Project resource allocation as a competitive advantage

Features - Cost allocation

Tier 2 aerospace and defense (A&D) suppliers can win more work on military and governmental projects by managing the massive accounting burdens facing primary contractors.

Subscribe
July 2, 2019

All photos ccourtesy of IFS World

In today’s A&D manufacturing environment, original equipment manufacturers (OEMs) doing business directly with the federal government are operating under various complex contract types that typically include:

  • Cost reimbursement, cost-plus defense contracts – Require rigorous tracking of project or system cost, so a standard markup can be applied
  • Earned value management – System where liquidity events are tied to specific project milestones
  • Time and materials contracts – Tie payment to labor hours, actual materials cost, profit
  • Performance-based logistics – Manufacturer sells no product, rather hours of operation, requiring project accounting across the asset’s entire life cycle

According to research from the Department of Defense Manufacturing Technology Program, 60% of the value of systems and products delivered by vendors originates from their suppliers, the Tier 2 A&D manufacturers who provide components and subsystems for defense programs of the OEMs.

This is creating new opportunities for Tier 2 manufacturers supplying defense OEMs, as they are finding that the more they help these customers meet the reporting and cost control requirements of the federal government, the more attractive they are as a business partner. Tier 2 suppliers also find with precise tracking of project cost, they can quickly and accurately generate pricing and proposals for new work.

Managing ambiguity

Traditional enterprise resource planning (ERP) software and its predecessor, materials requirements planning (MRP), were designed to match resources and demand in a repetitive manufacturing environment – and assume a certain degree of predictability. Project-driven manufacturing, program-centric manufacturing, and engineer-to-order manufacturing are more dynamic processes. These disciplines involve dealing with known and unknown variables. Software used in these environments must manage project risk and allocate resources and cost across multiple projects.

In an A&D project environment, this risk includes engineering, design, and project management time. But the greatest challenge is for employees involved in executing the manufacturing side of the project as it is defined. Suppliers must track production, installation, and in some cases maintenance and sustainment costs for each customer and program.

The right ERP software becomes critical to A&D manufacturers that must meet project reporting and accounting requirements of complex procurement systems, while operating profitably.

Point solutions miss the mark

In many A&D settings, manufacturers rely on capable, stand-alone project management or project portfolio management software tools such as Microsoft Project or Primavera. The problem is: they stand alone.

If you try to track load against resources outside of ERP, you are not managing the project from a financial and cost standpoint. An operations or scheduling tool – at the most – may encompass manufacturing time and attendance or engineer work centers.

As they attack cost allocation in complex project environments, some people will track their resources in hours or people they have and allocate them appropriately. This may be done project-by-project, but optimally, a planner should know what jobs they have done today and into next year. Therefore, they can understand which resources are already allocated to existing work and during which periods of time.

Growing OEM pressure

During the past three to five years, the need to manage project resources to meet the needs of OEMs has become more common in ERP software requests for information (RFIs) from A&D manufacturers. This rise in prevalence suggests OEMs are pushing more of the project accounting requirements to vendors.

Without an ERP with strong project cost allocation functionality, managers perform a lot of non-value-added work. A manufacturer may dedicate resources trying to manage schedules and resource load, but even with extensive use of full-time managers devoted to project coordination, a manufacturer may face several negative outcomes, such as racking up overtime, bringing in contractors in a way that exceeds costs allocated for a given portion of the project, or committing to deliver a task-related drawing or other work that cannot be done because of limited labor hours.

Solving cost allocation problems

Planners need to know what other jobs they have now and in the future. If they take on a new job, they can allocate resources considering the project requirement and with a better understanding of their existing resource load. 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 contractors.

This relies on the software providing end-to-end visibility of the supply chain, inbound demand, and a chain of internal, interdependent resources. Without full project allocation functionality, many people will start the process with a rough-cut demand plan to see how their resources are allocated. Generally, they are looking at a group of resources rather than specific skills or individuals or a specific work center.

An integrated solution

The optimal software tool for this task will dig deeper. Which manufacturing disciplines and capacities can I commit to the project, which engineers with which skill sets, how many project managers, and what inventory is available?

The software should overlay this granular view of capacity in the quoting process to estimate the number of hours and compare it to current capacity use, allowing a move from quoted plans into actual plans for resources. The plan becomes not just hours and graphics on a Gantt chart, but dollars. The 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. Stand-alone project management software will not give you that united view of dollars, capacity, and the project plan.

Project functionality needs to be part and parcel of the ERP system rather than two separate applications, united point-to-point. Any demand put into a project requiring generation of a shop or a work order or a resource in the field must accrue against available resources and affect the total project cost. No separate project management tool can automatically create those transactions in an ERP system of record.

The destination

To put A&D manufacturers in the driver’s seat, they must 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 – the forecasted number of hours and dollars to complete the project, and estimate at completion by hours – the forecasted cost of the project at completion.

Using ERP software to connect the shop floor and work order schedules directly into the project is the only way to deliver resource forecasting, labor-hour scheduling, and resource allocation in a single platform.

IFS

About the author: Carrie Ghai is senior business solutions consultant, North America for IFS. She can be reached at carrie.ghai@ifsworld.com .