The Manufacturing Operations Blog

On the ROI Trail

Advancing the argument from my previous post, most of what we know as enterprise software today had roots in manufacturing industries and were designed to run manufacturing companies. Somewhere along the way, the evolution of enterprise software took a detour and started focusing on other functions in a typical enterprise such as financial accounting, order management, procurement etc. Why did that happen? Why did we suddenly ignore Manufacturing and got more interested in fancy topics such as HRMS, CRM, Sales, Marketing, PLM and whole host of other 3 and 4 letter acronyms.

One of the reasons IT systems got more popular in other functional areas than manufacturing was because of easy ROI for the customer. Most of the enterprise software has traditionally been focused on automating transactions, and then making the data available to other users by implementing an integrated system. While in functions such as accounting, procurement and order management, there was a big value in automating transactions; there is no such direct connection to that in Manufacturing. In fact in Manufacturing, data entry in IT systems initially increased the workload on operators who would have otherwise focused on production. Software vendors and consultants talked the manufacturing community into accepting this extra workload in return for big payback down the line. The argument was – if operators could enter data into a system instead of writing it on a piece of paper, it would provide better visibility and therefore better decision making for the management, even if it increased the work for the operators and in some cases distracted them from what they were trained to do, i.e. make products. Better visibility was supposed to lead to better decisions and better decisions were supposed to deliver return on investment.

Well, the ROI in most cases never came. Why is that?

The way it works in manufacturing is slightly different. The actual physical process in manufacturing is not centered on transactions, unlike in Purchasing as an example, where the transaction is central to the whole process. In manufacturing, the transaction is only a by-product. Therefore, there is minimal impact on actual process of manufacturing by automating transactions via software.

Let’s illustrate that further by comparing manufacturing with another function such as Purchasing.

In Purchasing, as you can see the physical process of procurement, in a non-automated environment resembles very closely with the automated process in ERP. For example, even before ERP systems came along, buyers in purchasing departments did exactly the same; they cut the Pos, negotiated with suppliers etc. ERP vendors also did a relatively decent job of matching the screens and UIs closely with the actual paper based forms for requisitions and POs etc. Unlike the older paper based system, in the automated environment, the user, in this case a requester or the buyer is creating the requisition or the PO directly in the ERP or the Procurement system and in many cases even sending it to the supplier directly. In addition to reducing the paperwork, the automation is also improving productivity and data integrity as the PO now is automatically available to an AP clerk. You see, there was net saving of cycle time per PO or Requisition. Initially that led to layoffs but to overcome the objections, the vendors changed the argument to “more time for productive causes such as negotiations with suppliers etc.”

Compare that with manufacturing now, where the physical process of producing goods has nothing to do with an IT system. Unlike Purchasing, you couldn’t argue that with an IT system that automates WIP reporting, you could make a particular product faster than before. In fact in some cases it slowed down the operators. With every physical activity that the user has to perform, he has to make a trip to the system screen and enter a transaction into the system.

There is another difference. A typical user in functions such as Purchasing or Accounting sat in nice temperature controlled office environment that the computer industry really liked. The operator on the other hand lived and worked in a relatively rough environment with large size industrial fans was used to dry the sweat.

The bottom-line is, it was hard to embed an IT system directly into he daily work life of a manufacturing user such as an operator. The real ROI in a Manufacturing process still came from where it had always come ever since the beginning of industrial revolution –by undertaking process improvements. The only way to make the process faster better was by making actual physical changes in the way the process was liad out or the way the work was performed. The early generation of Manufacturing IT systems didn’t deliver on that front.

So, is there no ROI in Manufacturing IT?

On the contrary, manufacturing provides an ideal opportunity for improvements and therefore ROIs, due to the complexity of the manufacturing function as a whole. To add to that, manufacturing function is typically the largest cost center for corporations involved in any type of manufacturing.

However as I said, the real ROI in manufacturing is typically elsewhere, in running Continuous Improvement (CI) programs that act on the actual physical process of manufacturing and help improve it. CI programs have been around since 19^th century, the earliest days of Industrial Manufacturing. The earliest CI programs can be traced back to F W Taylor’s theory of ‘Scientific Management’. CI programs keep appearing in various shapes and sizes and have dominated the sizable chunk of management books, Gurus and theorists.

CI programs are like religions in many ways. Even though unique in the path they follow, they methods they preach, they all lead to the same objective- operational excellence. The goals they lead to are quite simple – reduce cost of operating, improve quality and improve flexibility.

From manufacturing managers and some executive’s perspective, CI programs are extremely important. No Plant Manager prides himself on running the plant day in and day out, even though that takes most of his time. What they really like to show off to their management and the outside world are their CI programs.

The key to ROI in manufacturing is to somehow link the software to running CI programs. Software vendors are starting to get it and many of them already claim it. An ideal IT system targeted at CI programs should be designed from ‘Top Down’, starting with asking what information the users need to run their CI programs. They would simplify the designs and use the means best suited with this goal in mind – provide users the information they need not just to run their jobs but to run their jobs better. There is a big difference between the two.

- Providing the users information they need to run their job is important but not critical as most users have the information available today in some form or other.

- Providing the users information they need to run the operations better means telling them first how they are doing and giving them indications about how they can run it better.

An IT system that is targeted at running CI programs would focus on acquiring information from existing sources, automatic or manual before putting more systems that require the operators to enter data into. To take the point further, the system would let the users use what they are used to whether that is an existing homegrown system or a decades old paper based system.

A Manufacturing system that provides the foundation to run the Continuous Improvement programs in a company would have no problem proving return on investment for its customers.