February 21, 2012 by Jonathan Gross
All business leaders want to take their organizations to the next level. In an effort to do so, many have invested heavily in ERP implementations and have suffered through associated business disruptions. Notwithstanding their good intentions, most companies haven’t come close to realizing the value achieved by those featured in various ERP case studies. Revenues haven’t leapt 20 percent. Operating costs haven’t been slashed by 15 percent. And on-time deliveries haven’t reached record highs of 95 percent.
So, what’s holding them back?
To me, it’s not a question of capability. I believe that all businesses have the potential to achieve significant post-implementation value. Rather, I think it’s a question of understanding and commitment – an understanding that business value comes from business change, not systems; and a commitment to executing a good plan.
This article will discuss an area that – for most businesses – provides a great opportunity to extract meaningful post-implementation value. Without hyperbole, this area represents an organization’s central logistics hub. It touches all corners of a business’ operations, including sales forecasting, supply chain, production, distribution and purchasing.
I’m speaking, of course, about replenishment planning and shop scheduling. This is where an organization’s supply meets its demand. It’s where forecasts are converted into purchase and/or production orders. Planning activities influence inventory levels and, by extension, cash flow. They influence production and distribution schedules and, by extension, sales turnover and on-time delivery rates. In short, companies that plan and schedule well are more likely to: anticipate demand and respond nimbly to unforeseen market shifts; have higher customer satisfaction rates; and have less cash tied up in obsolescing inventory.
The sad truth is that most companies’ ERP systems issue poor planning recommendations – ones that, if acted upon, would lead to a huge mismatch between supply and demand. Because those system-generated recommendations don’t reflect true operating realities, planners, purchasers, materials managers, production managers and others often ignore system-generated planning signals and advice.
Almost always, however, poor planning advice has little to do with the software itself. Software is made up of a bunch of zeros and ones, and simply generates outputs from formulae and rules. In all likelihood, the formulae and rules were programmed just fine. Rather, poor recommendations are usually the result of inaccurate and untimely base data.
The good news is that any company can significantly improve its planning and scheduling activities. And, if it does, it’ll go a long way to generating that seemingly elusive ERP-related business value. From a high level, there are three key success factors to planning. They are:
• Accurate item and movement data – The system needs accurate data to simulate a company’s operating reality. Key data requirements include item-level order modifiers, bill of materials and routings.
• Accurate inventory data – If inventory counts and movements are not accurately reflected in the system, the planning engine will either make recommendations that cause the company to 1) prematurely order inventory or 2) deliver items beyond the due date. The former case constrains cash flow and unnecessarily increases the value of a depreciating asset class. The latter case leads to higher rates of customer dissatisfaction and turnover. In our experience, a planning engine will only be capable of issuing meaningful planning recommendations when a company has accuracy rates of 95 percent for its on-hand inventory; maintains accurate demand and supply forecasts; and knows its minimum inventory level requirements (safety stock).
• Timely recording of material movements – The status of purchase orders and production orders varies over time, as materials flow through supply chains and production. To ensure that planning signals and recommendations are meaningful, the company needs to update the system promptly. Businesses can choose to do this a couple of ways – through manual input or in an automated fashion.
Before relying on an ERP system to manage planning and scheduling activities, businesses should first make sure that the right processes are in place. Sound processes will allow the company to generate accurate and timely data. Only then will a company be in a position to use an ERP system to improve planning and scheduling activities.
Jonathan Gross is vice-president of Pemeco, Inc., a consulting firm specializing in ERP selection and implementation. He can be reached at firstname.lastname@example.org. This article originally appeared on Pemeco’s website – www.pemeco.com.