Canned’ manufacturing software is cheaper in the long run
When the term “make or buy” is used in a manufacturing context, it generally concerns a decision to produce a part or to buy it from a supplier.
But the make-or-buy decision we are reporting on is the decision by a manufacturer to either purchase “canned” software or to write its own programs for production and inventory control.
Recently, we were referred to a manufacturer that was just beginning to assemble its products rather than subcontracting the assembly. Previously it had contracted out its manufacturing and assembly. But due to quality and delivery problems, it decided to start doing the assembly itself.
The issue we were asked to look at was the inventory levels. The firm’s banker was concerned because of its ever-increasing borrowing needs to support its inventory and receivables. The banker was even more concerned that its move to assemble its own products would further inflate inventory.
The first step in any consulting assignment is to ascertain the facts of the situation. So we proceeded to talk with the owners to gather the facts. One of our first questions was very revealing: How many times was the firm turning its inventory? The firm asked us to clarify the question.
We explained that “inventory turns” was a standard measure used to determine how efficiently a company moves product from the raw material stage to a completed sale. In this firm’s case, raw material would be the piece parts it buys from its suppliers. We explained that inventory turns is computed by dividing the total dollars of inventory into either total annual sales or total annual cost of good sold, with total cost of goods divided by inventory dollars being the better measure.
We stated that industry associations or trade publications often publish industry financial statistics that would provide the firm with a benchmark for inventory turns. When we had to explain that basic concept, we knew that we were dealing with a prospect that was not sophisticated in inventory management.
We looked at the firm’s numbers and found that it was turning its inventory 3.95 times per year, or every 92 days. Those numbers suggested that there was a lot of room to improve performance and reduce inventory. That is exactly why we were there and why the firm’s banker was concerned.
Next we asked to see the systems the firm had been designing to manage its inventory. The firm related how it had found a group of college grads to network its computers. The company was using the same group to help it write programs using Microsoft Access for inventory control and purchasing.
We asked to see a bill-of-materials for one of its products, which listed the components going into a final assembly. What we got was a 13-page, 381-item listing of every component for one of its final product assemblies.
That listing told us two things. First, the company had little concept of what a bill-of-materials was. Second, when it entered a production order for a certain number of finished units, it was probably ordering components based on the in-process time to assemble the finished product, rather than on the in-process time necessary to make the subassemblies and the final assemblies. That would mean that some components would arrive before they were needed and others would arrive late.
One of the most basic components of a “canned” manufacturing package is the bill-of-materials processor. The bill-of-materials processor links individual piece-parts to form assemblies and subassemblies in a tree structure that, when all levels are included, will represent the finished product.
A manufacturing package will use the bill-of-materials structure for determining the timing of ordering components, aggregating component orders across several different models, accumulating costs, and performing several other processes that will help to control and manage the manufacturing cycle. Our prospect had yet to discover that key concept.
After spending about two hours explaining the firm’s situation, the prospect asked for our initial impressions of what should be done.
“Stop re-inventing the wheel. Stop trying to program a production and inventory control system. In the long run you will spend more money programing your proprietary system and end up with a system which is not as good as what you can buy in ‘canned’ manufacturing software,” we said.
From its viewpoint, the problem with our solution was both a cost and management-effort problem. Our solution had a bigger up-front cost for buying the software versus its smaller ongoing cost for writing the programs as it went along. Second, installing a whole new system would have been a revolutionary change because it would have included all of its systems from general ledger to payables to purchasing.
Form our viewpoint, the problem with the firm’s solution was that the long-run costs were far greater and the long-run benefits were far smaller than it could achieve with software that was designed as an integrated package.
Integration is another key point that we stress in making this decision. Since “canned” packages are designed as integrated suites of applications, many benefits are realized in a company’s financial systems.
Purchases and receivings flow smoothly into accounts payable. Labor costs are collected and reported on parts and assemblies. Those in turn flow into the general ledger for the preparation of the financial statements. Integrated systems increase the accuracy and timeliness of the financial reporting.
Our experience is that over the life of a computer software system, you cannot make (write) a better, cheaper system than you can buy. Companies that choose to make their own software are choosing to take the cheaper, easier way in the short run. But in the long run, they’re not better off.
Stay tuned to a future article to find out what our prospect decides.
Further information on the manufacturing software purchase decision is available on our web site: http://www.execpc.com/~devitt/
Michael Devitt is president of Devitt Consulting Group in Shorewood.
July 1998 Small Business Times, Milwaukee
