ERP and the quest for both effectiveness and effiency

Posted on 7 Apr 2009 by The Manufacturer

Can enterprise resource planning make manufacturers operate in an efficient but not an effective way? Yes, says Chris Pope, who reports on how ERP has evolved to become more effective as well as efficient

In any discussion of enterprise resource planning (ERP) the subject matter often turns to efficiency gains or savings. And with good reason: the ability to automate and speed up many processes within a manufacturing business has long been a key feature of ERP.

Efficiency has always been strongly associated with manufacturing. Indeed the very definition of efficiency, that is ‘working or producing effectively without wasting effort, energy or money’, and to achieve efficient production, might well be regarded as a kind of Holy Grail for many manufacturers. The prevailing interest in lean manufacturing and other philosophies that focus on reducing waste have only intensified the efficiency focus.

Yet there is a very real danger that by focusing on aspects of minimising waste, energy or money, manufacturers can miss the more important element of effectiveness. This is more than just semantics because effectiveness or being effective is defined as ‘producing a desired result’ and in a changing business environment it is entirely possible for a manufacturer to use ERP in order to operate in an efficient but not an effective way, especially at an overall business objective level. For example, a manufacturer might use an ERP system to optimise its inventory levels, but fails to achieve a smooth production plan. It might maximise the efficiency of its production planning by reducing costly tool changeovers but still end up making the wrong product for the wrong customer. In other words, it is operating ineffectively.

At the heart of this is the recognition that in recent years modern manufacturing has had to undergo not just a rapid evolution but in many senses a revolution. Phil Burgess, business consulting director for software developer Infor identifies two key phases in this, the first beginning post-Y2K when manufacturers started having to think beyond the four walls of their production site. “Manufacturing was no longer about optimum planning or condensing sales or processing to cash collection cycles,” he says. “Instead, businesses started needing, for example, the capability to handle customer orders coming over the internet, or suppliers gaining visibility of production plans.”

The shift to ‘Make to Order’
This evolved further in around 2005 when many manufacturers recognised that pure ERP did not meet their increasingly sophisticated requirements. That is, ERP on its own did not enable them to be truly effective, both at micro or departmental level as well as at a macro or whole business level. “An entire market place of niche [software] players looked to fill in areas of ineffectiveness such as product life cycle management, demand forecasting, supply chain planning, enterprise asset management and business intelligence, to name a few,” says Burgess. The reality was that many ERP systems which had previously acted as an enabling technology for manufacturers to be both efficient and effective were now in fact becoming a constraint. As Jeremy Bucknell, managing director of SAP Business One Gold Partner Codestone, observes: “Manufacturers, especially small and medium-sized enterprises, were increasingly coming to recognise the need for a flexible package to meet their exact needs and at a cost which makes sense to them. At the heart of this lay the integration of previously disparate silos of information into the same application and the culmination of the associated efficiency gains.”

Steve Whitehouse from SSL WinMan agrees and adds that it is not just the nature of manufacturing that has fundamentally changed, but the variety of processes as well. “Manufacturing predominantly used to be ‘Make to Stock’ and on a batch basis and even early generation ERP systems could help achieve this,” he says. “Increased competitiveness resulting from globalisation has led to more varied and demanding customer expectations, so manufacturing is now increasingly on a Make to Order basis. But manufacturers also increasingly have to be able to cope with Engineer to Order, Configure to Order and Design to Order manufacturing and quite possibly a combination of these, either in a traditional or lean environment.” For Whitehouse, in order for manufacturers to remain effective and efficient they need to accurately identify what their business needs to achieve from a holistic enterprise perspective and then closely match any ERP system to the processes involved in achieving this.

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This places significant demands on the ERP system in question. Jonathan Orme of Exel Computer Systems pulls no punches when he says that unless the ERP system is built on the latest technology platform that allows extended enterprise visibility and operations using a single database, companies can find their ERP will not achieve expectations. For Orme, one of the most important enabling technologies is the ability for what he describes as third generation ERP systems to use a web browser to access company data. This is especially important when working with multi-site operations or for manufacturers with global operations. As long as the user has access to the internet and a browser enabled device, they can do business in real time, wherever the business needs to take place. “This is so much more than using the internet to provide system functionality,” he says. “It removes the need for any client based software while retaining the content-rich user interface that is an essential prerequisite for any modern manufacturer today. Not only does it remove at a stroke considerable initial deployment costs and on-going maintenance, it facilitates manufacturers to effectively respond and adapt to meet the needs of their customers today and in the future.”

The ability to enable manufacturers to effectively meet changing customer and market demands is firmly at the heart of software vendor Epicor’s approach, which recently released its latest ERP system that it claims would “virtually put ERP everywhere.” The core of this ability rests on an underlying, adaptable technological and collaborative business architecture that is designed to satisfy the needs of any enterprise regardless of location, industry or access device and, by doing so, “enabling business anywhere”. James Norwood, vice president of worldwide product marketing for Epicor says that is not just the enabling power of technology on the ability of any ERP system to deliver, but also the willingness of manufacturers to recognise this and embrace it as a means of driving decisive business strategies. “Businesses need to look seriously at their ERP systems and establish what they need to do to achieve diversification — whatever it takes to get the company in shape to handle anticipated challenges and exploit future opportunities.”

A forward-facing perspective is something that many ERP vendors attribute to ERP users, to be both efficient and effective. Tempting as it may be for manufacturers to concentrate on cost cutting measures and other waste reduction aspects of efficiency gains, the focus must however be on the bigger picture and on what it takes to keep the business effective. Norwood says: “We strongly advise that a down market is not the time to tighten belts — it’s actually the time to invest in areas where you know you could achieve competitive advantage. Then, when the bad times are over, you can come out stronger and see real growth.”

Greater than the sum of its parts
Vendors will disagree about which specific ERP solution is most capable of delivering the means to become more effective and not just more efficient. But each of the above would agree that one key ingredient is the ability of modern ERP systems to recognise that effective manufacturing is greater than the sum of its parts. In other words, it’s about looking at the needs of a modern manufacturer from a holistic perspective and not from a fragmented or departmental level. It is being aware of how each correlates with all the others, because it’s not uncommon for a direct efficiency gain in one department to potentially have a negative impact on the effectiveness of another department. Sometimes this is detrimental to the entire business while at other times it may actually be a sacrifice worth making because of the benefits achieved at an overall enterprise level.

The requirement for ERP to be able to reach beyond the physical walls of the enterprise and out into the realm of the supply chain has already been noted. However, this is more than just achieving efficiency gains in terms of raw materials in and finished goods out, or even managing the potentially problematic issue of multiple subcontractors. As Whitehouse notes, it is also central to the ability to achieve effective sales and marketing — that is, maximising the ability to sell the right product at the right time at the right cost to the greatest number of customers. “The ability to access customer, prospect and supplier information held on a common database by anyone in the organisation means fewer errors in communication between internal departments and ultimately happier customers,” Whitehouse says. “As all communications can be recorded, the success of marketing campaigns can be assessed and fed into future campaigns with any subsequent fine-tuning that may be required done so as quickly as possible which again means that the business is genuinely being as effective as possible.”

All of this is ultimately good news for UK manufacturers, especially in the current challenging economy. Success not just in the short term but in the medium and long term will depend on the ability not just to make things more efficiently, but to more effectively give an increasingly diverse customer base the products that it wants, when it wants. And the right ERP solution, applied correctly, can give companies just that.