Book Review: Necessary But Not Sufficient: Author: Eliyahu Goldratt

Were Mr.Eliyahu Goldratt and his team to write the ideas covered in his book ‘Necessary But Not Sufficient’ as a technical journal, it will probably be titled ‘ERP Industry: Where are we today? What are the challenges? What is the future?

How do we reach there?’

The book of 20 chapters can be divided into two parts. The first part covering about 12-13 chapters addresses the first two questions and the remaining chapters address the last two questions about the future.

Let us begin with a brief introduction to the book.

This is a 'Business Novel' written by Eliyahu Goldratt and his team. The other books in this genre that I have read are The Goal and Critical Chain. The title of this book reflects the authors' view that while technology is necessary, it is not sufficient for an organization. The way companies measure performance should change along with the implementation of technology solutions.

Mr.Goldratt has co-authored this book with Ms.Carol A Ptak and Eli Schragenheim. Ms.Ptak is a senior ERP professional with expertise in Supply Chain and Manufacturing Solutions and Mr.Schragenheim is an ERP practitioner with expertise in Theory of Constraints.

The main characters of the book are Scot Duncan the CEO of the company BGSoft. The company sells ERP solutions. He is supported by Lenny, VP of Product Development (I guess it is the title), Gail, VP of Marketing and Maggi, the CEO of KPI Systems, the main implementation partner of BGSoft.

Book starts by looking at the current state of ERP Industry. The industry is growing rapidly, at over 40% every quarter. Every company in the industry is enjoying hefty valuations. For example BGSoft is enjoying a market capitalization of over 10 Billion Dollars with an earnings multiple of 100 reflecting its position as the market leader in the rapidly growing industry. This valuation allows the company to grow its bottom line by buying small companies offering niche solutions. BGSoft has streamlined the process of integrating these solutions into its overall product portfolio.

All gung-ho you may say, but no.

New features are added to meet ever increasing market requirements. Those are needed to maintain the market position of the company. They also come with challenges. As product complexity increases, every bug impacts multiple areas in the product. Due to this the time taken to fix the bugs is increasing. This causes dissatisfaction among the current customer base.

Service quality deteriorates as product complexity increases. .

In addition, the market of ERP is saturating. Traditionally ERP Vendors sell to large companies with factories across cities, states, countries and even continents. Most of the large companies in US have already implemented ERP. ERP Vendors are finding it increasingly difficult to get new customers. The customer base shrinks, but the competition remains as strong as ever.

Another challenge is that existing customers are getting disenchanted. ERP Vendors

are unable to justify the bottomline benefits of ERP. The discussions are stuck at the level of technology (Workflow, Cloud, Architecture) or at the operational level of approvals, yield, process standardization and inventory optimization.

No one talks the language of CEO, that of RoI, Payback and Bottom line.

This provides answer to a puzzle that Scot Duncan and team is facing. One of the ways for industry to end its dependence on large customers is to focus on the mid-market segment. Considering that this segment has fewer evaluation layers and fewer stakeholders, the selling lead time to sell ERP to this segment should be much shorter than for large industries.

It is not. The lead time remains the same.

Scot understands that the reason for longer lead time in small companies is that it is the CEO who takes the purchase decision. Since no one in the sales process talks his language, the lead time increases.

Even implementation consultants talk the language of operations.

Maggi points out that if ERP consultants talk 'bottom line' from the start of the project, they can deliver those benefits early in the implementation cycle.

The points clarified one of the key gaps in my experience at one of the companies that I worked for. In every meeting owner CEO used to talk of opportunity cost of ERP. We gave the normal spiel about improvement in operations. However, it is clear to me that the Owner was talking about bottom line impact and all of us were talking operational benefits.

I could hear the owner screaming in his mind, "Tell me how much is the bottom line impact of my investment in ERP? Has it increased sales? Has it reduced costs? By how much? Prove it."

We were talking different languages.

There is a fascinating discussion on how ERP can bring bottom line benefits to a customer. Craig, the CEO of Pierco, a top customer of BGSoft, asks for bottom line justification for ERP Investment. Maggi talks about the reduction in time to close the quarterly books. It has come down from almost 6 weeks before ERP Implementation to just about a week. While Craig agrees about the operational benefits, he points out that it has not reduced cost. No employee has been laid off and company is still paying salaries.

Craig asks them to submit a report within 6 weeks on the bottom line benefits that he can expect from ERP

Back in the office, Maggi puts together a team to identify the bottom line benefits that ERP can provide. The team comes back with the following output.

One time benefits:

1. Faster collections due to more accurate invoicing. This will free up the cash flow and reduce the working capital requirements
2. Reduction in inventory quantity and obsolescence due to better planning.

Recurring benefits

1. Reduction in inventory carrying costs
2. Improved sales due to reduction in stockouts due to better planning.
3. Improved purchasing due to centralized purchasing
4. Reduction in payables due to timely payment. This further improves the working capital and reduces interest on Working capital.
5. Improvement in inventory utilization and inventory turns. How to tie this to reduction in working capital requirements and bottom line?

Scot and his colleagues, Lenny and Gail discuss the above list. Scot and Lenny conclude that the benefits mentioned above are not applicable to mid-market companies. These companies do not have global sourcing, multiple plants where inventory can be optimized, or many warehouses from where they ship to customers  

Gail doesn't agree. She gives an example of a SMB customer who has got huge benefits after implementing ERP. The company, Stein Industries had implemented the Theory of Constraints concepts called 'Drum - Buffer - Rope' system on top of their existing ERP. This helped them manage the bottleneck resources better and increase the capacity utilization. However introducing that in a company was fraught with many cultural and performance measurement changes. So they decide to keep looking.

The experience with Stein Industries taught them that for small companies, the bottom line value is in production planning and scheduling optimization.

This is where part 2 begins.

BGSoft do not have an APS (Advanced Planning and Scheduling) solution. To fill the gaps in Product Portfolio, BGSoft buys an APS company called Intellogic. The product of Intellogic had a number of redundant features and Lenny strips many features and decide to integrate the stripped product into BGSoft. The key feature in the new offering is the 'Drum - Buffer - Rope' system.

Pierco had installed a new product line in one of their divisions offering an upgraded product. All the customers stopped ordering the older version of the product and the demand for the new product piled up. Unless they improved the capacity utilization of the new line quickly, the division was looking at 20% shortfall in sales in the remaining two months in the financial year.

After hearing about the new offering from BGSoft, Pierco agrees to become the beta site. The implementation goes smoothly.

The results of beta tests are amazing. Pierco was able to increase their capacity by almost 50% in the remaining two months of the financial year. They were able to exceed their sales targets for the year.

BGSoft also benefited since they were able to sell many more concurrent user licenses to the production departments in Pierco.

Seeing the results from their Beta Test, BGSoft makes two decisions. One, they realized that there is still a lot of potential in large companies. So they decide to focus on large companies. Two, they will aggressively push the new APS solution to existing large customers.

After the great results it achieved last year, Pierco has implemented the new system in all its manufacturing divisions. With factories using their capacities to the full, they face multiple challenges downstream.

The warehouses are not able to manage the increase in sales. They are unable to load the trucks on time and are losing sales. In addition, factories are not sending optimal quantity of each item. They are sending excess of some items leading to shortages in other products.

There are two reasons why warehouses are flooded with products they do not need. One reason is that when one warehouse raises the demand for a product that is shortages in that warehouse (Local Shortage), the factory produces more quantities to meet the scale economy. So, the product is shipped to all warehouses, even those where the material is in stock. In addition, to ensure that the trucks are loaded fully (another local optimization), more material is stacked into the truck.

Both of these do not account for increase in warehouse stock. On analysis they find that material planning is done four months ahead when the forecasts are hazy. As the current date nears the forecasts become more concrete and lower than the original forecast. This causes a mismatch between planned demand and actual demand

There is another reason for difference in forecast sales. Forecasts made at the region / warehouse level (local optima) is not as accurate longer the duration.

The solution is simple in theory. Reduce the forecast duration and broaden the scope of forecast to a global (country) level. This will ensure forecast accuracy and stock reduction. This is global optima.

The problem is in the measurement policies adopted by most organizations. They encourage local optima. Factory performance is measured in terms of units of production. Each line foreman is measured based on his performance. Each machine is measured on its utilization. Each warehouse is measured on the basis of its stockouts and loss of sales.

To get the benefits of technology, the performance measures must shift to global optima.

By looking at the current problem from the perspective of global optima, they (BGSoft and Pierco) realize that both the requirements - reduction in forecast duration and increase in forecast accuracy - can be met by amending the inventory management process.  

To benefit from Global Optima, it is decided to have central warehouses at the plant level. The logic is that since plant services the entire country, the forecasts will be more accurate at the plant level. The central warehouses will stock three weeks of inventory for all the products. Everyday the plants will ship materials to warehouses as per requirements. 

The warehouses will maintain a minimum inventory, about a week.  The performance measurement criteria for both warehouses and plants are changed. Warehouses will be measured on the sales loss due to inventory stockouts. Plants will be measured on the average value of inventory they hold.

This solution is acceptable to managers in Pierco. Both BGSoft and Pierco celebrate a job well done.

***************************************************************************

The story closely follows the evolution ERP over the last two decades. In this time, the ERP Vendors added more features, applications and industries to their portfolio. This meant releasing newer versions of the product and asking the existing customers to upgrade. Some of the changes did not make any sense at that time. For example, I could never figure out why a company will replace a stable  on-premise application with another on-premise application

Now I know. The new version is introduced to generate market hype.

I guess it worked. The company generated a lot of business through version upgrades

There are multiple cribs I have about this book. First, this book flatters to deceive. It starts off by saying that the ERP market for large customers have saturated and the vendors have to start focusing on mid-market segments. It builds up a case for how ERP can add value to mid-market companies. As an ERP consultant focusing on mid-market companies, I was curious to learn about ways to add bottomline value to that segment. Suddenly the book takes a U-turn and decides that ERP can't add bottom line value to mid-market segment. Vendors like BGSoft can only grow by adding more value to their large customer segment.

In the part on warehouses, the book talks about reduction in forecasts sales as the forecast date nears. Four month forecast had predicted higher sales based on which factories had shipped material. As the time neared, the forecasts were downgraded. ERP or no ERP, is this not a real planning challenge for any manufacturing industry? That is why they have planning time fences, right? The book also talks about overstock for 'some' items while there is 'stockout' for other items in the warehouse. The reason for stockouts is not clearly explained

The book moves from one idea to another leaving the reader wondering about the core idea..

Having said that, there are a lot of lessons for an ERP Consultant. The discussion on bottomline benefits that an ERP can deliver is pure gold.

What is it with the 'f' key by the way. In many places it is not working. So 'flow' is written as 'low' and 'fire' as 'ire'.

And spell check misses that.