InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

February 5, 2001

Ready For A Recession?

Manufacturers are thankful--or wishful--for applications that help them respond

By Steve Konicki (skonicki@cmp.com)

More on ERP:

Break Out (12/18/00)

he slowdown in the manufacturing industry has people talking about a recession, following thousands of recent layoffs, plant closings, and scaled-back production schedules. Yet some manufacturers say things might have been worse if they hadn't spent heavily in recent years on enterprise applications that are now helping them weather the downturn.

Owens Corning Inc. says its IT systems made it more nimble in the face of the slowdown, enabling the company to avoid getting stuck with excess inventory. Others, including Cisco Systems and IBM, say their investments in enterprise resource planning, supply-chain, and business-intelligence applications are resulting in cost savings that can make up for declines in revenue. IBM's business systems are even helping the company deliver above-average financial results despite the lean times.

The bottom fell out for most manufacturers between Christmas and the end of January. "This was not a slow build up to a recession," says Lee Geishecker, a Gartner research director. The National Association of Purchasing Management's index of manufacturing output fell to 41.2 last month; the drop was sharper than expected, and marked six months of decline for manufacturers. "Enterprise systems did what they should have done for many manufacturers--they alerted them that demand just stopped," Geishecker says. "And manufacturers did what they should have done--they slowed or halted production."

The Federal Reserve Board, in a statement accompanying its half-percentage point interest-rate cut last week, credited technology with helping manufacturers avoid stockpiling inventory, softening what might have been a more serious blow. Still, the situation remains serious, and manufacturers with outdated or poorly integrated IT systems are paying the price.

Automaker DaimlerChrysler AG was caught by the downturn before it could implement its ambitious FastCar and DCX Net projects, which will eventually integrate hundreds of disparate enterprise systems worldwide, provide an Internet link to suppliers, and tie demand data to production and supply-chain systems in real time. The result: The company didn't foresee the need to decrease production of slower-selling cars or to ramp up on in-demand vehicles such as the PT Cruiser or the Dodge Caravan and Chrysler Town & Country minivans with their surprisingly popular power-lift back gates.

Millions of dollars in potential revenue was lost, says Gary Dilts, the automaker's senior VP of E-business. DaimlerChrysler last week disclosed plans to cut 26,000 jobs, close six plants, and slash production by 15%.

"Because there are so many potential blind alleys that can't be monitored in real time, the company has been afraid to capitalize on demand and make sharp turns in the market," Dilts says. "That means we end up building cars based on what is most efficient for production, not based on market demand."

DaimlerChrysler originally planned to build 180,000 PT Cruisers for the 2001 model year; as it turned out, that wasn't enough. Had FastCar been in place, the company would have had early warning of long waiting lists and unfilled orders for the car. The system, which is being built with supply-chain and collaboration software from i2 Technologies Inc. and interactive 3-D modeling tools from Dassault Systemes S.A., will tie dealers' order-management software to DaimlerChrysler's order-management apps. DCX Net will link facility-management systems to production and inventory-management systems--and together with FastCar might have helped the company find a factory to expand production and line up suppliers. Instead, some plants remained underutilized even as demand for the PT Cruiser surged.

The real-time Internet supply chain promised by FastCar would also have made it easier for DaimlerChrysler to locate suppliers of motion sensors for its minivans with power-lift gates, Dilts says. Production on such vehicles was stalled at the start of the model year because the sole supplier of the sensors couldn't meet demand. The automaker lost six weeks of production while using the phone, fax, and electronic data interchange to get the part from another supplier.

"If you can assemble the car electronically, create a production schedule at the factory using real-time tools, and handle fulfillment using another integrated set of tools, you can ramp up production very quickly," Dilts says.

That's the kind of system an automaker and its suppliers need. Textron Inc. the Providence, R.I., diverse manufacturer that makes components such as instrument panels for cars learned via phone calls from automakers that forecasted demand in 2001 topped out at 16 million vehicles, down from 17.2 million in 2000. The company has many ERP and legacy systems, none of them integrated, says Textron CIO Ken Bohlen, so it's hard to get and share consistent data about supply and demand, either internally or with business partners. When the slowdown hit, Textron had to move quickly to keep inventory from piling up and to meet fourth-quarter earnings-per-share projections of $1.28 from continuing operations, up 14% from the prior year.

Owens Corning, in Toledo, Ohio, says its full suite of SAP R/3 tools and mySAP.com Business Information Warehouse and data-analysis tools are helping it get through the slowdown in home construction that hit in late 2000. Sales for its fourth quarter ended Dec. 31 fell more than 13% to $1.11 billion, from $1.28 billion a year ago.

"No system is going to overcome a downturn in the economy like this," says David Johns, CIO of the company, which produces insulation, roofing shingles, and construction materials. But SAP helped the company slow production to prevent inventory from building up and to keep working capital at a sufficient level to get through the year, Johns says. "Does [R/3] put us in a better situation than five or six years ago, before we had an integrated ERP system? Absolutely," he says.

Other businesses are using their enterprise applications to turn a profit in these slow-growth times. PC industry sales were flat in the fourth quarter, but IBM's personal computing division has celebrated its first two profitable quarters since being launched two years ago. Adalio Sanchez, general manager of manufacturing for the division, which builds IBM's notebooks, PCs, and Intel servers, says new business systems and the manufacturing processes made possible by them are largely responsible.

In the past year, the division has used SAP R/3, i2 supply-chain software, and Siebel Systems Inc. customer-relationship management tools to rebuild its order-management, supply-chain, inventory-and production-management, and fulfillment operations. IBM no longer maintains an inventory of parts. Suppliers, connected in real time to IBM's back-office systems, deliver parts from nearby depots at the beginning of each shift for systems to be built that day. Production schedules are set in R/3 and sent to a factory floor, where teams of six people build each computer to order. The division is assembling 25% more systems with the same number of employees, and it's cut $1.1 billion in costs in the past year, Sanchez says.

Cisco's E-Hub private exchange is already saving the company hundreds of thousands of dollars a day, says Karen Brunett, Cisco's director of Internet business solutions, and that could grow to $1 million daily this year. E-Hub, launched two months ago, is integrated with Oracle ERP applications and ties demand from customer orders to Cisco's supply-chain and production-management systems. Cisco's contract manufacturers see the networking vendor's demands in real time, as do their suppliers. Manugistics Group Inc.'s NetWorks Supply software ensures that a contract manufacturer has a source for all needed parts. Manugistics NetWorks OneView is used to place component orders and keep track of order status in real time, so Cisco can identify any parts-related problems early.

Three in five manufacturers will increase IT spending this year, according to InformationWeek Research's Outlook 2001 survey. But that means two in five won't. At DaimlerChrysler, Dilts says, cuts in IT funding are unlikely: Going off track now would only lead to more trouble for the battered carmaker down the road.