Is Your ERP System Built for Your Industry?

Is Your ERP System Built for Your Industry? A Closer Look at Manufacturing Categories and Corresponding Production Management Tactics TABLE OF CONTENTS I. INTRODUCTION 1 II. A CLOSER LOOK AT MANUFACTURING INDUSTRIES 2 III. MANUFACTURING PROCESSES & PRODUCTION REQUIREMENTS 3 Batch Processing 3 Organic Processing 4 High-Volume Repetitive Hybrid 5 High-Volume Repetitive Schedule/Release 5 Continuous Flow 6 IV. SUMMARY 7 About Edgewater Fullscope, Inc. 8 © 2015 Edgewater Fullscope 1 I. INTRODUCTION Most ERP enterprise applications have three major components: manufacturing, distribution and finance. In the world of process manufacturing, quality management, since it is so imbedded in all the processes, also becomes a core requirement. The purpose of this white paper is to discuss the manufacturing element of enterprise resource planning (ERP). Most ERP solutions target either the process or discrete sector, and a few, like Microsoft Dynamics AX, straddle both. The diagram in Figure One above presents the process manufacturing paradigm. The top portion lists the different types of manufacturing processes within process companies, while the bottom shows the corresponding base concepts used to actually manage production. This paper defines these categories and provides a guideline for any process manufacturing company that needs to identify ERP system requirements most suitable for their business. The Process Manufacturing Paradigm Process Discrete Continuous Flow HV Repetitive Organic Process Batch Process Hybrid Campaign Mgt Schedule Release Work Orders Formula Work Order Work Orders Figure One © 2015 Edgewater Fullscope 2 II. A CLOSER LOOK AT MANUFACTURING INDUSTRIES To understand the nuances of process manufacturing that are discussed later in this document, it helps to first understand the three general types of manufacturing companies: Process manufacturing companies are those that add value to raw materials or ingredients through processes that involve blending, formulations, reactions or disassembly. Often there is raw material variability to account for, and processes are often adjusted to compensate. Typical process manufacturing verticals are food, beverages, chemicals, pharmaceutical, life sciences, primary metals and pulp and paper. Discrete manufacturing companies add value to raw materials through processes of fabrication and assembly. Discrete manufacturing is often characterized by individual or separate unit production. Units can be produced in low volume with very high complexity or high volumes of low complexity. Low-volume/ high-complexity production results in the need for an extremely flexible manufacturing system that can improve quality and time-to-market speed while cutting costs. High- volume/low-complexity production puts high premiums on inventory controls, lead times and materials costs. Examples are automotive, electronics and toys. Hybrid (or mixed mode) manufacturing companies straddle the manufacturing paradigm, having some discrete and some process applications. There are hybrid examples in many industries, including primary metals, pulp and paper and even medical devices. • Primary metals companies have a wet side and dry side. In the foundry section (wet side) of the plant they might smelt metals from raw materials or recycled metals using process formulas to produce co- and by-products. From this process they produce ingots, profiles, bar stock, sheet stock or coils of wire. These “intermediates” become the starting raw materials for the discrete process, where they may fabricate parts and assemble them into finished products likes hinges or locks. • Pulp and paper companies often have hybrid processes with wet and dry sides. The pulp mills use process formulas to make the paper itself, and the dry, or discrete processes, cut, slit and package the paper into end-items. • Medical device manufacturers often make the chemicals that go into their diagnostic machines. Chemical production uses formulations while the physical machines are assembled using discrete bills of materials (BOM). The ideal ERP system should allow a user to select which method to use for which process. A product can be built using a discrete bill of material, or a formula, all in the same application. Hybrids can use either work orders or repetitive-based production. In a work order, the materials are issued to a specific job and a routing (production process) is associated with that build. A work order can use a BOM to fabricate or assemble product, or a work order can use a formula to blend ingredients, react or disassemble product. A process work order is often called a batch order, and that batch can manage co-products, by-products, waste, scrap, yield and variable production. © 2015 Edgewater Fullscope 3 III. MANUFACTURING PROCESSES & PRODUCTION REQUIREMENTS Batch Processing Batch processing is one of the simplest manufacturing process. In some cases, companies using discrete ERP applications to run their businesses are forced to use work-arounds to solve process issues. In batch processing, the company can use either a bill of materials or a formula. However, discrete BOM-based applications have limitations: • Units of measure (UOM)—Most BOMs need to base their material consumption on the end-item unit of measure, and this is one reason companies need six-digit decimal precision in BOMs. To add a miniscule amount of flavor or fragrance to produce 1000 gallons of scented wax, one must add a miniscule amount of essence. The ability to mix units of measure on a formula is extremely important. • Material/routing relationship—In a discrete work order system, materials must be issued in the first operation. In process companies, the materials are often issued only when they are needed at the operation. • Variable consumption—In some formulations, some products scale while others do not based on the end-item batch size. An example is a catalyst, in a chemical batch, or a yeast pack in a food example. BOMs have difficulty flagging non-scalable items. • Percentage-based formulations—Most BOMs are designed using quantity per equivalents. In some formulations, ingredients are issued based on percentages or hundred weights (baking). • Step consumption—BOMs do well in establishing variable and fixed consumption, but almost all discrete-based ERP systems do not support non-linear consumption on ingredients. Step consumption allows a fixed quantity to be defined for a certain range of batch sizes and other fixed quantities for other ranges of batch sizes. For example, a batch size up to 1000 gallons may require five pounds of a catalyst, while batch sizes from 1001 to 2000 gallons may require seven and a half pounds of a catalyst. • Variable output—Process companies deal with variability, both on input and output. Because there are sometimes reactions, yield can be positive or negative. Discrete work orders are designed to produce fixed quantities based on fixed inputs. Formulations can produce more or less than was planned, and work orders can be closed long or short. This is a key differentiator when comparing discrete work order and batch formulations. • Unplanned co-/by-products—Often in meat companies, or life sciences, what was planned on the batch order is not what resulted from production. The ability to add new, unplanned co- and by- products is another key difference between discrete work order and process batch orders. © 2015 Edgewater Fullscope 4 Organic Processing Organic processing is one of the most complex and difficult processes in the entire manufacturing paradigm. For our purposes, “organic” identifies process industries that deal with products from the earth. These companies manage huge variability in raw materials that range from quality issues, quantity, cost and performance. In addition, these companies are often dealing with “push” supply chains, that is, not demand-driven but supply-driven. Examples of organics are companies that process meat, pork, poultry, dairy and agricultural products. The basic building block of this sector tends to be the inverse BOM or formula. Unlike discrete industries where parts are assembled to produce end items, this process, shown below in Figure Two, starts with a raw material and disassembles it to produce co- and by-products. This sector offers extreme challenges when it comes to ERP requirements in planning, scheduling, costing and production reporting. Again, the building block of the ERP system must support the inverse BOM and the batch order must be able to handle: • Co-product and by-product management • Yield, yield by formula ingredient • Scrap and waste • Net realizable value (negative or positive costing of co-products and by-products) • Inverse costing (cost distribution for co-products) • Planning of the inverse BOM (supply and demand mapping) • Formulations by percentage and quantity per item • Scaling of formulas • Multiple UOM conversions • Catch weight reporting The Process Manufacturing Paradigm: Organics 3.6% Milk Whole Milk Quarts Baby Formula Milk Powder ButterButterfat WheyBy Product Raw Milk Figure Two © 2015 Edgewater Fullscope 5 High-Volume Repetitive Hybrid High-volume repetitive hybrid manufacturing differs from batch processes in that, typically materials are not issued to work orders, but to work centers. A good example of this is a food company manufacturing military meals ready to eat (MRE), using traditional process formulas to make lasagna, chili and other main courses. These items are packaged into reheatable pouches and packed with purchased products from outside vendors (snack packs, juice boxes, candy) into the final MRE. These products are not issued to work orders, but rather to an assembly line, each to a different workstation. As the MRE comes down the line, the worker stuffs products into the box to produce a meal or kit. So in this manufacturing case, the main course uses a batch work order to produce the main item and a high-volume repetitive concept to produce the final kit. An ERP system support alignment of the material consumption to work centers, and allow customers to model their processes, shown in Figure Three. The key to this ERP feature is tying a BOM or formula items to the routing’s work centers. When production is launched, the process batches will be produced, and a simple report by work center allows users to replenish work centers on the assembly line. High Volume Repetitive Process Flow Operation 10 Operation 20 Formula - Item 1 - Item 2 - Item 3 Operation 30 Figure Three High-Volume Repetitive Schedule/Release High-volume repetitive schedule/release manufacturing is similar to high-volume hybrid but uses pure schedule-based management. A typical example is a chemical process that uses long (week/month) production runs and report daily or by shift. The work order in this case has some limitations. Primarily because setups and cleanups need to be applied (costs) to the entire period’s production, the work order may fall short. The ERP system should allow a user to issue a large work order over time and close partials, by shift or by day. This simulates the schedule/release process, but not 100%. Each shift becomes a lot number (Julian date, with a shift dimension), and reporting can be done at the lot level. This works for production reporting, but setup and cleanup costing can be tricky. A production system based on schedule/release methodology works much like a blanket purchase or sales order. The order number is the consolidation key, and the line number is the individual release. In a production environment, a company would release a work schedule, for the week (or month), with each shift becoming a reportable entity. © 2015 Edgewater Fullscope 6 Setup and cleanup costs are distributed proportionately across all leases for the week, and as each shift closes a release, reporting can be done against that release for actual/ variances on material and labor. This allows users to manage and report on efficiencies by shift as if each shift were a work order. A sample schedule/release is included below in Figure Four as a reference. Schedule Number SC 001 (WO Equivalent) Production Tons Efficiency Cost per Ton Date/Shift Release Reporting (estimates) Monday Shift 1 1 SCOO1-1 1000 100% $100/ton Monday Shift 2 2 SCOO1-2 1200 120% $80/ton Monday Shift 3 3 SCOO1-3 950 95% $105/ton Tuesday Shift 1 4 SCOO1-4 995 99.50% $101/ton Tuesday Shift 2 5 SCOO1-5 1100 110% $90/ton Tuesday Shift 3 6 SCOO1-6 1095 101% $99/ton Continuous Flow Continuous flow manufacturing is most common in the world of petroleum refining. Most refineries use only the financial applications in ERP because in a continuous-flow environment, the work order is out of place. A refinery’s key performance indicators (KPI) are based on producing the most product at the lowest costs. Consequently, they will set up the plant to run a specific set of products, over a long period of time, to maximize efficiencies. In some cases they may spend up to two months retooling or setting up the plant before producing any end products, then run the plant continuously for maybe eight months and shut down. The final two months of the year will be spent on equipment change over, cleanup and maintenance. This is an extreme example, but a primary reason a work order based-system won’t work. The long runs, called campaigns, are specific to this sector of process manufacturing. Another challenge for this industry is the consumption of materials from tanks and silos and correct allocation to the process lots produced. Since all materials are issued and consumed in a continuous flow, it presents a challenge for batch-based systems. Figure Four © 2015 Edgewater Fullscope 7 IV. SUMMARY Process industries can be quite diverse when it comes to manufacturing processes. When evaluating ERP applications, remember that most of the differentiation occurs in the manufacturing process. First and foremost, if a company is a manufacturing-centric organization, what processes are involved? If a company is in an acquisition mode, what types of companies will be acquired? Begin to map requirements to an ERP application by answering these questions: 1. Is the company manufacturing-centric? Is manufacturing important to corporate goals? 2. What types of manufacturing processes are used? 3. What types of processes might be acquired in the future? 4. Which ERP application maps best to the required processes? © 2015 Edgewater Fullscope 8 About Edgewater Fullscope, Inc. Edgewater Fullscope delivers innovative Microsoft ERP, CRM and BI solutions and services to manufacturers. The award-winning company is one of the largest resellers of Microsoft Dynamics AX ERP in North America. With the acquisition of Microsoft Dynamics Cloud Partner of the Year Zero2Ten, Inc., Fullscope offers powerful yet flexible Microsoft Dynamics CRM Online implementation services and training programs to manufacturers of all sizes. About the Author Reddy Beeram is the director of product development for Edgewater Fullscope. About Microsoft Dynamics AX 2012 Microsoft Dynamics AX supports industry-specific and operational business processes, along with comprehensive, core ERP functionality for financial and human resources management. It empowers employees to anticipate and embrace change so businesses can thrive. As part of the Microsoft industry solutions program, Fullscope developed the original Process Manufacturing, Process Distribution and Total Quality Management modules, and they are now owned by Microsoft and included as part of Microsoft Dynamics AX 2012. For more information, contact Edgewater Fullscope at [email protected] or visit fullscope.com. This document is for informational purposes only. Fullscope makes no warranties, express, implied or statutory, as to the information in this document. Trademarks are properties of their respective companies and duly noted.