Best Plants Finalists Spend Smart On IT

Hungover.

That's the best way to describe the way manufacturers felt a few years ago when, having awakened from a spending spree on information technology, they found themselves in a brave new world of rampant cost-cutting and razor-thin IT budgets.

"There was a binge in IT spending from 1997 to 2000, and then another huge spending binge after Y2K that put tons of technology into our manufacturing companies, more than they could absorb," says Dan Miklovic, vice president and manufacturing research leader at Gartner G2.

The need to work off the glut of purchased technology is one way to explain the 50% drop in spending on IT from 2002 to 2004 among last year's IndustryWeek's Best Plants finalists. As a percent of total sales, IT investment by this group of world class manufacturing facilities halved from 2.2% to 1.1%.

Whether it was enterprise resource planning software, customer relationship management systems, or advanced planning and scheduling packages, manufacturers took years to install and fully utilize the surfeit of technology they had invested in. "These plants got out ahead of the curve and bought the right tools, put them in, and are now reaping the rewards," says Kevin O'Marah, vice president of research at AMR Research. "They got it early, and selectively picked the appropriate IT tools. You don't go out and buy new tools when you are still learning to use the ones you already have."

Another reason for the downturn in IT spending was -- plain and simple -- the ubiquitious push for manufacturers to cut costs. "I think this is part of the overall trend to cut down on capital spending in general," observes Martin Piszczalski, principal analyst at Gartner G2. "There is a move back toward having manufacturing people concentrating on making products. Spending more on information technology doesn't necessarily go to the bottom line."

Yet another factor that may have diminished IT investment is the trend for many larger manufacturers to send software development and support functions to low-cost providers offshore. "Offshoring IT costs tends to reduce your IT spending at the plant level," says M.R. Rangaswami, founder of Sand Hill Group, a venture capital firm and producer of the recent Software 2005 conference in Santa Clara, Calif., attended by 1,500 people in the industry.

Of all the technologies used by the 2004 Best Plants finalists, two could be found in almost every plant -- computer-aided-design (CAD) systems and electronic data interchange (EDI). Not only are these among the most mature technologies, they also are key links necessary to connect with and to serve other customers in manufacturing.

"Today all design is done on CAD systems, even if you are a one-man shop with $100,000 in sales," Piszczalski points out, adding that it often is a customer requirement. Adds O'Marah: "If you are cutting metal, and you are not using CAD, you're making mistakes. You have to do it digitally to reduce waste."

Similarly, with EDI, most companies that place orders with any complexity, volume or frequency tend to use EDI automatically. "People in manufacturing have not seen an alternative to EDI, and once you have something installed, you don't go and pull it out," Rangaswami says.

Another thing working in EDI's favor is its role in vendor-managed inventory (VMI).

"EDI is the technology manifestation of VMI," AMR's O'Marah says. "For plants with a pull system of replenishment, it works well."

Surprisingly, fewer than two out of three Best Plants had installed a technology that for years was viewed by most manufacturing experts as essential to remain competitive: ERP. At the plant level, though, ERP may not be essential for the lean enterprise.

"I think ERP is not that critical for some plants," says O'Marah. "The role of ERP has been hotly debated at some dedicated lean plants, where the question is raised as to whether they even need this kind of software. There are some circumstances in which the effort and cost of putting an ERP system in isn't justifiable."

What's more, ERP tends to be a companywide system that the corporate headquarters wanted, not a technology that people needed or wanted at the plant level. As O'Marah puts it, "ERP is the CFO's favorite toy, not the plant manager's."

Most (84%) Best Plants finalists, though, had installed a material requirements planning (MRP) system. In some cases, this software, which has been around for decades, is homegrown, but more often it is a software package that has been customized to fit a particular plant's needs.

Rounding out the most popular technologies in use at the Best Plants is the advanced planning and scheduling (APS) system, which is used by 78% of the facilities. "MRP gives you an unconstrained plan, while an APS lets you build a robust constraint-based plan that takes into account labor, materials, and equipment scheduling," says O'Marah. "To have a high level of implementation of APS in these Best Plants makes sense."

Other manufacturing observers agree. "When you start looking at the entire supply chain, you can get significant payoffs from an an APS by not having excess inventory rusting out in the yard," says Piszczalski. Adds O'Marah, "Some of these Best Plants bought APS a few years ago, figured out early how to use it, and now are using it and getting the benefits of their investment."

As a result, their IT costs are going down, while their business performance is going up. "IT does matter," concludes O'Marah, "And these plants are smart enough to know how to use it."