Towards Top Class ERP

A new study from the Aberdeen Group reveals what it takes to become a best-in-class enterprise resource planning (ERP) implementer.

Enterprise resource planning (ERP) strategies are not driven by a single dominant external business pressure. One company might be responding to accelerated growth, another to the need to improve customer service and response time, while a third may be operating under mandates to reduce costs. In spite of this variation, the majority of companies view ERP as a strategic weapon to streamline and automate business processes in order to improve efficiencies.

Aberdeen Group’s recent study, “The 2007 ERP in Manufacturing Benchmark Report”, explored feedback provided by over 1,400 manufacturers, and serves as a useful roadmap to those in the manufacturing community who desire to reduce costs, improve accuracy of inventory and schedules, and develop customer responsiveness through successful ERP implementations.

Aberdeen used five key performance indicators (KPIs) to distinguish Best-in-Class from Industry Average (norm) and Laggard companies:

• Inventory level reduction

• Inventory accuracy

• Manufacturing schedule compliance

• On-time shipment

• Days to close a month

While the implementation of ERP produced a reduction in costs, and improvements in scheduling and inventory accuracy across all companies, Best-in- Class companies achieved significantly better results across the indicators.

Best-in-Class companies are also more likely to implement greater functionality in their ERP systems, to calculate the return on investment (ROI) of ERP projects, and less likely to be running significantly outdated releases (two or more releases behind their ERP vendor’s current release).

As a result, Best-in-Class companies are much more likely to have visibility into the status of all processes from quote to cash, making them more proficient in notifying decision makers in real time as exceptions occur, and Best-in-Class are also more likely to be able to act proactively in anticipation of exceptions.

Business drivers

Aberdeen’s survey of over 1,400 manufacturers showed three dominant business drivers for the top pressures impacting ERP implementation strategies: growth expectations; customer service improvement; cost reduction.

Yet, when broken down by company size, a marked difference between these leading drivers is visible. Growth expectations and customer care weigh more heavily in influencing small (under $50 million annual revenue) and mid-size (between $50 million and $1 billion) companies. Smaller companies, especially, have yet to be challenged with the increasing complexities of operating multiple manufacturing sites that must be dealt with in large (over $1 billion) and even mid-size companies.

For example, Golden Temple, a manufacturer of organic teas and cereals, is in the process of implementing its first ERP. Over the past five years, the privately held company has experienced 20 to 30 percent growth and is now approximately US$85 million in annual revenues with 300 employees. The selected ERP is meant to replace its home-grown applications which could not keep up with the growth. “

Bringing ERP to Golden Temple is taking a lot of standardization of business processes and practices and a lot of changes to their infrastructure (with only four IT personnel on staff). The number one objective from this implementation is inventory control. They are seeking to better manage and track their inventory, while keeping a keen eye on inventory reduction. They need this capability due to the highly competitive organic products market and which requires lot tracking and raw materials traceability for certification purposes.

At the other end of the scale is a company in the automotive industry. Said its IT director, “We are becoming more global, and as we develop more business units in Asia and China, our current system isn’t able to support the new languages that we need (Chinese). In addition to the language support, we wanted one consolidated system so that we can roll all of the financial information up to the corporate level.

“Our current ERP in our North America location is at the end of its life. The financials aren’t adequate; there is functionality missing, and we couldn’t integrate any other systems into it. We have a number of disparate business systems, and we really want one integrated system for a single point of entry and shared data across the entire organization. We also want ease of to drive greater adoption of the solution across the company. The goal is to have total integrated functionality down to the shop floor.”

As for ERP replacement strategies, these are largely driven by the proliferation of enterprise applications, causing integration issues which create the desire to consolidate or rationalize multiple ERPs. But other driving factors include: • The need for more functionality • The need for global standardized solutions with international capabilities • Outdated and clumsy user interfaces

Extent of usage

Aberdeen’s 2006 ERP in Manufacturing Benchmark Report confirmed the generally accepted view that ERP is grossly underutilized. Last year’s benchmark found the average manufacturer used 10.5 out of 24 generic ERP modules and approximately 63 percent of the functionality available in those modules for a weighted average use of 27.6 percent of ERP functionality.

This year’s study showed exactly the same average number of modules deployed (10.5), but observed a slim increase in the average percent of functionality used within those modules (71 percent) for a slight increase in the weighted average use (31.2 percent).

Of course, some ERP vendors do not offer this full breadth of functionality and some manufacturers do not require all modules. Project Management, Product Configuration, and Distribution Requirements Planning are good examples of modules where total penetration should not be expected.

However, if ERP is implemented and the General Ledger module is not being used, chances are General Ledger is being done either by a corporate system, a stand-alone “best of breed” application, or (in small companies) a desktop application.

For core functionality required by any business – core financial applications, purchasing, order management, inventory control and payroll – only the smallest of companies are able to function without automating these functions to some extent.

Each of these functions, with perhaps the exception of Payroll (which can easily be outsourced) represents an opportunity for automation, application integration, or rationalization.

Another test of ERP usage can be measured by how pervasively it is used throughout the organization. The broader and deeper ERP reaches into an organization, the more business benefits can be gained.

Of the many extensions that sit beyond the modules of ERP, several of these are oriented toward reaping the full benefits of core ERP and mining the data contained therein. These include Business Intelligence and Business Process Management tools, as well as Corporate Performance Management application suites. Aberdeen has observed a correlation between the adoption of these tools and Best-in-Class performance.

Technology + organization

The selection and implementation of ERP is a major undertaking for any company. The level of standardization of business processes, as well as the integration of people, processes, and technology can have a significant impact on the benefits achieved for these efforts.

The essential ingredients of a well-designed ERP implementation strategy include the standardization, streamlining, and automation of business processes, both in planning and production as well as in the back and front office functions of order management, procurement, cash collection, and financial reconciliation.

In fact, Best-in-Class companies distinguish themselves by coordinating manufacturing operations with the upfront quote to order functions, as well as the back end service, logistics, and delivery organizations.

Both of these distinguishing characteristics of Best-in-Class touch not only business processes but also organizational structures. While management commitment to ERP has long been recognized as a mainstay of successful implementations, the marriage of technology solutions to real business problems has become the new mantra.

CIOs today must blend an understanding of business processes with technical expertise, but Best-in-Class companies are 45 percent more likely to ultimately assign ownership of the success of the ERP implementation to a line of business professionals and not IT.

The goal is to arm these business decision makers with visibility into all business processes from quotation to cash collection, making summary data immediately available with detail data available on demand. While study results show that Best-in-Class companies are better armed with various decision-making capabilities, almost half of these top performers do not have this real-time visibility for exception management. This allows for significant improvement.

Steps to success

Whether a company is trying to move its performance in ERP usage from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements:

For Laggards

1. Establish specific goals for obtaining business benefit from ERP

Because ERP is frequently considered a necessary infrastructure, specific goals for implementation are often ignored and ROI is not estimated prior to major projects or calculated after project completion. Our Best-in-Class KPIs provide a logical starting point for these goals – inventory and cost reductions, inventory accuracy and schedule and delivery compliance, as well as efficient month end closing processes.

2. Use ERP to standardize and automate business processes

For companies yet to implement ERP, this will be an important step in providing an automated system of record from which to produce operational and financial audit trails and an enterprise wide system of record. Make sure you have the most basic functionality implemented including General Ledger, Accounts Payable, Accounts Receivable, Order Management, Purchasing, and Inventory Control.

3. Do not let your maintenance dollars go to waste

While it may be acceptable to skip a release or run one release behind the most currently available, do not let your implementation lag significantly, leaving functionality and technology improvements largely unused.

For Industry Average

1. Broaden and deepen your use of ERP

Support all critical stakeholders’ visibility into current and accurate data. Companies typically have access to more functionality than they use. So use what you have and also continue to expand to include the entire business cycle.

2. Review current goals for obtaining business benefit

Set the bar higher, and seek new opportunities for growth. Your best competitors will seek out new functionality and technology and improve their performance even if you stand still.

3. Estimate ROI prior to embarking on major projects

Best-in-Class companies are much more likely to estimate ROI on ERP projects in order to cost justify investment. As a result they are not only more likely to actually make the investment, but also reap the benefits.

This should be considered for all major projects, not just capital purchases – including upgrades to new releases, implementing new modules or features, customizing applications, or aligning business processes to software capabilities.

For Best-in-Class

1. Take advantage of workflow automation technologies

While Best-in-Class are significantly more likely to currently employ workflow and event management technologies, still only about a third do and only about half have real-time visibility into all processes from quote to cash.

Workflow automation is particularly effective in helping to streamline and automate business processes (particularly those which span multiple departments or divisions) and detect when exceptions occur. As the amount of data collected continues to expand, it becomes increasingly important to prioritize and present critical data on a “need-to-know” basis.

2. Calculate ROI for completed projects

Although Best-in-Class companies are more likely to estimate ROI and to calculate the actual ROI after project completion, only half actually go through the exercise of proving the value of these projects. What gets measured gets managed: the simple process of scrutinizing the business benefit and value will lead to more tangible results.

The Aberdeen Group provides fact-based research focused on the global technologydriven value chain. The ERP benchmarking study is available for download at: www.

aberdeen.com/summary/report/benchmark/4119-RA-erp-manufacturing-2007.asp

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ERP software applications aim to improve the performance of organizations’ resource planning, management and operational control. As multi-module application software, ERP integrates activities across functional departments, from product planning, purchasing, inventory control and distribution. Aside from manufacturing, ERP software also encompasses applications for finance, accounting and human resources. Major suppliers include SAP, Oracle, Infor, Lawson, and Microsoft.

The impact of ERP on five key performance indicators.

ERP module adoption rates.

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Usability is the Key to ERP Success

An ERP system that scores high in usability delivers benefits more quickly to enable a faster return on investment. But how can you judge usability? Sun Whye Mun explains.

Buyers of manufacturing software have been looking for the holy grail of user-friendliness for years. Userfriendliness is a frequent discussion topic when companies evaluate enterprise resource planning (ERP) but it is one of those things nobody can really define, but everybody knows it when they see it.

To begin to define usability, it is best to start with the anticipated benefits such software solutions can deliver. A software solution that scores high in usability will shorten implementation time frames and reduce the amount of training required to go live, in turn enabling a faster return on investment and delivering benefits more quickly.

Such a system will result in a lower total cost of ownership, is likely to change and grow with your company, allows for easy upgrades and interoperability, and makes it much less likely that it will need to be replaced to enable future business processes. So how can you judge whether software is truly usable?

Flexible architecture

Surprisingly, the vendor’s IT architecture is just as important as the functionality of the system to your future success. First and foremost, the architecture should use industry standards. In addition, a good IT architecture should be lean, just like a manufacturing facility. It should have everything that you need – including strong security features – but should not include or require you to purchase a lot of stuff you don’t need.

Next, look for application flexibility. Your business will change but how easily can the software change with you? A role-based development process and real-life usability testing are two key things to look for when interviewing a vendor. Business processes should be easily changeable through switches or table entries.

The underlying design philosophy should make it easy to customize the application if necessary to support a differentiating business process, and the application should be easy and inexpensive to upgrade as new releases come out, even after customization.

In addition, there should be built-in workflows, analytics and a world-class portal with role-based metrics available. If your prospective vendor can’t show you evidence of these, then it is not likely to make the grade in terms of usability.

Works the way you do

We all know that business processes don’t remain static for very long. Who reading this article does business in exactly the same way they did even five years ago? Nobody – or you wouldn’t still be in business. So much has changed so rapidly that companies are continuously reinventing themselves – and you need systems that can keep pace with the changes.

Even recently it was inconceivable that customers would enter their own sales orders and configure products themselves over the Web. Today they demand this ability. Suppliers release their own purchase orders against contracts, or participate in vendormanaged inventory programs. Who knows what changes will occur in the future? Software needs to be flexible and adaptable as new ways of doing business emerge.

Today, more and more companies compete based on the speed of their supply chain. Flexibility, communication, collaboration and visibility are the most important enablers of supply chain velocity and transparency. How can you ensure that you provide supply chain transparency?

In most cases, it means providing portal access and other collaboration tools to customers and suppliers. A portal is the best and fastest way to share documents and to collaborate around the world at all hours of the day or night, every single day. A portal must be easy for users to access and set up without requiring a lot of IT help, and yet must include strong security.

Also look for pervasive workflows that notify users, customers or suppliers of events or delays that can affect business results. Workflows should be able to communicate across company boundaries, have easily set thresholds, and be easy to create or modify without requiring IT intervention.

Familiar interfaces

It is important that systems are easy to navigate for people who may use them only occasionally as well as for power users. Information workers today spend a large portion of their workday using their email applications, probably the most widely deployed applications in the world. Messages from co-workers, customers and suppliers constantly flow through email inboxes. Rather than jump from an ERP system to email, it’s simpler if business applications not only look and feel like email but are actually integrated with it.

A familiar interface enables workers to feel comfortable with an application immediately. And since industry analysts agree that one of the biggest costs involved in implementing new ERP systems is training, which often equals or exceeds the cost of the actual software purchase, eliminating the need for some training can speed up the implementation time frame dramatically, leading to faster ROI and time to benefit from the ERP investment.

Enhanced decision making

One of the lesser-known disadvantages of earlier generations of ERP is that software rarely communicated information to users about upcoming problems, unless the user was savvy enough to ask the right question at the right time. If the user was lucky or smart enough to stumble on a problem, deciding how to solve it was more often a matter of intuition than data analysis.

The tools available were simply too slow and cumbersome, especially as the pace of business got faster and faster. Data warehouses and other analytical tools usually rely on periodic updates, forcing users to work with less-than-current data. Disparate systems often yield conflicting information. No wonder most manufacturers ran by the seat of their pants. They simply had no tools.

Today it’s possible for analytics engines to be embedded in applications or in the IT stack. Engines can access information from multiple disparate systems instantly and present the user with up-to-date information in a graphical format.

Some engines and search tools can combine both structured data, like that found in ERP databases, and unstructured data, like that found in documents like contracts or RFPs (requests for proposal), to present the user with an immediate and complete picture.

Putting into practice

One example of a manufacturer that has successfully leveraged these benefits is Hi-Rise Paper Products, a packaging company established in Singapore in 1987.

Looking to reduce its manual paperwork and better manage its supply chain operations, especially on short turnaround orders, and large blanket orders, familiarity and ease of use of software ranked high on management’s priorities, to allow for faster learning and transition to the new system.

The new system also had to fit with the company’s existing systems for smooth integration into supply chain and financial management. A cost-efficient solution suitable for a business of its size was another requirement.

Embarking on an aggressive technological upgrade, Hi-Rise evaluated several available solutions in the industry. Using Microsoft Dynamics, Hi-Rise was able to achieve the following:

• Shorter Month-End Closing

Hi-Rise was able to cut time taken for month-end closing from the usual 10 days to just 5 to 6 days, saving considerable manpower hours, driving up business productivity and strengthening profitability.

• Improved visibility

Easy access to accurate, real-time business information enables more accurate responses to customer enquiries on sales order status and delivery schedules, which improves overall customer satisfaction. Checking a sales order figure from the purchasing system used to take up to 30 seconds, but now with an integrated platform, viewing new packaging designs and subbill material information has been cut by almost 90 percent, taking only two to three seconds.

• Streamlined requisition

Previously, generating a quote meant the need to manually calculate product costing, which was tedious, time consuming, and prone to error. With the customized Product Costing functionality, Hi-Rise is now able to key-in customer specifications in terms of carton size, quantity, and other desired features. Using pre-determined ratios and settings, the system can now generate faster costing figures to support quicker turnaround of customer quotes.

• Improved traceability

In line with its ISO certifications, Hi-Rise wanted to put in place stringent quality control processes to help to uphold its “zero defects” commitment to customers.

With the customized “Production and Quality Control” functionality, integrated with Microsoft Dynamics, Hi-Rise quality control staff can now easily trace past quality and defect records, instead of physically searching through files.

Lu Meng, Managing Director, Hi-Rise Paper Products: “At Hi-Rise, we want to be able to deliver not just good service, but enhanced customer satisfaction with value-added services backed by a streamlined and effective back-end system.

“At the end of the day, we want to ensure total customer satisfaction. We are now better equipped to take on the marketplace, and most importantly, maximize management visibility and traceability.”

Sun Whye Mun

Analyze data in graphical formats to make better business decisions.