By Frank Kapper, General Manager, Upland Ultriva
Over the past decade there has been a great need for better technology solutions to address global demand-driven and enterprise-wide supply chains. While lean manufacturing initiatives have instigated certain processes, such as Kanban, the reality for global manufacturers is simple: ERP (enterprise resource planning) solutions (from NetSuite to Oracle to SAP and others) have failed to deliver the promises needed. ERP is a critical and important aspect of any manufacturing firm; it is not a panacea. Over the next few months we are going to explore some of the reasons why ERP-based supplier portal solutions struggle to provide the tools required by manufacturers to visualize, collaborate, execute and manage extended enterprise value chains.
The goal of this conversation is to address the realities, limitations, and efficacy of technology solutions that work cohesively for global manufacturing firms operating in today’s intensively competitive and constantly changing global marketplace.
Source: Upland Ultriva
Singular Reliance on S&OP and MRP Forecasts Proves a Big Mistake
One reason so many manufacturing companies are dissatisfied with ERP systems is their singular reliance on Sales and Operations Planning (S&OP) and Material Requirements Planning (MRP) processes as the primary inputs to their production capacity and supply chain forecast plans. Inaccurate sales forecasts, delays in new product introductions, outdated BOMs, changing customer demand patterns, lack of real-time visibility into supplier performance, and production schedule adjustments are just a few of the items that can and do change S&OP and MRP data. A simple rolled throughput yield analysis of some of the key inputs to the S&OP & MRP process paints a very troubling picture:
Source: Upland Ultriva S&OP & MRP Process Modeling & Analysis Engagements
Even with world-class S&OP and MRP processes, the accuracy of the output will still be in the 60% to 80% range.
The Problem with MRP Push
ERP systems were designed from the ground-up around MRP forecasting; ERP fails to provide resource flows that are controlled and based upon true customer demand. Raw materials and components usage at manufacturing facilities drive replenishment to the upstream supply chain.
ERP generated MRP runs are frequently wrong because finished goods inventory planning is driven by historical sales performance and future-based sales forecasts rather than actual customer consumption and inventory holding patterns. Faulty sales forecasts erroneously drive raw material and component planning, creating costly errors.
With each MRP run, material planners, buyers and suppliers are tasked with reviewing every line item to identify changes in gross requirements and planned/firm order commitments. These changes produce an endless stream of deferred, cancelled and expedited orders. This constant push, pull and cancellation of orders leads to a bull-whip effect on suppliers that results in short shipments, late shipments and stock outs.
Source: Upland Ultriva Inventory Optimization Tool
ERP embeds this inherently flawed approach despite the best efforts of users to improve customer satisfaction levels through better forecasting, increased inventory levels and optimized production. These best efforts are frequently disappointing and drive a management requirement to eliminate waste. More than 80 percent of global manufacturing companies carry large amounts of inventory to meet customers’ changing demands, often based on inaccurate forecasts. Constantly fluctuating customer demand causes operational instability and increased costs due to expediting, equipment setup and employee overtime.
Balancing MRP Push with Lean Pull
Gartner Research analysis recommends manufacturing companies engage with customers and suppliers to establish a pull process from Finished Goods to Raw Materials. Gartner defines End to End (E2E) Pull replenishment as a paradigm shift away from improving forecasts and algorithms to a manufacturing pull system.
Pull-based supplier portal solutions, when integrated with ERP systems, close a critical gap by providing 24X7 visibility into extended enterprise value chains along with near real-time consumption signaling. This combination provides the demand sensing that organizations need to better synchronize manufacturing and supply chain operations.
There are always inventory items with erratic consumption patterns just as there are always inventory items with stable consumption patterns. By identifying the latter and converting them to pull-based replenishment via the e-Kanban capabilities in pull-based supplier portal solutions, material planners, buyers and suppliers benefit from the automated release of Kanban orders based on actual consumption. This frees-up critical resource time to focus on the managing and responding to the inevitable changes that will occur with MRP forecast items.
By integrating pull-based supplier portal solutions with ERP systems, manufacturers can fully engage with customers, distribution centers, and their supply chain partners. Manufacturers gain visibility into and control over downstream demand. Manufacturers quickly sense the changes in demand and adjust production schedules to minimize redundant finished goods inventory. Basing production on real demand and moving suppliers from forecast to consumption-driven replenishment delivers multiple benefits.
About the Author
Frank Kapper is an software industry and business executive with over 30 years of progressive experience leading enterprise-level Information Technology (IT) and Operational Excellence initiatives across a diverse set of aviation and manufacturing industries including aerospace and defense, automotive, commercial airlines, industrial and diversified, electronics, and medical devices. Kapper is an expert in business process modeling and analysis and a seasoned Lean Manufacturing practitioner. His core focus is the practical application of proven IT solutions that deliver measurable and sustainable operational and financial improvements across extended enterprise value chains.