Is Supply Chain Knowledge Key for ERP Implementations?

August 22, 2009

I used to work at QAD, a small manufacturing software vendor. I subscribe to a QAD chat group, and occasionally people ask questions like the one in the title.

It sounds as if the person asking is peddling something–who knows–but it’s an interesting question nonetheless. What kinds of knowledge are necessary (key) for an ERP implementation? If you run a manufacturing company, is APICS (that is, supply chain) knowledge particularly important?

Certainly, QAD used to think so. When I was an employee, you got a bonus for becoming APICS certified. (APICS is the American Production and Inventory Control Society; to get certified, you had to learn how MRP worked and how inventory should be managed.) And certainly, when the product was designed, the focus was on matching supply and demand. The product was built originally for Karl Lopker’s sandal manufacturing business, and the idea was always to have simple, usable product that managed inventory well.

So you would think that the answer, at least for QAD users, is, “Of course APICS knowledge is key. Duh.” But I don’t think so.

You see, while I was at QAD and then for some years afterward, I looked at a fair number of installations. And what I saw was disheartening, at least if you believed in good supply chain practices. The systems weren’t really using good supply chain practices, at least as APICS defined them.

Let me give you an example, which APICS-trained people will understand immediately. One of the ideas of these systems is to reduce the amount of inventory you have on hand at any one time. To do this inside the system, there are two parameters that you have to set, lead time (which is the amount of time it takes for an order to be fulfilled) and safety stock (the amount you want to have on hand at all times). The longer the lead time or the higher the amount of the safety stock, the greater your inventory expense.

So what would you say if discovered that in not one or even two installations, but many, the safety stock and lead time numbers for most of the inventory were set once, en masse, and then never set again? Well, I’ll tell you what to think. These figures, which are key to making the system work, are not being used.

Now this was not just true of QAD Software; it was equally true wherever I went, no matter what software was installed.

So doesn’t this say that supply chain knowledge is key, after all? If they had supply chain knowledge, wouldn’t they have paid more attention? At first, I thought so. But then after a while, I realized that more supply chain knowledge would have made very little difference.

You see, that’s not why they were using the software. All these companies, it turns out, didn’t really care about getting supply chain stuff right. They managed the supply chain fairly sloppily–tolerated a lot of inaccuracy and suboptimal behavior–and they got along (in their minds) just fine doing that. They didn’t want to put in the kind of care and rigor that is the sine qua non for doing with these systems what they were designed to do.

What were they using the software for? Well, mostly to manage the paperwork virtually. Please don’t cringe, Pam, if you happen to be reading this. This is not a hack on you. The plain fact is that the companies needed to keep track of their commitments (orders), their inventory, and their money, and that’s what they used the system for. They needed a piece of paper that told people what inventory to move that day and where to move it to. And the system gave it to them.

To do this, though, you didn’t need much APICS knowledge or, if you didn’t believe in APICS’s recipes for inventory management, other supply chain knowledge. All you really needed was to be able to count, which most of the users could do without being APICS-certified.

So is supply chain knowledge key for an ERP implementation? Not at all. You can have perfectly happy users who have got exactly the nice simple implementation they need without much supply chain knowledge at all.

This answer, of course, raises lots of questions. What is key? Why do these companies tolerate sloppy supply chain practices? Wouldn’t they be better off if they cleaned up their act. Herewith, brief answers.

What is key? At a rudimentary level, the financials. You have to get the basics right, here, or you’ll never close your books. In a system studied recently by a grad student at Harvard Business School, 65% of the inventory records were inaccurate. Can you imagine the upset if 65% of your account balances were incorrect?

Why do they tolerate sloppy supply chain practices? I think it’s largely because more finely tuned systems are much more brittle. They take a large amount of care and feeding and their ability to take hard, rude, unexpected shocks is limited.

And wouldn’t they do much better using the systems? In many cases, no. You see, at most of the companies I’ve run into, the MRP/APICS model that QAD (and every other software vendor) provided is not actually all that accurate. To make a really significant difference, you need more sophisticated tools that are better suited to the specifics of your supply chain.

Comments welcome.


5 Responses to “Is Supply Chain Knowledge Key for ERP Implementations?”

  1. Greg Jones Says:

    Brittle? More sophisticated tools needed?

    And those tools would be … ?

    Brittle is an interesting word choice. Are the APICS standards brittle? Or is the software? Or are the people?

    It sounds like a big part of your argument is that badly (ie with indifference to APICS standards) is typically ‘good enough’. And the other part of your argument is that following the APICS guidelines isn’t just ‘not good enough’ but potentially harmful.

    But the longstanding, canned, counter-argument is that you use what works from APICS and apply some common sense to not be so ridgit in implementing the concepts. To the extent that that argument holds, surely it is the brittleness of the people using, or not using, the system that is the bigger problem?

    Perhaps you are arguing that the common sense bits, those where a given company ignores APICS, are the bits they need dealt with in the ‘more sophisticated tool’. Maybe not. Is there a list of more sophisticated tools out there that you have in mind?

    In any event, it seemed to me that you ended the blog entry just as you were building up a good head of steam.

  2. Rafael Ordonez Says:

    OOps, looks sorry. If you are right, chances are, most people and companies are just throwing away a lot of money: they should get QuickBooks or any equivalent.

    I do not think so, QAD and other real ERP applications, do promote (by making easier or not so hard) a way to manage your supply chain, and it depends on the users, the managers, those who lead and wish to make a difference.

    There are a few articles by Dr. Larry Lapide (among many others) on Supply Chain Management Magazine and it shows how a better company does a better supply chain, so yes it might be that those you know about are not the best, still there is room to fail (as GM just did) how more should follow for being focus in GL which just tells what happened last months, and you need to know what is happening now and how could you shape the future.

  3. It is nice to hear some refreshing honesty for a change.
    I deal with small manufacturing businesses and I have heard dozens of reasons why it is unrealistic to specify lead times for many raw material pieces. Maybe if you are a GM, GE or a Ford you can demand adherence to predefined lead times from your suppliers, but for small businesses, constant lead times are frequently a pipe dream.
    I think understanding your supply chain is critical component to a successful business. I just think an MRP style of supply chain management is an idealized concept that does not fit for a lot of businesses.

    P.S. Nice WordPress theme 😉

  4. toppundit Says:

    You misunderstand. I didn’t say you can get away with using QuickBooks instead of QAD if you’re a manufacturing company. If you’re in manufacturing, you need to track both inventory and financials, and QAD (or any integrated system) lets you do both in a single system. This is a good thing.

    Glad you mentioned Larry, now recently retired. Kudos to him and all the good work he’s done. He and I were colleagues for many years at Benchmarking Partners.

  5. toppundit Says:

    Greg, thanks. Everybody complains that my blog posts are too long, so I stop as soon as I can. I just did a blog post on what I’m calling “brittle” applications. Hope that helps. As for the sophisticated tools, I’ll get to it right away.

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