By: Nelson M. Nones CPIM, Founder, Chairman and President, Geoprise Technologies Corporation
Today’s fastest growing and most highly valued industrial enterprises are specializing by focusing either on innovation and marketing while outsourcing production and logistics, or by delivering the outsourced manufacturing and logistics services. Outsourcers, in turn, create enterprise value as “manufacturing principals” who own — but rarely touch — the inventories of raw materials, semi-finished goods and finished goods that they procure and ultimately sell to their customers. For them, traditional enterprise resources planning (ERP) systems are costly and cumbersome to use because those systems were designed and built for the Age of the Dinosaurs.
Vertically Integrated Business Models Are Obsolete
The “dinosaurs” are vertically integrated industrial enterprises (Figure 1) which own and control manufacturing capacity at multiple stages of production, from resource extraction or manufacture of raw materials to finished goods production and even tertiary services such as consumer finance. Big oil firms, for example, are directly engaged in the entire breadth of the value stream, from “upstream” (exploration and extraction of crude oil) to “downstream” (production and distribution of refined petroleum products).
Figure 1 – Vertical Integration
These were among the world’s most valuable enterprises when measured by market capitalization as recently as four years ago. The largest, Exxon Mobil, boasted the world’s largest market capitalization as recently as mid-2013 but fell out of the top three after mid-2015. Another dinosaur, General Electric (GE), was the world’s most valuable company in 2004 but was de-listed from the Dow Jones Industrial Average (DJIA) in 2018.
After former CEO Jack Welch made it a key strategic priority, GE “invested $10 billion in IT since 1998 to make digitization a vital part of the company — from the ‘make’ side of internal process digitization, to the ‘buy’ side of sourcing and procurement, to the ‘sell’ side of customer transactions and service.” For GE, this meant implementing Oracle’s integrated suite of ERP applications within nearly all its business units.
From a supply chain management perspective, an integrated ERP application suite covers the full breadth of business planning and execution processes carried out by vertically integrated industrial enterprises, from forecasting through customer order processing and product costing (Figure 2).
Figure 2 – Integrated ERP Application Suite for Supply Chain Management
Specialization Is Quickly Taking Hold
Today’s “mammals” have replaced yesterday’s dinosaurs to such a degree that, as of this writing, the top three companies by market capitalization are Microsoft (1 trillion USD), Apple (989 billion) and Amazon (854 billion). None of them fit the definition of a vertically integrated industrial enterprise: Microsoft isn’t a manufacturer, Apple outsources nearly all its production to third parties, and Amazon, which doesn’t make a single thing, is currently investing most heavily in logistics and delivery services.
Apple, which formerly made all its products, began to adopt the “fabless” business model 20 years ago. Fabless manufacturing, originally introduced by semiconductor makers a half-century ago, is the design, marketing and sale of products which are fabricated or assembled by specialized firms such as Foxconn. This makes Apple the “manufacturing principal” and Foxconn the “toll” manufacturer (Figure 3).
Under toll manufacturing arrangements, the manufacturing principal hardly ever touches its own inventories of raw material, semi-finished goods and finished products. Those are consigned to toll manufacturing and third-party logistics (3PL) service providers, who earn their revenues from the manufacturing or logistics services they perform on the manufacturing principal’s behalf.
Figure 3 – Fabless Business Model
The trend away from vertical integration isn’t confined to electronics and semiconductor makers. Increasingly, pharmaceutical companies are relying on toll manufacturers and 3PL firms for packing and distributing finished drug products according to the exact regulations and marketing requirements of individual local markets.
It’s not just the shareholders of manufacturing principals like Apple who are benefiting from these arrangements. Amazon, another of the world’s three most valuable companies, catapulted over DHL and 48 other logistics firms to establish itself as the world’s largest 3PL company in 2017.
ERP Systems Designed for Vertically Integrated Business Models Aren’t Fit for the Future
A glance back at Figure 2 makes it clear that manufacturing principals do not require many of the capabilities found in traditional integrated ERP application suites. For example, principals who rely on 3PL partners don’t need distribution resources planning (DRP) processes — although DRP remains mission-critical for 3PL firms. Similarly, principals can skip the rough-cut capacity planning (RCCP), capacity requirements planning (CRP), shop floor control and quality control processes which are mission-critical for toll manufacturers.
Because they were originally built as tightly integrated application suites for dinosaurs, traditional ERP systems are unsuitable for mammals. Their underlying design assumes that most production will occur in-house and will be farmed out only occasionally to specialized subcontractors. For manufacturing principals, that design assumption renders traditional ERP systems too expensive to implement and cumbersome to operate, particularly in the area of shop floor control.
Businesses must maintain standard production routings in addition to bills of material when it is assumed that most production is performed in-house. They must also utilize those routings to release and track production orders in order to properly account for work-in-process (WIP) inventory, an important asset. That’s because raw materials and semi-finished goods are issued from stock before they are consumed in production, and finished goods are received into stock only after they are made and the necessary quality controls are completed. In between, those materials are only visible as WIP charged to open production orders, and never as stock.
Further, to support toll manufacturing operations, the traditional ERP design assumes that WIP belonging to a particular production order will be taken from an in-house production line, shipped to the toll manufacturer under a purchase order (PO) for services, and then returned to the in-house production line, before the production order can be completed.
For these reasons it’s easy to see why traditional ERP systems are so cumbersome to operate: they require manufacturing principals to release and track in-house production orders which do not actually exist. In the real world only the toll manufacturers need to release and track production orders using their own systems, while manufacturing principals only need to release and track POs.
Nevertheless, even though manufacturing principals rarely touch their inventories, they are required to keep records as if they did. For example:
- When inventories comprise a significant chunk of the balance sheet, manufacturing principals need clear visibility of those stocks in near real time in order to conserve their assets and avoid material misstatement risks;
- When potential warranty claims present a significant financial risk, manufacturing principals need immediate access to product traceability details — all the way down to specific lot and serial numbers — for recall containment and warranty claim verification purposes.
- Consumer safety laws regulations in many markets require manufacturing principals to keep similar product traceability records. Those who fail to comply risk losing their license to operate. Regulatory compliance is mission-critical for manufacturing principals in the aerospace, automotive, food, beverage and life sciences (pharmaceutical and medical device) industries.
Looking back at Figure 3, it is clear manufacturing principals must keep records of specific activities that are performed not on their own premises, but on the premises of their toll manufacturers and 3PL providers which could be located right next door or half a world away. In most situations this becomes feasible only when toll manufacturers and 3PL providers report those activities to the principal electronically according to a variety of industry-standard electronic data interchange (EDI) protocols such as RosettaNet for the electronics and semiconductor industry.
Unfortunately for manufacturing principals, toll manufacturers and 3Pl providers, traditional ERP systems create obstacles which make it prohibitively expensive to implement EDI between ERP systems supplied by different vendors. That’s because each of those ERP systems is only capable of sending and receiving data in its own proprietary format, yet none of those formats matches any of the industry-standard EDI protocols.
To resolve this dilemma, it is necessary to implement “middleware” which converts data in one proprietary format to and from data in another proprietary format — or to and from the format specified for an industry-standard EDI protocol, only to be converted later to the proprietary format which the opposite EDI system requires. If this sounds complicated, convoluted and confusing, well, it is; and it drives up the cost of implementing traditional ERP systems significantly.
GM-X ERP For Blockchain Is the Solution for Tomorrow’s Manufacturing Principals
The GM-X ERP for Blockchain application suite is a complete, flexible and innovative ERP system which meets all the enterprise and supply chain management needs of manufacturing principals:
- Master data management for finished goods, semi-finished goods or intermediates, raw materials or ingredients and third-party toll manufacturing or 3PL services, including product master and bills of material;
- Product costing to establish and regularly update standard as well as frozen (budgetary) standard costs by user-defined cost element; report purchase price variances (PPV) for raw materials or ingredients and third-party toll manufacturing or 3PL services; report material yield loss variances for finished goods, semi-finished goods and intermediates; and track actual cost by lot and/or production unit (serial number);
- Master production scheduling (MPS) and material requirements planning (MRP) to automatically create material replenishment requests whenever the on-hand quantity falls below the reorder point, based on reorder guidelines for individual products;
- Purchasing to raise and track requests for quotation (RFQ), quotes and purchase orders for products and services, and to receive materials from suppliers with drop shipment capabilities when materials are delivered to toll manufacturers or 3PL warehouses;
- Inventory control to track total quantities, quantities on hand, goods receipts, goods issues, inventory movements and transit status for individual products by owner and facility. Each facility can represent an on-premise warehouse, toll manufacturer site or 3PL warehouse. Inventories can be tracked by product, lot, serial number or by lot and serial number. They can also be tracked by containers representing hierarchies of handling units such as shipping cases, pallets and shipping containers;
- Customer order processing to raise and track sales orders, automatically create and manage stock reservations, prepare picklists, pick, pack and dispatch customer shipments; and
- Integrated multi-company and multi-currency financials including general ledger, invoicing, accounts receivable and accounts payable.
Unlike traditional ERP systems which unnecessarily force manufacturing principals to track WIP using production orders, the GM-X ERP for Blockchain application provides a one-step product conversion capability which maintains full forward and backward product traceability records linked to purchase orders for toll manufacturing or 3PL services. This saves significant amounts of data entry time and avoids data entry errors by eliminating the need for manufacturing principals to maintain product routings or track WIP using production orders.
The GM-X ERP for Blockchain application suite natively communicates with the ERP, manufacturing execution and warehouse management systems utilized by toll manufacturers and 3PL service providers, without any need for EDI middleware. That’s because it’s pre-packaged to support a wide variety of Web services and EDI protocols including:
- Private, permissioned blockchains that are easily configurable to support any required data format, provide unbreakable security, and transmit information as well as documents between manufacturing principals, toll manufacturers and 3PL providers in a form that is permanent, tamper proof and verifiable;
- RosettaNet EDI standard for the electronics and semiconductor industries; and
- Built-in application program interfaces (APIs) that can be exposed through a variety of Web service protocols including Simple Object Access Protocol (SOAP), Remote Procedure Calls (RPC) and the Web Services Security (WSS) Core Specification.
The manufacturing principals who are creating the greatest enterprise value today no longer need or want traditional ERP systems, which are too expensive and difficult to use because they were designed to support vertically integrated business models that have grown increasingly obsolete. The GM-X ERP for Blockchain application suite is an economical, flexible, future-proof and extraordinarily secure solution that is easy to implement and meets all the operational and financial accounting requirements of today’s forward thinking manufacturing principals.
Photo credit: Zach Dischner under Creative Commons 2.0 License