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Posts Tagged ‘ERP in Manufacturing 2010’

Required Actions: The Steps to Success. 

Whether a company is a “laggard” as defined in the Aberdeen Group’s report entitled ERP in Manufacturing 2010: Measuring Business Benefit and the Time to Value, or an “industry average” firm looking to move up to Best in Class, certain actions need to be performed in order to spur the necessary improvement.  We’ll look at those in this installment.

The 2010 Aberdeen survey concluded that among actions the “laggards” should take to catch up are:

  • Assign ERP ownership to line of business executives who stand to gain the most benefit from the implementation.  Laggard businesses stop short of achieving cost reductions and business improvement goals.  So assign specific responsibility to an executive measured by these criteria. 
  • Establish specific goals for obtaining business benefits from ERP – and measure progress.  Only 15% of Laggards quantify the business benefits of ERP.  Others fail to measure reductions in inventory or manufacturing or administrative costs.  100% of Best in Class companies measure all of these. 
  • Measure time to value.  Best in Class companies are twice as likely to measure the time it takes to recapture value from their ERP deployment in real dollar terms.  While improvement is ongoing and ERP is never “done” it is important to track time and costs relative to realized value and payback. 

 Meanwhile, the companies in the mid-tier “industry average” category, striving to become “best in class” should take the following actions: 

  • Take advantage of tools that review summary data and that provide dashboards and drill-downs.  Best in Class firms know that this type of visibility, now usually provided directly within ERP software, makes a tangible difference in monitoring and improving business performance.
  • Coordinate, collaborate and continuously improve. 
  • Broaden and deepen ERP usage.  This is a recurring theme in ERP: Best in Class manufacturers make broader and deeper use of ERP, in terms of number of modules implemented and functionality deployed.
  • Don’t let maintenance dollars go to waste.  Another recurring theme: Stay current on your software and the new innovation each new release provides.  Best in Class manufacturers are twice as likely to be current in their software as are industry average firms.

Finally, if you already are Best in Class, take action to:

  • Improve real time visibility into the entire quote to cash process.  Automatically notify decision makers when certain scheduled activities fail to occur as planned.  Having visibility and taking action are often two different things.
  • Manage by exception.  You must be notified in real time as exceptions occur in order to react immediately.  Event triggers in ERP software make both these actions possible today. 

By following the principles outlined in this series of five posts, manufacturing firms – already leaders in ERP deployment – can enjoy much greater gains in efficiency and profit improvement.  Take the steps outlined here to begin your own path to Best in Class.  It’s worked for others.  It will work for you. 

And of course [shameless plug] If you need assistance, firms like ours are here to help.

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The entire Aberdeen Group manufacturer’s survey we’ve been reviewing in this and our prior three posts covers a lot of ground.  You can read the full report here at your leisure.  We simply want to recap some of what we found to be the key lessons that any manufacturer would do well to note.

One of the highlights was the correlation between firms that were deemed Best in Class (as defined in our first post in this series) and the idea that these firms measure their performance (with the goal of improving that performance, of course).

Companies that measured their improvements and were among Best in Class found those improvements as follows:

  • 20% reduction in operating cost
  • 18% reduction in administrative cost
  • 22% reduction in inventory cost
  • 17% improvement in complete and on-time shipping
  • 18% improvement in manufacturing schedule

Meanwhile, “Average” companies saw improvements of roughly two-thirds the above figures.  And the improvement by “Laggard” or lowest-performing companies was only about one-fourth of the Best in Class.

One reason: The Best in Class made a point of measuring their results.  The Average and Laggard firms perceived an increase in performance, but the Best in Class companies measured theirs.  And without being able to measure and monetize those results, company managements are often hard pressed to justify continued investment in their systems. 

While some operational improvements might be only indirectly related to ERP implementation, others can be more directly attributed.  When Aberdeen looked at a long list of improvements (like the five noted above, plus areas like: reduction in waste, increased profits and revenues, reduced decision times, reduced headcount, and so on), it found that companies who measured their results could make a direct correlation to improvement in areas such as inventory costs and production throughput.  That’s because those types of improvement are the direct result of process improvements that are streamlined and improved by ERP.  These in turn result in better on-time and complete delivery. 

Ultimately, those who measure and improve continue to invest in their systems, continue to improve, and thus create a continuous improvement loop that gradually separates them from their competitors… until they end up in (or remain)… Best in Class!

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A key finding in Aberdeen’s ERP Manufacturer’s Survey was how in years past manufacturers failed to take full advantage of the capabilities of their systems.  (As ERP implementers, we see this all the time: a flurry of activity to get basic processes implemented, coupled with some effort to cut cost by minimizing training, and all too often, a corresponding stagnating over time of any continued efforts at improvement.)

Interestingly, Aberdeen found in this year’s study that manufacturers who qualified as Best in Class (see what that meant in our first post of this series, here) achieved significant progress in taking greater advantage of their systems and by getting access to information directly into the hands of key decision makers.  Here again, all too often we hear that “information is difficult (or impossible) to get out of our system” especially from businesses running older software, or software not really fit to their business.

Well, the best companies are making real progress here.  In many cases, they’re doing that by making sure they modernize their tech infrastructure.  That means upgrading software when upgrades become available.  Subscribing to maintenance plans.  Or, where necessary, moving to more modern systems altogether.

While ERP solutions today increasingly embrace lots of new ‘ease of use’ technologies, those stuck on older systems with older technologies find themselves unable to take advantage of the technology… and thus unable to get access to the information they need to make good decisions… and ultimately, limiting their ability to become Best in Class in their own right.

In short, they can’t execute against strategies aimed at improved performance, because their systems won’t support it.

This may be why last year, for the first time, the average age of ERP implementations actually shrunk.  This reflects an increase in replacements and first time implementations.  It means companies are beginning – for the first time in years – to embrace the newer ERP technologies, and with them, the ability to improve operations and workflow, and provide better, faster access to key information — all necessary components of growing the business.

The survey also showed that, increasingly, smaller companies are investing in ERP.  Some are doing so for the first time, and some are replacing outdated systems that in many cases were deployed around the Y2K (year 2000) threshold. 

However, the report points out, ERP age is only part of the story.  Sustained innovation is necessary if the ERP solution is to continue to serve the needs of the organization.  Business needs change as companies grow and evolve.  A business system with a long history may also be based on older, inflexible (or outdated) technologies that are simply not capable of taking advantage of many of the components of today’s wired and web-enabled world (for example, SOA). 

At the very least, companies need to recognize the importance of staying current, or “on maintenance” with the systems they do have today, if they plan on keeping them.  One final point in today’s thread: the survey shows that Best in Class companies are over 100% more likely to be on the latest release of their software than lesser companies.  Companies that are better positioned to take advantage of the full stack of their current solution’s capabilities are simply “better positioned to compete.”

In our next post, we’ll look at benchmarking requirements for success.

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The title of this series of posts comes from idea noted in our first post on the topic that manufacturers lead all other industries in the adoption of Enterprise Resource Planning systems – and benchmarking their results, we might add – by a factor of two to one.  Hence, manufacturing leads when it comes to deploying automation technology that leads to “Best in Class” performance.  In today’s post, we’ll look at the business drivers, or motivators, for that push into ERP.

Three key business drivers emerge from Aberdeen’s survey of over 700 managers at over 400 manufacturers:

  • Cost reduction
  • Customer service
  • Growth

These drivers have been consistent across five years’ worth of Aberdeen surveys.  In the most recent survey in fact, cost reduction rose to the number one factor – no surprise in light of the recession.

Cost reduction was the key driver in the small to mid-size (or “SMB”) business market – that’s our market space.  Larger companies (revenues over $1 Billion) had other concerns, namely interoperability across multiple operating locations, but our audience is mostly comprised of the smaller firms in this demographic, so we’ll stick with these for our analysis in these posts.

As the Aberdeen results point out “cost reduction could spell the difference between survival and failure.”  Second most important as a business driver to use ERP was the fact that SMBs are under increased pressure to “be responsive and easy to do business with.”   Finally, smaller companies have specifically targeted last year and this year for aggressive planned growth. 

 Most know that ERP is a critical foundation for that growth.

Strategies

 In order to relieve the “must reduce costs” pressure, Best in Class companies found it necessary first to streamline and accelerate business processes, and then to standardize those processes.  Additional strategies involved optimizing the use of current capacity; providing visibility across functions or departments; and modernizing tech infrastructure.

Some of the capabilities required to help reduce those costs included integrated business applications as a system of record.  Noted secondly was standardized enterprise-wide procedures for key functions like sales, procurement, production planning, cash collection and financial reconciliation.

What immediately jumps out is that you can’t have the second without the first.

Also cited was the ability for managers to drill down on key data points to enable better, faster decision making, and that the line of business ultimately “owns” the success or failure of the ERP implementation.

A fifth, key point that was clearly important to the Best in Class: Quantifiable business benefits that are the result of measured ERP benefits.

Next up: the importance of taking full advantage of your system’s capabilities, and staying current with your software.

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The roots of ERP, and its successor MRP, are firmly rooted in manufacturing.  So when the Aberdeen Group delivers its annual research report it often provides great guidance on how real-world manufacturers use tools such as ERP and MRP to improve operations and become Best of Class enterprises.

The most recent report details Aberdeen’s efforts to benchmark ERP in manufacturing by measuring “business benefit and time to value.”  Last year, Aberdeen surveyed 445 respondents, exploring Best in Class approaches to deriving the most benefit out of their ERP systems.  We’ll review some of their most important findings and conclusions in our series of posts that follows, beginning today.

Their “Best in Class” group had the following performance characteristics for which, one would think, all companies might want to strive:

  • 22% reductions in level of inventory
  • 97% inventory accuracy
  • 96% manufacturing schedule compliance
  • 98% on-time and complete shipments
  • An average of 3.4 days to close a month

 Those Best in Class firms shared several common characteristics including:

  • They were over twice as likely to quantify the business benefits of their ERP implementations
  • They took advantage of 39% more of their ERP system’s functionality
  • The top 20% in terms of aggregate performance enjoyed an 83% advantage in full visibility to their business

They concluded that in order to achieve Best in Class performance, companies must:

  • Establish a baseline; set goals; and quantify the business benefits resulting from their ERP implementation
  • Measure cost reductions and schedule improvements, along with time to value
  • Don’t let ERP maintenance dollars go to waste: broaden and deepen their ERP functionality.

It turns out that manufacturers implement ERP at a rate of adoption twice that of other industries.  About three-fourths of manufacturing firms have adopted ERP initiatives.  These other industries, in turn, tend to look to manufacturing for best practices to follow as the operational system that forms the basis of the business itself.  (By contrast, only about half of distributors and a third of service companies and non-profits have implemented ERP as of 2010.)

So, with manufacturing taking the lead in ERP implementation, it is useful to take a look at the ‘business drivers’ that lead to ERP deployment: What pressures encourage ERP adoption, and what results flow from these efforts?  We’ll explore further in our next post in this series.

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