Why Should Organizations Invest in ERP Systems?
Pat Garrehy, Rootstock Software, Founder and CEO
There have been a series of articles on this subject and the topic is covered in almost every software manufacturer’s PowerPoint presentation to a new prospect. There are many reasons, including growing revenues, creating business efficiencies, aligning the various departments of a company into a cohesive unit and so on.
The truth is that every company has a unique set of circumstances and will require its own way to justify a major project. In general, a good approach is to look at the investment from both a quantitative and qualitative perspective.
Let’s begin with the quantitative. The first thing most companies examine is how much inventory reduction they will obtain with an effective ERP system. Industry analysts generally agree that between a 20 to 30 percent reduction is achievable with improved management of raw material, parts, WIP and finished goods. Even if the incremental improvements are only 10 to 15 percent, this still results in significant savings.
Forecasting and scheduling improvements resulting from an effective ERP system will have a positive impact on purchased materials and components. With the ability to provide firmer commitments with predictable lead times to the company’s vendors, purchasing departments can negotiate better terms which can lead to five percent reductions.
An area often overlooked is the direct labor and indirect labor costs in the production area. Direct labor savings flow from improved scheduling that balances workload and minimizes overtime. If a manufacturing firm is currently using a combination of Quickbooks and spreadsheets, they will be shocked on how much time is being spent feeding the spreadsheet system and emailing documents to substitute as a work flow system. Indirect labor savings resulting from modern ERP systems add up quickly. Most industry analysts believe that a ten percent reduction in labor costs is easily achievable.
The last quantitative area to discuss is accounts receivable. With a manufacturer’s ability to product error free and timely invoices, the turns on receivable can be improved around five percent, resulting in a significant improvement in cash flow.
Again, each company is unique. If a company has years of experience in implementing incremental manufacturing operations improvements, it may see savings below industry averages. On the other hand, if the company has been growing and using minimal production support systems, it may see higher than average savings. Some companies may find other areas of the business that will yield significant cost savings. The best advise when developing the economics is to be consistent, be realistic and develop a real world narrative around each savings category.
Qualitative Benefits of a Cloud ERP System
Now, let’s focus on the qualitative approach to making the ERP case. The best examples I can give are the reasons our customers gave us for implementing our Cloud ERP solution. There were basically two main groups of customers and all used salesforce.com®. If the company was smaller and growing, they were previously using spread sheets or very simple ERP packages that they had outgrown.
“We had been running all of our reports in Quickbooks,” reports Northeast Lantern Vice President Christopher Heal. “We then needed to take the various reports, export them into Excel and formulate a single new report just to find the information we needed. Nonetheless, we still didn’t track inventory or have a snapshot of our production flow. Manufacturing cloud ERP will now help us do that, which will mean our customers will be able to get product faster.”
If the customer was larger, it had been using an on-premise ERP system that was no longer providing the help that they needed. A company with multiple divisions and differing ERP systems cannot obtain the global deployment and integrations of systems that it needs to be competitive. The cost/benefit analysis for a new Cloud based enterprise-wide system will often show significant economic advantages over maintaining multiple On Premise ERP versions and their required interfaces, conduits, and translators.
We then found three main features/benefits that encouraged prospects to become customers.
Salesforce.com customers and users want solutions that hook into their presently installed software. But, that’s not enough. They need a Cloud ERP that also provides the integrity, robust performance and flexibilities that traditional ERP provides.
Wilshire Coin is such a company. According to Zach Scott, Wilshire Coin operations manager, the company was advised to look into salesforce.com. The management team liked the concept of multi-person access to the data from anywhere in the world. As a result, Wilshire Coin became a salesforce.com user. They then hired a consultant to help them pick the right ERP to help with their other needs.
A larger organization wanted Cloud ERP to replace its on-premise legacy ERP software and consolidate all of their key metrics onto the Force.com®platform, considered by many to be the most powerful and flexible platform for business enterprise applications.
Lastly, domestic custom accessories manufacturer Unionwear wanted to convert its salesforce.com quotes and opportunities into sales orders with fully configured bills of materials and routings, automating planning, procurement, inventory, manufacturing shop floor control and scheduling, product costing, productivity analysis and financial management processes, providing end-to-end process improvements, cost reductions and improved customer responsiveness.
Naturally, in all three situations, the ERP needed to interface easily with salesforce.com and/or Force.com. From that point on, the reasons to decide to sign up were dependent on the package’s capabilities and how the software manufacturer could perform for them.
Both Continuous Software Enhancements and Customizations Must be Addressed
Most small companies do not have the resources to develop and maintain all of the features their growing businesses demand. The old legacy software does not allow the customizations and integrations they need and they do not want to get caught into a future legacy problem.
However, It makes little sense for an owner of a smaller business to invest in a new Cloud ERP if the new software won’t provide the answers needed that are so sorely wanted from the present elementary system. To spend more money to be in the same vacuum of information is simply a waste of money, even though it might interface with salesforce.com. Yes, there might be some improvements but not enough to force a solid payback on the new ERP.
The same holds true for larger concerns. With the supply chain now being global, additional importance is placed on certain features of ERP, such as multi-plant inventory, planning and tracking of freight and other shipment logistics, plus having to track consigned inventory and sub-contract expenditures. Increased machine automation in some industries means that they require more analysis regarding the cost of materials versus the cost of labor. Meanwhile, there are a whole host of manufacturing corporations that are making changes to the businesses to create a competitive edge with their engineering and services. They are looking for new ERP system features which provide better information and analytics in those areas as compared to tracking detail on the shop floor.
Thus, from a “features/functions” standpoint, these differences mean next-generation systems need to be more functional in different business areas than their predecessors. To be competitive, they must be able to rely on their ERP software vendor to continue to provide additional features and extensions. Likewise, they need to assume that, as their own business and industry evolves, they themselves will want to define some modest extensions to their ERP software to help themselves, and only themselves, thrive.
So, the bottom line becomes – why switch out the old, dated on-premise system if the wanted solutions can’t be provided.
As a result, both smaller and larger prospects may hold out purchasing, hoping against hope that some vendor will add what they need to their old legacy ERP package. While continuous software enhancements to the new ERP system are an absolute requirement, there is always at least one occurrence where a company wants a feature not requested by other prospects. Here is a very simple example of what a customer wanted that won’t be found in an ERP package.
“Being in the precious metals business, prices fluctuate constantly and it is imperative to our customers that the quotes they get are literally right on the money,” Wilshire Coin’s Scott advances. “As a result, (we need) a pricing tool that will constantly update prices, assuring our customers that the quote they get is at present market pricing.”
The new contemporary CLOUD ERP software must address how these customizations are easier to provide than that which was done in the old legacy On-Premise ERP software of the past. This means that customization can be done to a Cloud ERP system without losing the benefits of receiving the continuum of future upgrades (which typically happen on a regular weekly or monthly basis). This also means that these customizations can be done in such a manner as to not impact other customers that are using the same ERP system but don’t want or need this feature. It additionally can be done in such a manner that they don’t add overhead, making the standard ERP system costly to maintain because the customizations were made within the core ERP code versus “seamless integrated bolt-ons.” And lastly, the Cloud platform where the ERP system resides, as well as the ERP system itself, must be architected in such a manner that both are conducive to accepting customizations that can be done on the platform but “outside” the core ERP engine.
Many Cloud ERP packages have fallen short because in the rush to get to the Cloud, they are either severely limited in functionality or they are only replications of a predecessor legacy ERP package supporting one business type. They do not acknowledge that manufacturers require a greater variety of manufacturing methods and services to be supported. Let’s look at some examples of what is meant by this.
”Unionwear manufacturers completely customize products and we needed a cloud-based solution that will allow our textile and promotional clients to design accessories online, get real-time costing and stage opportunities that we flow directly into planning, procurement and production,” says Unionwear president Mitch Cahn. “The automation provided…makes small batch manufacturing a more fluid, profitable experience for both us and our clients.”
“We are a small company that locally designs and manufactures a large collection. That has always presented challenges in production timing and material management. With the MRP capabilities…, we will be able to more efficiently get our production and work orders completed,” says the operations manager of a fashion manufacturer. “That really stuck out for us.”
Northeast Lantern needs to track inventory and have vision on its production flow on the floor. This is especially important as twenty percent of the high-quality solid brass and copper lanterns manufacturer’s output is custom and the company provides a lifetime guarantee.
To assure they continue to make a top-quality product and make their manufacturing processes more efficient, Northeast Lantern requires a scheduling engine that dates work order operation routing steps (which can be sequential or concurrent) and processes them against a comprehensive set of prioritization rules. Northeast Lantern must be able to easily reprioritize work orders visually with drag-and-drop capacity planning screens. They need to quickly locate overloaded work centers or late work orders by color and, then, go to another tab in the capacity planning screens and see all of the shop orders for a particular job.
A larger company such as Metal Shark has the same needs.
“Our goal is to build a great boat at the best value to our customers. Our plant manufactures increasingly complex vessels in extremely tight timeframes with a high degree of automation, requiring precise controls and planning,” explains Chris Allard, Metal Shark CEO. As a manufacture-to-order job-shop, it is imperative to them that they can quickly schedule their shop and maximize efficiency. They were especially excited about how they could benefit from drag-and-drop shop floor features.
The Bottom Line
To purchase a new software suite, vendors must show owners and upper management how the new investment will make money and provide a solid return on investment. Dino Farina, Proveris Scientific founder and CEO knew that his company was consistently overbuying parts and materials just to assure that it had enough in inventory to meet order demand for its nasal and aerosol testing instrumentation. His question was, with cloud manufacturing ERP, would Proveris be able to determine how many of its most popular machines could be built with the inventory on hand?
“We were constantly trying to get the answers to such questions,” emphasizes Farina. “By the time we finally got the data, the answers were too late. With manufacturing Cloud ERP, we will now be able to not only find out how many units we can manufacture with the inventory on hand but whether we need more inventory, how much, how soon and at what cost. This will make our business more efficient by increasing our cash flow and improving our resource planning, while giving our customers faster deliveries on their orders.”
The ROI Implementing a Cloud ERP System
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