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Plucking More Profit from Production

Automated programs try to fill the gaps ERP systems leave on the shop floor.
Roy Harris and Michelle Celarier, CFO Magazine
January 1, 1999

As companies increasingly turn to enterprise resource planning (ERP) systems, CFOs have found a new connection to the worlds of manufacturing, distribution, and human resources that ERP integrates with finance. But without another software acronym--MES, for manufacturing execution systems--production-oriented companies often can't get the data they need.

That seemed a costly lesson for Hudson Foods back in the spring of 1996, after the Rogers, Arkansas-based company detected a single load of contaminated hamburger patties being shipped from a Nebraska plant. The company tried desperately to track other lots that might contain bad burgers. In the end, the government forced it to recall a record 25 million pounds of ground beef. One reason: inadequate measures for locating how many batches contained the prior day's "reworked" product, which was the source of the problem.

For a meat packer faced with such an emergency, "a cost of $250,000 [for the proper tracking software] can save millions of dollars," says Maryanne Steidinger, executive director of marketing for MES software provider Camstar Systems Inc., based in Campbell, California. Potential savings occur not only because recalls are minimized, she says, but also because "the quality control offered by the software reduces the chances that you'd even have the problem to begin with."

Steidinger is a partisan, but even companies not threatened by contaminated-burger-batch emergencies may do well to add the software to an ERP system.

Let Operators Operate
"MES is a highly automated shop-floor control system that does a variety of things ERP packages don't do," says Bill Swanton, vice president of Boston-based AMR Research, the market research firm credited with inventing the MES terminology years ago. "It helps the people in the plant run the plant better, and as a by-product, it generates better data for the ERP system."

In general, MES data includes real-time readings about the parts or ingredients that flow through the line, and on the quality-control and maintenance steps that are taken. By using bar codes or other automatic means to check on the manufacturing process, companies avoid the disruptive and time-consuming practice of having operators stop to make manual notations. Used properly, the MES data helps managers compare work shifts, while allowing for the tracking of components, finished goods, and scrap or reworked product.

Raymond Industrial Equipment Ltd., a Brantford, Ontario, maker of forklift trucks, uses MES data as part of a system that provides assemblers with computerized instructions laying out the day's work on a split screen. Text on the left describes how to do the job, and digitized images on the right provide visuals for them. When assemblers are finished, they sign off and go back to the original screen for the next job. "In real time, we know who is doing what on what part of what truck, and how long it's taking them to do it," says Jim Locker, vice president and general manager of Raymond. Finance gets accurate information about timing of the work, and, for example, whether there are "huge discrepancies from one shift to another."

At Lexmark International Inc., a Lexington, Kentucky, computer-printer maker, vice president and controller David Goodnight finds the MES data provided by its in-house-designed system greatly enhances the benefit of the J.D. Edwards ERP system that Lexmark has installed. "J.D. Edwards provides the transaction control and the financial information; MES provides the unique control we need on the manufacturing floor to monitor quality and process," he says.

The concept of manufacturing execution systems is confusing to many companies. And it's not just because of the wide variance in production processes, suggests Stephen Gaines, director of the chemicals and pharmaceuticals business of Germany-based SAP A.G., the enterprise resource provider. Experts don't agree consistently about what MES functions are in the first place, or about which systems should provide the data.

Indeed, information from a number of production-oriented IT systems--whether part of ERP, MES, or separate programs geared to the supply chain, maintenance, or quality control--often overlaps. "MES is not really a product," says Gaines, "but a grouping of real-time functions that can be delivered by one or more products." In certain industries, including chemicals and pharmaceuticals, some functions associated with MES are included in the SAP suite of offerings, he says. Still, Gaines acknowledges that ERP isn't designed to collect real-time data, and that certain manufacturing-related tasks, such as measuring temperatures or materials consumption, are "within the control domain of the plant." That means they are best handled by outside MES vendors or inside IT specialists who can help companies track the data and integrate it into the ERP system.

Targeting CFOs
MES providers, however, know who they are. Suppliers of the software have a well-organized trade group, the Manufacturing Execution Systems Association, or MESA International. High-profile companies ordering MES from MESA members include IBM, Ford Motor, Motorola, Hewlett-Packard, Intel, and Compaq Computer. Combined annual revenues of MES providers mushroomed to between $500 million and $600 million last year, although that amount was still dwarfed by the $15 billion or so rung up last year by such enterprise-resource consultants as SAP, Baan, Oracle, PeopleSoft, and J.D. Edwards.


So far, CFOs haven't been too involved in decisions about whether to add MES functions to their enterprise-resource systems, in part because production is an area thought to be relatively unfamiliar to the finance department. But as production efficiencies and bottom-line savings become easier to demonstrate, the CFO is increasingly being targeted by manufacturing-software marketers. Camstar's Steidinger says she is trying to sell to finance departments now, arguing that "from the CFO's standpoint, the savings can be huge"-- especially when the enhancement of ERP systems can be shown.

If CFOs do get involved more on the production side of the house, says AMR's Swanton, they may be in for some surprises about how manufacturing costs fit into the corporate overview these days. If a company's current ERP software attempts to value inventory by assuming "the major cost of a product is the direct labor," for example, "then you have a bent and broken cost model." Many of the manufacturing cost models finance executives use don't reflect the actual cost drivers on the plant floor, Swanton says, and today labor represents only about 7 to 10 percent of total corporate cost in many industries.

What ERP Leaves Out
Meanwhile, ERP systems that once made manufacturing controls a much larger part of the package now have broadened their horizons so that "human resources management, financial management across geographic boundaries, and sales and distribution are front-burner applications," says Swanton. So ERP consultants have been forming alliances with MES purveyors, and occasionally are devising their own manufacturing systems for clients. MES specialists usually manage it better, though, he says, "because they've been doing this, in some cases, for 20 years. And the reality is that ERP providers just don't have the depth to provide that type of real-time information."

The manufacturing modules in most ERP systems help with inventory management and other manufacturing-related chores. (That's true, for example, for one popular ERP system, MRP2, which stands for manufacturing resources planning.) But Bernard Asher, president and CEO of Mount Prospect, Illinois-based MES provider Real World Technology, notes that ERP systems focus on reducing such transaction-based activities as order-taking, accounting, and purchasing. Data that can help reduce production-cycle times or track problems on the line, for example, is often beyond ERP's capability. The production-line data that is part of MES, on the other hand, concentrates on such profit-generating activities as utilization of manufacturing equipment, raw materials and components, and personnel; and the reduction of non-value-added activities--an even greater reason why CFOs might want to get involved in examining MES systems.

"A manufacturing execution system is a bridge between transaction-based ERP systems, supply-chain planning systems, and real-time activities on the plant floor," says Asher. "If you can reduce the lead time, you would correspondingly see inventories go down," thus lowering the cost of materials.

He offers this simplified scenario of inefficiencies on a furniture maker's shop floor: An operator running a machine gets a list of work for the day. "I have to make six chairs, but I look around for the raw material, and I don't have it. I have only enough for four. My next job is to make 10 tables, but I need a special tool for that, and I can't find it. So I put that job aside. Then I have a shelf to make. I have the materials and tools for that, so I make it, even though it isn't due for two and a half months." Faced with those choices, and knowing the cost of downtime, the operator will make the product that's required far in the future, when what he really needed to be doing was making those chairs, because that's what was needed today.

While ERP systems will tell the factory what to build, they won't always know if the required resources are available, Asher asserts. An MES system makes sure all materials, along with electronic work instructions, are available before releasing the order to the plant floor. Then it synchronizes the work flow to the ERP assembly schedule and tracks production data--how much labor is used, how much material is used, and how efficiently the equipment is employed. The data is then fed back to the ERP, giving the overall system a way of figuring out the cost and productivity of the process. "If you can make things fast, you don't need to carry as much inventory," notes Asher. MES, he explains, provides real-time information from the production line, "so you can make a better decision, faster."

Raymond, a Real World Technology client, has found that "the amount of rework drops off dramatically," vice president and general manager Locker says. The resulting savings--which are above the targeted one percent improvement in plant efficiency-- have helped Raymond justify the cost of the MES system, he adds. It has reduced rework by at least 30 percent, and improved the quality of product. Raymond's inventory turns have improved to 25 per year, says Locker.

As for Hudson Foods--which a spokesman says had an ERP system from Marcam in place but lacked extensive tracking software--the data would be a bit too late. The company is now out of the beef business, having sold its meat plant in the wake of the highly publicized recall. Hudson's remaining operations have been bought out by Springdale, Arkansas-based Tyson Foods.


Michelle Celarier is a freelance writer in Croton-on-Hudson, New York. Roy Harris is a senior editor at CFO.




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