to your business in the most effective way.

The change process happens much faster and more reliably if at least the project leader is full time. In addition to a project leader you also need a project team to co-ordinate the change process. You should set up task forces to tackle each change area such as sales and operations planning, master production scheduling, data accuracy (bills of material and inventory in particular), performance measures, manufacturing and purchasing. The task force members must become the company experts in best practice in their area; some should become internal educators.

It is vital that you do not overlook the need to have in-company experts in both the software and the generic planning principles. Any help from outside consultants must be as coaches not players. You should check that any consultants who will actually be working with you (not the consultant group or partner you first speak to) has experience of successful implementations in a similar type of business.

And Finally
You now know everything you need to know to survive ERP.

* An ERP system is only the tool you need to achieve that step change in business performance, it is not (despite what it says on the box) a solution in its own right.

* For change to happen people have to do something different, a change of culture and people will not change until they understand what’s in it for them.

* To change culture you have to change performance measures.

* To change performance measures you have first to develop a shared vision, a new way of working together.

* No-one should be expected to know the best way to change their way of working, they need help and guidance from people who have done it before.

You should regularly check your planning and control processes by benchmarking your company against current best practice. The best way to do this is to use my free ABCD checklist.

Good luck!


For more details see "Business Excellence" which explains the ideas discussed in this article.

If you would like to make a start but do not have a budget, our stock record accuracy or Master Scheduling courses on CD are for you. These self-paced courses enable you to improve your business performance for little cost.

Phil Robinson was project leader for Knowles Electronics class "A" implementation in 1985, only the 3rd in the UK, became Director of Manufacturing, now runs BPIC (the Business Performance Improvement Company). He is also author of Business Excellence - the integrated solution to planning and control ISBN 0-952-8885-05.

Illustrations by Richard Robinson

Author : Phil Robinson

Published by BPIC - the business performance improvement consultancy

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Url : http://www.bpic.co.uk

Copyright 2007 Phil Robinson

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