Doug Hockenbrocht and Craig Zampa07.31.12
Most midsize manufacturers have been cruising along with enterprise resource planning (ERP) software that they implemented more than a decade ago. Because many executives don’t consider their enterprise applications revenue generators, the systems tend to be ignored as long as they continue to provide adequate functionality. Many organizations, including your competitors, have come to realize that while ERP software doesn’t appear to generate direct revenue, it significantly can impact financial performance.
We appear to be at the cusp of a significant change in the business climate where innovators garner additional market space while laggards fall further behind. The perfect storm of business efficiency through innovation and industry consolidation has leaders realizing that they need to respond to new markets in the most efficient manner possible. In a 2011 report about ERP in manufacturing conducted by The Aberdeen Group (a Boston, Mass.-based research and analysis firm) in 2011, the firm’s research differentiates best-in-class (top 20 percent) companies from laggards (bottom 30 percent) using five key performance criteria (see Figure 1). The criteria are essential in the management of cash flow, asset management, operational efficiency, and customer satisfaction, and provide a compelling business case for why ERP systems can become competitive differentiators.
For example, with today’s technology, many shop floor machine controllers can communicate directly with quality modules of enterprise software. If quality standards aren’t being met on five or six units in a row, the machine can stop production and notify appropriate personnel of the problem via work flow (technology automation that e-mails or alerts select personnel of problems). Without this type of capability, part production may need to be interrupted after a pre-defined cycle and quality tested to ensure standards are being met. This could cause a much larger quantity of scrap in addition to the reduced production due to regular interruption, each of which directly impacts profit margin.
Another missed opportunity is the ability to garner more value from customer and vendor relationships. Many of today’s applications come with enterprise portals that extend portions of the operation to your vendors and customers, greatly reducing rework required to administer sales orders and purchase orders in the enterprise software. For example, purchasing creates a purchase order (PO), and the application sends a link to the vendor contact for confirmation. Upon online vendor PO confirmation, status is updated in the software to ensure the vendor has received the PO and agrees to the terms (quantities, pricing, due dates, etc.). This single activity provides an opportunity to measure vendor performance metrics, reduces accounts payable discrepancies, and alleviates risk of late receipt due to lost POs. Similar tools can be used to manage customer orders and significantly reduce order entry errors and increase personnel productivity.
Reduce Risk of Business Interruption
Many business leaders think it’s less costly to continue with their legacy solutions rather than upgrade to more current, robust ERP systems. Nothing could be further from the truth in relation to the diminishing legacy knowledge pool and increasing risk of business application outage. First, it’s important to consider that a system implemented more than 10 or 20 years ago with a talent pool that’s knowledgeable with your customizations and software is closing in on retirement. Identifying replacement talent who can administer, support and program in the requisite system language may not be available. At that point, dealing with a new system implementation will be too late, and the entire business operation could be at risk of faltering. On the immediate forefront, there’s the considerable problem of disaster recovery. Many legacy solutions aren’t well designed for mass system failures. The hardware, configurations, and operating software may be relatively unique, creating severe issues for recovery and restoration. Today’s technology model has commoditized disaster recovery to a multi-site, redundant recovery model that will allow emergency recovery in a matter of minutes or hours instead of weeks or months.
Improve Potential for M&A Activity
Historically, merger and acquisition (M&A) activity has been focused on very large organizations purchasing smaller competitors to continually increase their control of the market space. Today, many midsize organizations have learned that part of their survival comes from expanding their value proposition either vertically (acquiring suppliers to increase control of quality and price) or horizontally (expanded and synergistic product offering for existing clients and new prospecting opportunities). If your business is running legacy hardware and ERP software that requires a very specialized and aging support system (people, hardware, network and system vendors) then options for M&A become far more limited. The prospect of synchronizing operations for an innovative company to a “legacy” operator may require much more cost, time and frustration than it’s worth.
Integrate All Systems Across the Business
Many legacy ERP systems that were built prior to the 2000s don’t have an integrated “reach” across the business. The software typically is specialized in certain areas like production, accounting, sales, shop-floor control or forecasting/replenishment, thus requiring other systems in subsequent areas of the organization. Often it’s a single legacy accounting system with Excel in use for forecasting, budgeting, and costing. A common scenario includes shop-floor employees recording production, scrap, and machine hours on paper logs and then forwarding the logs to their supervisor. The supervisor keys this data into multiple spreadsheets or multiple tabs on a single spreadsheet and manages this offline “database.” Similar processes are happening in purchasing to determine raw material replenishments as well as other business units, which are exercising non-integrated solutions to accomplish their tactical goals.
Unfortunately since these are all disparate systems, there’s a lack of information parity and visibility. In addition, the formulas and macros used to make the spreadsheet useful typically are created by a single individual and very little or no reference documentation, causing a very real single point of failure. Since portions of the data are required in each system, there’s an inordinate amount of duplicate data entry required. The duplicated work steps result in increased operating cost rework from data entry errors and general business inefficiency. Unfortunately, organizations have a difficult time quantifying these costs to establish them as part of the return on investment (ROI).
An independent technology assessment is a low-cost way to identify the critical gaps in business requirements and ERP software capability and determine how to best move toward becoming a best-in-class business. At the executive level, there’s great fear of realizing certain software implementation horror stories. These horror stories usually have very little to do with the software application and more to do with the implementation approach and resources.
Legacy System Justification
An organization seeking to potentially upgrade its ERP system first should capture and record all current ERP system costs. These costs would minimally include software maintenance and support, hardware maintenance and support, consultants, contractors, and IT staff (including those in the organization that spend a portion of their time supporting IT and ERP solutions). Historically, manufacturing organizations spend about 2.3-2.5 percent of revenue on IT. You can then begin to project the potential savings from a new integrated ERP system by quantifying the time, effort, and direct expenses associated with each business process. In the example above, 30 minutes per day may be saved by automating the employee time entry process. Over the course of a year, this could equal 110 hours at a labor rate of $35 per hour or $3,850 annual savings per shift. Each process across the enterprise should be assessed so that a complete picture can be painted. These savings then will be contrasted with the ERP replacement system costs and ROI and payback period calculated. The replacement ERP system costs would normally include both the capital expense (hardware, software, services, network upgrades, end-user devices, machine integrations) and the ongoing annual expenses associated with the new solution.
* * *
If your organization’s performance metrics are measuring closer to the laggards than the best-in-class, it’s not too late. Don’t ignore the importance of using progressive tools and processes for operational efficiency and competitive advantage. Start evaluating how your ERP system can offer you the tools to enable greater productivity and efficiency. The current ERP solutions offer robust capabilities in a fully integrated fashion with lower support requirements and thus can raise your level of competitiveness in the new economy.
Doug Hockenbrocht is a partner and Craig Zampa is a consulting manager with the technology consulting practice of Plante Moran. They focus on improving the operations of manufacturers through information technology, specializing in IT due diligence for mergers and acquisitions, business process reengineering, ERP evaluation and selection, ERP implementation, ERP assessment, project management, and IT contract negotiation. Their clients include small, middle-market and multi-billion manufacturers spanning segments such as medical device, automotive, chemical, and food and beverage. They serve manufacturers in Eastern and Western Europe, Asia, Mexico, Canada and throughout the United States.
We appear to be at the cusp of a significant change in the business climate where innovators garner additional market space while laggards fall further behind. The perfect storm of business efficiency through innovation and industry consolidation has leaders realizing that they need to respond to new markets in the most efficient manner possible. In a 2011 report about ERP in manufacturing conducted by The Aberdeen Group (a Boston, Mass.-based research and analysis firm) in 2011, the firm’s research differentiates best-in-class (top 20 percent) companies from laggards (bottom 30 percent) using five key performance criteria (see Figure 1). The criteria are essential in the management of cash flow, asset management, operational efficiency, and customer satisfaction, and provide a compelling business case for why ERP systems can become competitive differentiators.
Best-in-Class Performance (Figure 1)
The Aberdeen Group used five key performance criteria to distinguish between best-in-class companies and laggards.
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Increase Operational Efficiency
Legacy systems built on old architectures and written in expired programming languages cannot deliver the information required to make effective business decisions. Many of today’s software solutions are built on service-oriented architecture, deployed as software as a service, and flexible for efficient and timely end-user access (iPad, tablet computer and Mac). While this sounds like a bunch of “techie-speak,” it’s very relevant to the leadership in an organization. If divisional leaders can see where production, quality, scrap, delivery, and sales goals are being met or missed, then they can respond more quickly before significant margin is lost.For example, with today’s technology, many shop floor machine controllers can communicate directly with quality modules of enterprise software. If quality standards aren’t being met on five or six units in a row, the machine can stop production and notify appropriate personnel of the problem via work flow (technology automation that e-mails or alerts select personnel of problems). Without this type of capability, part production may need to be interrupted after a pre-defined cycle and quality tested to ensure standards are being met. This could cause a much larger quantity of scrap in addition to the reduced production due to regular interruption, each of which directly impacts profit margin.
Another missed opportunity is the ability to garner more value from customer and vendor relationships. Many of today’s applications come with enterprise portals that extend portions of the operation to your vendors and customers, greatly reducing rework required to administer sales orders and purchase orders in the enterprise software. For example, purchasing creates a purchase order (PO), and the application sends a link to the vendor contact for confirmation. Upon online vendor PO confirmation, status is updated in the software to ensure the vendor has received the PO and agrees to the terms (quantities, pricing, due dates, etc.). This single activity provides an opportunity to measure vendor performance metrics, reduces accounts payable discrepancies, and alleviates risk of late receipt due to lost POs. Similar tools can be used to manage customer orders and significantly reduce order entry errors and increase personnel productivity.
Reduce Risk of Business Interruption
Many business leaders think it’s less costly to continue with their legacy solutions rather than upgrade to more current, robust ERP systems. Nothing could be further from the truth in relation to the diminishing legacy knowledge pool and increasing risk of business application outage. First, it’s important to consider that a system implemented more than 10 or 20 years ago with a talent pool that’s knowledgeable with your customizations and software is closing in on retirement. Identifying replacement talent who can administer, support and program in the requisite system language may not be available. At that point, dealing with a new system implementation will be too late, and the entire business operation could be at risk of faltering. On the immediate forefront, there’s the considerable problem of disaster recovery. Many legacy solutions aren’t well designed for mass system failures. The hardware, configurations, and operating software may be relatively unique, creating severe issues for recovery and restoration. Today’s technology model has commoditized disaster recovery to a multi-site, redundant recovery model that will allow emergency recovery in a matter of minutes or hours instead of weeks or months.
Improve Potential for M&A Activity
Historically, merger and acquisition (M&A) activity has been focused on very large organizations purchasing smaller competitors to continually increase their control of the market space. Today, many midsize organizations have learned that part of their survival comes from expanding their value proposition either vertically (acquiring suppliers to increase control of quality and price) or horizontally (expanded and synergistic product offering for existing clients and new prospecting opportunities). If your business is running legacy hardware and ERP software that requires a very specialized and aging support system (people, hardware, network and system vendors) then options for M&A become far more limited. The prospect of synchronizing operations for an innovative company to a “legacy” operator may require much more cost, time and frustration than it’s worth.
New ERP Environment (Figure 2) |
Many legacy ERP systems that were built prior to the 2000s don’t have an integrated “reach” across the business. The software typically is specialized in certain areas like production, accounting, sales, shop-floor control or forecasting/replenishment, thus requiring other systems in subsequent areas of the organization. Often it’s a single legacy accounting system with Excel in use for forecasting, budgeting, and costing. A common scenario includes shop-floor employees recording production, scrap, and machine hours on paper logs and then forwarding the logs to their supervisor. The supervisor keys this data into multiple spreadsheets or multiple tabs on a single spreadsheet and manages this offline “database.” Similar processes are happening in purchasing to determine raw material replenishments as well as other business units, which are exercising non-integrated solutions to accomplish their tactical goals.
Unfortunately since these are all disparate systems, there’s a lack of information parity and visibility. In addition, the formulas and macros used to make the spreadsheet useful typically are created by a single individual and very little or no reference documentation, causing a very real single point of failure. Since portions of the data are required in each system, there’s an inordinate amount of duplicate data entry required. The duplicated work steps result in increased operating cost rework from data entry errors and general business inefficiency. Unfortunately, organizations have a difficult time quantifying these costs to establish them as part of the return on investment (ROI).
An independent technology assessment is a low-cost way to identify the critical gaps in business requirements and ERP software capability and determine how to best move toward becoming a best-in-class business. At the executive level, there’s great fear of realizing certain software implementation horror stories. These horror stories usually have very little to do with the software application and more to do with the implementation approach and resources.
Legacy System Justification
An organization seeking to potentially upgrade its ERP system first should capture and record all current ERP system costs. These costs would minimally include software maintenance and support, hardware maintenance and support, consultants, contractors, and IT staff (including those in the organization that spend a portion of their time supporting IT and ERP solutions). Historically, manufacturing organizations spend about 2.3-2.5 percent of revenue on IT. You can then begin to project the potential savings from a new integrated ERP system by quantifying the time, effort, and direct expenses associated with each business process. In the example above, 30 minutes per day may be saved by automating the employee time entry process. Over the course of a year, this could equal 110 hours at a labor rate of $35 per hour or $3,850 annual savings per shift. Each process across the enterprise should be assessed so that a complete picture can be painted. These savings then will be contrasted with the ERP replacement system costs and ROI and payback period calculated. The replacement ERP system costs would normally include both the capital expense (hardware, software, services, network upgrades, end-user devices, machine integrations) and the ongoing annual expenses associated with the new solution.
* * *
If your organization’s performance metrics are measuring closer to the laggards than the best-in-class, it’s not too late. Don’t ignore the importance of using progressive tools and processes for operational efficiency and competitive advantage. Start evaluating how your ERP system can offer you the tools to enable greater productivity and efficiency. The current ERP solutions offer robust capabilities in a fully integrated fashion with lower support requirements and thus can raise your level of competitiveness in the new economy.
Doug Hockenbrocht is a partner and Craig Zampa is a consulting manager with the technology consulting practice of Plante Moran. They focus on improving the operations of manufacturers through information technology, specializing in IT due diligence for mergers and acquisitions, business process reengineering, ERP evaluation and selection, ERP implementation, ERP assessment, project management, and IT contract negotiation. Their clients include small, middle-market and multi-billion manufacturers spanning segments such as medical device, automotive, chemical, and food and beverage. They serve manufacturers in Eastern and Western Europe, Asia, Mexico, Canada and throughout the United States.