The Ties That Bind
Enterprise resource planning unites all of a company's major business practices--from order processing to production--within a single family of software modules. It's not just for large manufacturers anymore
At 9 o'clock on a Friday morning in April 1997, a Big Three automaker phoned Jim Bianco with a crisis. A wire-forming machine at the company was on the fritz, setting up a parts shortage in the spring-making section. The carmaker was looking at a production delay that would have disastrous consequences on its manufacturing operations. Could Bianco's $11-million Iowa Spring Manufacturing Inc. make the springs?
In little more than an hour, Bianco had the answer. Iowa Spring would rejigger its schedule, bring in an extra crew, and work through the weekend to deliver 15,000 springs to the carmaker on Monday morning. "By Friday afternoon we'd received a faxed business order. An hour later the raw materials showed up. We were in production that same afternoon," says Bianco, president and founder of the company, which is located in Adel, near Des Moines. "We couldn't have done that without our computer system."
The system he's referring to is Time Critical Manufacturing, from Effective Management Systems. It's one of a large group of tools that at the moment is making the loudest buzz in manufacturing: programs that are designed for enterprise resource planning, or ERP.
ERP has already made news for the pains and gains it has brought many of the world's largest companies. Now it's available to small manufacturers as well, as suppliers of big ERP systems simplify their packages and lower their prices, and small vendors expand their products to fit the definition of ERP.
Essentially, ERP works like grease for information, easing the exchange of data among corporate divisions by uniting all major business practices within a single family of software modules. The modules typically run on client/server networks: collections of PCs (clients) wired into networks that connect the PCs both to one another and to the more powerful server computers that feed them data. Initially, each module works separately, performing specific data-processing functions.
For example, a labor module may run the company's payroll, an engineering module may index product drawings and designs, and an accounts-receivable module may kick out invoices. But ultimately, through built-in links, the modules work together, quickly disseminating vital information like delivery dates, inventory needs, and machine status among divisions that previously labored in lonely isolation.
ERP offers strong support for many of the latest make-or-break manufacturing practices, including just-in-time delivery of products to customers and requisition of inventory from suppliers, observes Jim Shepherd, vice-president of research for AMR Research of Boston. ERP also often incorporates support for electronic commerce and electronic data interchange (EDI).
Of course, stand-alone software packages perform many of the functions ERP does, but even when hooked into a network they usually can't share information unless it's translated into a common format. Since that may require complex programming, information gets printed out instead and reentered by every division that needs it--a time-consuming practice fraught with errors.
ERP modules, by contrast, all speak the same data language and can automatically exchange information. Thus, ERP creates a companywide management system in which everyone from the chief executive down to a machine operator can get business-critical information instantly. That speeds work flow by eliminating the mess of paper orders, reports, instructions, and explanations that can bob like flotsam around a business.
ERP is becoming available to small manufacturing and distribution companies from two directions, which can make the selection of a package rather daunting. (See "Does Size Really Matter?" below.) From above, big software houses such as SAP, Baan, Oracle, and PeopleSoft are peddling slimmed-down versions of their software that run on Microsoft Windows NT, which is more accessible than Unix to many small manufacturers. The hardware to run such systems also costs less than the big Unix boxes, and it's easier to maintain. "Now the hardware barrier is pretty low," says Shepherd. "And in most cases, for the software you're basically paying by the user. So it's quite easy to start small."
In addition, the major ERP vendors are now selling through third-party software distributors, or value-added resellers (VARs). That helps lower prices and also turns delivery over to people who customarily understand the unique needs of small companies. Perhaps most crucial, slimmed-down ERP doesn't require the kind of gut-wrenching installation process that larger systems do--like the two-year $100-million ordeal of Owens-Corning, which the Wall Street Journal called "the corporate equivalent of a root canal."
At the other end of the spectrum, small software vendors are selling comprehensive suites that, they claim, provide as much integration as the big ERP systems. Their products are created specifically for small producers and distributors, so they omit frequently unneeded capabilities like working in multiple languages, handling foreign currencies, and coping with numerous product divisions.
Together, those two approaches have produced a whole new class of small-company ERP that is easier and faster to install, runs on less costly, more familiar hardware, and sells as modules that can be mixed and matched or phased in to ease budget strain. Growing companies are taking advantage of those systems for a host of reasons: to improve quality control, to meet customers' rush requests, and to deliver customized products on mass-production time schedules, to name a few. Here are three companies that have built their business strategies around the software's promises.
Fast, flexible data communication Ă la ERP turned out to be a winning way for Kaye Instruments, a $17-million company in Bedford, Mass., to stroke its customers. By its own reckoning, Kaye dominates the market for high-precision thermal-measuring equipment used in making drugs. But to get there, it had to back out of unprofitable markets and target pharmaceutical and biotechnology companies almost exclusively.
For the strategy to work, Kaye needed to quickly acquire new customers in its target market. That meant providing extensive customer service and getting ISO 9001 certification. The latter is a coveted stamp of approval from the International Standards Organization that puts Kaye in a much stronger position when competing for certain European contracts. ISO 9001 certification is also attractive for U.S. customers, who face rigid quality-control standards and strict monitoring and reporting requirements.
Tim Donaghey, director of operations, says ERP was integral to Kaye's winning ISO 9001 certification. The ISO's key concern is product consistency, which requires careful management of revisions so that outdated specs and plans aren't confused with newer versions. That can be tough for companies that, like Kaye, sell many models and variations of their basic products.
ERP helped Kaye more closely integrate engineering and manufacturing, by allowing factory workers to instantly call up illustrations of products on PCs. Before ERP, workers looked at sometimes out-of-date paper drawings. Now that an electronic link ties a parts drawing to a work order, they see only the latest engineering revisions. "We don't send blueprints to the factory floor anymore," says Donaghey. ISO auditors appreciate the new electronic drawings, he adds, because they eliminate the possibility of errors.
Kaye's ERP system also gives employees immediate access to documents that catalog the 920 test procedures and assembly operations ISO 9001 demands. The documents are available to all employees involved in the manufacture of an ISO-certified product, including those in design, production, quality control, and senior management. The fast, orderly electronic cataloging and companywide dissemination of the test and assembly instructions prevents a costly, time-consuming muddle.
Kaye uses the AvantĂ‰ ERP system from DataWorks Corp., which took about six months to install and cost about $95,000. The company runs 18 of AvantĂ‰'s 32 modules, encompassing engineering, manufacturing, materials management, business planning, sales, customer service, finance, warranty tracking, and field service. And Kaye continues to augment the system. For example, a recently enhanced product-configurator module calculates costs for custom-made products by tallying material and manufacturing steps (along with their charges) while an order-entry clerk takes the specs over the telephone. That enables Kaye to provide fast, accurate price quotes--an element of good customer service. And because the software communicates with inventory management, production scheduling, and other areas, the clerk can immediately tell a customer when to expect a custom model.
"The system allows us to respond to customers by shifting our resources," says Kenneth Hurley, Kaye's president and CEO. "We went from needing weeks to needing only a couple of days to get an order out. If we have to, we can have an order out the door in a day." That's a real selling point when a pharmaceutical company suddenly learns of an upcoming inspection and needs a $30,000 Kaye product right away.
What's more, says Hurley, "from an operations perspective, it has cut our inventory in half." Since Kaye joined the ERP camp, the value of its preproduction inventory has dropped from 20% of its revenues to only 10%.
Staff reduction is another advantage. Free-flowing information eliminated the need for expediters, who ran around the plant keeping tabs on material movement and work flow. Kaye was also able to cut half of its materials-handling staff and one-third of its order-entry personnel. In all, the company has reduced its head count from 105 to 77 employees since instituting ERP, even though it added a direct sales staff of 7 during the same period.
"We have to provide a higher level of customer service than our competition," says Hurley. He credits ERP for helping the company do that.
Iowa spring is also using ERP to fuel aggressive growth--as evidenced by the company's scramble to fill that last-minute order from the carmaker. The company is shooting for $20 million in sales by 2000, almost double its level last year. But unlike Kaye, Iowa Spring serves mature markets--it makes coil springs for use in farm and construction machines, automobiles, garage doors, furniture, and major appliances. Competitors are abundant, margins are thin, and pressure to reduce prices is intense. So Iowa is relying on its reputation for incredibly fast response to customer requests, says Bianco.
That reputation explains why the large automaker, though not a regular Iowa Spring customer, called the company when one of its own machines broke. Bianco says that without ERP he could have spent days just dispatching workers to sift through paper orders, inventory reports, product-utilization reviews, and schedules. Before ERP, order processing at Iowa used to take up to four days. Now it's accomplished in minutes, according to Bianco. "Once a work order is in our system, there's no paperwork all the way to the factory floor," he says.
Iowa Spring uses modules from the Time Critical Manufacturing system that cover its accounting operations. The company took a phased approach to installation, adding modules at intervals from 1986 to 1996. The system now also handles order processing, purchasing and receiving, inventory management, shop-floor routing and control, and bills of material, which list the part numbers of components used in a finished product.
It works like this: When a clerk enters an incoming order, the ERP system checks the bill-of-material module to see what parts Iowa Spring needs. In the inventory-management module, it automatically determines whether enough material is on hand and sets up the purchasing procedure if it's not. Other modules determine what machines will be needed to make the springs, check what speeds and gear combinations to run on those machines, and arrange machine scheduling. Finally, the shop-floor module creates the work order, which gives machine operators the go-ahead to make the part. Later the ERP system triggers the billing module to create an invoice when workers electronically sign off the job.
By using shop-floor PCs to scan bar codes printed on each work order, factory workers register the times they start and finish their portions of the job. That makes it possible to clock the progress of an order through every step of the manufacturing process, which helps customer service respond to requests for early delivery or order status. "Before, we had to send a runner out to the plant to find out how much work had been done on an order," explains Brian Setchell, Iowa's general manager. "Now we can see what's happening on the shop floor at any time."
That pinpoint accounting, fed through a module for calculating product cost, lets Iowa Spring price its jobs more accurately than it could in its pre-ERP days. The spring maker dumped some jobs altogether after learning how unprofitable they were, which contributed to the 10% increase in profit that Bianco attributes to the ERP system.
Anthro Corp. didn't need to drive growth so much as find a way to cope with demand. A privately held company of 65 employees in Tualatin, Oreg., Anthro makes office furniture for electronic gear, including desks and racks for PCs, medical instruments, and video equipment. The company sells direct, taking orders over the phone and assembling prefabricated parts to customer specifications within 24 hours. As business grew, administration became hellish: Anthro found itself maintaining 30,000 separate accounts with 30,000 separate production orders and 30,000 separate bills. Supporting operations without the information links built into ERP was impossible.
To handle its high-volume business, Anthro went to the top of the ERP hierarchy, purchasing the R/3 system from SAP. Anthro employs four ERP modules: financial management (including a "configurator," which calculates costs as clerks enter orders), production planning, materials management, and sales and distribution. The system runs on 30 PCs and ties together everyone from senior managers to production workers.
Naturally, Anthro uses the features in SAP's latest version that are designed to attract small companies. For example, R/3's Business Engineer feature speeds installation by allowing users to turn off unnecessary functions, such as foreign- currency conversion, by clicking a switch. Anthro also expects to take advantage of a feature that allows users to customize their systems over the Internet.
But even the new features didn't ensure smooth sailing. "The pain is behind us," sighs Anthro's president, Shoaib Tareen, as he recalls the six-month implementation, which was completed last year. Although Anthro's direct investment in R/3 was about $500,000 (for software, hardware, training, and start-up consulting), the indirect investment in time and effort was huge. "You pull your brightest and best people, put them in a room and say, 'We're going to figure this thing out," Tareen says. "That goes on for several months."
It wasn't until November 1997--about four months after the launch--that Anthro solved one of its stickiest problems: handling customer records while taking calls. The reseller who helped with the installation wasn't well versed in configuring R/3 for telephone order banks. It delivered an awkward procedure in which operators selected from menus in as many as seven electronic locations to get customer information. "We had to fix it ourselves," says Tareen. Now an operator can blast straight to customer records from a single location.
Tareen says the system's paybacks accrue gradually. "I wouldn't try this if I had short-term financial pressures," he cautions. "You have to have a long-term focus, because the advantage is that, once you get it going, you can grow with it." Primary among those paybacks has been the ability to speed up production. For starters, the system keeps tabs on inventory--weighing what's being used against materials required for incoming orders--so Anthro doesn't run out of critical items like casters. It also ties inventory to production. Say that an operator takes an order for shelves in a color not currently stocked. The ERP system releases an immediate production order telling workers in the color department to apply custom-colored laminate to the boards they'll be using. The speedy notification gives the adhesives time to dry so that the next shift can cut the shelves.
It's those kinds of capabilities that enable Anthro to get even special orders out within 24 hours. As Ken Dixon, vice-president of finance and procurement, says, "We want to be the McDonald's of the furniture industry."
Jeffrey Zygmont writes about business and technology from Salem, N.H.
Does size really matter?
Whether to go big or small when choosing an ERP vendor is a tough decision. By going big, with a software house like SAP or Oracle, a business risks a grueling implementation but gains flexibility. By going small, it may sacrifice breadth of integration for ease of setup.
"In general, small companies look to big packages for a breakout strategy," says Peter Heller, senior director of product marketing for the Oracle Applications Division. "They think something drastic is going to happen, like they're going to go international or double their sales force. It's a wonderful opportunity for the little guy to try whatever business strategies are in front of him and, as things get more complex, to plan on the software being able to help him."
On the other hand, if the company expects to maintain the status quo, smaller may be better. "Some products have too many control characteristics"--capabilities for things like assimilating acquisitions, Heller says. "A small company could never use them. They're just too complex."
Other big-company specialists would disagree, noting that they've slimmed down their packages specifically for the small user--or provided ways for small companies to pick and choose among the features their large-company products provide. Consider SAP's R/3. Though originally designed for global manufacturers, R/3 now comes with a feature called Business Engineer, a checklist that enables a company to tailor R/3 to its needs. Users simply activate or deactivate settings by turning virtual switches on or off. For example, in configuring sales orders, a small company would begin with the standard order form that SAP has built into the package. Then, if the company sells only domestically, it would deactivate the export checks that the system is preprogrammed to perform.
That approach saves a company from the tedium of setting up R/3 from scratch, which entails creating whole tables and forms in wide-open data fields--often the preference of large manufacturers, says Christine Clevenger, SAP product manager for Business Engineer. Large companies want their sales orders, for instance, to look the way they've always looked. "But we're finding that smaller companies are willing to accept more flexibility," she says.
Still, implementing R/3 even with Business Engineer is no day in the park: the process takes on average about six months and can cost a bundle. R/3 Release 4.0 aims to address those weak spots by automating installation even further. It asks simple questions like "Does your company export?" or "Do you reuse packaging equipment that customers return?" Based on the answers, it builds a business model for the company and automatically configures R/3 accordingly.
Oracle, like SAP, has a small-company approach to ERP: a service called FastForward, which it offers with its Oracle Applications family of ERP tools. Under FastForward, Applications is already customized for the client when it's loaded, although the extent of that customization is limited by the vendor. "In consultant-speak, it's called a 'fixed-scope implementation," says Keith Costello, senior director of Oracle Consulting. That means the type, configuration, and number of reports, data charts, and tables are predetermined by Oracle. "If you wanted to modify a standard report, that would not be included," Costello explains.
So if a company wants to, say, tack additional detail to the canned listing of parts numbers in its inventory, it either pays extra or modifies the report itself, using the Oracle software-development tools it gets with the package. "The program is intended to get you up and running," explains Heller. "It's not that you're getting anything less. What you're doing is cutting out the implementation project."
Of course, the small-company specialists would beg to differ, claiming that only software developers with an intimate knowledge of small manufacturers' practices are in a position to optimally preconfigure a product for that market. "We provide systems in which there isn't a lot of care and feeding involved," says John Hiraoka, vice-president of advanced client/server development at DataWorks, a vendor to small and midsize companies. He notes that typical installations of DataWorks' three systems span only three to six months.
That's because DataWorks sells packages already customized to the common operating practices of small and midsize companies in certain industry sectors, like electronics and medical instruments. For example, a company that makes medical equipment regulated by the Food and Drug Administration must adhere to stringent record-keeping requirements, like cataloging all the parts by serial or batch number. So DataWorks builds the necessary part-tracking capability into the systems earmarked for medical-instrument makers. "When we begin the implementation, we're starting 80% of the way there," says Hiraoka.
Yet even companies using simplified ERP systems often require help, whether that aid comes from the software's developer or from a VAR. Tom Dykstra, vice-president of marketing strategies for Effective Management Systems, another small vendor, says the consulting costs for training and installation associated with its Time Critical Manufacturing package typically run from $25,000 to $50,000 over a six- to nine-month period.
To minimize those costs, companies should shop for an ERP package that's already somewhat aligned with the way they work, says Bruce Bond, research director of business applications for GartnerGroup, a technology advisory firm in Stamford, Conn.
For example, a food maker that cooks in batches and then cuts up portions for packaging will go through contortions if it purchases ERP tailored to a manufacturer that assembles products from discrete parts. "Generally, a 75% to 80% fit between software and existing business practices is considered a good match," says Bond.
Tallying up the bill
The cost of ERP is tough to calculate. Pricing depends on such factors as product, number of users, number of modules purchased, and consulting needs.
Noting that all contracts are negotiated individually, a spokeswoman for large-system vendor SAP refused to discuss pricing even in general terms. Most small manufacturers won't buy directly from SAP anyway; they'll buy from certified VARs, systems integrators, and regional consultants.
Oracle's FastForward service includes the software plus installation services, training, and support for one year for $400,000 for the FastForward Financials package and $840,000 for the complete Fast-Forward ERP package. The license that comes with the service covers a system sized for 20 concurrent users.
Effective Management Systems' Time Critical Manufacturing software typically prices out at $75,000 to $150,000 for small companies, plus another $25,000 to $50,000 for training and implementation.
DataWorks sells a range of ERP systems. For example, Vista is for job-shop manufacturers with annual revenues of less than $5 million that make one-of-a-kind products for special orders. AvantĂ‰ is designed for manufacturers taking in $50 million to $500 million. Prices range from $3,000 to $5,000 per user, with implementation costs at or below 40% of the total software tag.
ERP can involve some hardware investment, too. The least expensive server to manage the system, probably running Windows NT, might cost from $10,000 to $25,000, while a high-performance server running Unix could reach $100,000. Client workstations typically average about $2,500 apiece. A company not already suitably equipped might have to throw in an additional $10,000 for network equipment, printers, and other peripherals.
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