White paper. Engineer to Order Manufacturing

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1 White paper Selecting ERP for Engineer to Order Manufacturing

2 content Are you getting the real deal?... 3 Conclusion... 4 About IFS... 5

3 Selecting ERP for Engineer to Order Manufacturing By Peter Gross President Pemeco, Inc. If you work in the engineer to order (ETO) manufacturing environment long enough, you probably have had some negative experiences with enterprise software. The fact is that most enterprise resource planning (ERP) software was not designed for a project-oriented environment like ETO. ERP and its predecessor, materials requirements planning (MRP) were designed for traditional manufacturing. So how can an ETO manufacturer go about selecting ERP software that truly meets their needs? In this whitepaper, I will share my thoughts, based on more than 30 years in the industry, on how the needs of ETO manufacturers differ from those in more traditional models like make to stock, make to order or even configure to order. I will also discuss the specific functionality ERP designed for the ETO industry will have and how to select software that includes these features. Not every problem with ERP in an ETO environment is the fault of a vendor. Many challenged ERP projects founder because the project owners lack an appreciation of the challenges ETO poses for enterprise software. Moreover, the specific business needs of ETO from a business process and control standpoint are often not well documented, and therefore cannot be replicated in an enterprise application even with suitable functionality. As a case in point, I hope to finish in the weeks following this writing an 18-month ERP implementation rescue at a company in the southwestern United States. Their business model is heavily project oriented, but the core implementation team didn t understand the project implications of their ETO business. Requirements for things like revision control, contract billing based on completion percentages and other critical needs were not adequately addressed during software selection or the initial implementation. As much as I appreciate business from companies in this situation, I would much prefer to be involved in software selections and implementations that go well, meet business goals within budget and the established timeline. So how do we attain that goal? Following are five essential points to consider for ETO ERP success. 1

4 1. Make sure that whatever software you are looking at has functionality for project control and monitoring. Specifically, you will need the ability to define work breakdown structures (WBS) and activities, project networking definitions, predecessors and successors. The selected software should accommodate these structures to budget against, to report labor, to report actuals and progress, to progress bill and to recognize revenues appropriately. 2. Take a close look at the ERP software functionality from the standpoint of project costing and project budgeting. Most ERP software does handle actual costing and standard costing. But project costing is different, and is often not dealt with adequately. In ETO businesses, you need a project costing model where you engineer and roll out designs into production. You need to track the cost of engineering with a number of other overhead costs into the total project cost. Standard ERP software that only handles actual costing or standard costing often doesn t provide the project buckets to capture those costs. ERP designed for ETO should allow you to define a budget for your project to record estimates related to engineering and other traditionally indirect processes. As the project progresses and you design and build your items, actual costs are captured and can be compared against the estimates. This budgeting and project costing is essential for ETO manufacturers. 3. Pay attention to the segregation aspects of projects. ERP for ETO should allow for segregation of inventories and WIP. When manufacturing product in an ETO model, you build inventory for a particular engineered-to-order project and likely need to acquire materials and to build sub-assemblies specifically for this project. These need to be stored in your inventories segregated from other projects or non-project items. Similarly, project-related WIP must be segregated. These are key elements to look for in ERP software. 4. Because designs are typically not static, revision control must also be considered during selection. Good revision control processes help maintain items at up-to-date revision levels. Can items at old revisions be brought up to spec, or must they be disposed of, or what is to become of them? ERP, truly optimized for ETO, needs sophisticated reporting mechanisms to identify out-of-spec items in WIP or in inventory, with processes to bring them to the current revision. Without adequate revision control, you run the risk of running orders through manufacturing at the wrong revision. Without good visibility and corrective processes, quality is likely to reject materials made for wrong revisions. 5. Consider a full project-based solution. While ERP may have functionality to support ETO, the gold standard for project-based industry is the project-based solution 2

5 (PBS). PBS is a development in the ERP field in that it is more oriented towards managing unique projects. ERP is, after all, an evolution of MRP and a product of traditional manufacturing. Among many other things, PBS helps a company gain visibility into individual item s costs. For instance, if you are manufacturing a part repeatedly for customers with modifications, options and variations, it can be challenging to determine the costs of a particular item to a particular customer. It can be difficult to monitor costs and track profits without a project, the glue that binds these costs. ETO (and assemble to order or make to order) models can benefit from the PBS s ability to segregate WIP, inventories and cost of goods. Are you getting the real deal? Certainly, a software vendor whose products may not truly fit the needs of a projectbased business may still try to sell them to an ETO manufacturer. There are ways to determine if a vendor truly can meet your specific needs. When selecting software, you need to script your demonstrations in a fashion specific to the way your business operates. If revision control and change board processes are significant pieces of your business that must be managed well, it behooves you to design vendor demonstration scripts that address these needs and to guide the vendors to demonstrate the appropriate system functionality. Make sure to ask your software vendor to demonstrate system functionality that mirrors your operations. Have them set the demo system up with data that replicates yours. Have the vendor simulate the business process from engineering through production and review the impacts on the data, reports and metrics. Do not go for an out-of-the-box, smoke and mirrors demo. A successful software selection process for ETO depends not just on the vendor. The customer must also truly understand his own needs. From my experience at many sites, I know that there is little emphasis on project budgeting or, for that matter, tracking and monitoring of actuals against budgets. Companies are often at a loss trying to compare project actuals against budgets. A true PBS provides visibility of actuals to budget in real time and gives executives time to take corrective action. Historical records of actual and budgeted costs can also assist project estimating going forward. PBS is particularly important for aerospace, defense contractors and others that sell to the government organizations. These entities often require progress billing and earned value management (EVM). Contract billings are driven by completion percentages and cost plus calculations. Unless you have a project-based system to regroup costs, to define completion percentages and against which you can progress bill, there will be significant challenges. 3

6 It is essential for enterprise software used in a project environment to allow for comprehensive roll-up of project costs, as is shown here in IFS Applications. Conclusion Selecting the right ERP for an ETO environment requires a structured approach. For this type of business model, project management modules must be native and embedded components within ERP. Integrating ERP labor, inventory and WIP into a best-of-breed, standalone project management software tool is not encouraged. There are many applications that claim to be project management software for the ETO market, but really don t integrate well throughout the organization. As always with enterprise software projects, a good understanding of the business needs is paramount. And then, caveat emptor. Ask good questions. Review vendor functionality in your specific business context. And plan for success! Peter Gross has over 30 years of management consulting and information processing experience. His cross-sector expertise in ERP implementation, business planning, corporate restructuring, and project management spans the globe. Peter has significant experience servicing the following industries: aerospace & defense, industrial, advanced manufacturing, manufacturing, distribution, customs brokers, government, services and retail. Peter developed Pemeco s proprietary Milestone Deliverables implementation methodology. His book, Milestone Deliverables: The Hands-On Approach to Implementing ERP Projects sells in more than 40 countries. 4

7 About IFS IFS is a public company (OMX STO: IFS) founded in 1983 that develops, supplies, and implements IFS Applications, a component-based extended ERP suite built on SOA technology. IFS focuses on agile businesses where any of four core processes are strategic: service & asset management, manufacturing, supply chain and projects. The company has more than 2,000 customers and is present in 50+ countries with 2,700 employees in total. More details can be found at For further information, to Americas Argentina, Brazil, Canada, Mexico, United States Asia Pacific Australia, Indonesia, Japan, Malaysia, new Zealand, Philippines, PR China, Singapore, Thailand Europe east and central asia BALKANS, Czech Republic, GEORGIA, Hungary, Israel, KAZAKHSTAN, Poland, RUSSIA and cis, Slovakia, Turkey, UKRAINE Europe Central AUSTRIA, Belgium, GERMANY, ITALY, netherlands, SWITZERLAND Europe West France, Ireland, Portugal, Spain, United Kingdom Middle East and africa India, South Africa, Sri Lanka, United Arab Emirates Nordic Denmark, Norway, Sweden Finland and the Baltic area Estonia, Finland, Latvia, Lithuania En Production: IFS Corporate Marketing, October This document may contain statements of possible future functionality for IFS software products and technology. Such statements of future functionality are for information purposes only and should not be interpreted as any commitment or representation. IFS and all IFS product names are trademarks of IFS. The names of actual companies and products mentioned herein may be the trademarks of their respective owners. IFS AB 2012

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