ERP for a Medium Sized Manufacturer: Supply Chain

As a medium sized manufacturer, your supply chain is important, and manageable. Most of what you do evolved as a means of supporting your original business idea, and your supply chain expertise relies heavily on experience and learning from mistakes. Supply chain relationships with your vendors and customers are friendly and collaborative, and there is an undertone of partnership. As you look to the future, however, you wonder if your current procedures are scalable, and if there is any chance your close relationship with vendors and customers ever causes you to leave money on the table.

ERP can play a significant role in helping to answer these questions and concerns. If you are a medium sized manufacturer considering implementing ERP software, the toughest job you will have in determining how to utilize a solution to help you continue to grow will be in establishing the rules under which you wish your supply chain to operate. Discount the previous statement as motherhood and apple pie at your own peril; it is failure to understand the implications of ERP supply chain rules that most often causes an unintended and unpleasant business consequence to pop out somewhere unexpectedly.

Understanding Supply Chain Rules

If the phrase “supply chain rules” is meaningless to you, consider: If you increase safety stocks, inventories and service rise. If you increase lead times, inventory rises but service does not. If you decrease expected yield, overages increase. If you increase standard production run size, unsold inventory and obsolescence increases. If you make to stock and do not maintain sufficient inventory, service deteriorates. Rising inventories, deteriorating service, rising overages, and rising obsolescence all have negative financial effects, and it is difficult to track each problem back to the rules that created it.

There are two strategic choices that a medium size manufacturer needs to make about the future of its supply chain. (1) Are we going to be a make-to-order, or a make-to-stock business? (2) What do I want my service level to be?

Make-to-order is generally financially advantaged, but requires near flawless manufacturing execution in order to deliver competitive service levels. Make-to-stock normally yields better service, but at the cost of higher working capital and greater long-term obsolescence.

Determining what you want your service level to be is not easy. If your objective is the best service in the industry, that level of service can come at a steep price. On the other hand, if your goal is not to lead the industry in service, then how do articulate clearly what your service objectives are? If you don’t, you will find that your teams working in service functions are always over delivering service, even at the expense of your cost and financial objectives.

Because supply chain has so many upstream and downstream implications, good decisions are essential when it comes to ERP for a medium sized manufacturer. If you have already delegated those decisions, take time to figure out how far down the chain of command those decisions are being made. Then you will know who really decides how your company will operate.

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Tom Stephenson

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Tom Stephenson

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