When planning and executing manufacturing projects, difficulties can arise when trying to track two important metrics:
- The estimate to complete by hour, i.e. the forecasted number of hours and dollars to complete the project.
- The estimate at completion by hours, i.e. the forecasted cost of the project at completion.
Both of these factors impact project cost allocations, which can become critical when:
- Profitability, capacity and customer service are linked. The most common situation is where both profitability and either firm commitments to the customer or customer experience are important. If you spend more than anticipated 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.
- Where manufacturers are involved in government supply chains. 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.
- In program-based manufacturing agreements. 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.
Unfortunately, traditional ERP software and its predecessor, materials requirements planning (MRP) were designed to match resources and demand in a repetitive manufacturing environment. 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 competing for production capacity. Too often, manufacturers will rely on project management or project portfolio management software. While they 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.
Some manufacturers, as they attack the problem of cost allocation in complex project environments, will talk about tracking hours or people, and 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 today and 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.
Pressure From OEMs Growing
At IFS we have seen the need for project management resources focused on OEM demands become more common in ERP. This suggests that OEMs are pushing down more of the project accounting requirements on their vendors, where more of the value is delivered.
This translates to a greater need to see current jobs in progress, as well as those set for the future in order to understand what resources are allocated to existing work. This more powerful functionality helps planners answer both project-oriented and enterprise-level questions regarding 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 contractors.
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. ERP designed for the project manufacturer must enable the reallocation of hours and costs.
The optimal software tool will also 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 to 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. 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.
The New Age of Manufacturing
Manufacturing is not standing still. Processes have changed. At any given time, planners will need to look at an individual project or a changing portfolio of projects and identify what each have cost to date and what they will cost on completion. This must happen in the context of data from throughout the enterprise, including information on total resource loading across all projects.
In order to nail down reliable ETC and EAC figures, it is essential that project functionality is part and parcel of the ERP system rather than two separate applications. Any demand put into a project that requires you to generate a shop order or a work order or put a resource in the field must accrue against resources available at that time and affect the total cost. That means that project functionality must be embedded in the system of record, the ERP system.
Carrie Ghai is the Senior Business Solutions Consultant, North America, IFS.