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SOLVING PROJECT ALLOCATION RESOURCE PROBLEMS WITH AEROSPACE ERP

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KEY QUESTIONS:
What are estimate at completion (EAC)
and estimate to complete (ETC) and why
are they important?
P8
Why is ...
2 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP
Defense manufacturing is all
about project manufacturing...
3 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP
The right enterprise resource
planning (ERP) software is...
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Defence manufacturing is all about project manufacturing and project accounting. And that means enterprise resource planning (ERP) software for defence manufacturing must include robust functionality for project management and specifically project cost allocation.

Defence manufacturing is all about project manufacturing and project accounting. And that means enterprise resource planning (ERP) software for defence manufacturing must include robust functionality for project management and specifically project cost allocation.

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SOLVING PROJECT ALLOCATION RESOURCE PROBLEMS WITH AEROSPACE ERP

  1. 1. KEY QUESTIONS: What are estimate at completion (EAC) and estimate to complete (ETC) and why are they important? P8 Why is Project Cost Allocation crucial for aerospace and defense manufacturers? P2 What problems will your business experience with inadequate project cost allocation? P3 KEY QUESTIONS: SOLVING PROJECT ALLOCATION RESOURCE PROBLEMS WITH AEROSPACE ERP IFS WHITE PAPER Carrie Ghal, Senior Business Solutions Consultant, North America, IFS
  2. 2. 2 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP Defense manufacturing is all about project manufacturing and project accounting. And that means enterprise resource planning (ERP) software for defense manufacturing must include robust functionality for project management and specifically project cost allocations. SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP BY CARRIE GHAL, SENIOR BUSINESS SOLUTIONS CONSULTANT, NORTH AMERICA, IFS Defense manufacturing is all about project manufacturing and project accounting. And that means enterprise resource planning (ERP) software for defense manufacturing must include robust functionality for project management and specifically project cost allocation. WHY PROJECT COST ALLOCATION IS CRITICAL Top-tier defense vendors—original equipment manufacturers (OEMs) doing business directly with the federal government—are executing against complex contract vehicles that carry heavy project accounting requirements. These different types of contracts include: • Cost Reimbursement and Cost-plus defense contracts, which require rigorous tracking of project or system cost so a standard markup can be applied, up to a set limit. • Earned Value Management, a system where liquidity events are tied to the achievement of specific project milestones • Time and Materials contracts, which tie payment on direct labor hours, actual materials cost and profit. • Performance Based Logistics, an approach where a manufacturer sells not so much the product but hours of operation—time in the air, power-by- the-hour, etc. This forces a manufacturer to apply project account not just across the initial manufacturing process, but the entire lifecycle of the asset so they can profitably deliver on the promised level of availability. But according to research from the Department of Defense Manufacturing Technology Program, 60 percent of the value of systems and products delivered by tier-one vendors in fact originates from their suppliers—tier-two defense manufacturers who provide components and subsystems for defense programs of the OEMs. Manufactur- ing executive supplying defense OEMs are finding that the better job they do helping these customers meet the reporting and cost control requirements of the federal government, the more attractive they are as a business partner and the more work they can win. Tier-two vendors also find the more precise they are in tracking project cost, the more rapidly and accurately they can generate pricing and proposals for new work. And the more demanding lifecycle approaches to contracting may require the capture and allocation of cost not only for initial manufacturing, but for maintenance,
  3. 3. 3 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP The right enterprise resource planning (ERP) software is … critical to aerospace and defense manufacturers who need to meet the project reporting and accounting requirements of complex procurement systems while operating profitably in this environment. so a manufacturer may need to capture and track cost liabilities over the lifetime of an assembly, subassembly, component or system. This means that defense manufacturers must not only be able to submit bids for programs that are competitive but also enable them to make a profit. But as the project lifecycle progresses, they must retain visibility into how many additional resour- ces the project will require to get to completion as well as how many resources the project will have consumed when it is completed. The right enterprise resource planning (ERP) software is therefore critical to aerospace and defense manufacturers who need to meet the project reporting and accounting requirements of complex procurement systems while operating profitably in this environment. They must be able to confidently and quickly generate proposals, commit capacity, generate pricing and timelines that are attractive and attainable and report on progress towards project milestones and completion. And they must do this in an environment of uncertainty. MANAGING AMBIGUITY Managing the unknown in the face of hard cost and timeline constraints … if you are in project- or program-centric manufacturing, this is what you do every day. Each time you initiate a customer project, new product introduction or design, you have a relatively static set of resources to complete a yet-to-be-defined scope of work. Maybe the problem is open-ended and you are starting with just a design problem to solve or a black-box spec to achieve. That means you usually do not know the types and duration of resources required to complete a project. You must track what you have into the various project elements in real time so you can manage to the required outcome. Unfortunately, ERP software and its predecessor, materials requirements planning (MRP) were designed originally to match resources and demand in a repetitive manufacturing environment. They assume a certain degree of predictability and are still engineered around repetitive core processes rather than anecdotal, dynamic projects. Project-driven manufacturing, program-centric manufacturing, engineer-to- order—these disciplines involve not just dealing with known variables, but unknown ones. Software used in these environments must be designed specifically to manage project risk and to allocate resources and cost across multiple projects all competing for the same productive capacity. In an aerospace and defense project environment, this risk includes things that may otherwise be considered overhead in the front office, like engineering, design and project management time. But the greatest challenge is employees involved in executing the manufacturing side of the project as it is defined. The work and resulting cost of production, installation and in some cases maintenance and sustainment personnel must be tracked according to the project requirements of each OEM customer and each defense program.
  4. 4. 4 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP If you try to track load against resources outside of ERP, you are not managing the project from a financial and costing standpoint. You are using what is essentially an operations or scheduling tool that at the most may encompass manufacturing time and attendance or work centers for engineers. MISSING THE MARK In many aerospace and defense settings, manufacturers will rely on project management or project portfolio management software. Tools like Microsoft Project or Primavera are very capable standalone project management tools, but the problem is that they do stand alone. If you try to track load against resources outside of ERP, you are not managing the project from a financial and costing standpoint. You are using what is essentially an operations or scheduling tool that at the most may encompass manufacturing time and attendance or work centers for engineers. This level of management may present practical difficulties, and may also get you excluded from work. In the past three to five years, the need to manage project resources in order to meet the needs of OEMs has become more common in ERP software RFIs from aerospace and defense manufacturers. It was not as prevalent before, which suggests that OEMs are pushing down more of the project accounting requirements on their vendors, where much of the value is delivered anyway. It also suggests that lacking ERP with strong project cost allocation functionality, there is a lot of non-value-added work to perform. A manufacturer may have a team of dedicated resources trying to manage schedules and resource load. But even with this extensive use of full-time managers devoted to project coordination, a manufacturer may face a number of negative outcomes: • The manufacturer may have found after the fact that they have racked up overtime or brought in contractors and the cost has exceeded what is allocated for a given portion of the project. • They may have committed to deliver to customer a task-related drawing or other work and it cannot be done because you have run out of labor hours. • These situations can create delays as the manufacturer scrambles to figure out how they will rob Peter to pay Paul, trying to shave time, resources or budget off of a later phase of the project to make up for the shortfall. So while selecting and implementing an enterprise solution that properly addresses project cost allocation will require an investment in time and resources, there is definitely inherent cost in not managing the resource load appropriately in real time. SOLVING COST ALLOCATION PROBLEMS Some people, as they attack the problem of cost allocation in complex project environments, will talk about tracking their resources in terms of how many hours or people they have and begin to allocate them appropriately. This may be done on a project-by-project basis. But in order to do a more optimal and reliable job, a planner should know what jobs they have not only today but into next year. That way, they can start with an understanding of what resources are allocated to existing work and which are not allocated yet during which periods of time. If they take on a new job, they can then allocate resources not only in light of the project requirement, but with
  5. 5. 5 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP …ERP designed for the modern aerospace and defense manufacturer must forecast throughout the life of a project. This is a tall enough order. But then, during that project lifecycle, things change. an understanding of their existing resource load. This more powerful functionality can help them answer not only project-oriented, but enterprise-level questions including: • Do I need to ramp up my staff or bring in third parties? • How do I plan contractors into the plan and budget? • For a new project, what overlap is anticipated in resource requirements on top of what is already planned? In IFS Applications, the general resource capacity can include or exclude the forecast overlay. This will enable them to accurately quote lead times and cost because they will know even before the project starts where and when they may need more people or contrac- tors to do some of the work. So ERP designed for the modern aerospace and defense manufacturer must forecast throughout the life of a project. This is a tall enough order. But then, during that project lifecycle, things change. You may have anticipated needing 10 people for 10 weeks, but the customer changed the scope. Or perhaps a long lead time item is delayed due to a commodity shortage or vendor bottleneck. That impacts the rest of the schedule. ERP designed for the aerospace manufacturer must then enable the reallocation of hours and costs. Specifically, the software must enable: • A change in scope, design, or subcomponent of a component or part. Each of these will impact the management of priorities for labor and cash. • Prioritization of larger deals versus smaller deals. If you are delivering a project worth $12 million for a valued customer, you don’t want to get reallocate critical resources so you can complete a $400,000 project. • Course correction after mistakes. If you make an error that requires rework, how do you make up for the lost time and minimize cost overruns? • Management of lumpy, unpredictable business. We all know that our schedule and plans can be thrown off when contracts we expected to start on by a given date get delayed. But what happens if a contract we thought might be coming, estimated at about 20 percent in the pipeline, comes in. Are there resources I can use to satisfy this new demand, and how and when can I use them?
  6. 6. 6 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP This means the software must provide end to end visibility not only of the supply chain and inbound demand, but a chain of internal, interdependent resources. Lacking full project allocation functionality, many people will start the process with some type of rough-cut demand plan to see how all of their resources are allocated. Generally, this will only deal with things at a very high level, looking at a group of resources rather than specific skills or individuals or a specific work center. OPTIMAL STATE The optimal software tool for this task will take things to several more layers of granularity. Which manufacturing disciplines and capacities can I commit to the project, which engineers with which skill sets, how many project managers and inventory are available? In IFS Applications, the forecast can include hours by ETC and EAC driving the cost forecast. Lacking full project allocation functionality, many people will start the process with some type of rough-cut demand plan to see how all of their resources are allocated. Generally, this will only deal with things at a very high level, looking at a group of resources rather than specific skills or individuals or a specific work center.
  7. 7. 7 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP In a project-based ERP solution, it is possible to view the automated spread of hours based on the type of resource used on the project. The software should overlay this more granular view of capacity in the quoting process to estimate the number of hours and compare it current capacity usage this enables you to move from quoted plans into actual plans for resources once you win the work. You are now able to take the forecast and turn it into an actual resource plan that has actual productive capacity behind it. The plan becomes not just hours and graphics on a gantt chart, but dollars. Your software tool must deal with hours and dollars in concert. In a fully integrated ERP, you can generate more tasks and activities linked to work orders or shop orders to generate a flexible, fine-grained schedule and cost story. So if an existing project scope changes and you need two more workers at two hours each for two weeks, you can let the system overlay that in your capacity plan, convert that into dollars and estimate to completion given the latest forecast. What have you consumed on the project so far? What do you need to consume to finish project? Standalone project management software will not give you that united view of dollars, capacity and the project plan. In order to achieve this, it is essential that project functionality is part and parcel of the ERP system rather than two separate applications that are united in a point-to- point integration. Any demand put into a project that requires you to generate a shop order or a work order or put a resource in the field must accrue against resources available at that time and affect the total cost of the project. No separate project management tool is going to automatically create those transactions in your ERP system of record. One integrated solution manages not just resources but demands, all managed to the project schedule, covering: • Manufacturing managers’ use of resources against the project schedule. • Human resources to ensure you have right credentials, skills to validate certifications, with visibility of renewals of training, work schedules. How else can you be sure to have the right credentialed people on hand at a Your software tool must deal with hours and dollars in concert. In a fully integrated ERP, you can generate more tasks and activities linked to work orders or shop orders to generate a flexible, fine-grained schedule and cost story.
  8. 8. 8 SOLVING PROJECT RESOURCE ALLOCATION PROBLEMS WITH AEROSPACE ERP given time to complete elements of a project? • Rates of pay. In the planning phase, you may not know which individual project manager or engineer you will involve in later project phases. But as they log work against the project, you will want to ascertain what the actual cost of the project is and perhaps use visibility into rates of pay as a criteria in assigning tasks to as to manage to the budget. • Incident reporting and noncomformance reporting. Heavy manufacturing, construction and fabrication or asset intensive and construction can be put off budget or timeline by accidents. This is one more thing you cannot address completely in the forecasting stage. You will need visibility into accidents involving employees working on your project. Nonconformance and quality issues are also difficult to plan for, but they can and do affect the project schedule and budget. What amount of scrap, rework and other nonconformance events have taken place with parts involved in the project. • Capabilities for level loading to ensure you have enough worker-hours and are not overloading any one individual. How many overtime hours will my current plan require, and how much of an allowance for overtime by hours and dollars am I building into my project? THE DESTINATION: EAC AND ETC With the above elements in place, an aerospace manufacturer will be in the driver’s seat. They will be able to generate, at any given time, the two numbers they need to manage in a program-based manufacturing environment: • Estimate to complete by hours—forecasted number of hours and dollars to complete the project • Estimate at completion by hours—forecasted cost of the project at completion It makes perfect sense, but very few ERP software products can connect the shop floor and work order schedules directly into the project. This is the only way to deliver resource forecasting, labor hour scheduling and resource allocation in a single platform. Carrie Ghai is a senior business solutions consultant with IFS North America. She has been in the enterprise software industry since 1996. Prior, she held a num- ber of positions in industrial firms including Vice President of Customer Service in North America for Tetra. She holds an accounting degree from Ealing College of Higher Education and is qualified as a Certified Accountant (UK). …Very few ERP software products can connect the shop floor and work order schedules directly into the project. This is the only way to deliver resource forecasting, labor hour scheduling and resource allocation in a single platform.
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