Tackling Cost Allocation in Complex Project EnvironmentsAugust 12, 2019
Generating the right resource forecasting, labor-hour scheduling or resource allocation information can be a challenge for project-oriented manufacturers.
Tracking the right metrics is crucial when planning and carrying out manufacturing projects. In particular, one should be aware of estimate to complete by hours and estimate at completion by hours.
Project cost allocation is of fundamental importance, especially when profitability, capacity and customer service are linked. If you spend more than anticipated on labor or materials in certain phases of the project, and don’t realize it until much later, you could find that you’ve run out of budget or internal capacity to complete the work.
Alternatively, program-based manufacturing agreements might require dovetailing engineer-to-order and manufacturing activities with a customer’s new product development cycle.
Dealing With the Unknown
Traditional enterprise resource planning (ERP) and material requirements planning (MRP) software fall short in these scenarios because they were originally designed for repetitive manufacturing environments. For project-driven manufacturing, program-centric manufacturing and engineer-to-order, there are many unknown variables.
These disciplines need software that’s designed to manage project risk and allocate resources and cost for multiple projects. Yet many manufacturers rely on standalone project management or project portfolio management software. Tracking load against resources outside of ERP means these manufacturers aren’t really managing the project from a financial and costing standpoint. They’re just using what’s essentially an operations or scheduling tool which, at most, encompasses manufacturing time and attendance, or work centers for engineers.
When dealing with the problem of cost allocation in complex project environments, you can track resources in terms of how many hours or people are available and begin to allocate them appropriately. This would usually be done on a project-by-project basis, but to optimize this, planners should know which jobs they have today and in the future.
Completing the Project Balancing Act
In this manner, manufacturers start with an understanding of the resources allocated to existing work during a specific time-period, and that which isn’t. When they take on a new job, they can allocate resources in light of particular project requirements, as well as gain an understanding of existing or even anticipated resource load.
In introducing this enhanced functionality, planners can access the data and insights that enable them to answer project queries as well as enterprise-level questions to accurately quote costs and lead times. Even before a project starts, they’ll know when and where they might need more employees or contractors to complete the work.
Of course, things can change over course of a project lifecycle. That’s why ERP solutions should be designed with the modern project environment in mind, and be able to forecast throughout the life of a project. You might have anticipated needing 10 people for 10 weeks, but perhaps the project scope changes. If fewer people are required, can you reallocate them to other projects?
If more resources are required, do you have existing people who can be placed on the project, or do you need to hire, outsource, approve overtime or take other measures? 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 project manufacturer must enable the reallocation of hours and costs.
Every Detail Counts
To get the most benefit, software tools should be able to answer more granular questions. Which capacities can I commit to the project? Which engineers should I use, with which skills? How much inventory or how many project managers are available? Overlaying this granular view in the quoting process, to estimate the number of hours and compare it to current capacity usage, enables you to move from quoted plans into actual plans for resources once you win the work.
Turning the forecast into a resource plan with an accurate productive capacity behind it becomes much easier. The plan becomes more than hours and graphics on a Gantt chart; the software needs to deal with hours and dollars in concert. A fully integrated project ERP will enable manufacturers to generate more tasks and activities that link to work or shop orders to create a flexible, refined schedule and cost story.
Adapting To Modern Manufacturing
Manufacturing is an industry undergoing great change. Market and customer demands have evolved, and processes need to adapt to match them. Today, planners will deal with a project or portfolio of projects, each with a cost to date, and cost of completion. But these can’t be viewed in isolation – they must be seen in the context of data from across the whole enterprise and total resource loading across all projects.
Achieving reliable “estimate to complete” and “estimate at completion” figures is fundamental. It’s important, therefore, that project functionality becomes an essential part of the ERP system, not just two applications that are united in a point-to-point integration. When project demand requires you to generate a work order or put a resource in the field, it must accrue against resources available at that time, and affect the total cost of the project. And that means embedding project functionality in the system of record – the ERP system.
Why Pay More
When it comes to cost allocation you never want to pay for more than needed. This is why every Sustained Quality customer specification is addressed and analyzed on a case by case basis. Complex project environments are our specialty.
Ghai, Carrie. (2019). “Tracking Metrics That Matter in Project Manufacturing”. Retrieved from https://www.supplychainbrain.com/blogs/1-think-tank/post/29178-tracking-the-metrics-that-matter-in-project-manufacturing.