19 November 2009

The New ERP – Part 10

Setting priorities in The New ERP

So, how does the Thinking Processes and the Current Reality Tree (CRT) we've just built tie in with ERP decision-making?

Well, let us imagine a firm (taken from an actual case) that has completed their first CRT and they have at the root of their tree the following entities:

  • Non-integrated software applications are used to generate bar codes for various purposes
  • An ASN (advanced shipping notice) cannot be automatically processed by existing systems
  • Production schedules are created and maintained in Microsoft Excel rather than in an integrated data environment
  • Manual flags must be set in our contact management system if a sales order goes on hold for any reason
  • Order processing documents are presently reproduced in multiple copies for distribution on paper to various parties and departments
  • Data in existing software applications (e.g., Purchase Order expected receipt dates) are unreliable

By following this firm's relatively complex CRT to the top of the tree, the management team is able to see that their current reality is driving Operating Expenses (OE) that are too high – growing at a faster rate than Revenues or Throughput (T). They are also experiencing higher than desired Inventory levels, and since carrying costs for Inventory contribute to Operating Expenses, excess inventory is a double-whammy – putting upward pressure on Operating Expenses, as well. Of course, higher Operating Expenses lead to a lower NPBT (net profit before taxes). The management team also recognizes that much of the fire-fighting they have been doing over the last years – caused by their treating UDEs as "problems" and a failure to manage their organization as a "system" – has limited the time, money and energy available to spend on new business development. Therefore, they see that they have actually missed out on potential growth opportunities – thus reducing Throughput.

Our company's management team now turns to reviewing the several "roots" and they determine the following:

  • Roots 1, 2 and 5 predominantly affect the warehouse and shipping department. In this particular case, many of the functions between warehouse operations and shipping overlap, so these will be considered together.

  • Root number 6 is also a warehouse issue, but it affects receiving and there are separate people who handle that function. Therefore, this root will be evaluated separately.

  • Root number 3 primarily affects the Production Management Team – a group of people that work together to try to keep the work flowing through the factory as smoothly as possible. However, it also has some implications for sales ("If I take a big order, what date can I promise to my customer for shipment?") and for customer service, too ("What's the status on the production of the products for order number N that's supposed to ship tomorrow?").

  • Root number 4 affects accounts receivable personnel, who must notify the appropriate customer service people whenever an order goes on hold. There are also other functional areas that must be aware of potentially delayed orders and must guard against accidentally releasing an order that should not be shipped. It gets complex quickly.

Finding your "bottleneck"

In The Goal, Eliyahu Goldratt points out that any "system" or organization is like a "chain." It is not a collection of loosely related functional groups – shipping, receiving, production, accounting, and so forth. Rather, like a chain, if you want to strengthen the "system," it is imperative that the weakest link be identified and efforts made to strengthen that link. If the weakest link is not strengthened, then the chain itself will not have been strengthened (improved) at all. Your effort may have added weight to the chain, but will have done nothing by way of improvement.

For simplicity's sake, let us say that the management team in our example organization has determined that the sales department is doing great. Sales and customer service are presently able to continue to sell more products, so the firm's bottleneck does not appear to be in sales or customer service. Let us also say that, despite the firm's rather primitive reliance upon weekly production meetings and spreadsheets, production has not yet become a bottleneck for producing goods to meet known demand.

On the other hand, warehousing and shipping operations are having an increasingly difficult time keeping up with picking, packing and shipping all the orders. There are several factors at work, it seems. One is that the sheer volume of orders of every kind is increasing. More importantly, the company has just opened an e-store on their Web site and has started selling some products direct to the consumer.

While this move has proven to be a good one and is quite profitable for the organization, it has dramatically changed picking-pack-ship operations. Since the firm used to sell mostly to dealers and distributors, they generally picked and packed large quantities into a smaller number of shipments. All of their processes were configured to handle this kind of order processing.

Now, however, with the e-store in operation, shipping finds that, in addition to picking and shipping the large orders with large quantities in each order, they must also pick, pack and ship hundreds of small orders every day. Some of these orders are just a single item in a box. They must do this every day; and this change has had a dramatic impact on them since all the shipping, manifesting and labeling is presently a very time-consuming, paper-based process. Clearly, the pick-pack-ship operation is this firm's bottleneck to reaching more of its goal.

If you and your management team have been following along and you have completed your own Current Reality Tree, you will need to take similar steps to those described above. You will need to look at the roots of your CRT and consider which parts of your organization need to be changed (i.e., what needs to change) and, more specifically, try to identify your "bottleneck" operations – those operations in particular that represent the weakest link in your system's chain of actions that result in producing Throughput.

Note: If you determine that your "bottleneck" is – as is it is sometimes stated – "in the market," then what you are saying is that you have more capacity internally (within your system) do supply and deliver products or services than the market is willing to buy from you at this time. It is important to note that while the terminology is often applied to say, "The constraint or bottleneck is in the market," this is really a misleading misstatement.

If your team comes to the conclusion that your bottleneck is "in the market," then the real internal bottleneck is still internal and will likely be found in functions like

  • Research and development – timely production of innovative products or services that provide a sustainable market advantage

  • Marketing – development of new modes of communicating value to prospects and customers around your product or service offerings

  • Sales – creation and execution of a sales process and innovative new "un-refusable offers" that deliver more sales while sustaining Throughput

  • Elsewhere – quality, lead-time, packaging, and other factors can lead to customers or prospects not being interested in buying your products or services

[To be continued]

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