Intelligent Costing- How the Software Landscape Must Look to Succeed
Traditionally, manufacturing organizations and those in other industries have had a similar look and feel to how they have set up their systems to conduct and run their business.
For years, businesses within the manufacturing industry have operated similarly, maintaining conventional systems and traditional processes. With the emergence of technology-driven companies, some of these methods have had to be re-evaluated to remain competitive.
Here is how the technology landscape typically looks:
Customer Relationship Management- CRM
Fixed Asset Management- FAM
Planned Maintenance- PM
Enterprise resource planning- ERP
Production or Manufacturing Execution System- MES
Quality Management System- QMS
3PL- Supply Chain
Reporting & Business Intelligence- BI
Customer Relationship Management- CRM
A Customer Relationship Management (CRM) system is an integrated set of software solutions designed to help businesses better manage customer relationships. It enables companies to identify, acquire and retain customers while making more intelligent decisions quicker and more efficiently. Manufacturing organizations benefit from leveraging a CRM system by streamlining their customer service process and achieving greater levels of efficiency in how they interact with customers.
Enterprise resource planning- ERP
Enterprise resource planning (ERP) systems are used by various businesses to manage their operations and resources. These systems enable companies to use a component-based approach to potentially capture and collect information, such as customer data, inventory levels, finance, human resources, etc. In manufacturing organizations, ERP systems can be beneficial in streamlining their supply chain processes, coordinating personnel efforts, and delivering the required quantities of products on time, if setup and used correctly.
Fixed Asset Management- FAM
A fixed asset management system is an automated information and tracking system used to manage long-term physical assets. It tracks both financially significant and non-financial data about an organization's fixed assets, such as cost, depreciation, location, and maintenance.
A fixed asset management system can play an integral role in organizational efficiency in the manufacturing industry. It helps manufacturing companies keep track of illiquid or expensive assets with precision and accuracy; this makes it easier to control budgets and better levels of investment.
Planned Maintenance- PM
A planned maintenance system is a process and tool used in manufacturing that enables prevention, prediction, and systematic management of the performance degradation of an item or asset over time. It provides advanced decision support, allowing the users to utilize condition-based and time-based strategies that ensure maintenance activities are conducted at the right time and with the right resources.
Production or Manufacturing Execution System- MES
A Manufacturing Execution System (MES) is a software system used in manufacturing organizations to capture, store, and manage detailed data related to the manufacturing processes. It consists of algorithms, analytics tools, and interfaces that help with performance optimization. The MES can identify and provide insights into potential bottlenecks in the production chain and areas for improvement. It helps establish quality control KPIs and track product yields over time.
Organizations use MES to improve their operations by taking advantage of available resources more efficiently while reducing costs by lowering inventory levels, preventing downtime due to breakages or outages, and guaranteeing order-filling accuracy and on-time delivery of goods.
Quality Management System- QMS
A Quality Management System (QMS) is a set of organizational processes and procedures used to ensure that the products and services produced by a business meet the highest standards of quality. This system includes all the mechanisms, processes, and resources needed to monitor, measure, maintain, and improve product or service quality.
QMS provides opportunities for businesses to increase production efficiency and customer satisfaction in manufacturing. Through continually examining and improving products, processes, and services, manufacturers can minimize downtime for repair or maintenance, reduce customer complaints due to quality issues, and enhance their competitive advantage.
3PL- Supply Chain
A 3PL system, also known as a third-party logistics system, is an organizational structure used by manufacturing organizations to outsource the movement and storage of inventory. This arrangement helps businesses save on labor costs and improve the efficiency of their operations by allowing them to focus on their core competencies. 3PL systems provide essential services in delivery, tracking, transport, warehouse management, inventory control, and supply chain optimization.
Reporting & Business Intelligence- BI
A business intelligence system is an essential tool in modern manufacturing operations. It helps to capture, store and analyze data quickly and accurately, so companies can confidently make strategic decisions. This technology allows manufacturers to increase operational efficiency, identify trends, and quickly spot opportunities for improvement. As such, it is being increasingly adopted across the industry to stay competitive in an ever-evolving market.
What is the problem with how manufacturing technologies are used today?
Although the ideal situation would be for manufacturing systems to be unified, this is unfortunately not the reality. Companies often contend with a system of silos and separate entities without an integrated approach, making communication difficult and data sharing inefficient.
For many organizations, the ERP is used to do too many things, which causes constant conflict between business functions. Typically, no department has the system configured and used for the necessary purposes.
Here are some examples of how over-relying on an ERP lead to manufacturing effectiveness and profitability issues:
The quality team uses the ERP to maintain quality data. As a result, all system changes (even minor ones) must now go through a tedious and expensive change control and review process. Now minor and significant changes are worked around mostly in Excel because no one has the time or resources to see these changes through.
The production team would like to configure the system to include operations data to enhance the financial data to measure performance more effectively. The IT team tells them this would be a months-long project to scope out, execute, and test. Typically, there is no budget for this.
The supply chain team manages all purchases with one system and all customer deliveries with another 3PL system. The software vendor mentions an API, but no one knows what that means or what to do with it. So they manage delivery activity and cost info separately.
The quality data for input material % active components and the WIP & FG % active ingredients live in the QMS system, not the ERP. As a result, product yield, purchasing, and production variance calculations are incorrect.
The plant manager is overwhelmed by the number of disconnected systems. Rather than spend most of their day juggling 5 separate systems, plant managers run the plant informally. Data isn't captured because they must focus on keeping operations running instead of doing administrative or system maintenance tasks.
The cost accounting team does not know what the real cost is of production at each step or the product cost in cumulative. They use standard costing set once a year and variance reporting based on an outdated budget to help the executive team with decision-making. The reporting and business reporting tools only connect to the ERP and report on financial results and metrics. As a result, the cost accounting team spends lots of time in Excel, not really answering the questions at hand. Management uses intuition to run the organization.
As you can see, the number of systems in use today, the lack of integration, and the cost of integration lead to serious problems as the factors compound. The lack of cohesion means that organizations have suffered from slow change and higher costs due to people/systems having to duplicate efforts in different departments.
Ultimately, organizations have no clear understanding of end-to-end product cost and profitability.
Here's why:
The cost to source your inputs is in the ERP system.
The cost to make your product is in the ERP, FAM, PM, MES, and QMS systems.
The cost to deliver to customers is in the 3PL system.
The cost of terms and incentives from sales is in the CRM system.
As you can see, the end-to-end cost & profit performance, which is a component of each of the activities above, is lost. Most organizations don't admit all is lost. Instead, they make do the best they can.
Dealing with unintegrated systems typically involves excessive staffing, lots of Excel workbooks, lots of meetings, and a lot of can-do attitudes to try and make it all work. While this is how many, if not most, organizations got by in the last two decades, we are on the precipice of a major change.
What needs to change in the manufacturing technology landscape?
What’s that big change we need, you ask?
I've kept you waiting long enough, so here it is; the critical change to the manufacturing technology landscape is adding powerful FP&A software to finally integrate all the data from the systems into one without losing time or paying lots of money to have your ERP system configured and reconfigured.
Technology has finally caught up and found a way to pull together all the data from those systems to get a real, accurate, and timely look into the end-to-end product and customer profitability. Not in a back-of-the-envelope calculation but with a fully integrated approach that ties out to every GL account.
That's not it, either. There are now systems that take the complete data picture from those separate systems, pull them together in a sustainable fashion, and then use all that information to provide scenario planning, what-if analysis, artificial analysis, data visualization, and decision support.
Are ingredient prices increasing? Not a problem; we can estimate the impact for all products, everywhere, at budgeted and forecasted volumes.
Changing Bill of Material (BOM) recipes to increase yield while decreasing labor costs? Those cost savings can be calculated and captured on the same day.
Need to factor in production planning for a best, worst, and typical economic case? You'll have those options to compare side-by-side.
Need to compare vendor performance by input price and yield across the business and by product? Can do.
Want to understand and analyze product profitability in terms of actuals vs. budget vs. forecast vs. prior year? Not a problem.
Want to know what your target and actual product cost is each month, quarter, and year? You guessed it; that functionality comes standard.
If someone had shared with me what I had shared above just a few years ago, I would have thought the following:
They were crazy
They were trying to sell ERP consulting services
They were from some distant alternative universe
Fortunately, technology and application have finally caught up to business needs. I’ve spent the last few months talking with real people in real organizations who have adopted and shared how they are using these tools and I can confirm they are complete game changes.
By making this change, the one we have ALL been waiting for, manufacturers can remain competitive and thrive in an ever-changing production landscape. We solve decades-old pain points by using modern technology and enhancing their existing systems.
By harnessing the power of data and analytics, businesses of all sizes can better understand their customers' needs, develop innovative products and services that meet these needs, drive process improvements, and maximize profits. Managers and leaders can finally understand the cost and profitability of their entire organization and make better decisions.
Want to learn more? Let’s chat! I can share more about what FP&A software does and help you find the right tool for your organization.