BY JAMES COOKE, EDITOR AT LARGE
techwatch
the fatal flaw in ERP?
THERE’S A MATHEMATICAL FLAW IN EVERY ENTERPRISE
resource planning (ERP) system, and Mark Payne says he can
prove it. More important perhaps, Payne, who is vice president of
worldwide operations for Linksys, has demonstrated in his own
operation that correcting this flaw can lead to big savings.
What’s the flaw? According to Payne, the problem lies in the
algorithms ERP systems commonly use to calculate the volume of
goods a company must manufacture in order to meet demand.
As he explains it, there are three basic variables in the output
equation: demand, production, and inventory. The flaw in the
ERPs’ approach, he says, is that they use inventory as the constant
in the equation. That’s led to widespread
problems among ERP users in synchronizing
demand with supply for companies that build
products to replenish stock.
“If you hold inventory constant, you get
overselling or underselling of products in the
demand side of the equation, which creates
the same variations in the production side of
the equation,” Payne says. “This variation
smacks your production line. That’s why
everybody has been saying ‘If we just had a
flexible supply chain, we wouldn’t have these
inefficiencies.’”
Payne believes he has a better idea. He has
proposed an alternate formula, one that
makes production—not inventory—the
constant and treats demand and inventory as variables. If companies would let inventory levels fluctuate while holding production steady, he says, they’d obtain the supply chain flexibility they seek.
Although Payne laid out his argument in a 2007 book, Make the
Numbers, Don’t Chase the Numbers, he still faces skepticism from
many quarters. “Traditional supply chain people just don’t believe
it,” he says. “They believe total inventory will go up … when in fact
inventory goes down.”
His thesis would remain theoretical except that Payne put his
ideas into practice when he went to work for Irvine, Calif.-based
Linksys, a division of Cisco that makes routers and networking
hardware. When Payne joined the company in 2006, forecast accuracy was 20 percent for the entire product portfolio, which played
havoc with Linksys’s capacity planning. And because production
was out of sync with demand, Linksys ended up air-freighting
nearly 40 percent of its shipments (at a cost of $5 per $50 router).
Payne contracted with Palo Alto, Calif.-based Symphony Metreo to develop a software application using a formula in which
production is held constant and inventory
fluctuates (within a defined range) according
to demand. The sales and operations planning group at Linksys currently uses this software to monitor inventory levels for each
stock-keeping unit.
As a result of the shift in its
approach, Linksys has been
able to cut its own weeks of
inventory on hand by 35 percent. Smoothing out the peaks
and valleys in production has
also helped the company do a
better job of shipment planning. To date, expedited shipments have plummeted from
35 percent to 3 percent of
orders, resulting in a 90-per-
cent reduction in these costly
shipments.
Incidentally, the current
application did not displace the company’s
ERP system; in fact, Symphony Metreo’s
Finance, Sales & Operations Planning
Manager solution uses data from Linksys’s
Oracle ERP system. “We run the production
signal through the ERP system, and tell the
ERP system exactly what to execute,” Payne
explains. “The difference is that we do not
allow the ERP system to think or solve; we
give it the answer and let it do what ERP systems do best… transact!”
Editor’s note: The book Make the Numbers,
Don’t Chase the Numbers is published by
Penworth Publishing of Humble, Texas. It is
available for $24.95. For ordering information,
visit www.makethenumbers.com.
