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Mass Customization: ERP Implementation Challenges and What to Do About It

by

David J. Gardner

Manufacturers are investing billions of dollars implementing ERP (SAP, Baan, PeopleSoft, Oracle, etc.) to improve operational efficiency. Yet, there is a conflict between traditional ERP implementation and a rapidly emerging force in the global marketplace: mass customization (also known as "build-to-order" or "assemble-to-order").

Mass customization can be defined as manufacturing one-of-a-kind products to a customer's exact configuration requirements with the same efficiencies expected for a mass-produced product.

For more and more industries, "mass production" is out; "mass customization" is in. In most cases, the transition to mass customization has been extremely painful. This pain stems from attempting to map the "mass customization" strategy to a traditional "mass production" ERP implementation.

ERP is a vital component in any successful "mass customization" program. However, manufacturers must understand how to exploit the strengths and overcome the weaknesses of a traditional ERP implementation.

Manufacturing Evolution

When manufacturers shifted from craft manufacturing to mass production, the customer could purchase only products the manufacturer decided to offer and build. In exchange for limited choices, the consumer would be rewarded with lower prices. The ERP systems that we know today grew out of this mass production paradigm.

Manufacturing basically instructed Engineering "give me a bill of material and we'll build you anything." Well, Engineering never forgot this. And, the result has been predictable-thousands and thousands of bills of material.

It's interesting that, in spite of all the top assembly bills of materials created, the customer never seems to want what Engineering has released. Customers invariably want something "similar," but with one or more variations.

Manufacturers responded with "engineer-to-order" as a means to allow the customer to get the exact configuration they needed. And, of course, Engineering had to create and release a top assembly bill of material for each customer's order configuration. "Engineer-to-order" brings mixed results:

· customer satisfaction increases,
· order cycle times increase,
· engineering must be involved in supporting customer orders,
· manufacturing costs increase,
· gross margins decrease, and,
· overhead increases as a consequence of the need to create and maintain very large quantities of bill of materials.

For many companies, "engineer-to-order" isn't a compelling operations strategy. It's addresses a key problem--customer satisfaction--but brought undesirable side effects.

Mass production and "engineer-to-order" utilize a traditional ERP implementation strategy-a top assembly bill of material defines the order requirements. Mass customization requires a different implementation strategy. What's different with mass customization?

· Under mass customization, the ERP sales order and work order replace the top assembly bill of material. The sales order defines what the customer needs in her terms. Subsequently, the customer's needs must be aligned with previously released parts and bills of material in a work order to drive the customer's order through the factory.

· The customer is in the driver's seat with respect to getting exactly what they want. Headquarters no long attempts to decide what configurations the customer will want. The customer selects the product configuration they want from the options available.

· The manufacturer eliminates finished goods inventory. The focus shifts to building and shipping orders, not building finished goods in the hope that someone will want to purchase what the manufacturer has in stock.

· Customer satisfaction increases while the problems associated with "engineer-to-order are eliminated:

• order cycle times decrease
• engineering does not need to be involved in supporting order demand
• manufacturing costs decrease
• gross margins improve, and,
• the need for top assembly bills of material can be reduced up to 99% freeing Engineering to work on new products and enhancements to existing products.

Most companies attempting to implement mass customization continue to create bills of material to support individual orders thinking that they are a "mass customizer." This is a costly mistake that brings with it all the problems associated with "engineer-to-order." If Engineering isn't going to create top assembly bills of material to reflect actual (or anticipated) order configurations, what should they be doing?

Engineering's Role In Mass Customization

In a mass customization environment, Engineering is responsible for:

1. Defining and releasing the modules (basic product building blocks, features, and options) that will be used in producing customer orders,

2. Defining the mapping between the sales view of the building blocks (models, features and options) and the manufacturing view (parts and assemblies).

3. Defining the technical feasibility and expert knowledge for combining modules into actual configurations, and,

4. Supporting the integration and release of new features and options into the product line.

These are much higher value-added activities than creating and maintaining bills of material to support order configurations. If Engineering is no longer creating top assembly bills of material, how do they communicate allowable configuration information with the rest of the enterprise?

Engineering needs a means to capture the expert knowledge concerning the configurability of products. Such functionality is not available as part of ERP. For simple products or in situations where it is not cost-effective to generate a sophisticated information technology application, a paper-based configuration guide may suffice. Otherwise, a software application will be needed to capture and manage the expert knowledge about products.

Leveraging Configuration Knowledge Across the Enterprise

The expert configuration knowledge can be shared across the enterprise to support functions such as:

• Providing a means for a customer, dealer, reseller, or sales to properly configure a customer's order.
• Providing a means for Marketing to restrict the set of choices available to a customer even if the choices are technically feasible from an Engineering point of view.
• Validating a customer's order requirements.
• Conducting a "what-if" configuration analysis to determine product costs and lead times based on the presence or absence of certain features and options.
• Quoting.
• Forecasting.
• Mapping the customer's order requirements to the parts needed to actually manufacture the product. For example, if someone configures a truck, they would need to specify an engine and a transmission. The interface kit that mates the engine with the transmission would need to be added to the order even though the kit is likely not an attribute that the customer would specify on the order.
• Determining the parts the factory actually needs to manufacturer the customer's order based on plant-specific and engineering-specific product changes that are in the queue.
• Staging products under development for future release.

The Role of ERP in Mass Customization

In a mass customization environment, ERP accommodates all traditional manufacturing company functional needs: parts item master; bills of material; supply chain functions such as inventory control, material requirements planning, purchasing, production control; sales orders; and accounting.

However, other than bills of material, ERP does not provide any means for Engineering to define configurable products. Engineering needs to have a mechanism that is outside of ERP but can be easily integrated with ERP to accommodate this need. And, why does Engineering need this tool? Engineering is the only organization that has the expert knowledge about products required to support this mission-critical business need.

What About Sales Configurators?

Mass customization is an enterprise-wide business strategy, not a "front-office" or departmental problem. Effective mass customization implementations will favorably affect Customers, Sales, Marketing, Order Administration, Engineering, Manufacturing, Service and Finance. Sales Configurators are generally "front office" tools that do little more than automate the price list.

In general, Sales Configurators are not integrated with the "back office" and therein lies the key problem. Customer order requirements must be interpreted by Order Administration, Engineering and/or Manufacturing. This introduces errors and operational difficulties that adversely affect customer satisfaction. The customer's order is seldom (if ever) in alignment with the bills of material and the expert product knowledge.

A Sales Configurator can actually be a step backward as senior management incorrectly believes that it solves an enterprise-wide problem when quite the opposite is true.

Conclusion

In a mass customization program, Engineering no longer provides top assembly bills of material to describe each customer configuration. The top assembly bill is replaced by the ERP sales order and work order. Engineering's role shifts to defining the modules and managing the configuration rules that govern how the modules can ultimately be used. Different tools need to be employed than are offered in ERP to facilitate this enterprise-wide need. This expert knowledge can then be easily integrated with ERP.

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If your company offers configurable products, you may be looking for ways to: 

• Respond to more bids in a shorter lead time
• Properly set your customer's expectations about what you can offer
• Increase your order "win" rate
• Get buildable orders into the order backlog more quickly
• Ensure you understand your order configuration profit potential before you accept an order
• Dramatically reduce the Engineering content per order configuration
• Free up Engineering resources to work on new products and enhancements to existing products rather than being limited to supporting order demand
• Reduce Engineering errors that affect downstream efforts
• Smooth the production flow and eliminate production delays due to missing parts
• Get more capacity out of the same physical assets

Transforming a company from its current state to become a lean, efficient organization involves new thinking, new technology, and a highly-focused effort.  This initiative requires a holistic approach.  This is not the problem of a single department nor can it be resolved by the efforts of a single department. 

We've got the track record and expertise to help your company with this mission critical initiative. 

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