{The High Cost} of Legacy ERP Systems. plantemoran.com

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1 {The High Cost} of Legacy ERP Systems plantemoran.com

2 Many organizations have come to realize that while ERP software doesn t appear to generate direct revenue, it can significantly impact financial performance.

3 For many years, most mid-sized manufacturers have been cruising along with Enterprise Resource Planning (ERP) software that they implemented more than a decade ago. Since many executives don t consider their enterprise resource systems to be revenue generators, these applications tend to be ignored as long as they continue to provide adequate functionality. Many organizations have come to realize that while ERP software doesn t appear to generate direct revenue, it can significantly impact financial performance. We appear to be at the cusp of a significant change in the business climate where the innovators will garner additional market space while the laggards will 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. BEST-IN-CLASS PERFORMANCE Aberdeen used five key performance criteria to distinguish best-in-class companies from laggards: 18% reduction in level of inventory versus 3% for laggards 97% inventory accuracy versus 8% for laggards 96% manufacturing schedule compliance versus 79% for laggards 98% on-time and completion shipments versus 79% for laggards 3.3 days to close each month compared to 7 for laggards FIGURE 1 In a 2011 report ( ERP in Manufacturing 2011: Defining the ERP Strategy by the Aberdeen Group), Aberdeen differentiates best-in-class (top 20 percent) companies from laggards (bottom 30 percent) using five key performance criteria (Figure 1). These 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. Increase Operational Efficiency Legacy systems built on old architecture 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 (SOA), deployed as Software as a Service (SaaS), 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 supervisors and executives can see where production, quality, scrap, delivery, and sales goals are being met or missed, then they can respond more quickly before a significant margin is lost. 1

4 For example, with today s technology, many shop floor machine controllers can communicate directly with production and quality modules of enterprise software. If standards aren t being met, the machine can stop production and notify appropriate personnel of the problem via the workflow (technology automation that s 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, which directly impacts profit margin. Another opportunity is the ability to garner more value from customer and supplier relationships. Many of today s applications come with enterprise portals that extend portions of the operation to suppliers and customers. Based on your business rules, self-service activities can be introduced to administer sales orders and purchase orders in the enterprise software. Common customer activities include order confirmation, order processing status, shipment tracking, accounts receivable balance inquiry, pricing inquiry, and inventory availability. Similarly, suppliers are able to provide updates like quality documentation, material safety data sheets, purchase order acknowledgement, material release, and advanced shipping notification, resulting in diminished accounts payable discrepancies and late receipts due to lost purchase orders. They can also inquire on supplier quality performance metrics, the supplier scorecard, and the accounts payable payment status. 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 2

5 outage. These are important considerations given the amount of a business s activities that have been automated by these systems (e.g., deposits, payments, EDI). If a system was implemented more than 10 or 20 years ago, the talent pool knowledgeable in your customizations and software is likely closing in on retirement. Identifying replacement talent who can administer, support, and program in the RPG, COBOL, or proprietary 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 systems 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 Merger and Acquisition (M&A) Activity Historically, merger and acquisition activity has been focused on very large organizations purchasing smaller competitors to continually increase their control of the market space. Today, many mid-sized 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 require 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 with a legacy operator may be much more cost, time, and risk 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 is typically 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 are typically created by a single individual with 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 ROI. 3

6 An independent technology assessment is a low-cost way to identify the critical gaps in business requirements and ERP system 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 system 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. See the case study below for an example of how one organization justified migration to a new ERP system. FIGURE 2 FIGURE 3 4 LEGACY SYSTEM ENVIRONMENT Fixed Assets Engineering Maintenance Excel- Maintenance Log Label Magmt. Automated interface Quality System Legacy System Payroll Manual interface (upload/download) NEW ERP ENVIRONMENT Customer Portal New ERP Systems Payroll Supplier Portal Fixed Assets Automated interface Independent MS Excel Spreadsheets Quality Sales Quoting Purchasing Schedling Costing Accounting Tooling Document Control Manual interface (upload/download) Case Study A $100 million Tier 1 automotive supplier operating on a legacy ERP solution required nine customized spreadsheets and six third-party applications to successfully run its core business operations. Each of the interfaces to the legacy software required some type of manual upload and download of data (Figure 2) in addition to the manual labor to administer the applications and spreadsheets. The supplier forecasted an average growth of 10 percent per year over the next five years. To support this growth, 10 indirect employees were being added over the next three years at a total additional salary expense of $500,000 annually. Maintenance fees for the legacy ERP and third-party applications were approximately $153,000 per year, bringing a total five-year licensing and incremental employee expense forecast to approximately $2.8 million. The supplier identified 13 manual operations that were costing them more than 7,700 annual labor hours (3.75 full-time employees) at a total cost of $158,000. Also, there were 51 processes identified as having deficiencies that could be corrected with a more current and robust ERP system. The supplier developed a specific ERP recommendation requiring no customized spreadsheets with only two of the thirdparty applications being retained after the initial phase of implementation (Figure 3). Upon completion of the business case, the supplier was able to establish a two-year ROI and more than $1.1 million in increased cumulative cash flow after five years.

7 Conclusion If your organization s performance metrics are measuring closer to the laggards than the best-in-class companies, it s not too late. Don t ignore the importance of using updated technology and processes for operational efficiency and a 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 improved disaster recovery, thus raising your level of competitiveness in the new economy. For more information on Plante Moran ERP services, contact: DOUG HOCKENBROCHT doug.hockenbrocht@plantemoran.com CRAIG ZAMPA craig.zampa@plantemoran.com. 5

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