How ERP Systems Must Meet the Challenges of Automotive Suppliers

The minimum daily core requirements for business systems used to be financial management, inventory control, order management, and production scheduling. Competitive pressures over the past decade have forced the automotive OEMs and suppliers to become lean and mean. Now more than ever, the industry is run by mandates covering methodologies such as just-in-time (JIT) manufacturing, electronic data interchange (EDI), order release management, and quality ratings (QS-9000).

These mandates are more than decrees agreed upon by the participants within the automotive supply chain. They are really business processes that require unique automotive functionality—a new minimum set of core requirements—that have not typically been included in enterprise resource planning (ERP) systems. Here are some of those new requirements being found in the latest versions of ERP systems.

 

Working in a JIT environment

ERP systems have roots in the inventory management and work order processing found in conventional discrete manufacturing environments. However, today’s automotive manufacturing is more a repetitive environment. This means there’s minimal inventory and none of the conventional order management trappings such as order entry, purchase orders, and work orders.

The latest packaged ERP systems for automotive users would ideally operate without work orders, while providing all the transactional and planning functionality to support lean production and flow manufacturing, including planning and shipping schedules releases, kanban (whether manual or electronic), cumulative reconciliation, and advance ship notice (ASN) transactions.

However, work order-less ERP is unconventional, to say the least. But such systems do exist, in some fashion. Some ERP systems have been written from scratch with the work order-less, repetitive manufacturing philosophy in mind. For example, TRANS4M from CMI-Competitive Solutions, Inc. (Grand Rapids, MI) is a part-number based ERP system that helps provide complete control and visibility of work-in-process inventory as well as support for pay-point operations, process work centers, and multiple backflush methods. This ERP system competes with other ERP systems that have “hidden work orders,” says David Schaap, product marketing manager for CMI-Competitive Solutions, Inc. (Grand Rapids, MI). The hidden work orders help start and monitor production, but they also require a lot of manual intervention when schedules are changed after the work orders are released to production. A third group of ERP systems offer repetitive scheduling functionality, but still require work orders for some functions such as serial/lot traceability.

Reaching Out and Touching Suppliers

EDI is one of those technologies people refer to as an “enabling technology.” Yes, it eliminates paperwork: purchase orders, release documents, shipping manifests, and other business documents. Equally important, it creates a real-time communications frame-work throughout the automotive supplier community that integrates OEMs to suppliers; links OEM and supplier production, scheduling, and distribution systems together; and establishes an electronic process to communicate material releases (830), production sequences (866), advanced ship notices (ASN; 856), shipping schedules (862), receiving notifications (861), payment order/remittance advice (820), and other transaction sets.

Ironically, too much paper is still involved in the EDI communications between automotive supply chain participants. And where there’s paper, there’s multiple and manual data entry—and data entry errors. Moreover, EDI communications have mostly been between the OEMs and the Tier 1 suppliers. That’s about to change.Chrysler Corp., for instance, has had several mandates requiring that its Tier 1 suppliers communicate via EDI. Chrysler Tier 1 suppliers already should have EDI functionality integrated with their ERP-generated schedules. By July 1998, Chrysler Tier 1 suppliers were to use EDI to transmit 830s to Tier 2 suppliers. Likewise, Chrysler Tier 2s are to transmit 830s via EDI to Tier 3s by January 1999.

For this to be possible, EDI and release management instruction sets must be seamlessly integrated to the financial, production, resource scheduling, and distribution modules within ERP systems. To date, this hasn’t been fully realized because EDI requirements have evolved over time, and the EDI communications were often managed by service vendors acting as third-parties to both the ERP vendors and the ERP users. Consequently, current EDI/ERP connections are mostly customized implementations, requiring additional software development to integrate EDI data and data fields with the business rules encapsulated in the ERP system.

Newly available, fully integrated, EDI-enabled ERP systems can tie ERP-based data directly to the EDI transaction sets that require those data. For example, kanban pull signals and the material requirements planning module within ERP can drive the creation and transmission of JIT shipping schedules (862s). This ensures that Tier 2 suppliers get JIT schedules and shipping information in a more detailed and timely manner. Likewise, an ERP system that supports 866 production sequencing operations, including releasing shipment authorization numbers and number ranges, helps suppliers respond to OEM delivery requirements. Other examples can show how EDI-enabled ERP systems can help shorten production cycles, reduce costs, and ensure QS-9000 compliance.

Keep in mind, though, that EDI standards are still in flux. General Motors is in the process of converting from the North American ANSI ASC X12 EDI standard to the European Edifact standard in the U.S., so packaged ERP systems will need to handle both EDI standards, plus minor standards such as Odette and VDA.

Also realize that EDI requirements in general are not monolithic; not all automotive suppliers need all the EDI functionality that’s possible. For example, AlliedSignal, aSAP R/3 user, needs EDI communications to respond to the requirements of the automakers. But unlike many automotive suppliers, it also needs EDI functionality to handle a variety of aftermarket requirements.

Release Management Is More Than Letting Go

An outgrowth of JIT, and unique to the automotive industry, is that OEMs and at least the Tier 1 suppliers work according to ERP-generated schedules delivered through EDI and payments based on ASNs. Again, no work orders, purchase orders, or invoices required.

In doing that, explains Charles Eggerding, vice president, Automotive, for QAD(Grand Rapids, MI), suppliers don’t want to deal with a “three-way match.” What he means is that the OEMs or suppliers don’t want to issue purchase orders, receive inventory, and then sit around matching shipping documents to orders before cutting checks.

 

Rather, it would be better for the ERP system to track production schedules and generate the appropriate transaction sets when required. For example, the ERP system matches ASN to inbound shipments, confirms that the shipment is good, and then remits monies based on an acknowledgement of the shipment against the contract.

Frankly, some of the flow manufacturing methodologies occurring in the automotive industry just can’t be done manually—or at least not efficiently manually. Release management is a good example of why computerization, specifically ERP systems, is crucial. For instance, when working off a blanket agreement based on a schedule rather than on a work order, the OEM will send a ship-through number to its supplier, such as ship through 15 on Monday, through 30 on Tuesday, and through 20 on Wednesday. The ERP system must then dynamically calculate how much product to ship on a certain date based on what was shipped in the past. Any purchasing agent can do these calculations manually.

Now add to this two other uniquely automotive ordering techniques. First, retro-billing gives suppliers the ability to go back in time and retroactively change the price of products after they have been shipped. Second, pay-as-consumed lets the purchaser delay payment for a product until it is used, versus when it was shipped. While such ordering techniques are normal, few ERP system can create credit debit memos to retroactively bill at a new price for what product was shipped, let alone used.

According to Brian Finan, Detroit branch manager for J.D. Edwards World Solutions Company (Southfield, MI), the minimum release management requirements for automotive ERP systems include cumulative reconciliation, requirement net change reporting, high fabrication and material tracking, and controlled model year changeover at the part or destination level. Plus, ERP systems must be capable of managing the variations that all automotive supply chain participants typically put on the transactions themselves.

And There Are Other Requirements

Bar code labeling and data collection are now ubiquitous throughout the automotive industry. The Automotive Industry Action Group (AIAG) and the OEMs have labeling standards for kanbans, inventory (palletized materials, individual piece parts, subassemblies, and finished products), release documents, and even labor time and attendance. Some OEMs require bar coded shipping documents as backup and verification of the shipping manifests and ASNs that are generated with outbound shipments and sent by EDI. In most situations, standard label templates are provided, such as the AIAG shipping label.

Many of these mandates—both from AIAG and the automakers—are replacing pre-printed labeling with the need for both on-demand printing and custom labeling. Because of this, packaged ERP systems must be able to extract the relevant data for the label directly from the ERP database. Moreover, because OEM labeling requirements are ever-changing, the bar code labeling capabilities in the ERP system must be easy to use; that is, the standard label should only need to be described once in the ERP system.

QS-9000 is another automotive mandate directly affecting ERP systems. Specific QS-9000 tools are now being included in packaged ERP systems, such as process mapping tools, compliance tools, supplier analysis, supplier score card, and other types of supplier rating systems. These tools, driven by the supplier and inventory data already within the ERP system, will help users perform qualitative and quantitative checks on inbound and outbound shipments to certify suppliers for compliance. SAP’s R/3 ERP system, for instance has a quality management system integrated into the purchasing and the shipping portions of the system. This makes supplier rating an inherent part of doing business.

Of course, this all begs the question: Is specific automotive ERP functionality worth it in the first place? Absent hard numbers and rigorous research, most ERP user companies feel in their “virtual gut” that they gain benefits in terms of time, money, and competitiveness. A more quantifiable response comes from the AIAG. Its Manufacturing Assembly Pilot (MAP) study last year showed that EDI use at the Tier-2 level would slash lead times and generate savings estimated at $1.1 billion per year, overall.