Manufacturing for Enterprise Resource Planning

This article explained the three common types of manufacturing in Enterprise Resource Planning (ERP) and how to choose the correct type for ERP manufacturing projects.

I started my involvement in Enterprise Resource Planning (ERP) as an Engineer working in a precision engineering manufacturing company.  Later, I worked as an ERP presales consultant specializing in manufacturing industries. So, naturally, I have a strong passion for manufacturing.  As someone who worked as both end-user and consultant in manufacturing, I observed that manufacturing has been one of the more challenging projects for ERP consultants to understand and configure.

Manufacturing concept is a big topic that will require at least 3 days of training together with inventory management concept.  This article can only provide a basic understanding of the 3 common types of manufacturing to serve as a starting point for readers to learn further about this topic.

The three types of manufacturing in Enterprise Resouce Planning are:

1. Discrete Manufacturing
2. Project Manufacturing
3. Process Manufacturing

When a Project is not a Project

When users in a manufacturing environment use the word “project” in their daily operations, it may not means the same “project” in ERP manufacturing.  It may be referring to production orders in discrete manufacturing.  To further the confusion, some ERPs use the term “Jobs” to describe production orders, and other ERPs use the term “jobs” to refer to “projects”.  So, just literally taking the terms as they are in any ERP project is the first common mistake made by many ERP consultants including some who are senior in the ERP industry.

Often they don’t know what they don’t know and the project ends with many unnecessary customizations without the consultant realizing that their design is incorrect from the beginning.  The sad thing is, after some time, all of them assume that for a manufacturing project, it is normal to have many customizations.  And we all know that too many customizations will result in more bugs and instability of the ERP solution.  This is especially so when the customizations were designed by someone who did not have a strong understanding of the manufacturing concept.

Enterprise Resource Planning originally started in the 1960s.  It was a joint effort between J.I. Case, the manufacturer of tractors and other construction machinery, and their IT partner IBM. This further led to the creation of software known as Materials Requirements Planning(MRP). MRP in the 1970s helped plan raw material requirements for manufacturing, purchasing, and delivery. This was followed by the concept of Manufacturing Resource Planning (MRP II) which eventually evolved into Enterprise Resource Planning (ERP).  So, how can a software solution that started in the manufacturing industry and evolved over more than 60 years be so weak to require heavy customization when implemented for manufacturing companies?

This BOM is Not that BOM

Setting up the Bill-of-Material (BOM) and Routing/Operations is probably the most difficult and yet critical configuration in a manufacturing ERP implementation.  One common mistake which is also natural for consultants to do is to replicate the BOM from the engineering department to BOM set up in the ERP.  This often resulted in multiple level BOM that makes running the material planning complicated.

It is important to know that the engineering BOM is not the same as the BOM in the ERP.  For an engineer, the purpose of BOM is to indicate the sequence of assembly of the final products.  But for ERP BOM, its purpose is to help determine the material needed for the product and in some ERPs, also to indicate at which operations the particular material will be needed.

After understanding the purpose of BOM set up in ERP, the best practice is to flatten the BOM in the ERP.  This is done by reducing the number of levels of BOM in the ERP setup.

Grouping of Work Centers is an Art

Setting up of Work Center in the ERP will affect the definition of the routing and operations.  Often, in real-life manufacturing, the concept of a work center may not be very clear as the engineers may be running their manufacturing process without thinking in terms of the work centers but rather in terms of machines or machine centers.

The common request from the users is to set up the ERP according to the machine so that they can use it for scheduling right down to the machine level.  This is the dream of every production planner but in reality, things often do not happen according to plan.  If you do a detailed plan down to the machine level, a small variation from the planned production schedule will cascade into multiple reschedules. Or, a machine waiting for the planned job when at the same time another job is waiting for another similar machine because the second machine is the designated machine for this second job when actually, the first machine could have loaded up the second job immediately.

So, understanding the purpose of the work center and its effect is important.  And it may take some knowledge and confidence to convince the production planning to change their way of thinking.

Trying hard to do according to the user’s request without understanding the consequences will usually end up with unhappy customers.

Discrete Manufacturing

• Examples:  Car Manufacturing, Electrical Components Manufacturing, Furniture Manufacturing, etc.
• Common Terms Used:  Bill Of Material (BOM), Batch Size, Production Scheduling, etc.
• Distinct Rules:  1 car consumes 5 tires (inclusive of 1 spare tire).  So, if the actual raw material consumption for 1 car is not 5 tires, that will be considered a variance.  The cost of goods will only be recognized when the production order is completed and closed before converting from WIP.
• Other Important Sub-Concepts:  Make-to-Order, Make-to-Stock, Design-to-Order, Make-to-Assembly, Job Shop, Repetitive Manufacturing, Advanced Planning and Optimization (APO), Manufacturing Execution System (MES), Product Life Cycle Management (PLM), Work Center, etc.

Process Manufacturing

Process manufacturing is a production method that creates goods by combining supplies, ingredients, or raw materials using a formula or recipe.  One unique characteristic of process manufacturing is the ability to produce more than one output product in a single production run.  These products can be called Co-Products or By-products.

• Examples:  Food Manufacturing, Chemical Manufacturing, Pharmaceutical Manufacturing, Raw Material Manufacturing, etc.
• Common Terms Used: Recipe, Formula
• Distinct Rules:  Variation in the consumption of the raw material may be a norm.  For example, the formula for manufacturing apple juice may have to be adjusted regularly according to the origin and seasons of the raw apple. 
• Other Important Sub-Concepts:  Process manufacturing (continuous)
  Process manufacturing (batch), Supervisory Control and Data Acquisition (SCADA), Co-Products, By-Products, etc.

Project Manufacturing

Project manufacturing is an operation designed to produce large, expensive, specialized products.  It is highly flexible, because each project is usually significantly different from the one before it, even if the project’s size and expense and a high degree of customization, project manufacturing can take an extremely long time to complete.

• Examples:  Construction, Shipbuilding, Specialty Machinery, Aircraft Manufacturing, etc.
• Common Terms Used: Work Breakdown Structure (WBS), Revenue, Cost Recognition, Tasks, Actual vs Planned Cost/Revenue, Resources, Variation Order (VO), Project Retention, Milestone Billing, etc.
• Distinct Rules:  Revenue and Cost may need to be tracked down to the task or department level.  Various recognition of revenue and expenses methods such as Percentage of Completion Method, Recognition by Milestones, Sales Basis, Installment Method, Completed Contract Method, Cost Recoverability Method, etc.
• Other Important Sub-Concepts:  Sub-Projects, Handling of Variation Order (As part of the main project or as a separate project), etc.

Frequently Asked Questions (FAQ)

Do I need ERP with Comprehensive Manufacturing Functionalities for my Manufacturing Companies?

Answer: Yes and No.  It all depends on the scale, complexity, type of manufacturing operations, and management requirement.  Often, many of the functionalities in ERP software are not fully utilized, especially when implemented for first-time users.

Can you Implement Process Manufacturing using Discrete Manufacturing ERP?

Can you Implement Project Manufacturing using Discrete Manufacturing ERP?

Answer:  Maybe

What I am trying to illustrate is that the final answer is often not a straightforward one.  It will depend on your understanding of the concepts and how you will want to design the solution to meet the manufacturing process and the management requirement with the least effort and costs.

How to Determine which Type of ERP Manufacturing Module to Implement?

So, how do you determine which type of ERP manufacturing module to implement?  The final answer something may be determined by minor details that were uncovered in the later part of the project requirement review process.  Experience will be valuable in these situations.

Duration

Duration is probably one of the important indications.  If the manufacturing process will cross multiple financial periods, implementing discrete manufacturing may be a challenge as it will only recognize the WIP as cost after the production order is closed.

Accounting Policy in Revenue and Cost Recognition

The selected solution has to meet the requirement of the company accounting policy.  It is not uncommon for companies to use less optimized accounting methods for their manufacturing operations.  And it is not easy to change the accounting policy.  So, the manufacturing module and configuration often have to first meet the accounting policy in recognition of revenue, WIP, COGS, and inventory.

Logical Batch Size

Is there a logical batch size?  If not, discrete and project manufacturing is less likely to be appropriate.

Reports

The management and operations report requirement will provide some hints about the preferred manufacturing type.

Process Mapping

When in doubt, do a quick run-through of the process with the three manufacturing configurations mentally or a quick test to see how the configurations will be applied to the actual manufacturing process.

What Actions Should I Take

You should at least be educated on the differences between these manufacturing concepts.  Without understanding the basics, you can only do guesswork without realizing the consequences.  A telltale sign indicating that you may have selected the wrong manufacturing types in your ERP project is the numerous customizations created to meet the needs of the requirement.

Next, any consultant who implements ERP for manufacturing must understand the concept of product costing.  This can be difficult to understand the concept but ERP consultants must be good in the implementation of manufacturing projects.

Manufacturing ERP implementation is one of the most challenging ERP implementation project types due to the need for a strong basic manufacturing concept.  So, it takes time and experience to learn from your previous implementation.  Do a project review after each project, note the lessons learned, and share it with your peers and seniors.

Of course, you can also choose to continue to believe that heavy customizations are the norm in any manufacturing ERP project.

ERP Focus found that about 60% of ERP projects failed and 80% of their customers were unhappy with their current ERP.  Just make sure yours is not one of them.

Learn More about the author, Raymond Yap, and how we can help you.

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