© 2007 Aberdeen Group, Inc. www.aberdeen.com

May, 2007

Lean Principles: Integrated Business

Processes or “Random Acts of Lean?”

The key business driver to optimizing the Order to Cash cycle is the corporate mandate to improve operational performance in order to reduce costs and increase profitability. Whether these mandates result from global competition or expectations from the investment community, manufacturers, distributors, and service providers alike turn to Lean principles, yet often fall short of bridging the gap between the internal operating model and the business. Many commit “random acts of Lean,” but still struggle with cash.

Best in Class View Lean as Strategic The top four strategic actions of Best in Class are illustrated in Figure 1. Streamlining operations to eliminate waste, continuous improvement, elimination of bottlenecks, and build to order pull based methodologies are all hallmarks of Lean principles. Yet each can be implemented in pockets or out of context with the business. This is evidenced by contrasting these strategic actions with the approach to Enterprise Resource Planning (ERP).

Figure 1: Leading Strategic Actions to Optimize Order to Cash

24%

44%

58%

48%

43%

66%

72%

77%

0% 20% 40% 60% 80% 100%

Implement build to order pull basedmanufacturing methodologies

Identify and eliminate bottlenecks tooptimize throughput

Implement continuous improvementculture and methods

Streamline operations to removenon-value add costs

Best in ClassAll Others

Source: Aberdeen Group, April 2007

As a transaction-based system of record, ERP is an essential component in managing the Order to Cash cycle for any company. It provides a basis from which to streamline and standardize processes ranging from the conversion

“Our ERP implementation is the result of a very well integrated-suiteapproach, including: order acceptance and fulfillment, credit, manufacturing planning, allocation, distribution / route planning, excise and VAT taxes, pick slips and warehouse picking, docking / cross docking, invoicing, transportation and truck load / route display, finance, etc. As a result, these interconnected functions are very well integrated and coordinated. Even our customer has a portal access to view their order execution status.” ~ CIO, Mid-size Metals Fabricator

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“Our ERP is integrated to some extent; it encompasses sales order processing, inventory management, production, purchase order processing, accounts payables, accounts receivables, and GL. However, the following functions are not part of the ERP as of yet: quality, human resources, and production planning. There is a great deal of coordination among the departments involved. This stems out of the integration offered by the ERP, where one process cannot proceed without the other requisite processes having taken place.” - Logistics Manager, Consumer Packaged Goods Manufacturer

of a quote to an order to the release of orders, and from the completion of work to invoicing and cash collection. While Aberdeen’s August 2006 ERP in Manufacturing Benchmark found that 85% of the 1,200+ survey respondents had implemented ERP, our current findings from the order to cash study indicate that only 52% use integrated ERP for order entry, procurement, production, and financial management — although Best in Class are 40% more likely to have done so.

Table 1 illustrates the percentage of customers for some of the major ERP vendors that have taken an integrated approach to ERP implementation.

Table 1: Customers That Have Taken an Integrated Approach to ERP Implementation

ERP vendor Integrated ERP1

Currently Using Lean Features of

ERP

Currently Using Lean Specialty Solution

Infor 31% 35% 12%

QAD 37% 21% 11%

Lawson 50% 19% 25%

Microsoft Dynamics 38% 19% 25%

Oracle 43% 36% 25%

SAP 53% 34% 25%

Best in Class 70% 51% 28%

Source: Aberdeen Group, April 2007

1Integrated ERP minimally includes integrated order entry, procurement, production, and financial management applications

For manufacturing companies in particular, properly implemented Lean features such as integrated planning, scheduling and sequencing, electronic kanban, and supplier collaboration can help reduce manufacturing lead times and improve on-time delivery. While build to order pull-based schedules are also often associated with Lean, it is important to note that these are not strategic to all organizations. Companies dealing with seasonality and cyclical demand may need to build to forecast, but still can be pull versus push based. Many ERP vendors offer these Lean features. Table 1 also indicates the percentage of customers of these major ERP vendors that have implemented Lean features of ERP.

Lean specialty vendors also offer associated functionality and are actually more likely to support other functions such as value stream mapping to eliminate non-value added activities and costs in order to remove waste. Some of these specialty vendors include Factory Physics, nMetric, Orlando Software, Pelion Systems, Synchrono, and Ultriva. The final column of Table 1 indicates the percentage of ERP users which also currently use Lean specialty solutions.

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“Lean fanatics don’t understand it is not a good fit for seasonal products. The customer demand may be seasonal or raw materials may only be available for a limited time. Toilet tissue might be a good candidate for Lean, but not baby food. Peas and carrots only grow at certain times of the year, but babies eat year round. You can’t be constantly ramping up or running down. You need an even flow through the factory.” - VP Logistics/Supply Chain, Consumer Durable Goods Manufacturer

This market has not been immune to consolidation. Factory Logic was recently acquired by SAP. More recently on April 18, 2007 Pelion Systems, which has gone to market as a solution provider of Lean Manufacturing Operating Systems, and JCIT International, author of Demand Flow® Technology (DFT), announced an agreement to merge organizations. The result of this merger is a new organization – DemandPoint – focused on helping companies align their business around demand and drive order through the value chain for the express purpose of streamlining the order to cash cycle and improving cash flow and working capital.

Related Research Order to Cash: When You Make to Order; April 2007 Small Companies Think Strategically but Fail to Exploit ERP to Improve Cash Flow; April 2007 Benchmarking the Order to Cash Cycle; March 2007

The Order to Cash Cycle: Integrating Business Processes to Improve Operational Performance; April 2007 Realize the Returns from Enterprise Management Applications; January 2007 Benchmarking ERP in SMB; December 2006

Author: Cindy Jutras, Vice President, ERP Research, cindy.jutras@aberdeen.comFounded in 1988, Aberdeen Group is the technology- driven research destination of choice for the global business executive. Aberdeen Group has over 100,000 research members in over 36 countries around the world that both participate in and direct the most comprehensive technology-driven value chain research in the market. Through its continued fact-based research, benchmarking, and actionable analysis, Aberdeen Group offers global business and technology executives a unique mix of actionable research, KPIs, tools, and services. This document is the result of research performed by Aberdeen Group. Aberdeen Group believes its findings are objective and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, stored in a retrieval system, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.