Why Traditional ERP does not fit the Dairy Industry - Part 2
In the last newsletter I tried to address why traditional Enterprise Resource Planning (ERP) systems have difficulty fitting the dairy industry. In summary these include:
- The nature of dairy as a “batch” process industry versus discrete or process industry.
- Use of item codes to describe product attributes – while butterfat and non-fat solids are a part of cream they are not separate item codes for inventory or costing purposes.
- Dairy Costing 101 – with several class prices not being known until after the month is over, it is difficult at best to know what it costs to produce your product.
In this article, I will describe how DSI handles these important but unique aspects that make dairy so difficult for software systems to track and support.
Dairy as a Batch Process Industry
We realized long ago there were two pieces to the dairy manufacturing process. The first is what we call the hard side inventory items (plastic caps or packaging). This side can be handled by most ERP systems that allow users to update formulas with actual production. The second piece that is unique to dairy and represents 60% - 85% of the product cost is the diary liquid side of the equation. Dairy liquids are always different run-to-run and these differences should be captured and used for shrinkage, yield and costing to get a true picture of a plant’s efficiency.
Dairy liquids are also unique because the actual tests for most runs of dairy liquids are not known at the time of production. This is because the samples have to be processed by the lab; it is often the next day before the test information is available. Many systems can’t function or report accurate production information on the component level. So if there is a shrinkage problem at the butterfat level, it just shows up in the monthly financials and the accounting department starts trying to isolate its product loss in spreadsheets that either go nowhere or are difficult to follow for plant personnel.
The DSI system solves these requirements by having separate functions and rules for dealing with dairy liquids and hard side items. We do this behind the scenes to provide a user with a single interface.
Components as Item Codes
The great work around in most ERP systems for components is to provide an item code for each component. In DSI’s system, the user can report the amount of milk taken to the filler. We track components as attributes of the dairy liquid and the component test(s). This allows plants to track their product shrinkage at both a total pound and component level. True shrinkage tracking throughout the plant!
Dairy Costing 101
This is probably the area of the greatest frustration for plants I visit. The accounting department goes about preparing the financial statements. It then invests another three to five business days each month (sometimes much more) trying to create costing for the dairy products because the manufacturing system can’t handle or support dairy costing. Why?
- The cost of dairy liquids used in production is not known due to timing of the class announcement.
- The exact quantities used in a batch or day are only estimates from a formula.
- A pound of butterfat used for a Class I product is not the same cost as a pound of butterfat in Class III.
The whole purpose of the accounting department is to analyze the information from the manufacturing system, not create it.
The DSI production system has separate functionality for dairy liquid tracking and costing. The system allows users to update both the dairy liquid quantities and tests for a period up to 30 days after the production period month end. This can be done without affecting production or shipping of the product. Furthermore, the costing system allows the user to cost the dairy liquids used on blend, skim/butterfat, or multiple component pricing methods or any combination of these and will compute the FMO class utilization settlement amount for the period, if desired. We do this by allowing costing to be done at the component level within the dairy liquid.
Thus, if the butterfat in a run of ice cream mix was made from cream or milk the system will use the Class II butterfat cost plus a premium dictated by the procurement department to determine what the dairy liquid cost was in that mix. The user can then compare the true cost of the dairy liquid to standard costs determined by the accounting department. In light of the roller coaster prices, dairy has experienced over the last few years, this feature is extremely valuable and powerful.
The last piece of costing is that users can cost or value their product based on market prices plus a premium and take into account other cost factors such as storage and transfers. This is predominately useful for cheese manufacturers – particularly those that age their product.
In summary, the whole point of the ERP system is to provide better information without adding extra personnel. We believe that if you look under the covers of most ERP software you will see what makes DSI’s solution unique and able to provide your company with a quicker return on investment.