expandable

Project Lead

The project lead should be a person with broad knowledge of the company’s business, processes, have the ability to articulate the ERP solution vision, have respect of the executive sponsor/committee and the personality strength to work with and ability to communicate effectively across functional lines, the implementation team, and the Executive sponsor/committee.

The project lead should be a key operational stakeholder. The project lead, for manufacturing companies, typically comes from the manufacturing, finance, or IT organization. I strongly recommend an IT employee not lead the project for a few reasons including the greater likelihood the project will be viewed as a corporate IT project (which it is not). Even the best IT employees do not understand the working requirement nuances of manufacturing and finance well enough, and it places the accountability on a support function as opposed to the people who will reap the benefits for the project’s success.

Cross Functional Teams

Core Team: It is imperative that an adequate number of key personnel from all impacted functions be assigned to the core implementation project team led by the Project Lead. These core team members will be relied upon to make/communicate important workflow decisions, obtain input at the appropriate time, and communicate decisions and status to the functional working team (discussed below).

Functional Working Team: Best practices have a separate working team for each function, led by the function’s Core Team member. The Core Team member’s responsibility to:

Please note in order to cover this topic in a condensed format requires some order of simplification and therefore limits the complexity and depth that can be contained in this narrative. In addition, to understand how a standard cost system actually works is beyond the scope of this content. However, the underlying premises remain true and the benefits of Standard Costing are very real.

From my experience, combined with the minimal research available on the topic, my estimation is about 75%-80% of manufacturing companies use Standard Cost as the basis for the inventory valuation. The remaining 20%-25% is comprised of, in descending order of use, Actual Cost, FIFO – which is a form of Actual Cost and Weighted Average Costing.

This is somewhat comforting to me, as personally I fundamentally believe Standard Cost is the best approach except for specific industries or situations. For example, Actual Cost would be preferred for suppliers to the US government (e.g., DFAS) where the contract requires Actual Cost be used so government auditors can review the results against the invoices submitted to the government for payment to the supplier.

In fact, the right question to ask is why such a high percentage of manufacturing companies deploy a Standard Cost system if Actual Costing will give me what I want. The answer to that question is along the lines of the old adage “be careful what you wish for, because you might just get it.”

The key to understanding is what lies behind the curtain. In an Actual Cost system, to understand your business results, the company must review all the transactions to understand the underlying details and the actual materials purchased/used for a specific transaction. In addition, the mere requirement of tracking specific purchases throughout the manufacturing process in order to maintain traceability and accuracy of material costs consumed is an overhead burden and a discipline that must be deployed in support of using an Actual Cost system.

It is important to note, the below example is not meant as a complete condemnation of Actual Cost as it does have its place, but rather serves as quick illustration of how Actual Costing can lead one to an incorrect conclusion unless the proper (hint: inefficient) analysis is performed on your results.

Actual Cost

By way of example, let’s assume a company manufactured standard catalogue Product A and sold one each at the List Price of $1,000 to Company B and one to Company C. During the procurement process, Purchasing realized they had to expedite material to meet delivery schedules due to an oversight in planning. This material expediting caused the cost for the unit sold to Company C to be $900 as compared to a cost of $600 for the unit manufactured for Company B. As a result the gross margin for the sale to Company C was only $100 ($1,000-$900) while the gross margin for the sales to Company B was $400 ($1,000-$600).

The total revenue for the two sales was $2,000. The total cost equaled $1,500 therefore the total profit margin was $500. Upon reviewing the monthly results, the company executives decided to implement a new higher pricing structure for future sales to Customer C, because of the poor margins for this customer.

Standard Cost

The basic premise of a Standard Cost system is manufacturing /operations are measured against an approved standard cost. This enables management to focus and limit reviews of the results to significant variances to the standard established instead of reviewing each and every transaction. By using the same example as above and adding a standard cost of $600 for Product A, the clear difference in management philosophy becomes very apparent.

In this instance, the Standard Margin for each sale would be the same $400, because the revenue for each sales would remain at $1,000 while the cost would be the same $600 standard established for Product A. The company would also record an unfavorable Purchase Price Variance (PPV) as a result of the higher cost of expediting material to meet customer demand.

During the review of the monthly results, the total revenue presented was $2,000 ($1,000 x 2), standard cost of $1,200 ($600 x 2) and an unfavorable PPV of $300 ($900 actual vs the standard of $600). By summing the three elements, the total reported Gross Margin was reported $500 ($2,000-$1,200-$300), which is the same as the results in the Actual Cost example. However, management focused on the real fundamental issue which was the expediting fee as the profitability for sales to Company B and Company C were the same.

Conclusion

To assign the actual cost of the expediting fees to the next sale is completely arbitrary when manufacturing for a standard product offering. In addition, it can easily lead to inappropriate business actions. In essence, as the above examples highlight, Standard Cost enabled management to have a meaningful discussion on the causes of the expediting fees as compared to focusing on the false assumption of having a customer with unacceptable margins.

There are other benefits to the organization other than financial review of results. Two examples are 1) the Purchasing department can be measured against their procurement cost objective quite easily, from a top level perspective, by reviewing the Purchase Price Variance balance and 2) Inventory transactions do not need to be transacted by lot/serial number unless required for government compliance to warranty validation. This saves operations from this overhead burden.

The true elegance and simplicity of Standard Cost becomes even more apparent when manufacturing in large volumes as compared to the simple example discussed above. The basic point to remember is Standard Cost enables management by exception (i.e., variance to standard) as opposed to managing the entirety.

The 5 most common reasons, in no particular order of frequency, I have encountered through the years for delaying the “go” decision to obtain an ERP are:

Some of the above reasons could be very valid. For instance, I can agree with “getting by” for companies in survival mode caused by an economic downturn or a short term business situation. However, an objective of “getting by” should not be acceptable for any company trying to grow and realize more profits in the long run.

On the other hand, I will never be able to understand/agree with accounting’s comfort level being a determining factor in deciding to upgrade the company’s core operational system. If the accounting team is not comfortable, it is certainly understandable as it will be a big change. However, this should not drive the decision to “Go”, because an ERP system skill set is something that will eventually be required by most people in the company and simply delaying the decision is deferring too many benefits.

The remaining reasons might be eliminated through proper education, analysis and open discussions. The education might take the form of discussions with ERP knowledge/expertise, internal meetings or researching ERP benefits Ultimately, the key question to answer is “are the benefits derived from having an ERP system (e.g., improved, efficiencies, leveraging information across the company, lowering cost, improving customer satisfaction) outweigh the cost of the ERP system?”

With regards to the above question, it is important to note, one thing many people fail to consider is an ERP system might pay for itself if it helps eliminate any one of the below situations.

Implementing an ERP is not an easy task, but it is not something to be feared if managed correctly. The implementation will impact many employees, but that impact cannot be avoided and is best accomplished when your team has more bandwidth and is able to devote more time to fix/optimize processes. In addition, the company will not only reap the benefits sooner, but employee morale will increase as their frustrations diminish when they stop using an inadequate system.

In essence, the best time to implement an ERP system is not when you are getting crushed by the waves of growth. It is far better to get slightly out in front of the waves in order for you to ride the waves to success.

The last blog focused on the top 5 critical elements that can only be determined by asking customers of the ERP system. The first element, Software Quality, was covered in depth in my prior post. The remaining four elements are discussed below.

Quality of the Vendor’s Customer Support Organization

Simple question; how much value-add can the ERP system deliver if you don’t know how to use it correctly?

In short, reference checking is the only source of truth in the ERP selection process for these other key elements that are often overlooked in ERP selection process. Not performing solid due diligence on these items will greatly increase the risk of a bad decision.

The quality of the vendor’s customer support organization will have a major impact on your company’s ability to obtain maximum value from the ERP system. In addition, a strong training culture and offering is a key component of a vendor’s overall product solution.

Access to knowledgeable customer support representatives is a significant benefit that can reduce the likelihood of critical delays due to user error. Imagine you’re trying to close the monthly financial records and the system is reporting huge manufacturing variances. Being able to call the support hotline and talk to an experienced professional who can calmly and logically walk through the most likely case scenarios, as well as more challenging situations, with you to resolve the issue is an insurance policy that holds tremendous value.

The key answers that you need to determine are:

Time, Pain and Cost of Implementation and Data Migration

Every ERP sales person will tell you their implementations will be done on time, with little pain and the professional service fees will be on-budget. Do you simply take them at their word or would you feel more secure if you asked some recently completed implementations about their experience?

The probability of a successful ERP system implementation is directly proportional to the vendor’s success rate on other implementations as well as the planning done before the implementation has even begun. Given this, does the vendor offer a structured implementation plan – will you know what, when and who will be responsible to execute each step of the implementation before you begin?

Some questions that might prove eye-opening:

While there is an abundance of white papers on “How to Select an Enterprise Resource Planning System,” most articles tend to focus on functionality requirements, technology issues and total cost of ownership. Though it’s obviously important to verify that the product features, platform and price of a system meet the requirements of your organization, it is extremely important to understand that functionality is the only thing that a demo can provide. There are other elements that are impossible to ascertain from a demo or in discussion with the ERP vendor.

Due diligence on the less tangible elements of a vendor’s total solution – such as software quality, ease of implementation and responsiveness of customer support – can only be accomplished by asking other companies that have used or are using the ERP systems being evaluated. Not performing the same level of due diligence in checking references that was performed in examining product functionality invites critical shortcomings to remain hidden until well into the implementation process. By then it may be too late to change.

In short, reference checking is the only source of truth in the ERP selection process for these other key elements that are often overlooked in ERP selection process. Not performing solid due diligence on these items will greatly increase the risk of a bad decision.

Top 5 Critical Factors

When checking references it’s important to ask the right questions. Product functionality questions are mostly resolved during the software demonstration process, so the objective of checking references is to measure the elements of a vendor’s total solution that cannot be reliably validated by the vendor through presentations and software demonstration. The Top 5 are:

  1. Quality of the ERP software
  2. Quality of the vendor’s customer support organization
  3. Time, pain and cost of implementation and data migration
  4. Scalability of the ERP software
  5. ERP vendor’s commitment to your success

Quality of the ERP Software

Obviously, high quality software is an essential requirement in an ERP system. The frequency and severity of software bugs is a critical issue that can impact a company on many levels, from the consistency of financial reporting to the reliability of serial number and lot tracking. Software quality is an issue that cannot be resolved during the sales cycle in a demo or sales presentation. A sales engineer won’t provide a true representation of a system’s quality if they are having problems with a particular release or new product. Product specialists carefully script their demos to work around known issues so they do not come into play.

It’s especially important to gauge the quality of ERP systems that are new to the market or promote the fact that they are built on the latest technology platform. Sales reps will maintain that having the latest technology is a key advantage over a competitor’s more established system, but in many instances new software systems and products developed on emerging technology are unproven and lack market support and real world validation.

Usability is a quality issue that most vendors will claim, but is hard to validate without sitting down and using the software for an extended period of time in a real-world environment. One person’s definition of “user-friendly” can vary wildly from another’s based on the level of experience and simple preferences. If the system has bugs or shortcomings that require “work-arounds,” users will be tasked with performing multiple steps to achieve a routine outcome and will quickly become frustrated with the software.

Investigate the genealogy of the software. Who authored it? How many owners or name changes has it undergone? Was the product developed by the vendor or acquired through a merger or buyout? If the vendor is a reseller, do they have a position of strength with the software developer if needed? Gauging the quality level of a software system is an important consideration, and is an issue that can only be resolved outside the controlled sales environment. Talking to and asking questions of a good cross-section of individuals who are already using the system at their companies will be a good indication of the quality level of a system.

Questions to ask:

I will continue the detailed discussion on the four remaining elements on my next post.

Customer Relationship Management (CRM) is the key business application that enables sales representatives and sales management to track the activities with customers and prospects. When used properly it is a very powerful tool. Unfortunately, CRM deployment success rates are discouraging to say the least.

To increase your odds of having a successful CRM deployment, in order to reap the benefits of the CRM system, the three critical success factors are:

  1. Executive support and overview during both the implementation and post go-live
  2. Record and Maintain Data that is accurate and timely
  3. Clear process rules, consistently followed by the sales team

If ANY of these three elements above are not present, at time of CRM launch, you should defer the CRM deployment. Given their criticality, let’s take a closer look at each of these success factors.

Executive Support

While most enterprise-wide system projects require executive support to be successful, this is especially true of CRM deployment projects. In fact, you should not begin evaluating CRM systems unless executive sponsorship from the CEO, COO or the VP of Sales is in place.

Without the executive oversight and support, the company will be fighting an uphill battle with little chance of success, because sales reps will most likely resist using the CRM system for a variety of reasons including:

Data Integrity

One of the most common and frustrating problems encountered with CRM systems is the lack of data integrity. Data integrity issues that typically appear are a) multiple instances of the same company appearing in the database, b) data entered with minimal context or timely content, and 3) data not being maintained.

Multiple instances of the same company occur, because a formal agreed upon a naming convention is not in force. For instance, without a formal agreement, four different accounts (Acme Products, Acme Products, Inc., Acme Products, Inc and Acme Products, Incorporated) might be created for the same company. The system will treat each account as separate and distinct accounts. Sales rep notes, attachments and even account contacts could be scattered across the four accounts. Think of the CRM has an obedient soldier; it will do exactly as instructed. It doesn’t know or even care the four accounts are really the same company. It doesn’t matter to CRM, because you told it, right up front, these accounts are separate and distinct. It is following your instructions perfectly. Good job, Soldier!

If the information is scattered across different accounts, the likelihood a sales rep or management will make an inaccurate assessment of a prospect increases, because they didn’t know important information was recorded in Acme Products instead of Acme Products, Inc. This will probably result in ineffective plans and actions had all the notes been recorded in the one true account.

Just as important, a flawed assessment of the prospect will likely be reached if notes are not recorded accurately with proper appropriate detail or not entered in a timely manner. If a culture of data integrity does not exist, the data will be become stale over time and information that was once accurate, can no longer be relied upon. Data integrity issues will cause users to resist using the system and by definition, the benefits derived from the CRM will be severely diminished.

Clear Process Rules

Management’s ability to interpret the entire sales pipeline, is driven by two variables; the prospects’ location in the sales cycle and the probability an opportunity’s estimated final quote amount to become revenue. The communication of the meaning of these two variable and subsequent enforcement of the application of categorizing the prospect’s location in the pipeline and the manner in which the probability percent is determined, is the only way the sales pipeline will be accurately assessed, across the management team.

As an example, during the CRM implementation process, the company will need to define its sales cycle into steps/stages; i.e. how many steps, in the sales cycle, will there be before the account reaches the opportunity stage? These steps determine the categorization of an account; i.e. at which step, in the sales cycle is the prospect?

The opportunity stage is typically the stage where the total dollar amount of the opportunity, is a variable to forecast revenue. If the likelihood of winning the deal is small, it is up to management to decide if the low probability warrants the account to be categorized as an opportunity. There is no single right answer. It all depends how detailed management wants to monitor and review the account as it marches down the sales cycle path. However, consideration must be taken to account that additional steps in the sales cycle equates to more time the sales rep will have to change the stage and the more categories management will have to review. At some point, too many steps in the sales cycle becomes counterproductive and frustration for the sales rep; less time to sell due to maintaining the accuracy of the stage.

Strict enforcement of the categorization rules are required, else different sales reps will use their own set of rules to determine a prospect’s location in the sales cycle. Different ways to categorize prospects will immediately reduce the assessment accuracy of the pipeline.

Summary

There are many benefits of having a successful CRM system deployed, but unless close attention is paid to the three key success factors, it will likely result being an expensive failure with consequences for those leading the project.

Overview

The catalyst to acquiring a CRM system is very often the desire for management to better understand and to manage the pipeline of deals. This focus typically is on the acquisition of new customers. While CRM systems can indeed be a great tool for pipeline management, another benefit that is often overlooked in the decision to license a CRM system is the care and feeding of the installed base.

An old axiom in sales is that it is much easier to keep an existing customer than it is to acquire a new customer. From a top level perspective, an installed base customer has value for so many reasons that losing a customer to a competitor should never be taken lightly. The value that an existing customer can deliver include 1) repeat sales, 2) increased sales as a result of their growth, 3) references for prospects to contact, 4) upsell opportunities, 5) cross sell and 6) and sell to other parts of a large company.

In the SaaS environment, where the monthly revenue is the lifeblood of the company, the value of keeping a customer is one of the key determining factors in the valuation of a company. Not only will high churn, by its very existence, limit the revenue growth potential, it is a strong indicator for overall customer satisfaction. Not paying close attention to your installed base will ultimately result in disastrous consequences.

Elements to Review

Contacts: Relationships are made with people and not with companies.

One final closing comment; if your sales representatives are not keeping detailed notes regarding your existing customers all their knowledge will walk out the door if the sales person was to leave the company. The company will have a much better chance to maintain or improve the relationships with their customer during such a transition if all relevant notes, contacts and quotes are in the CRM system.

What is Backflushing?

From a functional perspective, backflushing automates the issuing of material to the manufacturing floor upon the completion of the production process, which the ERP system defines as the point when the manufactured part is transacted into Finished Goods.

From a backflushing evangelist’s perspective, Backflushing is a way to significantly increase manufacturing efficiencies by eliminating manufacturing Work Orders and its associated task of issuing material to the Work Order.

How does Backflushing Work?

The actual backflushing process is really quite simple and contains a few basic steps:

MANUFACTURING LOGISTICS

  1. Employees use the materials it needs to manufacture the quantity of the Part ID for a particular manufacturing schedule
  2. Scrap is tracked
  3. When the Part ID is ready to be transferred to another Inventory location (e.g., Finished Goods) the following information is entered into the ERP system:
    • Part ID manufactured
    • Quantity manufactured
    • Scrap incurred

ERP SYSTEM CALCULATIONS and AUTOMATED ENTRIES

  1. The ERP system will reduce the amount of raw materials and/or any sub-assemblies for the:
  2. Increase the inventory in Finished Goods for the quantity of the part that was manufactured

One can certainly make an argument that any one of the above examples where the prevention of an error, cost avoidance, and/or process improvement could very easily pay for the cost of an alerts module all by itself.

Follow-up Analysis and the Importance of Cycle Counting

By definition, if the BOM is accurate and all scrap is recorded, the only material manufacturing variance should be for any scrap recorded over/under the yield in the BOM. The only way to verify the accuracy of the backflush process is to establish and follow an efficient and regular cycle count program. If the cycle counts result in significant material quantity variances, then either the BOM is not accurate or scrap is not being recorded properly and corrective action must be taken immediately.

Keys to Success

To have a successful backflush process there are a few important things to ensure:

Tossing and turning at night is never fun, especially when the cause is concern over work related issues. There is an abundance of literature in medical journals regarding the negative impact on one’s health due stress or to a lack of sleep. Clearly, there would be a lot of demand for a product that could alleviate or even eliminate the stress and let you sleep at night. Even better if the cost of the product was reasonable and it actually allowed you to recoup your investment many times over.

I am sure you have heard the old axiom “if it sounds too good to be true, it usually is”. Well, in this case, I would say this doesn’t apply or at the very least it is worth your time to evaluate the product. What I am talking about is an alert system for your business, based on a set of self-defined rules waiting for an event to happen. The below are some examples of errors that could be prevented or actions that can occur with a proactive automated watch dog protecting your cash and profits while improving processes:

One can certainly make an argument that any one of the above examples where the prevention of an error, cost avoidance, and/or process improvement could very easily pay for the cost of an alerts module all by itself.

Another great example comes from one of our longtime customers. The owner was reviewing his records and was going back a few years to find something. By happenstance, he noticed that an invoice for a product shipment was sent that included a line item that had $0 for its list price. He couldn’t go back to the customer as the event was a few years in the past. This error literally cost him thousands of dollars. Right then and there he decided he didn’t want to even think about this happening again so “in order to sleep at night” he decided to purchase our alerts module.

The bottom line is the number of ways an alert system can help you and your business is almost limited by your imagination and creativity. How about a daily email alert that is sent at 6:00 every evening displaying the day’s bookings, shipments and cash collections amounts by customer?

A separate blog provides an overview regarding the five critical success factors needed to have a successful ERP implementation being:

  1. Executive sponsorship/committee and support
  2. Select a project manager
  3. Cross functional team assigned
  4. Training for all users
  5. Test prior to “go-live”

The number one critical success factor is listed first for a reason. Without the CEO’s or COO’s full support of the project, the probability of success is dramatically decreased. A culture of Accountability with Consequences must be created combined with direct communication from the Company Executives. If the ERP implementation team and the rest of the company does not feel nor understand the sense of urgency and criticality of having a successful ERP launch, full participation from all business functions will not happen for the following five reasons:

Resistance to change

It is a well-known fact that people resist change at the work place (and in life) for numerous reasons including a) fear of the unknown, b) job insecurity and c) if they don’t understand the reasons for as well as the benefits to be derived by the change. Without the proper executive sponsorship, the wall representing resistance to change will be an entrenched obstacle.

Insufficient Communication

Two way communication with the Executive Sponsor is crucial in order to a) keep morale high even when a particular battle appears lost, b) provide strategic guidance and tactical direction to ensure that everyone is on the same page c) keep accountability high throughout the project, and d) inform the rest of the company of the progress being made as well as showing continued executive support and of the project.

Prioritization

Undoubtedly, along the way, there will be challenges for the company that appear that will test the company’s resolve of keeping the project on track keep it from getting derailed by all urgent matters that surface. All the company employees, managers will need to know that the Executive Sponsor is available to “make the call” and therefore have clear direction on task priorities in both the short and long term.

Performance Reviews

In most instances, an ERP system was obtained because the company is growing rapidly or needs to get the operations under control. Either way, employees are feeling stretched and stressed just trying to “hold down the fort”. Without Accountability with Consequences, employees will remain focused on getting their day-to-day jobs done at the expense of the ERP implementation as that is what they will be measured on come performance review time.

Measurement Yields Improvement

The old business adage of what gets measured improves is very relevant in this instance. Just knowing executives care and communication with executives will result in better results.

About the Author

Bob Swedroe is President and CEO of Expandable Software, Inc., a leader in manufacturing software development since 1983. Bob has held executive management positions at both start-ups and Fortune 500 companies including XO Communications, Silicon Graphics and Concentric Networks.

About Expandable Software, Inc.

Expandable Software, Inc. develops, markets and supports and enterprise resource planning (ERP) software suite designed to help fast-growing manufacturing companies maximize business performance.

Expandable’s fully integrated enterprise solution achieves a low total cost of ownership by delivering long-term deployment of a single system implementation.

With its unique model of direct sales and support, Expandable minimizes implementation costs and assures expert ongoing customer support.