"Lies Your ERP System Tells You," Feature Article, March 2006

lies your ERP
system tells you

Enterprise resource planning has always had a hard time bridging the gap between corporate offices and the factory floor. Here's why.

by Alan S. Brown, Associate Editor

tens of thousands of large and medium-size companies have installed enterprise resource planning (ERP) software to harmonize business, manufacturing, and supply chain operations. Many have achieved outstanding returns. Others, however, found their systems yield results that are just wrong. They lie.

That seemed to be the case three years ago, when Nick Testa received a panicked call from the managers of a medium-size manufacturer. The parent company had given them 30 days to find and fix millions of dollars of inventory writeoffs.

Testa, one of a small army of consultants who help businesses wrestle with ERP systems, had a good idea of where the problem might lie. His firm, Acuity Consulting Inc. of Cypress, Calif., had helped install the company's ERP system several years earlier.

At the time, Testa recommended that the company buy ERP software with a feature called a configurator. It enabled companies to stock subassemblies and configure them into final products at the last possible second.

"They bought the system, then decided the configurator was too complex to implement," Testa said. Instead, they opted for a process that used the ERP system to create pick lists of parts needed for each final product. Workers would then grab the subassemblies from inventory and assemble them.

This seemed to work just like the configurator, with one subtle difference: The configurator passed along the labor cost of the subassemblies to the final product. Pick lists did not.

"They were entering their labor costs into the system and ignoring them in cost of goods sold," said Testa. In effect, the labor costs were indistinguishable from money invested in inventory.

"As a result, each year they were overstating the value of their inventory by millions of dollars," Testa said. "They didn't know what caused the problem and they didn't want to find out, so they just wrote off the difference until the parent company called them on it.

"That's the biggest problem with ERP systems," Testa said. "People muck with them. They try to make them perform the way they want rather than the way that's correct."

Testa knows. He has been tackling similar problems since the 1970s, when companies began installing material requirement planning systems (MRP), the forerunners of today's ERP software, to plan production and track inventory.

Enterprise resource management systems promise to simplify business planning, but gaps remain in moving information to and from the factory floor.

ERP systems go much further than MRP. They are the corporate system of record, a single database linking manufacturing with such business processes as new orders, purchasing, credit, accounting, supply chain management, and planning.

ERP systems stretch from headquarters across multiple factories, warehouses, engineering centers, and even sales offices. By linking these operations with profitability, ERP helps executives understand, manage, and accurately forecast all the factors—from sales and purchases to capacity utilization and hiring—that might affect profits.

It is an especially powerful vision in an age of relentless global competition and rising customer demands. It has helped vendors sell hundreds of thousands of ERP systems. For many manufacturers, ERP delivers on its promises.

Yet ERP has a weakness. Its power depends on recording and tracking thousands of individual transactions, or events, ranging from sales orders to each component on a bill of materials. It then models how those processes interact with one another. Like dominoes in a row, each new transaction sets off a cascade of new events. A new sales order, for example, triggers factory work orders, claims inventory, reserves manufacturing capacity, and schedules labor.

ERP models reflect reality only when each transaction registers true. "Yes, it is costly to enter each transaction," Testa said. "But as soon as you go around the system, it begins to degrade. Once that happens, people stop trusting it, and then they have another reason not to use it. It's a death spiral that's inherent in ERP: If you don't trust the system, you validate that the system's data is bad by screwing it up."

That seems to happen most often when ERP systems reach down to the factory floor. There's a disconnect. Sometimes, ERP simply does not provide the answers.

Part of the problem is manufacturing complexity. "ERP is great for deploying standardized processes across an enterprise, but it has had a hard time bridging that last mile due to the complexity and disparity of plant operating solutions," said Russ Fadel, vice president of manufacturing applications at SAP Labs LLC, in Palo Alto, Calif.

As CEO of Lighthammer Software Development Corp., which SAP acquired in 2005, Fadel tried to cross that bridge. His company developed software to link factory data with ERP information. He plays a similar role at SAP, whose manufacturing customers can have between 80 and 800 separate factory floor systems.

At worst, that means data and process models are scattered everywhere. At best, automated facilities use manufacturing execution systems that harmonize competing models and data, and moderate the flow of manufacturing information to and from the ERP system.

Yet even manufacturing execution systems, or MES, have a fatal flaw, according to Fadel. "Think of everything an MES system needs, like bills of materials, labor certifications, equipment, inventory," he said. "That data is owned by the ERP system and the MES has to replicate it."

In software, replication is bad. First, the organization has to agree on a single way to identify, number, and describe parts and actions that work with all software. Then it has to maintain it among scores of different databases that change all the time.

Finger in the Wind

An ERP system that does not capture changes in a bill of materials, for example, may schedule too much production time or too few workers. Supply chains may carry too much or too little inventory. Companies may lose money because they always have to expedite late orders.

This leads to a classic ERP problem, said Joshua Greenbaum, a principal at Enterprise Applications Consulting in Berkeley, Calif. "ERP does materials management and resource planning, but if you don't have accurate shop floor data, ERP forecasts are not much better than putting your finger in the wind," he said.

Yet despite the difficulties inherent in linking ERP to manufacturing, Greenbaum sees an even more pressing issue. "Implementation," he said, "is the number one, two, and three problem in ERP. It's not that the systems are inflexible, but that they're so very flexible."

Most ERP systems come with best practices—models of how business processes should be conducted and who should receive information—embedded in the software. "The conflict comes when companies try to reconcile what software says they should be doing with the way they've always done things," Greenbaum said. "Companies that spend millions of dollars on ERP software would like to think that the software works for them and not the other way around."

Enterprise resource management systems can "back-flush," or remove, parts or containers from inventory accounts as they come off the production line.

As a result, companies often make decisions without understanding their implications. Testa's missing millions in inventory is just one of many examples of compromise implementations. According to Greenbaum, "Software is a blank slate. It doesn't start to do anything until humans start doing something with it."

Author and consultant Robert Stein of Cedar Park, Texas, has implemented more than 20 ERP systems. He says inventory balances are the most telling indicator of ERP health in manufacturing. Stein's approach is to run a negative balance report that shows products that have negative amounts of inventory on the shelves.

Clearly, such a situation cannot exist, but it happens all the time. "I get page after page of negative balances," said Stein. "The most common mistake I have found is that someone receives parts at the back door and takes them to the shop floor without ever doing the computer transaction."

After those parts are used, many ERP systems catch up with them through a process called back-flushing. This occurs when workers enter a finished part into the ERP system. The system automatically back-flushes all of the components out of inventory. Since no one entered the components into inventory to begin with, back-flushing produces a negative tally.

Donald Sheldon, an Oxford, N.Y., consultant and author who advocates ERP use for lean and Six Sigma manufacturing, sees similar inventory issues. "It used to surprise me, but I've been going into multibillion dollar companies since 1994 and they have zero control over their inventory. Only about 70 percent of the inventory balances I see are accurate."

He also sees problems with back-flushing, which companies often use to track inventory in lean manufacturing because it eliminates the need to process work orders and work in progress each step of the way. Ordinarily, the system only back-flushes finished parts and not scrap. "If someone does not manually enter scrap into the system and you're making thousands of parts per day, it starts to add up very quickly," Sheldon said.

"Plant managers hear that they can save $3,000 in transaction time every day by back-flushing parts, and they start salivating," he explained. "But without the discipline to maintain data accuracy, they can't use the powerful tool they've invested in." Instead, some companies running ERP systems still start the day with a physical count of inventory.

Data Games

People often assume that any ERP information is correct. Sheldon disproves this by auditing bills of materials. Comparing engineering drawings, ERP descriptions, and factory practice almost always yields surprises. "One sporting goods company found workers were shimming parts to make up for mold tolerance buildup," he recalled. "It took only 30 minutes to fix, but they didn't even know they had an issue."

Sometimes analysts estimate rather than measure data, said Nicholas Dewhurst, executive vice president at Boothroyd Dewhurst Inc. in Wakefield, R.I. He recalls a meeting with managers who found a part too expensive to manufacture.

"We looked at the details and it was striking," he said. "Each of the part's machining operations took 10 minutes. When we dug further, we found they only took two or three minutes. Someone who was not familiar with the operation had estimated the time."

Other times, companies decide to capture new types of data and store it in any available ERP database field, according to consultant John Boyer of North Ogden, Utah. "They might decide to put a discount schedule in the product code field," he said. "But ERP data have tentacles that go everywhere in the system. Recording them incorrectly will corrupt information elsewhere.

"I've never walked into a company that has a complete grip on date validity," Boyer added. Most companies have sales, purchase, and production orders that are already past due. "They say, 'John, if we tackle that, all we'll do all day is sit and change dates.'

"I answer, 'The date has already changed. So are you willing to deal formally with it or not?' " Boyer said. "If the date's not valid, then all the calculations it drives are also invalid, and you're not using the system to help you make the best decisions. Sometimes, it's so messed up, they throw up their hands and say they'll deal with it on the factory floor another way."

All these data problems and informal shop floor workarounds have something in common. They are all symptoms of a lack of the discipline needed to enter every transaction, ensure it is correct, and do it every time.

Such discipline is never easy. "People decide how they're going to react based on everything from laziness and internal politics to the misguided thought that they're saving the company money by not spending time entering transactions," said Jim Shepherd, a senior vice president at technology consultant AMR Research in Boston.

"We frequently see data, jurisdictional, measurement, and other similar issues at the seams, where two or more organizations or information systems come together,"
he said.

Management execution systems manage automated equipment, and moderate the flow of information to and from enterprise systems.

Sometimes, it's as simple as management incentives. Factory managers whose bonuses depend on high-capacity utilization will always have conflicts with warehouse managers rewarded for low inventory. They will fight the implementation of an ERP system that gives the advantage to their opponent.

Other times, factory managers may balk because ERP is not as powerful as the software it replaces. Or they may complain that entering each transaction makes them less efficient. Friction at the seams is often exacerbated by ERP training that teaches employees to use the new system, but doesn't show them how their entries affect other parts of the business, Shepherd said.

"They must realize that even if ERP doesn't manage these functions as well as what they had, the benefit to the organization of having a single system of record outweighs the inconvenience of a less capable system," Shepherd explained.

"In most cases, value of information is much greater than any small loss of productivity," he said. "It lets management ask important questions, like whether it's working on the right projects, or if lots are the right size, or if it should subcontract a job. To make the right decisions or even recognize a problem, managers need lots of detailed information."

Easier Connections

ERP vendors are making it easier to get that information. Market leader SAP, for example, is collaborating with companies that make manufacturing software. One of them is Invensys Systems Inc. in Lake Forest, Calif., developer of the Wonderware manufacturing execution system.

Wonderware links directly with more than 1,000 different motion controllers, RFID readers, instruments, and other devices, according to Claus Abildgren, production-end performance management program manager at Invensys. It then translates SAP's ERP plans into manufacturing actions and reports plant data to the ERP for use in future plans.

"ERP software is not designed to operate processes," Abildgren said. "It needs partners to add functionality so customers can truly become agile and lean enterprises."

Vendors have also rethought how ERP delivers value. Instead of emphasizing control, they talk increasingly about embedding industry-specific best practices into their ERP infrastructure.

"An ERP implementation is a tremendous opportunity for top management to ask themselves how they want to operate their business to be more effective and embed those processes in the ERP system," said Mike Frichol, vice president of global industry marketing for discrete manufacturing at Infor Global Solutions, an ERP developer in Alpharetta, Ga. "Instead of productivity depending on the shift or supervisor, everyone does it the best way. Standard processes also make it easier to collect that type of data needed for continuous improvement."

Many people fight such cultural changes, Frichol said. In the end, though, they buy into them because ERP-based production planning makes work easier. "People don't like working in a factory where everything is chaos and you're expediting things all the time," he said. "A system that enforces discipline creates a calmer, more structured environment with lower labor turnover."

In the end, though, individuals have to take responsibility for entering the right data time and again. They must do it despite ongoing changes in models, specifications, and configurations. Data grows stale and corrupt over time, according to consultant Boyer. "Someone has to be accountable for each data element and keep it perfect," he said.

That sounds daunting. Yet every company operates at least one system where the data is always perfect, Boyer said. It is a system where everyone takes personal responsibility for accuracy. Where they report mistakes immediately. Where no one accepts any lies from their software.

It is, of course, payroll.

When operational personnel take as much responsibility for manufacturing data as they do for their paychecks, they will be able to count on their ERP systems to tell the truth.