Nearly 100% of U.S. manufacturing companies above 50 employees rely on a type of software called “ERP” – Enterprise Resource Planning – to manage their operations and financial reporting. SAP, Oracle, Microsoft, Infor and Epicor are leading companies in this space. The underlying algorithms of the software have remained largely unchanged since the 1980’s. These companies have “re-skinned” their products, without adding significant changes to meet the core challenge of any manufacturing operation – that is, to achieve a state of coherent collective action – everyone working on the right thing at the right time.
Consequently, the factory’s knowledge workers tend to work out of sync. Across two decades in many environments, I’ve observed that 20-60% of effort expended – by salespersons, contract managers, customer service, planners, buyers, schedulers, supervisors – is wasted on intracompany competition for scarce resources. The ERP software does not produce a coherent, achievable plan and schedule.
ERP’s don’t have complexity metrics. That is the problem. But first, let’s talk about what an ERP does have.
At its core, an ERP is a data store and transaction engine. It describes (models) an environment, and then serves as an informer to describe the current state of things and what should be done next.
The foundational level of an ERP is called the Configuration level, and describes the business itself – the operations sites, the machines and other resources, the employees, the inventory warehouses and locations, the financial chart of accounts and the rules for how financial transactions are generated when transactions are done.
Sitting on top of the configuration level is the Master Data level. Master Data is simple – it describes the business’ products and trading partners. This includes suppliers, customers, products and components, bills of material (BOM’s) and routings. A BOM is a list of ingredients used to make a product, and a routing is the set of directions, or steps, to make it.
Once we know who we’re trading with and what sort of thing we make and do, then we can setup the Order level. An order is a commitment to do something in the future. There are three kinds – a commitment to sell, called a Sales Order; a commitment to buy, called a Purchase Order (PO), and a commitment to make something, called a Work Order, or Job. There are also financial backlogs, such as Accounts Payable (AP) Vouchers – promises to pay a vendor in the future, and Accounts Receivable (AR) – money the firm expects to be paid for services rendered. So our ERP keeps a list of orders, and the ones that haven’t happened yet are called a backlog, and completing these orders are the basis of our future actions.
Going up the dependency ladder, next is the Transaction level. Transactions are records of the past. They describe events that have occurred – receiving goods or services from a supplier (PO Receipt), or making a product (Job Completion), or shipping a product to a customer (Sales Order Ship). Likewise when a check run is completed or payment is applied, financial transactions are created.
Next we have the Balances level. Balances tell us how much money, inventory, and work in process we have in the present. The General Ledger (GL) with its journal of financial transactions provides perpetual balances that describe how much money we owe to whom, and are owed, and have in bank accounts. Likewise, the Inventory Balance describes how much and how many finished products and components we own. The WIP Balance tells us the value of every product we are working on but haven’t yet completed.
Finally, the top level of the ERP is the Reports level. Reports provide visibility to all of the information in the system, so humans can see what is going on and decide what to do next.
ERP software provides the human-readable screens for employees to enter this information and perform the transactions. Most also provide connectors so that this information can be imported from other software.
ERP software is impressive, no doubt. For decades it has helped millions of businesses manage their operations and financials. But, we live in the Age of Data now, and it is time to move forward, and build something in addition to the ERP, that handles a much broader spectrum of problems and engages the employees in a more nuanced, sophisticated fashion.
If the ERP vendors don’t wake up to the reality of Complex Systems, and build in the data structures to support full engagement with the human workforce, addressing a broad spectrum of problem solving activities, orchestrating the collaboration of cross functional teams in real-time, they will be replaced or become a sub-system that interfaces with other software only, not humans.