November 8, 2018
As manufacturing volumes increase and unit cost decreases, project-oriented manufacturers are under constant pressure to better manage forecasting, labor hours and resource allocation. Yet many manufacturers are struggling to gain the required cost allocation from existing software implementations. This is where Enterprise Resource Planning systems come in to integrate shop floor and work order schedules directly into a manufacturing project.
Three scenarios, one common denominator—project cost allocation
Here are three examples where accurate project cost allocation is vital. A typical scenario would be where a project is dependent on profits and contractual customer agreements. If you overspend on labor or materials in certain phases of the project and do not realize it until much later, you could find you have run out of budget or internal capacity—including manhours and equipment—to complete the work.
Manufacturers in the automotive industry or commercial aviation space may find themselves involved in program-based manufacturing, which requires them to dovetail their engineer-to-order and manufacturing activities with their customer’s new product development cycle.
Defense manufacturers dealing with government entities require cost reimbursement and cost-plus contracts, which demand rigorous tracking of project or system cost so a standard markup can be applied, up to a set limit. Other contract forms include earned value management, time and materials and even performance-based logistics, where the entire product lifecycle must be managed profitably as a project.
Visibility and flexibility—key pain points
Unfortunately, traditional ERP software and its predecessor, materials requirements planning (MRP) were designed originally to match resources and demand in a repetitive manufacturing environment. However, the disciplines required for project-driven manufacturing, program-centric manufacturing and engineer-to-order involve dealing with many unknown variables.
Software used in these environments must be designed specifically to manage project risk and to allocate resources and cost across multiple projects all competing for the same productive capacity. Too often, manufacturers will rely on project management or project portfolio management software. While tools such as Microsoft Project or Primavera are very capable standalone project management tools, the problem is exactly that—they stand alone.
By tracking load against resources outside of ERP, manufacturers are not truly managing the project from a financial and costing standpoint. They are merely using what is essentially an operations or scheduling tool which, at most, encompasses manufacturing time and attendance or work centers for engineers.
Some manufacturers, as they attack the problem of cost allocation in complex project environments, will talk about tracking their resources in terms of how many hours or people they have and begin to allocate them appropriately. This may be done on a project-by-project basis. But in order to optimize this, planners should know what jobs they have not only today but into next year. They can then start with an understanding of what resources are allocated to existing work during specific periods of time and which are not.
Planners need to know not only what other jobs they have now but also ones they will have in the future. They can then start with an understanding of what resources are allocated to existing work. This means if they take on a new job, they can allocate resources not only in light of a specific project requirement, but with an understanding of their existing or even anticipated resource load. This more powerful functionality helps planners answer not only project-oriented, but enterprise-level questions and enable them to accurately quote lead times and cost. They can do this as they will know even before the project starts where and when they may need more employees, or even contractors to take on some of the work.
ERP solutions should also be designed for the modern project environment and be able to forecast throughout the life of a project. During that project lifecycle, things change. You may have anticipated needing 10 people for 10 weeks, but maybe the customer has changed the scope. If fewer people are required, can you reallocate them to other projects? ERP designed for the project manufacturer must enable the reallocation of hours and costs.
Getting down to the detail and the dollars
The optimal software tool for this task will dig deeper to several more layers of granularity: which manufacturing disciplines and capacities can I commit to the project, which engineers with which skill sets, how many project managers and how much inventory is available?
The software should overlay this more granular view of capacity in the quoting process to estimate the number of hours and compare it current capacity usage. This enables you to move from quoted plans into actual plans for resources once you win the work.
Manufacturers are then able to take the forecast and turn it into an actual resource plan that has accurate productive capacity behind it. The plan becomes not just hours and graphics on a Gantt chart but dollars. Your software tool must deal with hours and dollars in concert. In a fully integrated project ERP, you can generate more tasks and activities linked to work orders or shop orders to generate a flexible, fine-grained schedule and cost story.
Manufacturing in the modern age
Manufacturing processes have changed dramatically over the past few years. Planners can no longer rely on legacy tools and approaches to gauge the financial aspects of manufacturing projects. To identify what each have cost to date and what they will cost on completion, they need to look at an individual project or a changing portfolio of projects in the context of data.
As a large amount of data is gathered throughout the enterprise, having project functionality integrated within the ERP system—rather than two separate applications that are united in a point-to-point integration—becomes vital to nail down reliable estimate to complete and estimate at completion numbers.
Any demand put into a project that requires the ability to generate a shop order or a work order or put a resource in the field will need to take into consideration the resources available at that time. The large number of factors affecting the total cost of the project mean that ultimately, project functionality must be embedded in the ERP system of record.
Carrie Ghai, Senior Business Solutions Consultant, North America, IFS
Carrie Ghai is a senior business software consultant with IFS North America. She has been in the enterprise software industry since 1996. Prior, she held a number of positions in industrial firms including Vice President of Customer Service in North America for Tetra. She holds an accounting degree from Ealing College of Higher Education and qualified as a Certified Accountant (UK).