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Fast ROI for manufacturing companies and distributors from your ERP

I was recently interviewed by a reporter from Search Manufacturing ERP on how manufacturers can get quick ROI in today's market. I've worked with quite a few manufacturing companies both in my past life at Deloitte and at Ignify. ERP, in general, is not a fast ROI project I believe there are certainly some things that a manufacturer can do to get Quick ROI.

First of all, the manufacturing paradigm in North America has changed. With a few exceptions, Manufacturers in North America are no longer doing heavy manufacturing. Most of the manufacturing work is now done with subcontract vendors in China, SE Asia etc. So the manufacturing challenge is less about managing the shop floor but more about managing the supply chain and optimizing inventory either in the warehouse, with the vendor, on the water. This is, in fact, really important because the new paradigm means that lead times have shifted and become longer with a 60- 90 day lead time to get product not uncommon. That requires better forecasting, demand planning, purchase planning and better tracking of critical inventory items.

Not surprisingly, manufacturers have not yet made that paradigm shift completely. When I do a site visit at a manufacturing site I find the focus still very much production planning and shop floor control even though now the manufacturer is just doing warehousing and light manufacturing at best. There is very little focus on the planning, forecasting, warehouse management and supply chain management aspects which burden the cost significantly. As an example of a cost burden, I surveyed a manufacturer that builds heavy engineering product often finding themselves with gating parts – i.e. parts that are not available and hold up the completion of the item. The net effect was about 6 weeks added to the production cycle. Doesn't seem expensive? Check out the math below.

Average sales price of item: $2 million (this is a complex end product)

Cost of capital to manufacturer: 10%

Cost of 6 weeks of capital: $23,000 (2 million * 6 weeks/ 52 weeks * 10%)

Cost of delay on 100 shipments: $2,300,000

$2.3 million dollars in cost of gating parts! Now this is a $200 million manufacturer that has a net profit of $2.5 million (which by the way is a pretty good number for most manufacturers). The net impact of eliminating the gating with better inventory optimization would be to double the manufacturer's net profit. Before you say – this is not me because you don't do $2 million type products – change the numbers a bit. It could be 10,000 shipments of $20,000 type product going out or 100,000 shipments of $2,000 type product etc and you'd still have the same cost of capital of $2+ million dollars. Even if you can only shave off a couple weeks and not 6 weeks and if your volume is lower remember that you are still talking at least hundreds of thousands of dollars if not millions in savings by optimizing your inventory and supply chain with better planning. No small change by any standards.

The reality for manufacturers is that the management now has to be on the supply chain and inventory optimization and not just production planning and shop floor control. So how can you do this? Fortunately most of the newer generation ERPs provide functionality to do this out of the box. I'm going to take the example of Microsoft Dynamics AX – a next generation ERP from Microsoft – as a solution to this and show some quick and easy things to enable functionality that can help you get there.

One of the more important things to do in getting to a stable replenishment mode is to use automated replenishment to the extent possible: Dynamics AX has the ability to automatically spit out planned purchase orders by looking at a variety of things

  • Safety Stock levels
  • Forecast
  • Sales Orders
  • Purchase Order
  • Inventory that is Available to Promise
  • Vendor Lead times

For a human being, to take into account all of these parameters and provide a planned purchase forecast manually is just impossible – even if you just have under 200 Finished good SKUs. If anyone tells you otherwise they are kidding you or pulling wool over your eyes. No individual buyer or group of buyers is going to be able to do a multi-parametric calculation that involves six parameters and create a planned timeline for all your SKUs for each vendor without doing some rough (and dirty) ballparks. You need a fairly sophisticated automated process to do this right. And why shouldn't you – you will cut labor costs, you will reduce your inventory stocks outs as well as lower your cost of carrying inventory. And you should leverage the ERP to do that.

How do you do a forecast – for that you can use a demand forecasting system if you have a complex web of customers with changing patterns or you can get quite basic and track it in excel as a starting point and improve from there on. Dynamics AX provides you the ability to load forecasts by customers, customer group or at a total level.

Dynamics AX Sales Forecast by Item by Customer or Customer Group

The above figure for example shows the forecast in Dynamics AX by different customer groups. For example, the first line shows the forecast of 5000 units for all major customers and 6,000 units for a particular item for Retail customers. Dynamics AX splits them out based on an Item allocation key based on month (or any other time period relevant to you). By defining such item allocation keys you can take into account seasonality or business cycles.

Loading a forecast is however, optional. You can run planning just based on current open transactions including sales orders, purchase orders and inventory. The figure below shows planned purchase orders and planned production orders created using the MRP functionality for multiple release dates for multiple items with the quantity to be ordered and the desired delivery date. The delivery date ties to your need of the product and the order date factors in the vendor lead time.

Planned Purchase Orders with Dynamics AX Master Planning

The end result is a stable automated planned cycle that happens every day, week or month depending on the frequency of inventory churn and volume of orders in your business.

Now should you do this for every single SKU in your item master or just for some SKUs. My answer is your top % of SKUs by some measure. This measure could be sales quantity, Sales $, and most typically for manufacturers inventory carrying cost (which is determined by inventory value). Typically you would classify your items as ABCs and plan for the As and Bs and just ensure the Cs are always there and typically overstocked since they have a low inventory carrying cost. The ideal way to do it is again to have the ERP actually calculate the ABC classification for you. For example, in the example shown below I asked Dynamics AX to rank the top 25% of items by revenue as an A, Next 30% as a B and the rest as Cs. I may choose to do now do weekly planning on my As, monthly on my Bs and do no planning and use an auto-fill mechanism on my Cs.

ABC Classification of Items done automatically in Dynamics AX

This is simplifying it a bit but the point is that I don't need to go through a lot of grunt work to get this done. The system will do 90% of my work of loading forecasts, generating purchased orders and even deciding which items get planned for with the appropriate configuration. The end-result you've saved yourself a boat load of work and enough dollars to make this a high and fast ROI project.

Want more – email us at dynamics@ignify.com to get on our email list for valuable tips or to ask us any questions in general.

Sandeep Walia is the President & CEO of Ignify. Ignify is a technology provider of ERP, CRM, and eCommerce software solutions to businesses and public sector organizations. Ignify is a Microsoft Dynamics Inner Circle Partner and ranked in the top 18 Microsoft Dynamics partners. Ignify has been included as the fastest growing business in North America for 3 years in a row by Deloitte, Inc Magazine and Entrepreneur Magazine.

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