Process and IT to come together?

Here’s a conundrum. If you’re not a seriously large manufacturing company, the likelihood is that implementing an integrated enterprise system (ERP) will have reduced, not lifted, your profitability. Yet without it you can’t function, certainly not in today’s more demanding world, and certainly not if you want any kind of e-business interaction with your suppliers and customers. The latest ‘proof’ for what some have long suspected comes from a study by independent analyst Butler Group’s associate, Paul Strassmann, of Strassman Inc in the US. His research apparently shows that there is no correlation between IT spending and profits. The overwhelming evidence, he says, reverses conventional assumptions that IT per se is a panacea for profitability. “According to Strassmann,” says Martin Butler, Butler Group chairman, “IT makes well-managed firms better, and poorly-managed firms worse.” He cites, for example, Smithkline Beecham (as was) with 86.8% ROE (return on shareholder equity), yet spending only a fraction of Centrica’s investment in IT per employee, and the latter showing a negative ROE of 36.2%. Strassmann is unequivocal: “Spending money on IT guarantees absolutely nothing.” And he concludes: “Technology has been over-valued by companies involved in an ‘arms race’ of IT spending.” Seems a little strong: his research is US-centric and I don’t see many manufacturers with the money or egotism. And anyway there are lots of reasons for IT spending that could skew the figures. Nevertheless there’s little doubt that IT in 2001 is still too often viewed as the solution to users’ business and manufacturing problems, while changing processes and culture, attending to education and training and the rest – the hard parts – are given lip service only. And, despite its incontrovertible importance, the same applies to e-business. Last month, Cambridge University Institute for Manufacturing declared that manufacturers taking a ‘lean’ approach – focusing on customer needs first and building ‘pull’ systems into every aspect of their production, business and supply networks – are more likely to thrive than those putting resource into e-business. A group of managers visited blue chips like Pirelli and Siemens, and concluded that while the Internet does indeed have “an important role to play … web-based applications remain less important to success than factors such as human skills and process technology.” Investors not happy Eli Goldratt, the enigmatic business management guru and self-styled father of the Theory of Constraints (TOC) and advanced planning and scheduling (APS), would agree with the thrust of that. He says it’s clear that manufacturers’ profits, certainly if you’re not in the very big league, don’t correlate with any of their IT investments. Indeed he warns: “For some time now, shareholders have been expecting results from investments in e-strategies and ERP. Unless something radical is done soon, investors will switch-off the life support and find a better home for their money.” It’s slightly worrying all this. Because here we are in 2001 still advocating that British manufacturers should be investing in modern ERP – or more likely analyst Gartner’s ERP II, or AMR’s ECM (enterprise commerce management), both with their wider collaborative supply chain management (SCM) focus – to improve efficiency, cost savings, relationships and profitability. We’re saying we should be integrating that, where sensible, with our production and factory control and automation systems for similar reasons: again more IT spending. Oh and by the way, we should also be bolting-on newer applications like CRM (customer relationship management), BI (business intelligence) and APS, as well as SFDC (shop floor data capture) and FCS (finite capacity scheduling), and using simulation suites and the rest. And while we’re at it, there’s also the whole spread of web technologies and associated new e-business approaches to go at as a matter of urgency – from collaborative engineering (CPC/PDM), through e-procurement, to ‘self service’, personalised, web- and browser-served ERP again, like mySAP.com and the other modern releases from Oracle, Baan, IFS, Intentia, SSI and so on. The conundrum undermines all that, doesn’t it? Well yes and no. What Goldratt, TOC consultants around the world, and for that matter Oliver Wight, the Big Six, the lean manufacturing brigade, Six Sigma implementers and so on, will tell you is that yes all this IT may well be important, depending on your situation, but it needs to be seen in a more realistic light. And they’ll confirm that manufacturers in general are too reliant on IT to do the job of breathing new life into their businesses, rather than thinking through – and then acting on – the potential it conveys to change fundamentally for the better. That’s the nub of it. Goldratt’s main message is that ERP is necessary, but not enough: radically different manufacturing and business rules, processes and metrics should be in place (and he has plenty of excellent examples), taking advantage of the fact of ERP etc, and its accurate and pervasive universal data. ERP, he points out, removes the very reason for so many of the old and inefficient ways, developed over decades, of attempting to manage everything from the shopfloor to accounting practice – poor data. Change the rules and practices – and then capacity, throughput, customer responsiveness and profitability will indeed improve. He scorns even his favoured APS and supply chain optimisation (SCO) systems if users simply harness them to replicate what was done before, but do it ‘better’. His great claim: contrary to popular opinion there are ‘silver bullets’ that reap rapid success, but they’re not in the form of any IT on its own. Incidentally, the claims are real and verifiable. I have heard myself from manufacturers who have gone the Goldratt route and indeed seen hard improvements of 30—70% within three to six months. Like all serious change it requires guts and determination, because it’s easier said than done. And again, in almost all cases, it’s not a one-off project – changes in one area necessarily precipitate changes in others. Also, there are other routes. SSA for one pushes ‘Lean Manufacturing’, Glovia has Fujitsu’s Seiban, and there’s the whole raft of Just in Time and flow manufacturing approaches, Oliver Wight’s techniques leading to its Class A, and any number of methodologies from the Big Six and the main ERP vendors – not to mention graphical software tools to make it all easier. Deloitte Consulting’s head of manufacturing practice in Europe Pete Mooney, for example, says: “Goldratt’s whole Theory of Constraints and Drum Buffer Rope is all correct, but there are a lot of other tools. We don’t get on any one bandwagon; we offer whatever works. We do a lot of lean, especially in automotive, a lot of Six sigma, Kaizen, Kanban; we’re equipped to offer a lot of different methodologies.” So actually, no one (well very few) is saying you don’t need ERP: quite the opposite. There is no doubt that without it (or some equivalent that links manufacturing and business functions and people with integrated data), efficiency will be poor, data accuracy likewise, and so called ‘corporate knowledge’ and visibility restricted and out of date. And the result: you will be inflexible, unresponsive to changing demand and opportunity, and unable to participate in any open or collaborative sense with those you know you should. Which looks, on the face of it, like bad news for those that to date still haven’t bitten the ERP bullet. And the latest (last year’s) Computers in Manufacturing (CIM) survey by market researcher Benchmark suggests that is still a substantial group. Benchmark found applications like basic BoMs and stock control pretty well catered for across industry type and size: SMEs 76%, mid market 85% and corporates 89%. But for more integrated manufacturing management software, with MRP and scheduling, etc, the figures for take-up fall to 53%, 56% and 69% respectively. Ironically, and by happy coincidence, it could be rather better news than you think. Because what 2001 may well be remembered for is not the ‘e-revolution’ itself, but that the ‘e-revolution’ and post Y2k IT vendor difficulties finally triggered a wholesale movement towards what Goldratt and others have been urging for years – business and manufacturing process re-engineering: BPR, consultancy, education and training. It seems at last to be coming together. Last month, enterprise software big guns SAP and Mapics, plus Lilly for the SMEs, as well as IBM in America (and probably Europe soon), Ashridge Consulting, and Gartner eMetrix (part of the huge Gartner analyst group) added their considerable collective weight to the Goldratt Institute. They launched an offer that promises to get the real manufacturing revolution going – with massive impact on profitability. Powerful new offer The Goldratt ‘Necessary and Sufficient Offer’ (www.mcsolutions.co.uk/home.cfm) is implementation with a difference. It’s combined IT, TOC-BPR consulting and education and training with low up-front cost, and the facility for shared risk/reward payback against agreed goals. And the partners insist their offer will transform users’ bottom lines and growth like no other. So there’s never been a better time. Will it take off? First, for users it removes at a stroke the single greatest barrier to adopting what’s been available in part for almost as long as MRP II – the cost and much of the risk involved in believing what for many has been too unbelievable, or too much like hard work. But second, and just as important, it also works for the consultants and the IT software vendors – all of which get instant differentiation, and implicit approval of their software and services. They will fall upon this with their considerable marketing muscle – at a time when they’re finding e-business uptake not growing as fast as they need it to. It might not, of course: it hasn’t so far. But there are reasons for that. As Simon Bragg, senior enterprise software consultant with analyst ARC, says: “Think of a production manager with his system more or less working and the firm not going bankrupt: if he can crank it up a bit and get an extra 2% he’s going to be a hero. Will he risk his career for a new idea that looks like a lot of hard work? You have to remember that sadly, many of the best minds don’t end up in manufacturing.” And he points out the scale of the education job. “It’s the measurement, management and assumptions, like cost accounting, that are wrong.” Cost accounting says the cost of a bottleneck resource going down for an hour is the machine cost and some fixed overheads, whereas Goldratt points out that it’s one hour of sales production. With today’s thinking, in the worst case that translates to one hour’s production/sales on a complete supply chain. “Accountants have done more damage to British industry that the German Luftwaffe.” Nevertheless, he opines: “It’s certainly worth a look: it’s a good offer. And at least it creates awareness of Tier One consulting in the mid-market.” But he concludes: “The deeply frustrating thing is that companies like STG have been flogging Goldratt’s TOC technology for years and really getting nowhere – it was too cheap to be taken seriously and poorly marketed.” And it’s another issue, but it’s true that TOC technology has also been dissipated across several firms – including what’s now Mapics’ ThruPut and Intentia’s PMCIM – all selling the technology and struggling to keep the education going against the tide. There is one other point though. Both Deloitte and ARC agree that ‘collaborative commerce’ – outward-looking supply chain endeavours at whatever level – are likely to be the primary focus for many right now. So there is the little question mark over priorities. Bragg: “It’s probably now better to start with investment in externally-focused supply chain business processes and applications. As a general rule, there’s more money to be had out of these now, assuming that inside the four walls things aren’t so awful – they could be better, but that’s best done afterwards since it tends to be driven by highly dodgy forecasts. Sharing data with customers and the supply chain has got to be a better way.” Mooney, who says Deloitte was also approached by Goldratt, agrees, and says the big issues for him are inter-ERP integration and “the whole evolving area of collaborative commerce.” And he cites work being done by GM in fundamentally rethinking “how to make cars the way Dell makes computers: changing from total push to total pull. It effects everything – product design, how, where and with whom it does its manufacturing and subassemblies; the physical processes as well as the IT. But the potential savings are astronomical.” It sounds big ticket stuff, but it needn’t be. Companies from Caterpillar to Lear, TI Bundy, IMI Norgren and Cott Beverages have all done seriously clever stuff with supply chain fulfilment IT, the last four all with packaged software from Wesupply – and without spending an arm and a leg. Says Jane Lewis, Cott’s project manager: “We’re giving our suppliers total visibility of what we want, and an analysis of how our requirements have changed. In return, we’re getting a greater understanding of what they can deliver and have delivered.” It’s still methodology Makes sense, and there are plenty of others also offering pragmatic, supply chain focused solutions which aren’t going to cost a fortune, like Sony Manufacturing. Goldratt’s answer: his offer extends right out to include supply chain interactions and management too – TOC even applies to improving project and implementation management. We’ll see. Meantime, will you need to turn to different IT suppliers? Will you need to rip out your ERP, if you have one, and start again, as some seem to fear for their e-business initiatives? Almost certainly not. ERP software vendors across the board have hugely expanded their functionality ‘footprint’, through R&D, partnering and mergers and acquisitions. Says Nigel Montgomery, director of supply chain software research at analyst AMR, “We see a resurgence in the traditional ERP vendors, but evolving for multi-national global business.” Look at SAP and Oracle at the top end with personalised web portal HMIs into everything from sales, to MRP II, APS, SCM, CRM, BI, e-procurement, e-fulfilment – virtually every aspect of ‘collaborative commerce’. Then there’s JD Edwards with its Numetrix APS, Mapics with its Thru-Put APS, Baan under Invensys with its iBaan suite, SSA now with BPCS v8 – the list goes on. Theirs is the technology race, and they have in their sights the likes of Manugistics and i2, with their roots in top end advanced supply chain planning and optimisation, and now driving the global manufacturing corporates’ ambitions. And further down the pecking order, look at how vendors like McGufffie Brunton, SSI (Chelford) and K3 have expanded into integrated warehouse and inventory management systems and multi-media web development. It’s clear that most users need look no further than their existing main software providers and the usual suspects for specialist add-ons. Manufacturing and its IT are never dull, but the next few years look set to be exceptional.