Fatal Flaws

The latest wave
in the chemical industry is to implement Enterprise Resource Planning

(ERP) systems. The goal is worthy having a cohesive information system

to cover all business needs from financial controls and reporting, the

management of our relationships with and sales to our customers, long-range

planning of capacity requirements and short-range production scheduling,

supply chain management, inventory management and cost controls. ERP,

in short, should provide all employees in the corporation with information

to support them in performing their jobs.






Since everyone will be dependent upon the data from this pervasive information
system, everyone is dependent upon everyone else in the organization

to input accurate and timely data. The tool is really everyone's-ERP

serves many 'masters' in an organization. The chemical industry has

followed the historic pattern of other industries in choosing information

systems such as ERP. The initial packages were selected by the finance

department of these organizations. And the financial groups within the

chemical companies have done an excellent job of choosing their tool.

They have typically chosen the best financial tool available today.






But chemical production is a very complicated business. The complications
of balancing preferred sequencing in production against the customer

demands (which never matches that sequence!) against the need to keep

this high-fixed cost facility running to drive unit costs down is just

one example of pressures that will be placed upon an ERP system. Balancing

fluctuating quality parameters and controlling processes with strict

set points, producing end products to specifications using different

technologies, understanding the cost ramifications of new product introductions

or product abandonment, these are just some of the complications of

managing the chemical production site.






Why point out the obvious? After all, you live with and manage these
complications everyday. The whole point here is that your tools for

managing this complicated business-your ERP system-must have enough

robust functions to mirror your information requirements, however complicated

they might be. Without these functions you will have to either change

the way you do business, use another tool to manage that part of the

business, or change your ERP system. While no packaged ERP solution

will meet anyone's requirements perfectly, finding a closest fit to

your requirements means that the ERP tool will leverage everyone's productivity

and improve the company's overall performance.






Looks good to me


Selecting software from the various choices available in the marketplace
is a bewildering experience. So many details, so many presentations,

so much the same. If you have never selected and implemented an ERP

package before, there are some lessons others have learned that you

need to watch out for.






The first step is to determine what you really need in a system in order
to provide the best fitting tool possible. The definition must have

the same scope as your ERP implementation-and everyone who will be using

the ERP tool should be represented in defining the total requirements.






This is a tedious task, but there are some tools which can help you
in this effort. Remember that you need to identify those information

requirements which are unique to your particular business. For example,

you might need to report inventory cycle counts by height of the liquid

in a tank and have the system convert this to the inventory unit of

measure (UOM). This is a relatively unique requirement as for example,

an electronic manufacturer does not need this function. On the other

hand, making sure that the system will balance both the debits and the

credits when posting to the general ledger is a universal requirement.






For the chemical producer, missing either of those functions used as
examples (tank measurements and balanced entries) would mean that the

ERP system was not a proper tool for their needs. The problem, of course,

is to find out if there are any of these holes in the system before

buying. And that's the rub. One can never know everything there is to

know about the complex details of an ERP system before purchasing that

system. So one must know what questions to ask the vendors. Sometimes

we don't ask a question because it seems too detailed. But sometimes

we don't ask a question because it seems too obvious and we end up sadly

surprised when learning to use the ERP tool. For example, every business

in the world requires that a general ledger has an ability to check

for a balance between the debits and the credits before posting the

entry. This is clearly an obvious question which does not need to be

asked. So what are the obvious questions which should be asked?






Far beneath the surface...


You need to ask the questions about parts of the ERP system which are
critical to your success as a chemical producer, but which are not universally

required around the world by every industry. Remember that the majority

of ERP suppliers are selling their systems to many industries-automotive,

aerospace and defense, electronics, banking, insurance, health care

and chemical companies. The general ledger requirements are all the

same, but there are significant differences in other segments of the

ERP offering.



Here is a real conundrum. Most of you have not worked in these industries.
Therefore, it is not possible for you to know the differences in how

they manage their businesses and what unique requirements they would

have from an ERP system. So how do you know which requirements you have

as a chemical producer which are different than the requirements of,

say, a machine tool maker?






The danger is, of course, that in looking at the surface of ERP systems
they all seem to be doing a good job. And sometimes the fatal flaw is

not sitting on the surface of the system waiting to be easily seen.

The flaws are typically down deep in the system, far beneath the surface,

to be found only when you actually go to use the tool.






Fatal flaw # 1: UOM conversions


At the Plant Centric Conference held in April 1998, a representative
of Witco was describing his company's ERP implementation. His stunning

news was that Witco in the US will convert all of its plant operations

to the metric system. The immediate question should be Why such drastic

action?



"Going Metric" has drastic and wide-reaching ramifications.
You see such a seemingly little, bitsy detail as a UOM is all pervasive.

Just as you need units of measure to describe your formulations, to

record your purchases and their receipts, to measure volume of production,

to meter out shipments to your customers, to calculate performance measurements,

the UOM is all pervasive in an ERP system. It is so pervasive that,

like the air, you don't think about it. It is so critical you might

not even think to ask an ERP vendor if they can do UOM conversions and

how-always ask them how-they do it.






So, if your ERP system does not provide you with a sufficiently robust
tool in the area of UOM conversion, and you want to have a universally

consistent information system as Witco does, then you will be forced

into a difficult decision. Witco chose to change the way it does business

in a significant part of the world. And one can only imagine the additional

burden this will place upon the business. They believe that linking

up MES level systems will assist their operators in verifying their

inputs, but what about other areas of the business?






Will they ask their vendors to label their products in metric units?
What about their customers? Will they change pricing to metric units

and ask their customers to work in metric? What about historic data?

Will it all be converted? Even the general ledger-the universal tool

for everyone-could present them with a problem because some accounts

carry not only dollar values but quantities. And those quantities have

an implied UOM, not a recorded UOM. One can only guess that how many

mistakes will be innocently made over the time. UOM is a single field

on any screen in an ERP system, but not having robust enough function

to support UOM and its conversion could be a fatal flaw.






Fatal Flaw # 2: Quality is just for inspectors


While the UOM is pervasive and so common as to be almost taken for granted,
quality is another critical factor for most chemical producers, and

it is completely invisible. What the chemical ERP system must do is

to make the quality parameters visible to those who need to know. Since

the 'need to know' personnel are throughout the whole business, the

ERP system must treat quality an intrinsic part of the whole, not just

an 'add on' module used only by laboratory personnel or quality inspectors.






There are many places where quality is critical to the management of
the chemical operations. If mistakes are made in these areas, the results

could range from a small cost problem to a lost customer to real also

safety hazards. Quality information is needed by the scheduling personnel

who may be able to blend off some slightly off-spec materials in the

next production run of that product. And quality information is required

by our customers. They need to know the quality parameters of what they

are buying. Indeed, the chemical producer may be offering a 'sell-to-specification'

service, wherein the producer is supplying a product which meets his

customer's specifications for the customer's own end use needs. In this

case, if the quality information is not made available to the customer

service representative taking the customer order, how will they be able

to provide the customer with assurances about delivery?






Fatal Flaw # 3: Lot number=serial number


Tracking various quantities of products with different qualities requires
some reference number in the ERP system. For some suppliers, the need

for 'lot control' is translated by them to mean the same as serial number

control for their machine tool manufacturers. This is another example

of a tool which is not up to the job.






There are two problems with this 'serial number' approach. One is the
tracking of materials themselves especially if there are fluctuations

in quality during the actual production run. The second has to do with

control over the use and sale of the materials with various quality

parameters.






First of all a serial number assumes that only a quantity of one is
produced. The one item may have been produced alongwith others, but

they are all identical. Same parts making up the machine; same quality.

If the 'serial number approach' is to work for the chemical producer

then they must be operating in a batching mode where the lot number

will represent one quality specification for that batch. There can be

no fluctuations in quality within the batch.






But for other producers who run campaigns, there will be a problem.
During the campaign quality parameters may change slightly. Transition

(or twilight) materials between various grades made during the campaign

need to be identified. The lot number might represent a day's production,

but there are sub-lot requirements to track the varying quality outputs

during the day. Without an ability to work with sub-lots, the continuous

flow chemical producer will be 'playing tricks' on the system to get

it to support their information needs.






The second problem is not the identification of the various lots, but
the need to control the use and sale of the lots. Once the product is

produced we may not know the quality disposition of that lot till some

time. Some physical testing may take several days. Yet the materials

are in inventory, using up valuable storage space while the lab works

through its testing routines. The chemical ERP system should be able

to simultaneously track the materials from an accounting point of view-you

do own the products that you have just made-while also preventing unauthorized

use or sale of the product till disposition has been made. This implies

that there is a layering of information within the chemical ERP system

which separates the financial implications of actions (producing goods,

receiving goods) from the physical realities (goods in storage awaiting

disposition, available in three days; goods in storage approved for

immediate sale etc.). Yet the ERP system must make sure that the two

views-financial and operational-are inextricably tied together under

the covers. This design approach is not very obvious to the person trying

to select the ERP system which will best fit his needs, but it is a

fundamental requirement. After all, the ERP system is for multiple masters-finance

and operations. And the ERP system must be the unifying force which

keeps the financial picture exactly parallel to the physical picture

of the operations.






Fatal Flaw # 4: Only one way to make a product


The complications of the 'physical picture' mirrored in the ERP system
do not stop with how lots are tracked. Another complication comes from

the evolution of the chemical processes themselves. Within the chemical

enterprise, if not within a single production site, there are various

technologies which can be used to produce the same end item. This is

a reality in the chemical world, but is not typically accommodated in

the traditional ERP systems design. For the machine tool maker there

is only one way to assembly his machines.



For the chemical producer, having only one statement of how product
is made is not sufficient. If there are old processing lines and new

processing lines which make the same end item, then both are valid.

There differences are, however, critical and significant. Their cost

structures are different. The yields may be different. The run rates

may be different. The formulation may be different.






If the ERP system is to fit the chemical producer's requirements, there
needs to be an ability to state all methods of production. If processing

times and formulations vary from one process to another, then these

must be clearly delineated, visible and available to planners, schedulers,

operators and cost accountants. The planners and schedulers will need

to know what capacity will be used to produce the required end items.

Without this visibility they will be looking at the so-called standard

capacity as overloaded, and the so-called alternative capacity as idle.

They will also need to know if there are different material inputs required

from one process to the next. As they plan to load production on various

processes the planning results will then drive the procurement of the

right materials based upon the correct formulation for those lines.

The basis for performance measurement will be set as the 'standard'

for the scheduled process. Thus yields and run rates will be properly

measured against the right basis. But these measurements need to be

augmented by the cost analysis of the actual production run.






One of the 'hard-to-see' but essential requirements of the chemical
ERP system is to develop a weighted average cost for a product when

there are multiple valid processes which produce the product. With this

information, the company can measure its performance against the projected

run rates and usage, as well as against financial standards. The system

must be able to calculate the weighted average actual cost (actual cost

of each process during the accounting period, averaged according to

the relative volumes produced from each process). The system must also

be able to calculate a projected weighted average cost. This means that

the calculation will be driven from the stated volume of production,

and also how the planner predicts to load that total demand upon the

various processes available to them.






Fatal Flaw # 5: No fixed cost analysis


The chemical enterprise is one of very high capital costs. The plant
and equipment are a significant part of the cost of any product produced.

The most important measures which top management uses have to do with

these assets: Return on Assets (ROA), Evaluated Value Added (EVA), Utilization

and Yield (UY). Not to put too much of a negative spin on this, but

downward shifts in yield mean that the plant was being utilized but

the output of good (saleable) product was less than projected. A downward

shift in utilization means that the time available to produce product

has been lost forever, and the cost of that time must be borne by all

other products which are produced.



Typical ERP systems provide very meager tools for the chemical cost
analyst. This is because the typical ERP system is a job costing system.

The machine tool maker costs the assembly done on a particu