Vendor part numbers – good idea or a bad plan?

It seems that every few months I am posed with a similar question from clients. They ask me about the impact of creating vendor specific part numbers in their inventory. It seems that they believe they would get more information about an inventory item if they set up each unique vendor/item combination as a different part number also some feel if they order the materials using the vendor part number then there will be less confusion for the vendor and quality data would be easier to track.
My reply is pretty basic – don't do it. Here are some reasons.

1. Most ERP systems today support a Vendor/Item relationship. For those that do this they also provide a vendor part number, minimum order quantities and pricing associated with the vendor/item combination. When the PO is printed the Vendor part number is printed instead or in addition to the inventory number.
2. If you have vendor part numbers in your inventory then when you perform a physical inventory you will need to count each item separately. You will also want to segregate the inventory from each other to facility finding the right part number when it comes time to use the inventory.
3. When you consume the inventory you will need to specify which vendor item is being used. This requires more effort by the production folks and typically leads to less accuracy.
4. Reporting becomes more difficult. To review usage of a material across vendor you would have to add values from multiple items. If these items are not in sequence then the task of reporting becomes much more difficult.
5. Quality data should be tied to a LOT and not a vendor item number. You can still get the same quality data using a common inventory part number as long as you are lot tracking. The lot number will tie the receipt to an inventory item and also to the vendor.
6. When you create formulas you do not want to substitute vendor item numbers from batch to batch. This will cause much more work than is necessary with little to no return.

So in a nutshell – there may be some reasons that at the surface look like a good idea. But take my word for it. There are a number of ways to get you to the goal – adding vendors to the part number very rarely achieves the desired result.

Increase Profits by Reviewing Material Costs

How would you like to add 5% directly to your bottom line? Here is one way without much effort.
In changing economic conditions it is one thing to know your existing production costs it is another to anticipate changes before they happen. Far too few formula manufacturers have insight into upcoming production costs until it is too late. That is a bit like driving your car by looking in your rear view mirror.
Imagine the scenario where you could monitor your current production costs with an eye to changes coming in the future. What would you do with this information? Would you begin to look for alternative sources of materials? Would you work with R&D to identify replacement materials in your formulations? Would you brace your customers for a potential price increase? Any and all of these options are valid and each can add profits to your bottom line.
So how can you do it? The key is in knowing what material costs are changing in the future as well as what effect these changes have on the production cost of the finished goods.
The first part – knowing that material costs are changing – is the easier part of the challenge. If you can work with your vendors to get a better idea of when they anticipate price changes or if your material is traded on the commodities market you are most of the way there.
Spend some time looking at your most used materials in production. Specifically target those with relatively high costs per unit. Price changes in these products will have the greatest impact on your production cost. Then review the price fluctuations over the past couple years of this ingredient. Finally talk to some providers in the market. What are they seeing with this ingredient? Without much effort you can identify the key ingredients to monitor and gain some insight into the anticipated cost changes in the future.

Identify ingredients (high volume/high cost Review price fluctuations over the past couple years (higher fluctuation is key) Talk to suppliers in market about upcoming costs

Now that you have key items to monitor the next step is to calculate the affect these changes would have on your production costs.
Identify all formulas in which these ingredients appear. This should be a pretty basic where-used function in your manufacturing system. Once you know these formulas replace the existing cost with the proposed cost. The result is your new production cost for this formula. How does this compare with the existing formulation cost? It is enough for you to absorb or do you need to take corrective action?
Some formula manufacturing systems have functionality that will virtually automate the analysis step. The following screens are from Vicinity Manufacturing's Proposed Cost functionality
The user is able to select components (ingredients) and manually enter proposed costs or alter the costs by a % of current costs. With this table in place the Cost Rollup functionality is used to identify the formulas affected and calculate the new cost as seen below.



Whether you use an automated tool such as the one provided by Vicinity software or you do this manually with your existing system the results are the same. Find out what items impact the productoin costs, research and identify the proposed material cost and finally calculate the effect this change will have on your formulation costs.
This knowledge will go a long way to provide corrective action that will increase profits without making significant changes to your production process.

Replacing formula manufacturing systems – when it is time to change? – Part 2 Obsolete Software

While on a trip back from visiting clients in Barbados I was listening to some newly downloaded tunes on my trusty 5-year old iPod. I was blissfully content with my eclectic mix of Bob Marley, Rolling Stones, Katy Perry and Rhianna. Little did I realize the "kid" sitting next to me was doing the same on his brand new iPhone. The difference was that he had all these really great applications on his iPhone that I did not realize existed.
Not to be outdone with multi-tasking I pulled out my notebook computer to get some work done while I listened to my music mix. My new friend continued to read downloaded new stories, queue up emails to deliver when we land, update a white paper he was working on as well as sort through hundreds of photos stored on his phone. He was a busy fellow.
As a self-proclaimed "geek" I was amazed at how far behind I had fallen with my poor single purpose iPod.
For me it was a wakeup call that the world had moved on. Instead of multiple large devices this kid was running circles around me and loving every minute of the experience.
That got me to thinking about my clients and potential clients. How much has changed in technology that we are not taking advantage? What am I doing to help these realize the potential that can assist them today? That brings me to the second installment of "Replacing formula manufacturing systems".
Many formula manufacturers are running on systems purchased and implemented in the 1990's. Many of these were selected as a reaction to the Y2K issues in 1999 and 2000.
Since that time much has changed in the formula manufacturing industry.
Technology

• SQL Server has become the default database
• .Net Framework for easy integration with other systems
• Virtual servers or hosted environments

Work environment

• Teleworking
• Toll Manufacturing / Outsourcing
• Mobile access to data (smartphones/iPod)

Compliance

• Country of Origin Labeling
• Allergen disclosure
• MSDS / Nutritional Analysis

Customer/Vendor interaction

• Relationship tracking with CRM
• Electronic Funds Transfer
• Web based access to data (MSDS, COA)

The challenge for many companies is to look internally and see what their old legacy systems are offering and what have they just learned to live with. Has the world passed you by? Is your system living in the 1990's while your customers are living in the present?
I good way to get a reasonable assessment of your current system is to ask your colleagues. I would suggest asking your existing suppliers about their systems. What features do they have that might assist your company? How are they addressing similar business issues and can you get that out of your legacy system? If not – it might be time for a change.
In working with our clients or new prospects a couple common reasons emerge.

• Hardware is obsolete but the company is concerned that the software will not be supported by the new hardware
• Sales is requesting more information about customer demand
• Compliance officer is addressing issues with outside applications such as excel
• Scheduling is performed manually or with limited system assistance
• Communication with customers/vendors is manual and not tracked

The fact is that the world has changed. Software has really stepped up to the plate for formula manufacturers over the past 10 years and it is not uncommon for new systems to pay for themselves within 12 months. That is a quick return on investment and is progress that pays dividends for years moving forward.
So how do you go from the 1990's into the 2000's without breaking the bank? How do you pick from qualified manufacturing systems?
Here are some key points to remember if you feel you have room for improvement

• There are a few large ERP players in the market right now – look at them first (Microsoft, Sage, SAP, Infor)
• Eliminate all discrete/assembly/BOM manufacturing applications from consideration – there are plenty formula manufacturing applications out there
• Be careful of the "boutique" message that "all-in-one" solutions is the only path – a small company writing all the software running your business is very dangerous and often falls short as times change and the small company can't keep up with the changes
• Select a new application to solve key business issues not just features – take some time to look at what you could do that would bring cash into your company and find an application that delivers on that vision
• Ask vendors, trusted customers, advisors and search the various web sources to find candidates to replace the legacy system – if the application does not speak about your industry on the first page of their web site - move on
• Forget the RFP process. If you cannot tell that an ERP system is written for your industry then you need to move on. When you come across one that focuses on your industry you will know it. There is no reason to pay a consultant that knows little to nothing about your industry to help you find potential solutions. The software developers have done a great job making them known. Instead search the web using words key to your industry, review trade show exhibitor guides, ask the major ERP suppliers how they handle formula manufacturing and ask anyone who knows your industry.

The truth is that most companies review their ERP solutions at least every 5 years and most change system or significantly upgrade systems every 10 years. How old is your system and is it time for a review or a replacement? The odds are you have unsupported business issues that can be solved by an updated application. The odds are also good that the new system can be paid for within 12 months. So what are you waiting for?
For me – I am going to start looking at alternative systems to my trusty Blackberry and iPod. I am ready to do more with my single handheld device and do more with my time when I am ready to do the work. That is where technology has progressed and I need to get on board.
So check back in the future and monitor my progress. Also if you find your systems are less than ideal and are looking to change feel free to contact me. Also check out Vicinity Manufacturing at www.vicinitymanfucturing.com to see what a formula manufacturing solution can do for you today.
Up next? We will talk about replacing the custom written software. See you then.

Replacing formula manufacturing systems – when it is time to change? – Part 1 Excel

Change comes hard to many of us. My friends will agree that I am not immune to this. I personally over analyze the situation looking for reasons to keep the status quo. While on occasion this serves me well its result is often missed opportunities and sticking with a situation much longer than warranted.
In more than 20 years of implementing systems for formula manufacturing companies I would suggest that there are many of you in the same boat. Many of us are holding onto existing ERP system well beyond their useful lives.
Like me holding onto my obsolete phone system many are holding onto formula manufacturing systems well longer than we should.
In the following blog entries I will provide insight into the primary reasons formula manufacturers typically hold onto their obsolete solutions, key indicators that a time has come for a change and alternatives to the current systems.
In my experience there are 3 primary categories of formula manufacturing systems that need to be reviewed and serious consideration should be given to determine if they are still providing value to your organization.

1. Excel spreadsheets running the formula manufacturing business
2. Obsolete formula manufacturing application that is no longer up to date
3. Custom written solution that has not been updated with changes in the business environment

Excel spreadsheets – While I have never seen a static supporting this claim I think it is a fair assertion that the most prolific formula manufacturing solution on the market today is – EXCEL.
You would be amazed at how many companies trust their greatest asset – their formulas – with an easy to customize but impossible to integrate tool such as spreadsheets. Every month I am approached by companies that store all of their formulas in hundreds – if not thousands – of spreadsheets or one mammoth spreadsheet. Over time they have become obsolete and the company is dependent on one person to update and maintain the data. Great job security if you can get it.
It is obvious to me why these installations exist.
In the infant stages of a formula manufacturing company the R&D director (or equivalent) decided that writing the formulas on the backs of envelopes or in the lab notebook was "old school' and there was a better way to centralize the formulas. Armed with their version of Excel that shipped with their desktop computer version of Microsoft Office they began creating spreadsheets to store this data. After all the software was already owned, Excel is easy to use and new employees already had experience with the tool. What more would we want?
Well as time went on one copy of a formula became the basis for another formula. Someone requested more information to be tracked and every subsequent formula had this new addition. Changes to existing formulas made duplicates of the master formula and often multiple copies of the formulas were stored on various workstations. You know – just in case something happened to the original.
This approached worked fine as long as only one person maintained the formulas or virtually no changes to the formula structure changed. Also as long as no one needed any information across multiple formulas or the inventory data (such as price) never changed – then you were golden.
Well life does not work that way. Things change. Yes I said it – things change – and so should we.
With the growing compliance requirements such as Country of Origin, allergen disclosure, SQF audits and HACCP our life is no longer simple enough to be trusted with a spreadsheet written in the back room of an R&D laboratory. Instead formula manufacturers need centralized formulas that feed production data. We need formulas that have integrated QC functionality and the ability to perform cost rollups on the fly without additional data entry.
Excel spreadsheets are fine for analysis of existing data – such as yield trending or material usage – but to store master data such as formulas and batch tickets – we need a database oriented formula management system.
So are you one of these companies relying heavily on spreadsheets to store your master formula and production data? If so take a long hard look at what you are building. Do you really think it can continue into the future? The odds are against that design. Fortunately with enlightenment comes education and with education comes change. I am a poster child for that enlightenment – once again ask my friends.
Over the past 20 years many solutions have come and most have gone. The key is that each of the successful applications are built around a central database of master file data that multiple users can access. There is only one set of data and a change in one place affects all other parts of the organization. In this case that is a good thing.
If you are interested in a state of the art solution priced at a reasonable level then you should check out Vicinity from Vicinity Manufacturing (www.viciintymanufacturing). There are others but this one was written from the ground up with the sole purpose to address the formula manufacturing needs and is not attempting to be everything to everyone.
So take a look at your existing system. Are you using excel to store data or to analyze results? I challenge you to dig deep take a long hard look and make changes where they make sense. Once centralized source of formula data will do wonders for your company and believe it or not will save you significant profits in the months and years to come.
In the meantime stay tuned to the next couple installments where we look at obsolete market leaders and what to do with that custom solution the "Bob" wrote before he headed to Tahiti.

The root canal for the formula manufacturer

In working with a bakery prospect last week I was inspired to write this blog.
I was having some pain in a tooth for quite some time and my dentist sent me to an Endodontist for a root canal. While there I was taken aback by the degrees, diplomas and accreditations proudly displayed by the doctor. When I asked about the educational requirements to perform my root canal my appreciation only increased. This person really knows what they are doing. I was impressed.
My bakery prospect is a family run company and has very limited resources and does not have a defined IT department. That is pretty typical for our prospects. When they came to me they were wrestling with the development models being presented to them – All-in-One vs Best of Breed.
I told them – "I am just glad that my general practitioner did not perform my root canal. The same can be said for business software."
It seems to me that the software development world is firmly planted in one of two worlds related to formula manufacturing. All-in-one (general practitioner) vs Best of Breed (Endodontist).
The All-in-One model of development requires one software vendor to develop, write, support and document every aspect of an information system for a formula manufacturer. This includes financials (AP, AR and GL), distribution (Pos, Sales Orders and Inventory), manufacturing and every other related feature (warehouse management, CRM, eCommerce). Some notable examples are SAP and Ross on the high end. On the lower end you have small boutique development firms that are pouring all their available resources into the products and barely keeping up with technology changes and changes in manufacturing, compliance and scheduling. Some are not even on SQL as the database and few are on .NET as a platform – each have been available for many years but some of these boutiques have not yet managed the transition to current technologies.
The other group of applications takes a best-of-breed approach where one central application is the key and additional functionality is added by smaller laser focused development firms. With this approach 75% of the features most companies require are delivered by out of the box widely distributed software such as Microsoft Dynamics. A company buying into this approach will rely on Microsoft for core functionality such as financials (AP, AR and GL), distribution (Pos, Sales Orders and Inventory). The remaining functionality is often industry specific and is delivered by ISV (Independent Software Vendors) that work very closely with the core ERP system.
So which approach is better for me?
Each has strengths and weaknesses and each has their own legacy.
All-in-One – The biggest advantage of this approach is that all development is controlled by one company. That is also the biggest liability. With exception of some large developers (SAP, Ross etc) these firms are rather small - less than 50 employees. The development resources are pulled in the direction that results in more sales, often leaving core functionality unaddressed. For example: most boutique formula manufacturing development firms spend most of their time on manufacturing issues (that makes sense) but they often overlook new developments in core product offerings such as electronic disbursement, CRM, sales taxes, commissions, warehouse management, eCommerce just to name a few. Finally – as the product matures so too does its development platform. If a developer is not careful either the product will become obsolete or a significant re-write of their product will be required – stopping all new development for at least a year. Neither is good.
Best of Breed – The biggest advantage of this approach is that the unique business requirements are developed by firms that focus entirely on solving that business issue. For example: a company specializing in formula manufacturing such as Vicinity Manufacturing writes this component, warehouse management experts provide their addition and eCommerce by people that eat sleep and breath those issues. It is all tied together by Microsoft Dynamics. In the end the total solution is tailored to meet the specific needs of the company at a very competitive price. Twenty years ago this approach would not have been feasible. But with .NET as a development platform Microsoft has made this model very attractive and the cost effective option for companies to consider. The biggest challenge of this approach is to ensure the local VAR (Value Added Reseller) can assist the implementation in ensuring the proper tools are brought to the table. In the Microsoft Dynamics channel that is easy to deliver.
So in the end it comes down to your comfort level as well as your understanding of technology advances.
If you feel your company is better served by a single (often small) company that controls all the feature functionality entering your company, if you are not interested in realizing technology improvements before changing software again and the all-in-one application has everything your company may ever need – then you would go with this approach.
If your company is dynamic in nature and experiences changes in requirements as years go along, your company has limited development resources in house to address gaps in your system functionality and you embrace competition as a way to reduce cost and increase functionality then the best-of-breed is a better model for you.
Personally – I am not excited about getting a root canal but if I have to get one then I want the person with the most experience, most up to date on the latest developments and only does root canals every day working on my mouth. If I have a problem with my foot I go to the Podiatrist or headaches to a Neurologist. While I like my family doctor I will take a team approach to my medical care thank you very much and I feel the same about my business software.
How about you?

Real life example of ROI – now it is your turn

I wanted to share a real life example of ROI and how yours truly ignored it for months if not years. I think I can also tie this into your business and formula manufacturing.
Last week we cut over our phone and internet service to CBeyond – a publically traded telecom based in Atlanta. While I was satisfied with my previous carrier my internal phone system was outdated and we had limited ability to change features without a series of expensive site visits. The phone system had to go – I knew that for years.
One day a month or so ago a solicitor for CBeyond stopped by my office. I used to get these visits into my office every couple weeks and I routinely dismissed them as an inconvenience. For some reason this time I gave them my card and told the salesperson to send me some information. What was I thinking?
Wouldn't you know it? Two days later I received a packet of information in the mail and a couple pleasant emails. Before I knew it I had an appointment with this salesperson in my office to talk about what they could do to help me with my business.
It was not until that face to face meeting that I had stopped long enough to see what I was doing with my existing system. I was paying my previous carrier about $1,500 per month for services that I did not need and did not receive services that I wanted. The salesperson was successful in showing me that I could get what I wanted for about $500 per month but I would have to change phone systems. Little did he know that a new phone system is really what I needed.
So like most people I bought myself some time and sent the salesperson away. In the back of my mind I was looking for why this deal was too good to be true. What is the catch? I had every intention of ignoring the data right in my face and continue down the path of my existing system. Honestly – I was not sure how much a new phone system would cost and was not interested in the change at this point.
I did not have all the data yet and was not ready to make a decision - much less a change.
A couple weeks later I was in a conference with some Microsoft Dynamics ISV owners - much like myself. The topic of internal phone systems came up and I asked the question - Has anyone heard of this new provider? Immediately a friend spoke up saying it was the best thing he had done in years and they were very happy. When I asked further about the physical phone system he replied that it was ridiculously inexpensive and he gave me the name of a consultant that does all the work.
48 hours later I had a quote for a phone system from Logic Speak ($3,000 for a 10 phone system) and we were off to the races.
The problem has been solved and we are a better company for the change. The total cost was $3,000 up front plus $500 per month in services.
Compare that to $1,500 per month. That is an ROI of 3 months! Every month after the first three months I am making $1,000 per month – and I have more flexibility and more control. THAT is a positive ROI.
So how is this relevant to formula manufacturers and how can you use my experience in your business?
How old is your existing ERP system? Did you replace it with the Y2K conversions? If you system is 10 years old you really should look around. You have gotten your value from your existing system and you may find that changing is not as expensive as you might think.
So here is the blueprint that I used for my phone system that I think is relevant to selecting an ERP solution.

1. Identify if there is a need that has to be addressed – for me it was a better phone system
2. Quantify that need – what cash will it bring into my company if I make the change? – for me it was reducing my phone bill from $1,500 to $500 per month – for you it may be reducing inventory or identifying low batch yields
3. Talk to others about your issues and hear their solutions – search the web and find companies that specialize in your business. They have solved the problems before – leverage on what they have done.
4. Engage with a professional that understands your business and can deliver the change that is needed. Be open and honest about what you are trying to accomplish and give the professional a chance to work with you to find a workable solution.

For me the key was in leveraging people that had been through the process before. I gained confidence in the hardware supplier immediately. He knew what he was doing. From there I let the professionals do their thing and got out of their way.
The result for us is a state of the art phone system that meets our needs today with a local service provider that makes our problems go away in short order and for a reasonable rate. I could not ask for better than that.
So if you are not getting what you should out of your existing system and you think it is time for a change then follow the steps above. Feel free to reach out to me and of course check out our solution at Vicinity Manufacturing . If you want to try out our phone system just call us at 770-421-1777 – we are a better company for the change.
I also feel it is important to share the names of people that have helped me in my successes.
John Stulak – Ethotech - Microsoft ISV friend who just switched to CBeyond and gave me the courage to move forward
Andrew Griffin – Cbeyond sales representative – he did all the right things at the right time
Jared Kee – Logic Speak Inc. – provider of phone system and the guy that made this work
So here is your take away:

• What are the top 5 pains that is costing your money?
• What is the value of solving those pains?
• Who out there has solved these pains in the past?
• Why am I waiting to solve these pains if there is a positive ROI?

Decision time: Wait it out or retool now

I would like to challenge some conventional wisdom during economic downturns in the formula manufacturing sector. I propose that during slow economic times it is critical to re-tool and invest in the future. It is much better to rework business processes while production is slow than when you are rushing to get orders out the door. Your project team has more time to focus on what makes your company great and what you customers really need from their supplier. When times are busy no one has time to address these critical topics.
I am working with number of formula manufacturing clients that are taking this relative slow time to rework their business and manufacturing processes. They are expecting that the market will rebound and when it does they will be ready. They are betting that their competition will be rebounding with obsolete systems and this will turn into huge market share gains when the sales return.
These clients are focusing on some of the following areas:

• Reduction of inventory values to free up working capital by better inventory accuracy
• Understanding future raw material price increases and the impacts on finished good costs to either identify cheaper substitutes OR differentiating their higher quality product in the market place
• Retooling the scheduling process to better utilize existing capacity by implementing shop floor scheduling and MRP
• Identifying formulas with lagging production yields to reengineer the formula or process or phase out the products if possible

By keeping a keen focus on the immediate goals that not only increase working capital today but also position the company for greater demand in the future, these companies are staying afloat today while becoming the leaders of tomorrow.
So the key is how to you pay for such an endeavor?
The items above are not as expensive as you might imagine. Vicinity from Vicinity Manufacturing coupled with Microsoft Dynamics is one example of an inexpensive ERP solution that addresses all these issues for formula manufacturers without breaking the bank. There are others in the market as well but one thing that makes Microsoft Dynamics so much more attractive today is financing available via Microsoft Financing. You owe it to yourself to take a look.
So what are you waiting for? Is your system a result of Y2K and approaching 10+ years old using outdated technology?
Is your competition sitting back waiting this out or are they preparing for the next wave? Can you really afford to wait to find out?
So I challenge you to think toward the future with an eye on today. It can be done with a reasonable budget and is more affordable then you might think.