Why you can’t plan with ERP
Processes are becoming more complex due to outsourcing, globalization, products becoming services and ever shorter product life cycles. It is getting harder to seamlessly synchronize these processes in supply networks: perfect planning prevents poor performance. That’s why organizations invest in ERP systems, which promise the boundary less planning and control of these processes. Unfortunately, often without success. Why do ERP systems fail to plan and control processes?
Partnerships, close contact with suppliers, service providers, customers and manufacturers that produce for the world are the order of the day. Companies outsource non-core activities such as ICT, call centers, administrative processes, logistics and even manufacturing to specialist companies.
Planning and control of such a supply network is a powerful weapon to compete in an environment of ever-changing individual customer demand, with many new products and combinations of services that are quickly launched into the market and the need to keep costs as low as possible.
Precise planning and control
Companies that fail to do so are punished mercilessly by their consumers. This applies to apparel and electronics manufacturers, telecom providers and retailers, but also to health care institutions.
Stock used to be the “elastic band” between the fluctuations in customer demands and the (im)possibilities of suppliers or the internal organization. If you take away the rubber band, to save working capital for example, then you connect the links in the network one-on-one.
This requires precise planning and control of customer demand on the one hand, and of the supply on the other hand and, what’s more, it requires transparency in the supply network. Transparency means that you know exactly what the stock is, which engineers are available, which carrier still has capacity, what the actual customer demand is and what the customer demand will be in the coming days or even upcoming hours.
It is becoming increasingly difficult to seamlessly connect processes in networks with each other. This requires careful planning and control. And IT must support it.
Speed of information is a ‘must have’
Quickly obtaining the right information from the network for optimal decision-making determines the company’s range in the market. An example: a customer calls asking if a new telephone system can be delivered and installed before the end of next week. Since it’s an important customer, efforts must be made to deliver this order as requested by the customer. The company needs to answer directly with delivery and installation options, otherwise the customer will place his order with the competitor. This requires full and timely visibility of the capacity for the entire supply chain, but also intelligent functional features for planning and control. But why can’t that be done with ERP?
Requirements for planning and control
Linking commercial and logistic planning
Total network transparency
Understanding of available capacities
Include cash flow and working capital
Planning for the entire network
Capable-to-promise information (CTP)
Business preference rules
ERP and demand management: lots of plan and do, little check and act
Demand forecasting is useful and necessary. This information is necessary for planning the capacity of factories, warehouses, call centers and engineers, purchasing of components with long lead times, agreements with suppliers and the prediction of the expected cash flows. However, these predictions seldom come true. The hard reality is one of great unpredictability. Each ERP offers endless possibilities for demand forecasting with mostly historical data based on sales and operations planning. However, ERP systems are weak in the day-to-day monitoring of the realization of the demand forecast at the customer level: demand management.
If you notice in time that the real demand is different than the expected demand, then there are still opportunities to make adjustments by using extra capacity or demand if necessary. At the end of a period it is, by definition, too late to react. That leaves only the pointless bickering about the ‘forecasting accuracy’.
Philips Lighting reduced inventory in the supply chain from 16.8 to 15.5 percent of sales value. The decrease is the result of a shift from push to pull. On Logistiek.nl Philips Lighting states that “From now on sales & operations planning determines when the plants start producing, not when they stop.”
ERP does not optimize planning
The daily schedule determines the efficient deployment of people and resources in the network. And that requires a delicate touch… This way every product manager knows that his process has an optimal production sequence. If you are producing paint, you start with light colors, then you make the dark colors and finally you end with black. That way you keep losses to a minimum. Like this, every process follows its own rules for optimal use of resources and people.
Unfortunately, ERP systems do not support such optimal sequences. In principle, orders are processed within ERP on a first-come, first-served basis. Therefore, most companies work with additional software for the fine planning of their operational processes, which explicitly examines the effect of planning on the actual cash flows.
Planning and control at paint manufacturers Sigma
Sigma is a paint and varnish manufacturer. The company opened a modern factory. The processes are highly automated. The plant is a bottleneck and the capacity planning of the new plant is critical. The staffing plan is also critical. Only well-trained and experienced people can operate the plants. Therefore Sigma introduced a new system for capacity planning when commissioning the plant.
Sigma has no demand forecast for all end products. For thousands of end products it’s too complicated and too unreliable. Instead, a demand forecast is made in liters per type of paint. It is known in which production tanks the types of paint need to be produced and how many hours it takes to produce a certain quantity of paint. With this information it’s possible to make an overall plan for the tank capacity. However, planning the capacity for the filling lines is more complex; on which lines should which cans be filled? For the filling of large cans the production in liters per hour is much greater than when filling small cans. Therefore a capacity planning has no value if the can sizes are unknown. However, it is impossible to plan all the cans separately for each type of paint.
Sigma keeps a record per type of paint on what the average distribution percentage for the can sizes was in the previous year. Together with the prediction of the total amount of liters per type of paint this can be converted into a capacity requirement in hours for each filling line. For the short term, a detailed production schedule is created for each type of paint in each color based on the latest demand data. This schedule takes into account the minimization of switching times on the filling lines and optimal production sequences.
ERP works per link, not for the total network
You want to answer the customer for that telephone exchange within seconds… In that case you need current information from the network. Nowadays over 60% of the primary processes are outsourced. It is strange that ERP software considers the outsourced links in the network to be a ‘black box’, while the capacity of one of these links might be a bottleneck. You yourself make a perfect plan, make promises to customers and, ultimately, a supplier will let you down. At best ERP systems exchange concrete, hard purchase orders with EDI, but that, of course, is not planning.
You have to be able to plan the whole network at once, including all partners. ERP systems offer a solution to the fragmentation of information within a company, but not to support the planning of the entire network. This is where ERP fails.
ERP plans everything in detail…. and with that the flexibility’s gone
Planning with ERP goes into detail, every item, every week, for each capacity group. That cannot be done in any other way because ERP systems are based on the MRP techniques from the 70s of last century. The Bill-of-Material (BOM) and Bill-of-Labor steer the planning. The longest duration in the BOM is also the planning horizon for you to capture your planning in detail. Many weeks, and sometimes many months ahead: ‘push’. That only works in very stable markets. Not in dynamic markets, and especially not in service environments, where no fixed BOM exists.
With this detailed planning, ERP systems also get rid of all flexibility that actually exists in these processes. It is better to first make a rough and tactical plan, at the level of the product family or capacity group, for one week or a few weeks ahead, taking into account the capabilities in the network. And afterwards, in the very short term, from hour-to-hour, do the fine planning at item level or for that specific customer order.
The “best” costs in the network are achieved with this rough tactical planning, as in the example of Sigma Coatings. The final delivery reliability is achieved with that last operational fine planning based on the latest figures on the actual current demand: ‘pull’. Planning at multiple aggregation levels is not supported by ERP. And in that case you destroy more than you care for with planning.
ERP does not allow you to make reliable promises to the customer
You want to be able to make clear agreements with the customer. Information about the so-called “capability-to-promise” offers the possibility of making realistic promises about delivery and also to comply with them by providing insight into the available capacities in the network.
ERP systems only provide “available-to-promise” based on what is really in stock. That’s not enough when you produce or assemble to order, and you are actually selling ‘capabilities’… In ERP you need to “hard link” the capacities to the customer orders, but by doing so all capacity is removed. The use of ERP in customer-driven logistics is difficult.
ERP cannot make alternative plans
Many planners make but just one single plan. Of course this plan never works out. In this case the planners will have to consider how they reacted previously. What are alternative suppliers, in which factories will you produce and how can you still get the products to the customer quickly? Therefore, you will not make one single tactical plan, but you will make several contingency plans. What if demand is 50%, 100%, or 200% of the forecast?
The possibilities to compare the financial effects of multiple scenarios on cash flows and working capital are lacking in ERP. The cost price data in these systems do not offer a realistic image of the real flows. Even better would be if the system offers suggestions on how certain bottlenecks can best be solved using simple priority rules. Unfortunately,…
ERP combined with best-of-breed, a marriage made in heaven
Expectations for an ERP system are often very high. However, ERP systems are designed to solve the information fragmentation in companies, and not to support the most effective and efficient implementation of processes and the planning and control of these processes.
As the processes become more complex or time critical, their control calls for individual and quality support. ERP systems as the backbone of information services are therefore complemented by the implementation of specialized applications for process execution and for network planning and optimization, the “best-of-breed’ solutions.
Next generation planning and control: sense and respond…
Innovation in ICT continues and is getting better. Who doesn’t play sports on Nintendo Wii, or chat with friends on Facebook, listen to the latest podcasts on an iPod, read mail on the iPhone, use a Privium pass for the iris scan at the airport or make sneaky dates through Grindr- dating? All these gadgets for faster data exchange and communication seem to have completely passed by the ERP users…
The new buzz is “situational awareness”. In plain language: environment awareness. This means that each employee has information to better assess situations and is able to make better decisions, to steer and to direct.
The new motto is “Sense and Respond“. Feel and react. Communication starts with the parts of the network and not with a central computer. Whether it’s packages, boxes, pallets, containers, freshly picked roses from Africa or mechanics: they indicate what they are, how heavy they are, where they have to go and at what time they have to arrive there.
Situational awareness is not the traditional 19” screen full of numbers and letters. They are virtual dashboards and control towers that visualize what happens in global networks. And with the huge amount of information the decision maker has to make correct decisions quickly and accurately. That will never happen with ERP.
New technologies will make processes even smarter. That ‘smart’ approach combines innovations such as gaming, virtual reality, supply chain cockpits, mobile communications, location based services, remote administration, RFID, agent-based software and of course a seamless IT highway for all that data. Were ERP systems designed to do this? Or is there a huge generation gap?
ERP vendors in front of the advertising standards authority!
Initially I planned on calling this article “Why you can’t plan with SAP”. But actually that’s not fair for the other providers of ERP software. They too are unable to ‘plan and control’. Actually, the time has come for someone to go to the Advertising Standard Authority and complain about the P in ERP. Enterprise resource planning is out of the question.
Walther Ploos van Amstel.