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Is there a flaw in ERP systems?

ERP pitfalls in build-to-stock business models stem from holding inventory -- not production -- constant, according to Linksys's Mark Payne. Here, he talks about how to fix the problem.

Mark Payne thinks there's something wrong with ERP systems -- at least when it comes to managing build-to-stock...

business models. ERP's pitfall is that it holds constant the wrong variable -- inventory instead of production line. He thinks companies should hold the production line constant and let inventory fluctuate within a range. To that end, he has developed software with vendor Symphony Metreo that he says enables companies to adopt this methodology on top of their current ERP systems.

This production scheduling technique and software has led to vast improvements where Payne has deployed it, including Polaroid and, currently, Cisco. Payne is vice president of worldwide operations for Linksys, where he's responsible for managing IT call centers, logistics and central engineering services, as well as sales and operational planning. With the adoption of his "Make the Numbers" methodology, customer inventory at Linksys has been reduced by 30%, backlog has been reduced by 60%, and write-offs were zero last year.

In this interview, Payne explains his methodology and how it's applied, and talks about some of the metrics he says a company can achieve once it's implemented correctly.

For more on production scheduling techniques
Learn why ERP is seen as an important tool in manufacturing and globalization efforts

Read a plant manager's guide to supply chain best practices

Find out what to consider for SaaS ERP

SearchSAP.com: So what's the flaw in ERP?

Mark Payne: [My] process is built for the business model where the customer expects immediate shipment when the order is placed.

When that condition is met, you must manage three different variables independently yet simultaneously. You have to build ahead of it and hold inventory. So you have to have a forecast by SKU, a build plan by SKU which begets inventory. And all those variables are basically independent variables, and only one of them can be constant.

The way the ERP systems are set up today is that they're holding inventory constant. If you have a build-to-stock business model and you're holding the inventory variable constant … by mathematical definition your answer has to be that the production plan is going to be just as wavy as your misses in the sales forecast line, because you're holding the wrong variable constant.

In my methodology, I flip that around. We basically hold the production line [as] constant as we can. Let the inventory flutter off the misses of the oversell[ing] and underselling of the forecast.

SearchSAP.com: How can companies put this methodology into place?

Payne: It's very difficult to wire an ERP system that way -- so we've developed a tool that sits on top of SAP or Oracle or any ERP systems … Symphony RPM. So in other words, I'm telling the ERP exactly what I want made by SKU, by week, when I want it shipped. I'm not letting it do lead-time offset, I'm not letting it do any math. I'm just telling it -- look, go execute, go cut the PO, collect the money, send the signals, get it shipped and keep all that data square. We're not devaluing the ERP system; we're just using it in a different way.

The inventory is never stagnant, it's always moving. My philosophy is to manage the details and let the computer roll up the results -- versus some board of directors or some management team saying, "Ya, I'm going to sell a billion dollars," and you have to say, "Of what?"

Make the numbers, don't chase the numbers. Set realistic expectations and then work the reality of the problem versus trying to wish a number to happen. If you chase the number, A, you're going to fool yourself, and, B, you end up doing things like: Well let's cut travel, let's cut pencils, let's defer expenses, let's fire people, versus the biggest lever in a typical business like the ones I run, which is cost to goods sold.

SearchSAP.com: How did you figure this out?

Payne: The ERP systems couldn't do what I was thinking.

It's just [that] the answer the ERP was giving was wrong, in my opinion, and it was backwards. We needed to flip that around, and there wasn't really a good way within the ERP system because your business hierarchies change over time. The ERP systems aren't as flexible as some of these tools you can sit on top of them.

It's a game board concept run at the SKU level over a week. We take that detailed data and we roll it up to get the multiple dimensions and … data hierarchies, to show marketing, logistics, suppliers, customers, everybody. We show everybody their view of the world off one set of data, and we have incredible control.

In a business where you're transitioning products like we are -- we're going from product A to product B to product C very quickly -- the ERP systems really don't do that well. Whereas this methodology, it's really clean. You don't have to manage tables in the ERP system. With the ERP systems, if you're transitioning from product A to product B, a typical setup of an ERP system will have orders trump your forecast. So, if you keep getting orders for the old product, it will want to go keep building it when you're trying to get off of it. It creates millions of dollars' worth of obsolesce, write-downs and all sorts of inventory problems, because ERPs inherently are inefficient at doing that.

SearchSAP.com: How long does this methodology take to implement?

Payne:

[It] takes me about three months. I can go into any company and have this fully operational in 90 days.

SearchSAP.com: Explain why this is an important methodology for companies to adopt now.

Payne: Would you like 5% gross margin improvement in the next nine months? Because your inventory goes down, your customer service goes up, your turns go faster, and you can level load your capacity -- meaning your suppliers or your own manufacturing facilities … run at their maximum optimal output. And you don't need as many people to run this kind of methodology. And you execute so much cleaner, and the visibility is so much higher, you make … much better decisions, and you get way out in front of the business. And your sales go up.

[In] the Linksys case study, we've reduced inventory by 35%, customer inventory was reduced by 30%, our backlog was reduced by 60%. We were expediting 40% of our overall volume. We're down to expediting 0.5% of our overall volume. I mean these are staggering numbers, because we changed the way we did business. We changed the process. We didn't just keep doing the same thing and expecting a different result. I took the same people and made them play a different game.

Mark Payne, who is vice president of worldwide operations at Linksys, is also the author of Make the Numbers, Don't Chase the Numbers

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