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1. COMPANY BACKGROUND Custom Engineering Results (CER) is an engineering services company specializing in custom electronic industrial controls and the remanufacture of heavy, electro-mechanical industrial
1. COMPANY BACKGROUND Custom Engineering Results (CER) is an engineering services company specializing in custom electronic industrial controls and the remanufacture of heavy, electro-mechanical industrial equipment. It was formed after World War II to repair and rewire large electric motors used in a wide range of sophisticated applications, including industrial machinery, generators, and aircraft engines. The founder, a mechanical engineer, grew the business by delivering custom engineering services to local companies of various sizes. In the past decade, global companies have come to demand CER' products and services, especially its electronic industrial controls. As it grew, it began to source assemblies from Ireland and China. Currently, CER produces approximately 1,500 different active products, with a mix of around 300 of these products and on average 3,600 units shipped to its customers every month. Their sales are distributed through 8-10 wholesalers. Additionally, CER also sells directly to 50 regular customers. Sales are also seasonal and thin-out during economic downturns. Production must be ramped-up and down for these seasonal peaks and valleys. Hence, the company both builds to stock and to customer orders. CER has two divisions. Its older division, Electromechanical Motors & Equipment (EME) is also its largest division, representing approximately 75% of CER' sales revenues. The younger division, Electronic Control Systems (ECS), manufactures semi-custom electronic control systems featuring user-configurable control panel hardware and customer-specific software modifications. CER' EME division can best be characterized as a remanufacturer of low-tech, electromechanical industrial equipment. In contrast, the ECS division can best be characterized as a manufacturer of new, hightech, custom electronic control systems. As CER has grown, the differences between its two divisions' business models have created signicant management problems. From an operational perspective, these differences are evident in the way each division has utilized CER' manufacturing control system in the past. The EME division primarily utilizes maintenance bills of material (BOMs) designed to provide a skeleton set of material, labor, and machine requirements created based on the past history for jobs of a similar type. They are then modified extensively to support the remanufacturing effort and to estimate cost, profit, and price. Each job is essentially custom and unique to the machine, generator, or power system being refurbished. In contrast, the ECS division has traditionally developed bills of materials for most new products, which are then modified as necessary to create different product configuration options to meet customer orders. However, instead of using a more conventional, standard approach to address this BOM exibility requirement, CER created unique product numbers for each customer order by copying a standard product BOM, then adding custom components and routing steps. This resulted in many thousands of "dead" BOM product variations saved in its manufacturing control system due to one time or limited run production orders. These many variants would impact the ERP implementation effort, because they increased the complexity of data conversion. In addition, the operational differences between divisions created signicant CER cost management and control problems. First, the accuracy of the price quotations for the EME division depended on the skill and experience of the sales managers responsible for pricing actions. The existing manufacturing control system, combined with EME's current approach to job cost estimation, made it difcult to accurately estimate and track the time and cost of a job. Thus, one need CER had was to implement a better, more automated system of analyzing prior jobs to help quote on new work. Second, the ECS division's approach of modifying standard product BOMs to create many custom products caused problems because this customization of standard products was not captured in labor and materials reporting. While it built semi-custom products, the current manufacturing control system did not capture these costs by job at the point they were incurred. Instead, CER' approach was to back ush costs based on standards, not utilizing the factory data collection and inventory control capabilities to capture actual production costs. This meant that cost variances were incorrectly calculated based on a standard versus "as built" basis. As such, it is not possible to assess whether production costs are accurate, much less conduct any sort of valid cost variance analysis. 2. ERP SYSTEM JUSTIFICATION 2.1 The Need for New Systems The need for new information system eventually became clear to CER' senior management. Using the old system, it was no longer possible to understand product and service costs. The accuracy of the data and reporting was questionable and of significant concern to the senior management. On the factory oor, controlling production jobs was increasingly difcult due to parts, materials, and finished goods inventory inaccuracies. In addition, true production capacity and job progress was unclear at best. 2.2 Justications for a New ERP System When CER' senior management decided to act, they chose to do so for several reasons: 2.2.1 Support niche market strategy: First, it was evident that CER could no longer compete on price when going headto-head against large competitors on most standard type products and services. Due to scale economies, larger competitors could always submit a "low ball" price quote that CER could not match. However, on semicustom and custom products and services that are low volume or unique by larger competitors' standards, CER could compete protably. This was a market niche in which they have done well in the past. Their unique, remanufacturing capabilities and new, semicustom manufacturing capabilities and niche products should remain their focus. Therefore, the replacement of their outdated systems with a new ERP system capable of supporting this environment was imperative. 2.2.2 Provide better cost data: Second, while CER cannot challenge competitors on price, it must be prepared to compete on cost when customers and the market dictate nal price. CER must be capable of managing its costs to satisfy customer requirements protably. The new ERP system must therefore provide better cost data for CER to be capable of pricing remanufactured products and new product sales to remain protable. Improved cost reporting is considered imperative to CER' future survival. 2.2.3 Improve the accuracy of nancial reporting: Third, and perhaps most important, CER was under pressure from its external investors and bank(s) to improve the accuracy of its nancial reporting, especially in the area of cost management and inventory valuation. Related to this, its auditors have stepped up their demands due to pressure on accounting rms to improve the quality of their audits. CER' old systems did not provide the necessary detail and clarity required, or the nancial controls to satisfy external parties. l-lence, management had no option but to act and to do so soon to avoid negative consequences initiated by the external parties. 2.2.4 Other justications: There were other, supporting justications. For example: 1) streamline the value chain so that inventory is not carried at multiple locations, 2) better track of sales and the ow of j obs through production, and 3) improve sales forecasting. 3. ERP SYSTEM ACQUISTION The ERP system evaluation process took place in two phases. First, a team of four senior managers contacted ERP software vendors, collected information, and narrowed the list of vendors to a smaller subset. This senior management team included the CFO, COO, and the sons of the company founder. The two sons of the founder are also the presidents of the two divisions. Second, senior management's primary goal was to choose an ERP system that most closely satisfied the needs of the EME division , the larger division - not the ECS division. Therefore, even though ECS was chosen as the rst site for the ERP implementation, ECS' requirements were considered as secondary. To develop the ERP selection criteria, members of the senior management team met with the various user groups to become familiar with the functions and features being used in CER' current systems. After doing so, they developed a short list of ERP software vendors, asked these firms to present their system's features, and extended an RFQ to bid on the job. Three potential vendors provided formal proposals. At the conclusion of the process, an ERP system developed by SysEpic was purchased for $250,000. The nal ERP software selection decision was made by the CFO in conjunction with the C00. The firm's IT manager was allowed little input and essentially excluded from the decision process. Despite selecting this ERP software, CER' senior management team concluded that the software vendor's services were too expensive for CER to engage them to support the system implementation process. SysEpic was also deemed as \"not being exible enough" to help CER meet its desired, aggressive go-live date. 4. IMPLEMENTATION ISSUES Numerous signicant issues surrounded this project. First, SysEpic's ERP system was selected, and the project approved in November 2017 with an initial " go live" implementation date, set by the CFO, of July lst, 2018. ECS employees were given six months to install the software, convert (and cleanup) the data, test the system, and train the employees using ECS' data. However, ECS did not actually begin work on the data conversion and testing effort until early April of 2018. When asked later, the CFO stated that the initial implementation date was fair and that individuals, including the IT manager, were simply making excuses for not starting and completing their work on time. Second, it was never clear who was in control of the project. The CFO claimed he assigned the IT manager to be the project manager. However, while the IT manager was given responsibility for the project's successful implementation, he was given no decision-making authority. All decisions, no matter how small, were to be approved by the CFO. While the IT manager had a Master's degree in project management, he was not allowed to develop a detailed plan for the project work. When the IT manager argued for additional time, money, or manpower, the CFO stated that the IT manager and other project team members needed to work harder to get the implementation completed on time. Third, tasks and dependencies between tasks were never clearly articulated. SysEpic provided a 126step project planning process, however CER chose not to follow it closely. Rather, it managed the project via short, very general lists of 1215 tasks. ECS did not identify a critical path of tasks or perform key resource projections. Task or resource dependencies were only addressed when they became critical, which happened frequently. Finally, while the CEO set a \"drop dead" implementation date and CFO stood rm with the date set by CEO, the implementation team did not conduct any sort of analysis to assess the feasibility of the timeframe. Fourth, like the IT manager, the middle and line managers were told the implementation date was xed and were given little decision-making authority. From a manpower perspective, the CFO resisted requests from ECS division managers to release employees from their existing duties to work on the project. When it became clear that the implementation deadline could not be met without adding signicant resources, the CFO continued to dictate that no extra money or resources would be provided. His solution was to implement mandatory overtime. When the economy worsened and the project bogged down, CER proceeded to layoff key personnel who had been supporting the project, further straining project resources. Few employees complained as good manufacturing related jobs were in short supply. Fifth, the total project budget had been set at $500,000 by the CFO. When asked how he developed this estimate, the CFO responded that he had based his project budget on the purchase cost ofthe ERP software. Since the ERP software cost $250,000 he reasoned that the total IT implementation costs for both divisions should not exceed the software's initial purchase cost. While the CFO had been told by SysEpic, by other SysEpic client rms, and by various ERP consultants that the implementation cost could greatly exceed the CFO's estimate, he dismissed their cost projections as greatly exaggerated. 5. SYSTEM IMPLEMENTATION In conguring its new ERP system, CER made several choices that would signicantly complicate things later. For example, it to setup two different companies rather than setup two separate divisions within the same company. This created data integration problems, such as the interdivisional transfer of nished goods or inventory was required to be treated as external sales versus a simple internal company transfer between divisions. Data conversion between the old system and the new system proved problematic. Because much ofthe data in the old system was obsolete or no longer used, it was necessary to first purge this data before converting it to the new system. For example, during the data conversion 170,000 obsolete part numbers and their associated routings were purged. The data was rst exported to Excel from the old system, the obsolete data removed, and the remaining data revised to include additional attributes needed by the SysEpic ERP system. Macros were written to make many revisions, but an audit of this process was not conducted that would have allowed ECS to detect and correct many errors. The users were trained using only vendor supplied test data. No testing or training using ECS data occurred before the go-live date. Hence, users had little opportunity to learn the new system and to identify and point out flaws in the data conversions. Because most employees were doing this work in addition to their existing job, many avoided getting involved in the data conversion effort, hence, important tasks were missed. For example, data critical to product cost buildups was either not input or was input incorrectly. In addition, users were not trained to create reports. Because of the lack of training and little understanding of the new system, the users expected the new system to produce reports that looked similar to those generated by the old system. Most did not realize that they would need to use a reporting tool to create their own reports. While there had been milestones for training and data conversion (i.e. clean the data), and for importing the data, there was no formal process for tracking their achievement or considering the impact on other tasks. Typically, at weekly meeting users were asked whether they got things done, and if they were not done, they were told to get it done next week. Consequently, many tasks were moving targets that required continuous attention as the 'go-live' date approached. Customers had been informed to expect delays because of the changeover to the new system, and most customers were understanding. However, the anticipated three-month implementation stretched out. By six months, ECS realized that their ERP system was not working properly. At one point ECS' product returns reached 40% of sales due to incorrect congurations or quality problems. It took a consulting rm another three months to x the data problems. Thus, during the rst nine months of system use, most users reverted to manual, pencil and paper forms or Excel spreadsheets to control inventory, schedule and track production, and perform most business tasks. It was also almost impossible to accurately track and calculate product costs, a key justication for the new system. Eventually, the system was implemented through "sheer brute force" from the top, and the ERP project teams worked hard to make it happen. Employees were initially extremely resistant. However, attitudes changed gradually and most used online training to become procient users. 6. THE IT MANAGERS As was stated earlier, the CFO had determined that the total ERP implementation budget for both divisions was to be $500,000. This included $250,000 to purchase the software and $250,000 to conduct the implementation process. This budget for the implementation process was split with $100,000 allocated for ECS and $150,000 for the EME division respectively. The CFO stated that he withheld this information from the IT manager, instead informing him that he had a budget of $100,000 to implement the ERP system for both divisions. His explanation was, "I expected the IT manager to show leadership to implement the ERP system at ECS for signicantly less than the $100,000 budgeted for the first division." In the end, the IT implementation costs for ECS were $90,000, effectively leaving only a $10,000 budget for implementing the system at the larger EME division. Hence, the CFO stated "the IT manager had failed to control costs effectively." Fall 2018 the CFO terminated the IT manager and in November of that year, a second IT manager was hired. The second IT manager had a Masters in CIS and extensive MIS experience. However, he soon fell out of favor with the CFO and was red. CER recruited four IT managers in a three-year period. 7. FINAL COMMENTS After two years, most users had increased their use of the ERP system as the information outputs improved. However, signicant reporting requirements have still not been met and important system features are not being utilized. When asked to rate their satisfaction with the ERP implementation, users reported an average score of 1 or 2 on a 5point scale (lZVery Low, 3=Neutral, 5=Very High). When asked this same question, the CFO reported that he would rate his satisfaction as being at least a 4 or 5
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