SOLVING PROJECT ALLOCATION RESOURCE PROBLEMS WITH AEROSPACE ERP

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 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,

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.

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

…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?

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.

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.

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.

En5060-1Production:IFSCorporateMarketing,April2018.
IFSworld.com
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