How to Achieve Lean Manufacturing

Since it is lean manufacturing's role to deliver value to the customer, the first step for any manufacturer that attempts to make its organization lean is to define value from the perspective of the customer, whether the end customer or an intermediate customer. This value must be identified and expressed in terms of how the specific product meets the customer's need, at a specific price and at a specific time. To do that, one has to be able to evaluate performance in terms of customers, products, profitability analyses, and so on, by measuring well thought-out key performance indicators (KPIs), such as customer sales, product sales, profitability by customer, profitability by product, etc.

Map the Value Stream

As the next step, manufacturers must identify and map those activities that contribute to value and those which do not. The entire sequence of the activities or processes that are involved in creating, producing, and delivering a good or service to the market—from design and sourcing to production and shipment—is called the value stream. For any finished good, the value stream encompasses the raw material supplier, the manufacture and assembly of the good, and the distribution network. For a service, on the other hand, the value stream consists of suppliers, support personnel and technology, the service producer, and the distribution channel. The value stream may be controlled by a single business or by a network of several businesses.

Once the activities have been identified, companies must determine what activities are value-adding, what activities are non-value-adding but essential to the business (e.g., payroll), and what activities are non-value adding and non-essential to the business. The impact that necessary, non-value adding activities have on the value stream must be minimized, while non-value adding, non-necessary activities must be eliminated from the process. To that end, a value stream mapping (VSM), which is a logical diagram of every step involved in the material and information flows from the order to the delivery of a product, can be done for the current process and the future process. A visual representation of every step in a process is thereby drawn and key data, including customer demand rate, quality, and machine reliability, are noted down.

Because VSM can lead to potential cost reductions, improved throughput, higher asset utilization, etc., some software vendors are now providing business process design, viewing and publishing application tools, and even business process reference models or templates of best practice process models, to assist with VSM creation. These tools are used to design processes, to communicate them, and to educate and work according to decided processes. By modeling the processes, one can visualize what the organization does and how it does it, as well as gain a view of responsibilities. Meanwhile, by connecting tools and documentation to processes, one can visualize which activities are performed and who or what controls them. Solutions might also include deployed functionality for publishing processes, connected applications, and documentation to an intranet-based workplace, which would ease the communication of changes throughout an organization and support employees working according to decided processes. Processes could even be published to a Web site, which would make it far easier for employees to easily access suggested or decided processes.
Once manufacturers identify value-adding and non-value-adding but necessary activities, they should then work to make these activities flow as an uninterrupted movement of products or services through the value chain to the customer. This requires manufacturers to eliminate functional barriers and to develop a product-focused organization. Dramatically reducing lead and cycle times, and eliminating work in queue, batch processing, waiting, scrap, and unnecessary transportation in this way, should lead, in the best-case scenario, to single piece flow.

Several tools can help organizations to achieve flow manufacturing, including total productive maintenance (TPM), leveled schedules (heijunka), long-term purchase agreements with suppliers, just-in-time (JIT) call-offs (possibly via electronic kanbans), and supplier managed inventory (SMI) for raw materials. In addition, though it may be surprising to some, forecasting can also be important in lean manufacturing, as it provides the basis for long-term purchase agreements with suppliers and also determines long-term capacity requirements. Forecasting also helps with generating a leveled master production schedule (MPS) based on the flow of materials through the supply chain or factory and costs. This is particularly useful where there is variable demand or new product introductions (NPI), since there may always be one major capacity constraint or minor ones may pop up here and there.

In fact, while forecasting might have had a poor reputation in manufacturing circles (particularly among those firms attempting lean), recently there has been an increased awareness that with good collaborative planning and forecasting software that supports collaborative sales and operations planning (S&OP) processes, many manufacturers could improve their business performance (see Sales and Operations Planning). Thus, as with production planning, manufacturers need to remain on top of forecasting by leveraging much shorter review intervals than the traditional quarterly (if not yearly) updates. By taking forecasting more seriously and supporting it with smart, interactive tools, all parties within the manufacturing business should be on the same page at the end of the day, which should result in increased agility. The exception, of course, is manufacturers in volatile markets or with products with short lifecycles, for whom forecasting based on history often means missing the true demand signals from customers or distribution channels.

Flow manufacturing does not address synchronizing around the supply chain, multiple partners, and suppliers, since it is merely a shop-floor execution tool. If only for this reason, enterprises should still use supply chain planning (SCP) for strategic purposes in which multiple departments (sales and operations, inventory, distribution, collaborative demand management, transportation planning, etc.) are involved, such as planning for resources across an organization, preparing for promotions, negotiating long-term contracts, establishing objectives, and coordinating multi-site operations.
After manufacturers remove waste and establish a seamless flow, they must transform into demand-driven organizations where customer demand pulls products through the value stream, driving manufacturing activity and material flow. The ultimate goal is to become so responsive that products are delivered only when the customer, internal or external, needs it (i.e., places or signals the actual order)—not before and not after, though delaying the use of material and labor as long as possible.

To that end, intuitive and visible pull signals should initiate manufacturing and movement of material. This might necessitate support for various types of pull signals or kanbans (e.g., printed-out cards or electronic signals in case of using computers). Production of product can consequently be order-less, with backflushing to report automatic material consumption of components. This should result in major reductions in work-in-process (WIP) and production cycle times. The number of cards to print and use for each item and receiving location can either be entered manually or calculated and updated automatically in an enterprise system.

Kanban cards contain somewhat differing information for production cards, which signal that the container should be filled with new parts (i.e., item number, item description, requesting location, packaging type, container quantity, and replenishment lead-time) and transportation cards, which signal that the container should be moved whether empty or full (i.e., item number, item description, sending location, receiving location, total number of kanban cards, and standard container quantity). In the so-called one-card type of kanban system, only production cards or transportation cards are used, while in the two-card type of system both production cards and transportation cards are used.

Taking it a step further, one could leverage product technology that fosters collaborative agreements with suppliers and trading partners to have signals and the requisite data collection as the actual products flow through the supply chain. This would increase transparency and avoid stock bullwhip effects across the entire supply chain. A good example would be a repetitive scheduling technique like customer delivery schedule (CDS), which supports repetitive demands for one or several items to one or several locations in one transaction for discrete times or time buckets.

Such schedule level management tools can enable users to receive demands with different levels of accuracy or validity from different partners within the customer organization, while managing different types of demands, such as consolidated customer forecasts, customer forecasts, customer call-offs and JIT call-offs, customer sales reports, and sales statistics. The tool can be either integrated with various electronic data interchange (EDI) components that support several types of EDI message standards and message types, or managed manually. Use of vendor managed inventory (VMI) or point-of-sale (POS) data on the customer side should have a similar effect.

Software vendors also offer a number of other tools to help organizations respond to customer demand. For instance, a supermarket is a tightly managed amount of inventory within the value stream that allows for a pull system. Such inventory buffers can contain either finished items or WIP. They are used to handle finished goods inventories that are replenished by a continuous flow pacemaker process, which falls somewhere between a continuous flow process and other manufacturing processes shared by other value streams, as well as for incoming parts and material being pulled from supplier locations.

Some vendors offer strong JIT call-off management functionality as a planning and execution environment for both proactive and reactive sequence deliveries, as well as for frequent electronic kanban deliveries. Using this functionality, final products are broken down into specific items, a specific end product is pinpointed and identified via a sequence number or a production identification (ID), and the sequence call-off is sent out when the final production sequence is frozen at the customer line (which may be either hours or days before the parts are needed, depending on the application).

For advanced flow-oriented planning and execution environments, support for supply in line sequence (SILS) is available. SILS promotes the use of configuration within sequence flows, which allows, for instance, the ordering of a configuration of cables for a single vehicle on the customer's production line. To be able to pack according to all the different pack demands that can be found within the SILS concept, a very flexible set of rules must support manual or automatic packing of call-off demands according to a variant of the SILS concept or the customer's demands.

Lean Tools and Practices that Eliminate Manufacturing Waste

The Five S's

The first practice mentioned here sprang from the same Japanese system that originally gave birth to lean manufacturing. The five S's is a methodology for organizing, cleaning, developing, and sustaining a productive work environment to create a workspace that is more organized and efficient. The rationale behind the five S's is that a clean workspace provides a safer, more productive environment for employees and promotes good business. The five terms beginning with "S" are manual disciplines employees should use to create a workplace suitable for lean production. The first term, sort (seiri in Japanese), means to separate needed items from unneeded ones and remove the latter. The second term, simplify, straighten, or set in order (seiton in Japanese) means to neatly arrange items for use. Shine, sweep, or scrub (seiso in Japanese) means to clean up the work area to establish ownership and responsibility, while standardize, systemize, or schedule (seiketsu in Japanese) means to standardize efforts as checklists, so as to practice the preceding three principles of sort, simplify, and scrub on a daily basis. Finally, sustain (shisuke in Japanese) means to always follow the first four S's so as to create a disciplined culture that practices and repeats the Five S principles until they become a way of life for employees.

Visual Controls

In terms of tools, lean manufacturing tends to focus heavily on visual controls to make life straightforward for operators and to avoid errors. Visual control requires that the entire workplace is set up with visible and intuitive signals that allow any employee to instantaneously know what is going on, understand any process, and see clearly what is being done correctly and what is out of place. Typical visual control mechanisms include warning signs, lockout tags, labels, and color-coded markings. One example is andon, an electronic board that provides visibility of floor status as well as information to help coordinate the efforts to linked work centers, through signal lights that are green (for "running"), red (for "stop"), and yellow (for "needs attention"). The primary benefit of visual control is that it is a simple and intuitive method that shows an employee quickly when a process is functioning properly and when it is not.

Standardized Work

Knowing which processes to perform is as important as knowing when they are functioning properly. To ensure that the required product quality level, consistency, effectiveness, and efficiency are realized, documented step-by-step processes, or standard operation procedures (SOP), are needed to define the standardized work necessary to reduce errors and touch times. Standardized work is one of the most overlooked tools of lean manufacturing, despite entailing the useful creation and documentation of clearly defined operations for both workers and machines. Such clearly defined operations allow manufacturers to apply best practices to manufacturing processes. Standardized work also provides the foundation for continuous improvement, since documented processes can be more easily analyzed and improved. To define standardized work, SOPs should use pictures, words, tables, symbols, colors, and visual indicators to communicate a consistent, intuitive message to diverse workgroups. Such graphical instructions, also known as operation method sheets (OMS), explain each step in the sequence of event (SOE) defined for a given production line, and can design and produce visual work instructions on paper or on screen.

Mistake Proofing

As continual improvement is one of the primary concepts behind lean manufacturing, mistake proofing, or poka-yoke in Japanese, is an important waste reduction tool. Mistake proofing is an essential failsafe activity to prevent errors at their source. In simple terms, mistake proofing is any device, mechanism, or technique that either prevents a mistake from being made or makes the mistake obvious so as to avoid a product defect. The objective of mistake proofing is either to prevent the cause of defects in manufacturing or to ensure that each item can be inspected cost-effectively so that no defective items reach downstream processes. For example, in an assembly operation, if each correct part is not used, a sensing device detects that a part was unused and shuts down the operation, thereby preventing the assembler from moving the incomplete part to the next station or beginning another operation.
Lean manufacturing further requires manufacturers to address equipment productivity issues through the adoption of total productive maintenance (TPM), which is a set of techniques, originally pioneered by Denso in the Toyota Group in Japan, that consists of corrective maintenance and maintenance prevention, plus continual efforts to adapt, modify, and refine equipment to increase flexibility, reduce material handling, and promote continuous flows (see Lean Asset Management—Is Preventive Maintenance Anti-lean?). TPM is operator-oriented maintenance that involves of all qualified employees in all maintenance activities. Its goal, hand in hand with the aforementioned five S's, is to ensure resource availability by eliminating machine-related accidents, defects, and breakdowns that sap efficiency and drain productivity on the factory floor. This includes setup and adjustment losses, idling and minor stoppages, reduced operating speeds, defects, rework, and startup yield losses.

Machine breakdown is a critical issue for the shop floor, as in a lean environment one machine going down can stop the entire production line or flow. Accordingly, TPM and other advanced enterprise asset management (EAM) options increase equipment reliability, and thus improve availability, reduce downtime, reduce product scrap (and wasted time managing that scrap), and increase machine tolerances (and consequently quality). As a further aid, diagnostics management features can automatically identify situations where the current maintenance strategy is not working and trigger a continuous improvement review. This often requires support for reliability driven maintenance (RDM), which can underpin the TPM strategy (see Reliability Driven Maintenance—Closing the CMMS Value Gap?). Finally, enterprise systems that can synchronize maintenance and production planning should maximize the available production time and contribute towards greater throughput and overall equipment effectiveness (OEE).

Simulation is another tool to help reduce maintenance-related waste. By supporting simulation, advanced service management systems typically include maintenance scheduling based on production plans, with automated update of the maintenance schedule based on actual finished production (with electronic links into the equipment's own runtime meters to schedule maintenance). The idea is to eliminate the following "big six" maintenance-related wastes.

1. Equipment downtime
2. Setup and adjustments
3. Minor stoppages or idleness
4. Unplanned breaks
5. Time spent making rejected product due to machine error
6. Rejects during start ups

Cellular Manufacturing

Moving from maintenance to manufacturing processes, the lean philosophy traditionally depends on cellular manufacturing, which is a manufacturing process that produces families of parts within a single line or cell of machines controlled by operators who work only within the line or cell. Manufacturing cells, arranged to ergonomically minimize workers' stretching and reaching for parts, supplies, or tools to accomplish the task, often replaced traditional, linear production lines to help companies prroduce products in smaller lot sizes, ensure a more continuous flow, and improve product quality. A related concept, nagara, is the Japanese term used to depict a production system where seemingly unrelated tasks can be produced by the same operator simultaneously. Nowadays, however, lean thinking is moving beyond pure cell- and product grouping-based production.

Lean Manufacturing: A Primer

It is not exactly breaking news that, due to the need for driving down costs and increasing efficiency, manufacturers (if not enterprises of all kinds) are increasingly subject to massive pressures. These pressures, however, often invalidate the traditional materials requirements planning (MRP) batch- and push-based production planning and associated economies of scale product costing approaches.

This is Part One of a multi-part note.

For this reason, there has been increased interest in the lean manufacturing support philosophy. To understand this trend, one need look no further than the enterprise resource planning (ERP) systems of the 1990s, which, unfortunately, are cognitive (i.e., sending well-devised "plans of mice and men", which, without feedback from the real-world would "often go astray") rather than reflexive in nature. In addition, there is a host of other well-publicized MRP-related problems, such as complex bills of material (BOMs), inefficient workflows, transactions and activities that add no value, and poor (typically manual) data collection. It is not surprising then that companies struggling to serve their customers using purely traditional planning and costing methodology are often unable to meet the demands for agility and responsiveness that consumers at the end of the supply chain are requesting.

Consequently, for some time now, almost every industry publication, consultant, analyst, and industry pundit has been touting the lean approach as the panacea to whatever troubles manufacturing and distribution across the globe. The early revolutionary efforts of a handful of manufacturers have indeed established that lean works, especially in terms of increasing customer satisfaction levels (i.e., ensuring they get exactly what they want, when they want it), decreasing costs, and improving responsiveness via shorter lead times and improved quality and consistency.

Nevertheless, manufacturers today face additional challenges in the form of increased customer expectations, shortened product cycles, product proliferation, foreign competition, and, occasionally, a declining economy. To make things worse, decreasing product life cycles mean that manufacturing and distribution are increasing in complexity, which, for the manufacturer, translates into a need to better manage customer demands and expectations and respond accordingly.

Hence, while several years ago most prospects inquired tentatively about lean capabilities, now they seem to be increasingly requesting these. An ARC Advisory Group's strategy report from 2004 suggested that "today 36 percent of US manufacturers and 70 percent of UK manufacturers are using lean as their primary improvement methodology", which should show how prominent lean thinking has become. Many of these companies may not yet be involved in full-blown lean manufacturing, but they are at least using some lean tools and principles as their primary improvement methodology.
According to the APICS Dictionary, the philosophy of lean manufacturing is to emphasize the minimization of the amount of all the resources (including time) used in the various activities of the enterprise. This involves identifying and eliminating non-value-adding activities in design, production, supply chain management (SCM), and dealing with the customers. Lean producers employ teams of multi-skilled workers at all levels of the organization, and use highly flexible, increasingly automated machines to produce large volumes of products with potentially enormous variety. The lean philosophy sets out principles and practices to reduce cost through the relentless removal of waste and through the simplification of all manufacturing and support processes.

What is commonly referred to as lean manufacturing today is an extension of the proverbial Toyota Production System (TPS), which was originated by Taiichi Ohno and first saw use in the 1950s. The conditions that led to its development stemmed from the aftermath of World War II, when Japanese automotive manufacturers faced serious competition from American counterparts. At this time, Japanese manufacturers not only were rebuilding their war torn factories, but also were facing a serious shortage of raw materials. American companies, on the other hand, had an abundance of manufacturing capacity and resources, and dominated the Japanese market by flooding it with low cost products. However, they still had some shortcomings, since they provided little product variety and had rigid, top-down production processes that limited their ability to respond to increasingly changing customer demands.

Toyota Motor Corporation realized the only way it could survive was to provide the Japanese consumer (and the global customer ever after) with the one thing American automotive manufacturers could not provide at that stage—product variety—all while maintaining as high a quality, short a lead time, and low a cost as possible. Toyota, with fierce competition in terms of quality and price, a market opportunity for increased product variety, and limited production resources and raw materials, had to create a radical new method of manufacturing in order to survive.

The result was the aforementioned TPS, which methodically eliminated any waste in the production process and yet stayed focused on satisfying customer demands. It has revolutionized automotive manufacturing with kaizen (the Japanese term for improvement, which in the manufacturing context relates to finding and eliminating waste in machinery, labor, or production methods), poka-yoke (mistake proofing techniques), kanban (pull-signal) replenishment and point-of-use delivery, and assembly line innovations that are the now backbone of virtually all automotive plants around the world.

Today's concept of lean manufacturing grew from TPS, and the name "lean" stems from its driving principle to use less of everything (i.e., less labor, less space, less inventory, less movement, etc.) than traditional manufacturing processes, while producing a greater variety of products. In other words, it is essentially an umbrella philosophy that focuses on creating customer value-adding activities, the systematic identification and elimination of waste, and continuous improvement in manufacturing environments to increase productivity. The primary focus here is on customer value-adding activities, while the elimination of waste (muda in Japanese) and continuous improvement are consequences of this.

Ross Systems Closes Ranks For A (Possible) Turnaround

On February 5, Ross Systems, Inc. (NASDAQ: ROSS), a provider of ERP and e-business solutions for mid-market process manufacturers, reported the signing of a definitive sale agreement for certain assets related to its Human Resource and Payroll product line to NOW SOLUTIONS, LLC, a private company. Ross at the same time executed a distribution agreement with NOW to continue to sell the product under license from NOW as a complement to its enterprise systems for process manufacturing companies. The gross asset sale price of $6.1 million excludes incentives. After fees and expenses the company expects the transaction to generate a non-recurring gain on the sale of approximately $3.7 million before incentives.

"This transaction is a win/win. Ross will utilize the cash to strengthen its balance sheet, while at the same time continuing to provide the product to its targeted market of process manufacturers, and NOW will take the highly regarded product to a broader target market." said Pat Tinley, Ross CEO. "We believe that the sale of this non strategic asset will permit Ross to focus on its core competencies and accelerate our growth of market share in the process manufacturing sector."

On January 25, Ross Systems reported results for its second quarter ended December 31, 2000. The net profit for the quarter was $0.2 million, compared to a net loss of $1.1 million per share in the same quarter of the prior year, and a loss of $4.2 million in the previous quarter (See Figure 1). Revenues in the quarter were $12.6 million, down 42% from $21.8 million in the same quarter of the prior year. But operating cash flow during the quarter was positive and continued to improve from the previous quarter. Lower license revenues (down 62%) also resulted in reduced consulting demand for new installations (down 36%). Operating expenses for the quarter however continued to improve and declined by 46% from the same quarter of the prior year.
The company also continued its strategy of increasing market penetration in the process-manufacturing segment, where it believes its product suite is highly regarded. The company will continue with a direct sales organization in North America and Western Europe but is leveraging its indirect distribution channels in Eastern Europe, Latin America, and Asia to maximize its profitability while maintaining a productive sales presence in markets where a direct presence is not cost effective. During the quarter, the company signed new customer agreements in Poland, Mexico, Russia, and Japan.

In the prior quarter the company announced a partnership with Integris US to provide IT outsourcing and ASP software solutions called "Ross eSourcing". This new offering will provide Ross' customers a hosted, subscription-based, alternative for their enterprise software solutions. The company also continues to expand its eBusiness solutions and during the quarter signed a number of new contracts. In Europe, the eBusiness practice had its largest growth quarter to date.

"We are pleased that our actions of the last several quarters have resulted in a return to profitability ahead of our expectations,'' said Pat Tinley. "As we predicted last quarter, the reduced operational costs combined with our improving market momentum will provide for balanced growth and more consistent profitability going forward. The management team believes that completed expense reduction actions, combined with programs designed to achieve both technology-based and process-based productivity improvements, will permit the company to continue to accelerate its rate of profitability."


Although management's actions of pulling out all the stops are praiseworthy and have produced possibly miraculous results, the company is still cry far from being out of woods. Still, the company remains in the race for a piece of the prosperous process manufacturing market. We applaud the company's decision to divest its payroll and HR products for the healthcare and public sector market segments. These products, which have proven to be significantly less profitable than Ross' process manufacturing product line, have long been diverting the company's resources and focus. The benefit of divestiture is twofold: 1) the company will focus on its core competencies in process manufacturing, and 2) the projected cash infusion will come in handy for completion of the R&D mission the company embarked on two years ago (for more information, see Ross Systems, Inc.: In Process of Renaissance).

While the company's steadily declining revenue trend ruthlessly continues (See Figure 1), it may be mitigated in the future by Ross' recent profitable quarterly performance. While Ross offers strong functionality for the process manufacturing mid-market segment, with a sharp vertical focus and good multi-national capabilities, it has all but lost visibility in the high-end of the market owing to its protracted poor financial performance (in contrast to the very good performance of its main competitor SCT Corporation, see SCT Corporation: The Last Viable Process Manufacturing Vendor Standing?) as well as to scalability caveats caused by its recent commitment to only Microsoft technology.

Given its low-end market niche visibility and the likely focus, Ross' move to better leverage its indirect channel is wise, and we recommend it consider utilizing that model in North America and Europe too. Look for the global process manufacturing market to be a fierce battlefield. As we became aware of SCT's aggressive campaign to increase its international presence, Infinum Software, another tacit vendor, with a viable product for some process manufacturing industries (for more information, see Infinium Software Inc.: Having All the Right Cards?), also notified us about its intentions to maintain a much higher profile in the future. To that end, Ross should also swiftly and vigorously articulate its CRM and digital marketplace strategy. As stated earlier, its ASP strategy in the US has been improved by its partnership with Integris to provide Ross eSourcing.

While Ross has a new suite of e-business products, a large customer base, and a global organization with solid experience in the process manufacturing market, Ross has to feel testy about its future. Ross could benefit from focusing on the process market because it is one of the few vendors with strong products to offer. For more information on the status of the process market see Process ERP Market Loses PRISM and Protean.

Great Plains - Getting Greater and Less Plain

In March, Great Plains Software, Inc., a leading provider of e-business solutions for the mid-market, announced financial results for the fiscal quarter ended February 29, 2000. Great Plains reported record third quarter revenues of $48.1 million, a 34% increase over the same period last fiscal year. Revenues for the nine months ended February 29, 2000 were $135.3 million, an increase of 43% over the same period last fiscal year. Net income and diluted earnings per share for the third fiscal quarter, excluding the effect of amortization of acquired intangibles, were $3.5 million and 21 cents per share, respectively. Consensus EPS reported by First Call is 20 cents. These results compare to $3.5 million and 24 cents per share for the same period last fiscal year.

"In the mid-market, business is becoming e-business. Increasingly, every mid-market customer realizes the need to become electronically interconnected with their community including their suppliers, customers, employees and prospects. Great Plains and our partners are delivering the e-business solutions today to enable these companies to thrive in this new interconnected world," said Doug Burgum, chairman and CEO of Great Plains.

The following are some of the highlights that have been announced or occurred since Great Plains' last earnings release:

* Great Plains enhanced the Sales and Marketing Series of Great Plains Siebel Front Office with the addition of Telebusiness for telemarketing campaign management. The Sales and Marketing Series is fully integrated with its core ERP products, eEnterprise and Dynamics for SQL Server.

* Great Plains' network of Application Service Provider (ASP) partnerships grew to 27. The ASP offering expands the prospect base, adds incremental distribution, and provides additional business opportunities to partners.

* Great Plains announced immediate support for the Microsoft Windows 2000 operating system with its leading e-business product solutions, eEnterprise, Dynamics, and Great Plains Siebel Front Office.

* Great Plains continued its European expansion with the establishment of offices across Germany, Austria, and Switzerland. Through acquisitions, Great Plains added 100 team members, 80 partners, and more than 1,600 customers across this European region.

* Great Plains acquired PWA Group, Limited, a leading provider of Web-based employee-facing solutions and upper-tier mid-market human resources and payroll solutions. This acquisition provides Great Plains a strategic e-business employee-facing component and significantly expands its human resources and payroll offerings.

* Great Plains grew its community of mid-market customers and expanded its reseller partner channel through the acquisition of RealWorld Corporation, a developer of accounting and business solutions. This acquisition added 20,000 customers and 200 partners to the Great Plains community.

* Great Plains announced the acquisition of FRx Software. FRx's Web-centric analytic applications are the standard for mid-market financial reporting and have been marketed with Great Plains' solutions since 1994. FRx Software will operate as an independent, wholly owned subsidiary of Great Plains and will continue to market it solutions through existing and new distribution relationships.

* Great Plains and Scala Business Solutions N.V. formed a strategic partnership to collaborate and deliver additional e-business and enterprise solutions to global customers, including the development of a new generation of Wireless Application Protocol (WAP) products to extend the e-business desktop to a variety of devices.

* Great Plains released the Call Center application for Great Plains Siebel Front Office. The Call Center application is an integrated sales and service solution for universal call agents to address outbound sales opportunities while conducting inbound support.

* AppNet, Inc. and Great Plains partnered to design a Web-based business environment that delivers personalized, end-to-end business processes, community interactions, and buying power aggregation to any interconnected community member.

* Great Plains added e-business banking functionality through the addition of funds transfer, pay tracking and reconciliation applications. These e-bank applications electronically interconnect businesses and banks and fully integrate with eEnterprise and Dynamics.

Over the last 18 months, Great Plains has made a big noise and established itself as a low-end mid-market leader while remaining constantly profitable (See Figure 1). Great Plains has recently taken full advantage of its favorable market capitalization to extend both its foothold in the coveted small-to-medium (SME) ERP market segment and fill the current gaps within its product portfolio and geographical coverage.
We believe that the company struck a good balance in extending its offering through both acquisition and partnering with best-of-breed vendors. Further, it has been impressive in selecting partners and integrating disparate products. Nevertheless, we believe that the company should now take a deep breath and carefully devise its future moves. Rampant additional acquisitions may lead to an unmanageable product portfolio and wear thin corporate financial and human resources.

Moreover, the company will be faced with the following challenges.

First, it will have to integrate its full suite of acquired applications, since some of its fierce competitors within the SME market, like Solomon Software, promote their single code base for the entire product range as a big advantage.

Second, it can expect growing pains in merging disparate product lines and training the newly extended large affiliate channel.

Finally, Great Plains will have to beef up its multi-site manufacturing and distribution functionality as well as its multi-national capabilities in order to remain the leader in the SME market. The dot.com companies are increasingly realizing that the fancy 'click' side of the business is a mere castle in the air without a proper 'brick' business foundation. Will these capabilities be achieved with yet another acquisition?

Three Ways ERP Can Help Manage Risk and Prevent Fraud

Business is all about taking risks. But intelligent managers know how to manage risks, thus preventing accidental losses as well as other operational, financial, and strategic risks—including fraud.

To manage business risks by using technology, we must first understand and prioritize the risks a specific business faces, and then understand how IT can help that business. Then we can come to understand how those risks intersect with the IT systems a business might already have in place.

One risk within your business may stem from operating in an e-commerce environment. In that case, you want to know how IT is supporting the Web portal. Do people simply view a catalog, or do they order online and log back into your system later to view their order status? How does that portal tie in with your back-end systems and business data?

Or maybe you have multiple business units, several running on a top-tier enterprise resource planning (ERP) system like IFS Applications. But a Mexican unit is still running a homegrown application, passing its data to you in spreadsheets modified to reflect currency exchange. The manual processes involved in this data transfer and data alteration represent a business risk that could be mitigated by the built-in security features of an ERP system.

So, while technology might be designed to assist in risk management, that technology must still be configured and used intelligently to deliver this business benefit.

Indeed, intelligent use of an ERP system can not only help ensure compliance with legal requirements and accounting rules, but it can also help prevent fraud. An ERP application and its user permissions settings can prevent theft. Aggressive and intelligent use of an ERP system's safeguards can save time during auditing. Properly configuring an ERP application can help protect your company from fraud and costly corporate mistakes in a number of ways. Following are three practical approaches a business can take to protect its assets through its ERP system.

1. Use a top-down approach to identify risks.

Business risk management requires a top-down approach. Senior management often focuses its efforts on creating competitive advantages and might not see one in spending extra money on compliance. But even companies not immediately affected by regulations like the US Sarbanes-Oxley Act (SOX) and the Health Insurance Portability and Accountability Act (HIPAA) of 1996 can benefit from applying some of the principles required for compliance to their business. Efforts to comply with basic data security and risk prevention guidelines can even further reduce the risk of financial loss through administrative mistakes or fraud. The specific steps necessary to ensure compliance with these guidelines will differ from one company or business model to the next, but any company needs to pay attention to such basics as good financial statements, data security, privacy, and housing of key information—and how that information affects things like ensuring accurate financial reporting.

Part of this top-down approach involves identifying what information is key to your business. For a manufacturer, this data might consist of accounting, payroll, and health insurance information, plus things like physical plant assets and inventory. In contrast, a professional services environment is much simpler, with key information consisting of things like customer service and payroll data, with the only other real assets consisting of phones and perhaps leased office space.
Of course, this information comes from the heart of a business: its key business processes, or the mechanisms by which resources flow in and out of the company. When these processes differ, they prevent different risks. A company selling a small number of high-value products (industrial equipment, for instance) to a small number of customers faces a very different risk profile than a company selling hundreds of thousands of items to a large number of customers.

A company serving a smaller number of customers with very high-value products needs to make sure that only authorized people are able to set up new customers in their accounting systems. Consequently, the company must be careful to ensure that payment terms, credit limits, and other controls are set up properly.

However, the customer creation process will not be a critical control point for a company with a higher volume of customers and lower value per sale. It is important to understand your business flow and transaction volumes and the implications for relationships with your trading partners. An ERP system can be an excellent tool for formalizing processes for setting up new customers, and perhaps more importantly for setting up supplier relationships in your systems.

Surprisingly, many companies with powerful ERP packages in place circumvent those controls by using Microsoft Excel more than they say they do. Unmonitored use of Excel and other tools outside of an enterprise application may be of special concern during and after mergers and acquisitions. In a merger situation, a company must determine the maturity of the acquired company's IT tools and processes, and how best to integrate them into the existing systems. But at least during an interim period, the primary means of transferring information from the systems of the acquired company to its new parent may be unsecured spreadsheets.

Even without the challenges of mergers and acquisitions, a business might use outside tools like Hyperion as part of its reporting routines. Any time that tools outside an enterprise application are used, you need to ask how your data transfer methods can ensure completeness and accuracy in your business processes as data flows between two or three—or maybe more—separate and distinct systems. Using ad hoc tools like Excel—tools without a lot of built-in controls—means it's harder to guarantee data integrity. Taking measures to reduce alterations to your data outside of the ERP system makes a huge difference not only in preventing incorrect or fraudulent activity, but in streamlining your processes before an audit.

2. Harness the general user controls in your application.

Even when a company keeps 80 percent of its information in a top-tier ERP system and minimizes risks resulting from the use of ad hoc tools, it may not be familiar with the capabilities of its ERP system and how that system can be configured for risk management. Often, these capabilities are overlooked during implementation because risk management was not a main deliverable in the project proposal—and of course the company isn't anticipating an audit or attempted fraud. Because risk management can take a backseat to other deliverables, it's important for project managers and consultants to act as advocates and encourage people to consider three main risk management areas during ERP planning and implementation:

i) Prevent mistakes and fraud through role-based security. This is an ERP feature not everyone understands. You must ensure the right people are assigned to the right activities and prevented from engaging in the wrong activities. Generally, this requires a separation of powers, as you don't want to allow one person to complete every activity within a business cycle—whether that cycle is orders-to-cash or purchase-to-pay. For instance, if a single person can create a supplier, create a purchase order for that supplier, purchase the product, and cut and send a check, how do you ensure that person's cousin doesn't suddenly become a supplier? If that person also has access to inventory records, he or she could make an adjustment to inventory to hide the fact that a product from his or her imaginary supplier was never received. Physical inventory would never catch it, but the company would have paid for the imaginary product, and before the discrepancy is detected, the perpetrator could have inventory-adjusted it out. Some enterprise applications simplify identification and elimination of role-based security risks (see figure 1).

Figure 1. Segregation of duties analysis (provided by IFS North America).

Even some companies that attempt to segregate all the necessary functions to deliver role-based security still employ a financial clerk. This clerk can perform a number of tasks for accounts receivable, accounts payable, general ledger, and inventory adjustments. This violates a number of rules of financial segregation, despite the fact that the company is using a major ERP system designed to deliver financial segregation and role-based security, and in some cases separates those duties in other positions.

Correctly segregating duties to manage risk requires analysis of a company's key business cycles to identify which administrative roles need to be separate and distinct. This is not as simple as it sounds: in a small or midsized department, three people may have different roles in the company, but they are also each other's back-up. As each employee goes on vacation or takes sick leave, others assume the absent employee's duties, often with help from a system administrator. When the employee returns to the office, often there is not a process in place to remove the system permissions. Without diligent attention to assigning and managing these user permissions, before long, role-based security disintegrates.

Role-based security must be built into an application, defined and configured during implementation—and then maintained.

ii) Implement detective as well as preventive controls. Sometimes a company's administrative staff is too small to segregate roles with enough granularity to truly benefit from role-based security; or, it may operate in too complex a manner to make role-based security practical. But even when good preventive controls such as role-based security are in place, it is critical that a company can monitor employees' access to its business systems, and track what they do with that access.

Let's say that according to your role-based security schema, an individual can create customers in the system, but normally does not set up a whole customer record, leaving some of the work for others. It makes sense to monitor this individual on a monthly basis to track that key activity (see figure 2). Another way detective controls can be useful is if a double approval of check is required. The system may have to be altered when the president, for instance, is out of the office. But when the president returns, he or she can review a log to see what checks were cut in his or her absence.

Figure 2. Activity and event tracking (provided by IFS North America).

A CFO's Guide For Managing IT

Often, it is difficult to determine precisely when sea change starts. For the Information Technology sector, it is clear that if the signs were not apparent before, sometime shortly after 12:01 on Saturday, January 1, 2000, things changed forever. Ironically, IT changed, not because something happened, but because of a non-event. Y2K didn't really happen, at least in sense of the disaster that was predicted. IT did its job.

For corporate boards and executives not really comfortable with technology in the first place, the Y2K non-event has had the practical consequence of moving IT activities from a headline to a footnote on the corporate report. As a result IT, which had gained a seat at the Executive Committee during the Internet/Y2K bubble, started to be relegated back to a staff function. Often, in all but the largest organizations, the management of IT is returning to the CFO.
The adage, "you better be careful what you wish for", might be in the back of the mind of a CFO the day IT responsibility becomes part of the finance and accounting domain. On the surface, the IT organization does look a bit like accounting. There are technicians and data base administrators who keep the operations going on a daily basis, much like the payroll or accounts payable and receivable clerks. There may be systems analysts and programmers who handle the more complex assignments, not unlike accountants. And, there is usual cadre of supervisors and managers. In larger organizations, both accounting and IT may have staff dispersed into operating units.

The differences start to emerge when the CFO looks at the IT budget and the organizational scope of IT initiatives. The budget for IT is often significantly greater than that of accounting, finance, treasury, fixed assets, and payroll combined. And the IT budget has both an operating and a capital component. Both budgets can run deep into the operations of the company. In the heyday, many companies made IT responsible for all voice and data communications and centralized technology purchases in the IT budget.

While the IT organization and even its budgetary scope may be somewhat familiar territory to the CFO, major differences between IT and accounting emerge in organizational mission. The accounting part of the CFO's job is a tactical activity, which simply (or perhaps creatively) measures organizational results. The finance part is slightly more strategic in that it ensures that adequate cash is available for operations in the future. IT also has a tactical and strategic component. From a tactical perspective, IT has to ensure that "the system is up", but from a strategic point of view, IT is charged with ensuring that not only will the system have the capacity to "be up" in the future but also the capability to provide the company with cost effective business solutions. The issues that surround IT capacity and capability will challenge most IT managers and will drive most CFO's outside of their accounting/finance based comfort zone.
The first thing CFOs realize when the IT function becomes their responsibility is that there is more organization passion around IT than there has ever been around accounting. Not only does every employee have a better computer at home than they have in the office but many of the non-IT employees will seem to know a lot about computing, at least at a certain level.

Early on, CFOs will think that the IT project prioritization system is obviously broken. Peers, who couldn't seem to read the financial reports, will be lobbying to have their IT projects that promise to provide "the information we need to manage the business" moved up in the priority list.

These initial responses to the CFO's new responsibilities may be overwhelming, but there are several things that should be done before making any changes in the IT organization or in IT strategy.

* Become aware of the current IT strategies, project priorities and IT service levels that involve the finance and accounting department. Find out what kind of a job your subordinates think IT is doing and evaluate your IT projects against the organizational goals you have set for your own department. In other words, find out what kind of user of IT resources you have been. Your credibility with the IT organization and the rest of the company will be influenced by the way you have used IT in the past.

* Find out what the big issues are from the IT staff. Determine what they consider to be "deal breakers" down the road. Get their perspective on the top priority IT projects and their timetables for completion. If you get the IT organizational perspective before you go talk to your peers about their projects and priorities, you will have one point of view to balance their input.

* Talk with your peers about their IT projects and priorities. Here are a few things to remember when talking to IT users:

o Personal productivity projects (those that reduce the time to perform a task) are not nearly as important as those that eliminate tasks altogether.

o Good IT projects usually have cross-functional sponsorship. In other words, a departmental project is fine, but a project that involves two or more departments is much better because cross-functional projects tend to involve business processes.

o IT projects that have been in progress for more than 6 months may have been improperly designed. Large projects should be designed in phases so results can be evaluated periodically instead of at the end a long timetable.

o ROI is difficult to measure in the white-collar environment. Look for ROI surrogates (see Is ROI King In Evaluating IT Investments?) that measure process improvements.

o When you are looking for organizational comfort and support, look to your R & D department. R & D and IT have similar methodologies and share the same project prioritization issues, often with the same internal customers.