Getting Value and Results (5) out of an ERP System Part 5 (of 5): The Big Picture

 

In the last part of this series, I’d like to begin with the original question these blogs are trying to answer: Have we forgotten that an ERP system implementation or roll-out is supposed to provide us with value? Or are we simply content if the system is up and running and ‘kind of works’? Specifically, when ERP systems are rolled out to plants or distribution centers globally, we often see the ‘template’ approach, where transactions and processes are plugged in without great consideration of value gain or improvements in terms of efficiency, automation and transparency.

“Let’s get it up and running first and worry about the details later”, is what I hear a lot. Is that detail really done after ‘go-live’? More often than not, work-arounds, quick fixes and band aides are devised in order to save the day. This is mainly due to the fact that focus quickly shifts to keeping the business running. No one has time for a thorough system overhaul as everybody is busy expediting,

On top of that, leadership is not keen spending more money on “theoretical” promises when they had just spent exorbitant funds on the ERP implementation.

This is all ok when the business works out and the results are rolling in. The next question then is: what are good results? All too often we hear “We have a service level of 95%. What’s the problem?” The problem is, that in most cases those service levels are achieved through herculean efforts of your heroes and none of it is due to the new (or now already old) ERP system. Your company was already competitive before (otherwise you would not be in business) and the ERP did absolutely nothing (or very little) to better that situation. However, it did cost a lot of money and still does as it needs to be supported and kept running. For what? So that you’re part of global digitalization?

Enough complaining. Let’s talk solutions. Firstly, I believe it’s never too late to optimize. But one has to be committed to focus on value-based goal setting, with the awareness and acceptance that there is quite some work to be done. Most importantly, and this is nothing new, we’ve got to be willing to change. You can’t hang on to the stuff you know how it works. You must have an open mind for transactions and processes you might have not executed before or even heard about. And you must be willing to let go of old structures and habits, no matter how hard and scary that might be.

It is not guaranteed that if you change things will get better, but things will for sure not get better if you don’t change anything.

However, don’t get me wrong, I’m not saying you should change everything no matter what. All I am saying is get prepared for change and accept it if it’s based on a sound plan to get value-based results. There are many ways to achieve that, and I am by far not claiming that my approach is the best, but it is an approach. Without one you’ll most likely get stuck.

As described in the previous blogs in this series we suggest a 10 point plan of action:
1.       Devise a problem statement that brings about clarity of your current situation, without being         clouded by fixes and work-arounds that keep us barely going.
2.       Analyze your current situation with effective KPIs and clearly state your goals
3.       Develop a goal tree with critical success factors and necessary conditions
4.       From it, and with your undesired effects, construct a Current Reality Tree
5.       Define Injections (activities and plans) that help you turn the undesired effects into desired effects and describe those in a Future Reality Tree
6.       Develop your value streams and make them transparent to all stake holders
7.       Work with SAP value stream maps to define de-coupling points, planning and scheduling processes, master data and expected results in terms of inventory holdings and service levels
8.       Develop a training program to communicate the standardized processes and make sure everybody knows them and uses them for sustainable, long-lasting results.
9.       Implement a culture of causality and value-driven problem solving and get away from the “busy work” of utilization driven and event-based thinking.
10.   Change! Then stay on course.

If you are looking for a good reason to do all this, just think about the fact that purchasing and implementing an expensive ERP system, without getting business value out of it, is like buying a race car and putting it into the living room.

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Getting Value and Results (4) out of an ERP System Part 4 (of 5): SAP Value Stream Mapping

 

Part 4 of the series addresses our ERP value stream mapping techniques. With it we go beyond traditional value stream mapping, in that we combine the material and information flows with specific settings we have to configure in the ERP system so that it can support the flow we intend to obtain. Since we often implement or optimize SAP ERP systems, I’d like to demonstrate SAP value stream mapping here.

Value stream mapping, also known as "material- and information-flow mapping", is a lean-management method for analyzing the current state and designing a future state for the series of events that take a product or service from the beginning of the specific process, until it reaches the customer. A value stream map is a visual tool, that displays all critical steps in a specific process, and easily quantifies the time and volume taken at each stage. Value stream maps show the flow of both materials and information, as they progress through the process. The difference between a value stream and a value chain, is that a value stream focuses only on areas of a firm, that add value to a product or service, whereas a value chain refers to all the activities within a company.

SAP value stream mapping follows the same principles and conventions that traditional value stream mapping does. Additionally, it adds SAP specific data and settings. On an SAP value stream map you can document lot sizing procedures and MRP type from the material master, work center category and capacity related information from work centers, identify production versions and routings to be used, define operation data from the routing with its cycle times, and much, much more. A finished SAP value stream map can serve as a complete documentation for a system architect, to set up all the functions, features and customizing settings, in order to run the value stream repetitively and effectively with SAP.

Additionally, to traditional value stream mapping, SAP value stream mapping adds pragmatism to the design process and allows for the immediate realization of the theoretical design.

First you design the inventory points. These also serve as de-coupling points as we will see later. An inventory point is defined in SAP as a material master record. Without a material master record, you cannot post a goods receipt of material into stock, and therefore, without a material master in SAP, there is no inventory in SAP. A stock or inventory point in a value stream map, is identified with a triangle and a capital I in it. Here we add two boxes with data to the triangle, to maintain SAP specific inventory and master data.

But inventory points must not be traditional stock alone. It can also be a supermarket, as used in lean projects. If the flow is set up as a self-organizing system, as in the case of Kanban or conwip, then we need a supermarket, from which an order can pull. Notice the icon for supermarket is a different one than the traditional stock point. However, the boxes below are the same. Except that here, you may maintain control cycle data additionally to the material master data.

Then we’ll design the material flow along work centers or machines. Notice that the flow happens between two inventory points. Eventually this flow will be described by a routing and then used in a production order. From upstream, the left side of the flow, raw materials or semi-finished product is issued and consumed to the order, and the downstream inventory point will receive the finished product from the order. Along the routing there are work centers and the activities, or operations which are executed on those work centers.

The work center box contains a description of the work center, and the work center’s SAP identification code. The blue box underneath the identification code contains performance data of the work center. Then there are the work center specific data settings like the work center category, standard value key, and the scheduling formulas, amongst other things, in the grey box. Lastly, you can identify what type of capacity may be used on that specific work center. Is it a labor capacity? A machine capacity? Or both. The capacity itself then, is also described by the respective data box.

Finally, we can also add the information flow to the map. All the planning, scheduling and monitoring activities are defined there.

These SAP value stream maps can become quite elaborate and detailed and therefore require a lot of effort to put together. We typically plot them on big posters, hang them up on the wall in the war room and go through various iterations as a team. The results are very rewarding in the long run, as you can readily pinpoint inefficiencies and device some strategies to improve all in one place.

Like mentioned before, if you put the work and focus into developing the SAP VSM, you’ll be compensated with a complete system documentation and a very solid basis for continuous improvements.

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Getting Value and Results (3) out of an ERP System Part 3 (of 5): Achieving Clarity for a Roadmap to Success

 

In the following, we’ll discuss part 3 of the series on getting value out of your ERP system. Once you clearly stated the problem and carried out a thorough and useful analysis, you should then clearly define your goals and the desired effects you’d like to get out of a rather expensive ERP system, that looked so promising when you purchased it.

To develop a roadmap with all the activities necessary to achieve better results, we must first define what those results are supposed to be. A very systemic and logical approach to define quality results is William H Dettmer’s ‘Logical Thinking Process’. With it, Dettmer suggest defining a goal tree with critical success factors and necessary conditions.

A goal tree provides clarity about necessary conditions which must be fulfilled to use critical success factors to achieve the goal. It’s really worthwhile to spend a good amount of time defining the goal tree, as it serves the basis for the determination of the root causes for undesired effects.

Dettmer suggests listing the undesired effects with their causalities and then building a tree with an ‘IF… Then’ structure from the top down. As an example: one of the undesired effects is that we have high inventory of purchased parts, but still many stock-outs. One of the causes for that situation is that our suppliers don’t deliver what we need when we need it. This in turn can be caused by the fact that we plan exclusively deterministic and therefore order the wrong quantities too late. Another additive cause could be that we’re not planning, but only react to what we need right now.

Knowing now the causality tree, you can find and identify critical root causes. These critical root causes are then used to develop the Future Reality Tree.

In the FRT you go from the bottom up and use Injections (solutions) to break the negative causalities and turn undesired effects into desired effects.

If you do this using system thinking and logical causalities, you will be rewarded with a very clear picture about what needs to be done in order to achieve your goals. I find this extremely helpful in our optimization projects as it lays out a plan that you can use to define your road map, monitor your progress and measure your results.

In below graphic you can also see that the Future Reality Tree also shows those real effective reinforcing loops that are essential for sustainable success.

The approach which we’re discussing here requires time, effort and discipline. It’s not complicated but requires attention and focus. It is very contrary to the ‘band aid’ and ‘work-around’ problem fixing which so many apply. Dettmer’s Logical Thinking Process stems from and combines parts from the Theory Of Constraints and, maybe even more important, Systems Thinking and causal loops. These are thinking and problem-solving techniques which look at the Big Picture and strive to solve problems holistically, considering and avoiding unintended consequences.

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Getting Value and Results (2) out of an ERP System Part 2 (of 5): Assessment and Analytics

 

In part 1 of this series, we asked the question about getting value and results out of an ERP implementation or optimization. In this part I’d like to present the tools and analytics we apply to assess a current situation in terms of productivity, efficiency, automation and inventory performance.

Naturally, if one wants to improve an unsatisfactory situation, one must have a clear picture of the current situation. We need to know where we stand before we can think about activities to improve and better our positions. But what are the Key Indicators which tell us how we perform?

One of the key measures in production is ‘flow’. When materials and orders don’t flow, they cause long lead times, high levels of Work in Process, bad fill rates and constant re-scheduling is required. To generate flow is why capacity planning and production scheduling is done in the first place. If you don’t do it right, it is impossible to flow the orders through the shop floor. And since a lot of companies (at least many I worked with) don’t use their ERP system effectively to generate a periodic schedule, there are a lot of shop floors out there which don’t flow well.

So how can you measure the degree of flow you have on your shop floor? I recommend reading Factory Physics (by Spearman and Hopp) from which I borrowed what I believe is an excellent method: flow benchmarking. With flow benchmarking you can determine how well your production is using inventory to deliver high Throughput and short Cycle Times. Flow benchmarking uses Little’s Law to relate Revenue (Throughput) with average Inventory holdings (WIP) and Lead Times (or Cycle Times) and provides an excellent opportunity to calculate a third variable when two are measurable. It shows how well materials flow and is an brilliant tool to set a WIP cap in a pull system.

In the example provided, we can see that the shop floor is currently operating in the bad zone (the red dot) which is below the Practical Worst Case (PWC). In fact, they require approximately 2 million worth of work in process to deliver an output worth just above 600k. That output however, does not cover the demand of 640k. In short, they’re consuming too much inventory, to achieve an output which doesn’t even cover demand. We can also see that capacity is not the problem. The maximum capacity available is defined by the blue line. (flow benchmarking also includes the Lead Time, which is not shown in the example)

What we should deduce from this measure, is that we must move the dot to the left and up. That would move us into the lean zone, where we start generating more output with less input (WiP). How can you do that? Reducing variability through the correct setting of de-coupling points and using buffers moves the dot to the left, and the implementation of better planning and scheduling will move the dot upward.

Another important measure we must get clarity about is our ability to fulfill customer demand. This measure should focus not only on fill rates or service levels, but also on how flexible we can react to changing demand patterns. I’ve seen many variations of this KPI, with many different input and output parameters. In the end, what counts is how happy your customers can be with the reliability of your delivery. Of course, there are limits as to how much variability in demand you can swallow. Therefore, you must lay down some rules so that everyone – up and down the supply chain – has clarity about what to expect. This includes a clear definition about what you offer right from stock and what you offer to an order with a predetermined lead time the customer must accept.

Consequently, we measure service level (or fill rate for MTS) separately for MTS from MTO. This sounds simple and logical, but I’m often surprised that when I ask planners which parts they classify as MTS and which ones as MTO, they can’t give me a clear answer.

Another important aspect in the measurement of service is to know how much variability we add ourselves. “Why would we add variability to an already noise-laden process” you might ask. Well, you certainly don’t add variability on purpose, but it happens through a myriad of ineffective ways. Deterministic planning, unnecessary deep Bills of Material, incorrect use of de-coupling points and the lack of clearly defined rules are just a few practices that add deteriorating variability into the process.

That is why we also like to measure possible sources of inefficiencies, so that we can device solutions which reduce noise and increase productivity. Like in the following example, we have analyzed the product structure and how it was built into the ERP (BoM, routings, inventory and scheduling points)

As can be seen in above graphic, the more inventory and scheduling points there are, the more variability can (and will) occur. And every time there is variability, the system degrades, leaving you with bad fill rates in the end.

Of course, there are many more KPIs, like fill rate or service level, inventory measures and utilization which I cannot sufficiently cover in a blog post, but if I may make one recommendation here: don’t evaluate the KPI’s separately. Always look at them in the context of the other and the big picture. Sometime one KPI is in direct conflict with another (e.g. the desire for high resource utilization is in direct opposition with flow when variability is present).

Naturally, the more clarity you’ll get out of the analysis, the better your position for improvement.  

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Getting Value and Results (1) out of an ERP System. A new Concept? Part 1 (of 5)

Do you know the story of the company who decided to acquire and implement an ERP system? It was sometime between 1990 and 2020 that their leadership wanted to modernize their process landscape and participate in the global quest for digitalization. A task force was put together and Requests for Quotation were sent to various System Integrators. Then, in elaborate meetings, the consultants demonstrated their experience and capabilities with the functionality and intricacies that an ERP implementation required.

Shortly thereafter, the best presenter was selected, and an implementation project put together, consisting of experienced consultants and super users from the client. Interviews were performed and the current processes and activities were captured, documented and translated into the new system. As the company wanted to implement in multiple manufacturing sites and distribution centers around the world, a template was defined for a speedy roll-out. That template included configuration settings, master data specifications and a lot more that made it easy for IT to plug the new system into any of the sites out there.

So far so good. “We’re getting a new system which is integrated, modern, sophisticated and will catapult us into the elite club of digitalized companies out there”, was the initial consent between business leadership and IT.

Fast forward to 5 to 15 years after Go-Live:
·       The company’s IT still runs the ERP system.
·       Planning, Scheduling and Monitoring of Production is executed in an abundance of very sophisticated spreadsheets
·       Planning and replenishment of inventories for purchased parts in the plant and finished goods in the DC is done through constant expediting and rescheduling of orders, because the ERP is incapacitated by thousands of daily exception messages and an abundance of noise and the constant beating by the bullwhip effect.
·       Every now and then another plant or distribution center is implementing the template
·       A new culture has developed: suddenly, there are “gurus” running the show. The gurus have figured out how that new system works from the underbelly. They fix every problem and become the heroes of the moment. No problem is big enough for them to not have a work-around, another spreadsheet or a third-party solution as a quick fix. Nobody dares to question them, and they are indispensable to the business.
·       Business runs as usual. It’s not worse and not better than before the implementation of the ERP system. They still have inventory problems, stock-outs and mediocre fill rates or service levels. But they have the gurus now. And the gurus fix what needs to be fixed.
·       What’s really worrisome is the sheer number of manual interventions necessary to fulfill customer demand on time and on quantity, when so much money was spent on the ERP with the expectation of automation and visibility.

On the company went and intended to implement the ERP system in another location. However, that location was threatened by global supply chain problems and other economic forces. Therefore, this time, leadership of the company expected some value coming out of the implementation. That was new and unexpected. IT had already engaged with a consultancy and the template was already groomed and ready for roll-out. Interviews with stakeholders had already been performed and it was clearly defined how the old processes (the ones that produced bad results) were perfectly copied and orchestrated into the ERP system (which was now mainly driven by spreadsheets).

This was a problematic situation. People on all levels were confused. “Wasn’t this ERP system supposed to deliver value in the first place?” “We implemented so many plants before. Why should we do it differently now? It was working before. Wasn’t it? And if it wasn’t working before, why didn’t we do anything about it?”

The most telling question, however, was the following: “We didn’t know that a roll-out of the ERP should actually deliver value and better results. We have always implemented to get the system up and running. And that was always our measure of success.”

I am sure there are many companies out there who do much better, but for those who can see themselves in a similar place, I’d like to provide some suggestions based on our experiences and the methodologies we have developed over the years.

This series of blogs contains 5 parts. The first one is the problem statement you just read. Next, I’ll go into how we perform assessments and analyze a current situation. Part 3 is all about logic trees and how systems thinking can help turning undesired effects into desired effects. Then, in part 4 we discuss our SAP value stream mapping and how it can help with the realization of value. Finally, in part 5 we attempt to put the pieces together to show how you may achieve considerable change and significant value in a sustainable manner.

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Getting Value and Results out of an ERP 5