How to achieve Operational Excellence with ERP?
How to achieve Operational Excellence for sustainable profitability is a question that bothers most manufacturing companies. Even more so, in the case of manufacturing companies whose raw material costs and finished goods costs, are market-driven. Such companies only have control over their internal processes. How can they maintain profitability in such situations? The only solution is to achieve Operational Excellence.
Let us now briefly touch upon what is operational excellence? what are steps to operational excellence and then get into practical aspects of how manufacturing companies can leverage ERP to achieve operational excellence
What is Operational Excellence?
Wikipedia describes “Operational Excellence” as follows:
“Operational Excellence is the execution of the business strategy more consistently and reliably than the competition. Operational Excellence is evidenced by results. An Operationally Excellent company will have lower operational risk, lower operating costs, and increased revenues relative to its competitors. It may more simply be interpreted as “Execution Excellence.”
What are the Steps / Strategy to achieve Operational Excellence?
It is quite apparent, that in order to achieve operational excellence it is necessary to clearly define the operational excellence goals of the manufacturing organization. Then, put together a team, which is aligned with the vision & capable of motivating their team members to relentlessly works toward achieving operational excellence. Management should provide the necessary resources in terms of software, technology, tools required to achieve operational excellence. Some companies may also decide to use six sigma, lean thinking and so on. Management must conduct frequent & regular meetings to check the progress and measure the manufacturing KPIs set in order to take corrective actions as early as possible.
How to achieve Operational Excellence with ERP?
ERP software integrates all important processes of an organization such as planning, production, purchasing, inventory, sales, marketing, finance, human resources and gathers real-time data into a centralized system from various departments, locations, business verticals.
Manufacturing companies can leverage ERP software to define and implement business flow, to describe rules & guidelines as well as implement validations and checklists for almost every activity in the organization. Let us now see how ERP is a great mechanism to define and roll-out strategies for operational excellence.
1. Procurement Policy
Procurement is a strategic function that has a direct impact on the profitability of a manufacturing company. An ERP Software with an integrated eProcurement solution digitizes, streamlines, automates vendor registration, demand aggregation, sending requests for and inviting quotations, comparative statements, shows vendors providing lowest landed rates.
Given below are some guidelines to achieve excellence in Procurement.
- Implement a companywide procurement policy
- Aggregate demand indents from functions, locations, and departments.
- Place bulk orders with staggered delivery to get competitive prices from suppliers
- Discover more local suppliers who can provide quality materials
- Plan logistics well in advance in order to ensure timely deliveries and save costs
- Before purchasing cross check if any material is available in stock and whether it can be used with a little modification.
With this, now, you have improved negotiation edge to command rate contracts, price protection, etc. Ultimately you will be able to procure goods in lower cycle times at optimal costs. Thus, you will achieve fairness, transparency, speed & cost-efficiency in Procurement.
2. Optimum Inventory
Manufacturing companies must ensure optimum inventory levels to ensure continuous production. They must avoid situations of stock-outs or overstocking.
Overstocking not only locks-in the working capital of an organization but also leads to additional expenses on warehousing, storage, insurance, material handling and so on.
On the other hand, a stock-out of any critical items can bring the production to a grinding halt, resulting in heavy losses for a company.
How ERP helps to achieve excellence in Inventory management
- Material Requirement Planning methods help plan inventory requirements
- Tracking of inventory across multiple locations
- Real-time, accurate knowledge of inventory & items in stock across an organization
- Define reorder points to send notifications, alerts if inventory falls below the xxx level
Thus companies can ensure optimum inventory. This also ensures a healthy working capital.
3. Real-time Information & Approvals
Quite often we observe that a process gets delayed because the right information is not available to the right people for making decisions. Or requisite authorities are not available for approvals and so on. The answer to this is to ensure, real-time, accurate data and information, visibility into process & approvals for the entire organization.
How ERP helps achieve excellence in processes & approvals
- Companies capture real-time data in digital format, & store it in a centralized system
- Everyone in the organization has real-time, accurate visibility of operations
- ERP Mobile apps provide access to required information & facility to enter the relevant information into ERP directly from remote locations.
- Senior Management & Field Employees receive information, reports, notifications, alerts for transaction approvals based on their roles and authorization limits defined in ERP to perform their tasks while on the Go!
Effectively, this gets rid of delays and bring speed in business processes
4. Find Cost-Effective / Alternative Methods / Items to increase efficiency
With the implementation of ERP, there is a significant saving in manual & paperwork; reduction in a lot of repetitive activities. This reduces the chances of delays & errors. With instant notifications, alerts & approvals, there is improved collaboration with the manufacturing company.
Employees can now focus their energies on more significant & value addition work that directly contributes to the profitability of the company.
How ERP indirectly help to find cost-effective methods?
With more time at their disposal employees can work towards:
- Aggregating company-wide procurement demands to improve negotiation leverage
- Discover more suppliers in their niche and ensure a health supplier database
- Build relationships with suppliers to get insights alternate raw materials, consumables
- Identify alternate cost-effective materials without compromising quality
All these will eventually lead to reduced procurement cycle time, reduced production costs and improved profitability
5. Sound Financial Health – Timely Collection & Payments
Sound financial health implies a healthy working capital. Every organization must ensure timely collections from customers. Similarly, timely payments to suppliers, help create goodwill, build trust and ensure long term healthy relationships with suppliers.
How ERP helps ensure timely collections & payments
- With ERP, you can define credit value & maximum credit days for each customer. When credit limits are reached, ERP provides warning messages to restrict further transactions.
- With “Dunning Process” ERP sends automated & frequent reminders to customers for ensuring payments are received on time. This results in faster processing of amounts receivable and lowers possibilities of bad debts.
- ERP accounts payable module helps efficiently manage vendor payments. Set alerts for payments due as per agreed payment terms to establish trust and ensure a healthy supplier relationship.
6. Timely Production
Smooth & continuous production is the primary requirement of a manufacturing company to ensure Timely Production & time to market. We can define success factors for Timely Production as follows:
- Timely availability of materials
- Proper Production planning
- Maximum Plant Uptime & optimum utilization
- Proper coordination among all departments locations
How ERP helps achieve timely production?
With the help of ERP, a manufacturing company can design a proper production planning schedule. ERP provides real-time insights into inventory, helps define re-order points for replenishment & so on. ERP ensures regular inspections, checks, servicing of equipment, for preventive maintenance for optimum utilization of machinery. ERP provides real-time accurate data to ensure better coordination among teams spread across various locations.
7. Minimize Rework & Rejection
Rework or Rejection both are harmful for manufacturing companies, as they result in a loss of time, wastage & material overuse.
How ERP helps minimize Rework & Rejection?
ERP can help set up stringent quality guidelines as well as checks and validations at every stage of the production process. Moreover, ERP provides a specific feature to collect root cause rework & rejection, thus providing a “Root Cause Analysis” report. Manufacturing companies can collect, compile and analyze this data over a period of time, to prevent future occurrences of Rework & Rejection.
8. Waste Reduction
Waste is inevitable in manufacturing. While it is impossible to eliminate waste completely, manufacturing companies should always focus on opportunities to reduce waste, try to find innovative ways to reuse the scrap/waste in other processes or products to save money. You should also keep a close watch on the industry standards for ensuring you are at par or better than the competition in managing waste.
Let’s consider the example of Fabrication units. Earlier, the fabrication industry had about 7% – 8% raw material waste while cutting. However, they have now adopted Nesting Software, which automatically & efficiently arranges manufacturing parts optimally on sheets or plates of raw material. It optimizes the use of raw material without sacrificing quality.
Nesting software can be integrated with ERP in 2 ways; either at the time of material requirement planning or at the time of material issue for job-based industries. Thus, you will be able to optimize both the purchase as well as the consumption of raw materials.
Thus, fabrication units are able to minimize the waste to about 2% – 3%. This reduction of waste/scrap not only saves money but also improves the bottom-line.
9. Maximum Uptime, Utilization, Productivity, Minimum breakdown
Having plant, machinery and assets in peak physical conditions are essential for manufacturing companies to ensure continuous & efficient production. Ensuring maximum uptime and minimum breakdown or downtime, implies more production, faster time to market & higher chances of profitability.
How ERP Plant Maintenance Module helps ensure Maximum Uptime & Productivity
- Saves information of all plants, equipment, their locations, details about annual maintenance contracts, repairs and renewals, spares & warranty details.
- Defines conditions & triggers for preventive maintenance
- Stores schedule of regular inspections, checks, servicing of equipment, machinery
- Provides alerts and notifications to ensure timely inspections and maintenance
- Tracks when where & how downtime occurs to prevent future occurrence
- Sets conditions for the replacement of old & obsolete equipment to improve production
All of this helps to ensure peak conditions of equipment and machinery and maximum utilization for optimum output.
Operational Excellence is not a destination. It is a continuous journey to achieve excellence in every aspect of business operation. ERP Software is a great mechanism to define and roll out your strategies for Operational excellence. ERP facilitates the optimum utilization of machinery, materials, manpower, money and time to boost the profitability of your manufacturing organization.