The ERP in Manufacturing Benchmark Report

Transcription

1 The ERP in Manufacturing Benchmark Report August 2006

2 Executive Summary Enterprise Resource Planning (ERP) systems and their MRP (Material Requirements Planning) predecessors have been around for almost three decades now. As a result, many aging implementations, based on outdated technology, are limiting the business process evolution necessary to any company who wants to thrive and grow amidst the pressures of globalization and increasingly demanding customers. Conversely manufacturers demand more value from ERP implementations, not only as their systems age, but as enterprise applications proliferate, raising questions concerning upgrade, replacement, consolidation and rationalization. Key Business Value Findings The chief ERP implementation challenges cited by respondents were associated with the alignment of business processes with software capabilities. Customization related challenges arise where software has been adapted to fit the business. Business process redesign challenges arise where processes are adapted to the software. Companies struggle to balance the two amidst costs associated with upgrades and latent integration costs where point solutions or custom applications have been used to fill the gaps in functionality. Implications & Analysis As a result, enterprises are struggling to derive more and better business value -Jim Moore, Business System Manager, from their ERP implementations. That R&M Energy Systems often means driving the use of ERP deeper into their organizations or broader across more of the enterprise. It means extending the footprint beyond the core ERP functionality and making decisions between ERP vendors and pure play or best of breed solutions. For this to be successful, business processes must be streamlined and standardized throughout and in many cases outdated technology just doesn t cut it. Recommendations for Action In implementing enterprise applications many organizations neglect to assess the technology platform, only to discover-after the fact-that the hardware and networking infrastructure is insufficient to support the software. Companies should evaluate current ERP implementations to ensure they effectively accomplish the following: Balance aligning business processes to software capabilities against aligning software capabilities to business processes to maximize benefit and allow your business to evolve Consolidation decisions must weigh carefully the business value brought to the enterprise. AberdeenGroup i

3 Resist replacement strategies that simply duplicate business processes currently in place Don t fall into the trap of believing an ERP implementation is ever completely done Increase collaboration between Information Technology (IT) and Line of Business staff in order to gain the most business value within time and budget constraints. ii AberdeenGroup

4 Table of Contents Executive Summary... i Key Business Value Findings... i Implications & Analysis... i Recommendations for Action... i Chapter One: Issue at Hand... 1 Chapter Two: Key Business Value Findings... 5 Factors Affecting Upgrade decisions... 6 Factors Affecting Replacement Strategies... 8 Consolidation Strategies... 9 Challenges and Responses Chapter Three: Implications & Analysis Measuring Success ERP Usage Beyond ERP Software Selection Criteria Chapter Four: Recommendations for Action Consolidation Recommendations Replacement Strategy Recommendations Recommendations Concerning Rationalization of ERP Extensions Laggard Steps to Success Industry Average Steps to Success Best in Class Next Steps Author Profile AberdeenGroup

5 Appendix A: Research Methodology Appendix B: Related Aberdeen Research & Tools About AberdeenGroup Our Mission Our Approach Our History of Integrity AberdeenGroup

6 Figures Figure 1: Age of ERP Implementations...2 Figure 2: How many ERP s do you have across your enterprise?...2 Figure 3: Business Drivers impacting ERP strategies...4 Figure 4: Planned actions within the next 12 months...5 Figure 5: Current Release Status...6 Figure 6: Reasons to delay upgrading...7 Figure 7: Motivation behind replacement strategy...8 Figure 8: Planning to Consolidate?...10 Figure 9: Performance Improvements Achieved with ERP Implementations...15 Figure 10: Metrics Tied to Success...15 Figure 11: Did you purchase this from your ERP vendor?...19 Figure 12: How likely are you to purchase this from your ERP vendor?...19 Figure 13: Software Selection Criteria...21 Tables Table 1: ERP Implementation Challenges and Responses...11 Table 2: Field Service Competitive Framework...13 Table 3: ERP Module Adoption rates...17 Table 4: Expected and Actual ROI (Return on Investment)...23 Table 5: Competitive Framework...29 AberdeenGroup

7 Chapter One: Issue at Hand Key Takeaways Aging implementations limit the business process evolution and provide a catalyst for change The proliferation of enterprise applications poses a question of consolidation and rationalization Manufacturers demand more real business value from ERP T he evolution of ERP (Enterprise Resource Planning) has been an interesting journey. The consolidation of the enterprise applications market in general and the ERP vendor landscape in particular, is having a significant impact on the implementation strategies and execution plans of manufacturers. In addition, continued pressure on manufacturers to optimize resources, meet tighter delivery schedules, and improve overall responsiveness is driving change and forcing many companies to reevaluate their ERP strategies. ERP systems and their MRP (Material Requirements Planning) predecessors have been around for a long time. Aberdeen found a wide range of maturity across ERP implementations. A full 31% are more than 10 years old (see Figure 1). Ten years ago the breadth of functionality available from ERP solution providers was far different than it is today and the technology was worlds apart. Even less than 7 years ago, at the turn of century, amidst the Y2K (Year 2000) scramble, the solution landscape was far different than it is today and probably a healthy portion of those 34% with ERP implementations that are 5-10 years old were selecting from a menu of options significantly reduced from today s offerings. As a result, a wealth of home-grown and custom applications have been developed and adopted over the years to fill gaps previously left by MRP and ERP solutions of days gone by. High levels of customization, combined with aging technologies presents a significant challenge to ERP strategies today. Competitive Framework Key The Aberdeen Competitive Framework defines enterprises as falling into one of the three following levels of practices and performance: Laggards (30%) practices that are significantly behind the average of the industry Industry norm (50%) practices that represent the average or norm Best in class (20%) practices that are the best currently being employed and significantly superior to the industry norm AberdeenGroup 1

8 Figure 1: Age of ERP Implementations No ERP 9% < 2 years, 9% > 15 years 13% > 2 years but < 5 years 18% > 10 years but <15 years 18% > 5 years but <10 years 33% Source: AberdeenGroup, August 2006 An MRP or ERP evaluation was once thought to be a strategic 5-8 year decision, yet the age of these implementations implies the longevity of these solutions far exceeds their anticipated life. A full 24% of respondents specified their ERP system replaced manual processes (not shown), indicating they still had the first ERP system ever implemented. Another 42% indicated their current ERP had replaced home-grown or custom developed applications, while only 34% identified their current implementation as a replacement of another ERP, confirming that many companies view ERP implementations like brain surgery. You don t do it unless the patient is dying. Figure 2: How many ERP s do you have across your enterprise? 1 20% 58% 88% % 10% 4% 9% 4% 2% 18% 22% 22 Large Mid-size Small >4 2% 2% 31% 0% 20% 40% 60% 80% 100% Source: AberdeenGroup, July 2006 As ERP implementations have been aging, they have also been proliferating. Aberdeen found 71% of large companies with two or more ERP packages implemented across the enterprise and 26% with four or more (see Figure 2). Aberdeen defines the threshold for 2 AberdeenGroup

9 the upper echelon of large companies to be $1 billion in revenues and many of these companies have grown to be this size through merger and acquisition (M&A). This is spurring the need to examine the options of staying the course, with each acquired company continuing with its installed applications, or consolidating applications to one or more standards across the enterprise or choosing some combination of these two. While small companies, those with revenues less than $50 million, generally operate with a single ERP package, it is certainly not uncommon to find a multi-erp environment in mid-size manufacturers. Of those companies with more than one ERP package installed across the enterprise, the most often cited factor as the cause for this proliferation is growth through merger and acquisition (40%). However, a close second was the result of enterprises leaving the ERP decision in the hands of autonomous or semi-autonomous divisions (39%). In fact, through the 1980 s and into the mid-1990 s, this was a fairly common occurrence across multi-national, multi-divisional companies. The enterprise applications landscape during this timeframe included corporate financial systems running on mainframes and MRP (Material Requirements Planning) systems running on mini-computers at individual plants. A further 20% of multi-erp companies now have corporate standards in place governing the evaluation and acquisition of ERP software, but still have instances of other enterprise applications that have not been replaced with the standard. PACE Key For more detailed description see Appendix A Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures external forces that impact an organization s market position, competitiveness, or business operations Actions the strategic approaches that an organization takes in response to industry pressures Capabilities the business process competencies required to execute corporate strategy Enablers the key functionality of technology solutions required to support the organization s enabling business practices But manufacturing is not the only industry seeing significant consolidation. Several years ago ERP companies fought hard for relative positioning on the Top 50 list. In fact, at one point the list was expanded to the top 100 so more aspiring market leaders could get their share of the spotlight. Today we struggle to come up with 100 ERP solution providers across the entire vendor landscape. And Aberdeen would argue that the Top 50 has really shrunk to the Top 20. Aberdeen has compared acquisition strategies of several ERP vendors, both large and small. Amidst a myriad of strategies, approaches and tactics, the net result is a rapidly consolidating market. This leaves the future of installed products in question. While most acquiring companies will assure acquired customers of continued maintenance, level of continued product innovation will vary from product to product and company to company. In addition to the aging and proliferation of ERP and its consolidating market, what business drivers are impacting the formulation of ERP strategies? By and far operational factors such as the standardization and acceleration of manufacturing processes, reduction of costs and streamlining of processes lead the charge. No manufacturing company today is immune from the impact of globalization or the acceleration of change and these companies are looking for demonstrable business value from ERP. Almost a third of par- AberdeenGroup 3

10 ticipants view the need to improve customer service as a key driver as well. Growth, either organically or through mergers and acquisitions is viewed by fewer companies as a driving factor impacting ERP decisions. Figure 3: Business Drivers impacting ERP strategies Standardization and acceleration of mfg processes Pressure to reduce operating costs Streamline order fulfillment processes Requirements to improve customer service Linking of global operations Organic revenue growth Easier connection with external partners Revenue growth through M&A Regulatory compliance requirements Shorter product life cycles 24% 23% 16% 14% 13% 9% 32% 61% 54% 47% 0% 10% 20% 30% 40% 50% 60% 70% All respondents Source: AberdeenGroup, August AberdeenGroup

11 Chapter Two: Key Business Value Findings Key Takeaways Upgrade strategies are reflective of significant time and effort involved Standardization of business processes and integration issues drive consolidation decisions and replacement strategies Aligning business processes with software capabilities versus aligning software capabilities with business processes must be balanced against the costs of customization and integration G iven the need to streamline and accelerate manufacturing processes today, manufacturers are faced with many decisions. Do they upgrade to the latest release of their current software, replace it or none of the above? Intentions vary with the level of maturity of the ERP implementation. In the aggregate 40% anticipate keeping current versions of existing implementations at status quo, but there is also significant activity planned (see Figure 4). A surprising 14% across all companies have a replacement strategy at selected locations and almost half (45%) plan to upgrade to the latest release. Given the population of legacy systems and old releases pervasive across the manufacturing industry, this signals far more activity and progress than we have seen in the recent past. Figure 4: Planned actions within the next 12 months 70% 60% 50% 40% 30% 20% 10% 0 < 2 years 59% 46% 44% 54% 41% 42% 35% 29% 12% 10% 11% <2 & <5 years <5 & <10 Years <10 % <15 years 41% 33% 26% 17% > 15 years Continue on current release Upgrade to latest release Replace ERP Source: AberdeenGroup, August 2006 Those who have recently implemented or re-implemented within the past 2 years are in no rush to upgrade, but the likelihood of upgrading rises steadily up until the 10 year AberdeenGroup 5

12 mark. At that point the upgrade process is likely to be more difficult and cost prohibitive and companies are more likely to replace ERP. And of course, for those with multiple ERP packages there is the added question of whether or not to consolidate. Across our field of survey participants, 71% of those with multiple ERPs intend to consolidate. Factors Affecting Upgrade decisions A large percentage (45%) of respondents indicated plans to upgrade to the latest release of their software within the next 12 months. However, a full 77% of respondents were not currently implemented on the latest release (Figure 5). While 14% intend to replace ERP at selected installations, this still leaves a large percentage intending to be one or more releases behind. Figure 5: Current Release Status 2 release behind, 30% Implemented on latest release, 23% 1 release behind, 47% Source: AberdeenGroup, August 2006 Operating 1 release behind the most current is a planned strategy for many companies. Manufacturing companies are conservative in nature. Even those who are pioneers in their field tend not to be pioneers in Information Technology (IT) deployment. Unless the new release contains features that are absolutely critical to their immediate success, they are perfectly willing to let others be the first out of the gate. In addition, over half (51%) indicated the functionality introduced in new releases did not warrant the effort to upgrade (Figure 6). For many companies (58%) the upgrade process is long and difficult, particularly if there is a significant level of customization. For many these are reasons enough to delay the upgrade process and skip one or more releases. These companies eventually play leap frog and catch up, but at any point in time, they are equally or more likely to not be at the latest release. 6 AberdeenGroup

13 Figure 6: Reasons to delay upgrading Upgrade process is too long and hard we eventually catch up 57% Not enough new features to warrant efforts 51% Current release satisfies our needs Uncertainty over the quality of new releases Customizations make upgrading cost prohibitive 45% 45% 43% Not on maintenance Not interested in new features offered 10% 10% 0% 10% 20% 30% 40% 50% 60% All respondents Source: AberdeenGroup, August 2006 In some cases there are also monetary considerations of additional software license fees. While some ERP solution providers always allow maintenance paying customers to move to the most current release with no additional software license fee, this is not always the case. With the shift to a new architectural base, some ERP vendors have introduced additional or replacement license fees. Yet at some point the risks associated with not upgrading outweigh the costs. BAE Systems, a company that develops, delivers and supports advanced defense and aerospace systems in the air, on land, at sea and in space, manufactures military aircraft, such as Typhoon, F-35 Joint Strike Fighter, Hawk advanced jet trainer and Nimrod maritime reconnaissance aircraft. The company determined that a comprehensive upgrade to its heavily customized ERP system was required to improve overall efficiency. Over time significant levels of data corruption had become apparent, primarily because we were running numerous customizations, which made it difficult to follow an upgrade path, said Steve Haywood, head of business systems development Air Systems for BAE. Over time significant levels of data corruption had become apparent, primarily because we were running numerous customizations, which made it difficult to follow an upgrade path. -Steve Haywood, Head of Business Systems Development, BAE Systems BAE Systems worked closely with SSA Global (now part of Infor) and an integration partner on the system upgrade, which included data migration and busi- AberdeenGroup 7

14 ness process and software reengineering and testing. Now that they have bitten the bullet on upgrade they plan to take advantage of regular feature pack updates and keep to a maintenance schedule and migration path. Factors Affecting Replacement Strategies Figure 7: Motivation behind replacement strategy ERP consolidation Outdated technology Integration issues Business is evolving Require functionality not in latest release Require functionality not in current release Extensive customization prevent upgrade Unhappy with support from current vendor ERP endor not keeping pace 19% 18% 14% 13% 42% 37% 36% 34% 62% All respondents 0% 10% 20% 30% 40% 50% 60% 70% Source: AberdeenGroup, August 2006 Far and away the most common motivator in terms of ERP replacement strategies is the move towards ERP consolidation (Figure 7). Several other issues cited as reasons for replacement serve also to strengthen this impetus. Outdated technology alone might not provide sufficient incentive for such drastic measures, but when it causes integration issues and prevents companies from adapting to changing business processes these factors combine to prompt action. Integration issues become much more prevalent as companies grow through mergers and acquisitions and correlate directly with the intended integration of the acquired company. Where mergers occur primarily for purposes of diversification and the acquired company remains relatively autonomous, there is less immediate need for integration between systems. However, even in instances where product portfolios are being diversified, there may be significant opportunity to grow existing customer share. Unless customer bases are mutually exclusive, opportunities emerge to leverage relationships across business units or divisions in order to grow revenue synergistically. Ralco Industries is one company that decided on a replacement strategy - twice. Since 1970, Ralco has been serving its customers various metal stamping and assembly needs in the automotive and non-automotive industries. The company had purchased its original Manufacturing Resource Planning (MRP) system in In 1995 they purchased another software package for shipping and receiv- 8 AberdeenGroup

15 ing and later decided to go with the entire system in A conversion date was set and when the day arrived, they pushed the button and found key features not working as planned. They had a disaster on their hands. After six months of intense effort to make the old system work, we had to back off, but we knew we needed something else, notes System Manager Eric Reno. The key questions were, what exactly did we need, and who could provide it? We were looking for system that could be accessed from anywhere in the world. We had a vision of what we wanted-a living control plant that would collect data, update it, and send it where it was needed. Our vision matched up with the vision of Rob Beatty, found of Plexus Online -Jim Piper, President, Ralco Industries Ralco CEO Tom Gitter and President Jim Piper had a vision of total systems integration, not only throughout traditional ERP modules, but also with their shop floor. We were looking for a system that could be accessed from anywhere in the world. We had a vision of what we wanted a living control plan that would collect data, update it, and send it where it was needed. Our vision matched up with the vision of Rob Beatty, founder of Plexus Online, according to Piper. Unlike most ERP software, Plexus Online is delivered in an on-demand, software as a service (SaaS) model. Ralco started its implementation with the Plexus Online Purchasing module. When their old MRP system crashed in January 2002, Ralco took the full plunge and hasn t looked back since. They now subscribe to a full range of modules from Sales/Customer Relationship Management to Production and manufacturing management, as well as Communication, EDI and Security modules. Consolidation Strategies Mid-size and Large companies are far more likely to face decisions around consolidation of ERPs. Seventy one percent of large companies and 41% of mid-size companies have more than one ERP across the enterprise (Figure 2). Of the entire survey population with multiple ERPs, 71% intend to consolidate, but intentions scale with the size of the company as shown in Figure 8. AberdeenGroup 9

16 Figure 8: Planning to Consolidate? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 84% 67% 58% 42% 33% 16% Small Mid-size Large Yes No However, consolidation strategies do not always involve consolidating to a single ERP. While 64% of those companies with consolidation strategies indicated they intended to consolidate to 1 ERP, 22% indicated the intention to consolidate to 2 and 5% plan to consolidate to 3 (not shown). In addition 9% indicated plans to consolidate to more than 3 ERPs but Aberdeen would contend this may not actually qualify as a true consolidation strategy. Source: AberdeenGroup, August 2006 Two years ago Goss International made the decision to consolidate and chose SAP as the single strategic platform. Not only has it chosen a single ERP platform, it maintains a single instance of software and a single database, forcing standardization across all divisions using the software. As indicated in Chapter One, the primary cause for proliferation of ERPs is growth through mergers and acquisition. These growing companies face the challenge of standardizing business processes across the enterprise. FMC Technologies is one such company. It has grown to be a collection of relatively autonomous businesses, the largest of which is its Energy Production Systems business which provides solutions for customers engaged in petroleum exploration and production. This part of FMC Technologies has standardized on SAP. But this is only one part of FMC s consolidation strategy. Other business units are smaller and the decision for these was driven by the search for the least expensive package that served the needs of the business. Therefore, for FMC Technologies, the result was to consolidate within class of business. For these smaller business units, the target ERP is Infor s Syteline. Goss International is another example of a company faced with the decision to consolidate ERP or not. The company is a global leader in web offset printing solutions, with a complete product range of newspaper and commercial press systems, as well as mailroom and post press equipment to worldwide markets. Having grown through acquisition, at one point the company had accumulated a collection of ERPs including Baan (currently owned by Infor), SAP s R3, Oracle and several highly customized legacy systems. Two 10 AberdeenGroup

17 years ago the company made the decision to consolidate and chose SAP as the single strategic platform. Not only has it chosen a single ERP platform, but it also maintains a single instance of the software and a single data base, forcing standardization across all divisions using the software. Challenges and Responses Standing in the way of optimized ERP implementations, according to survey respondents, is the alignment of software capabilities with business processes often producing customization related challenges (Table 1). These top 2 challenges are tightly coupled, but there can be a duality of cause and effect. The need to redesign business processes can result from the changing needs of the business, which may or may not result in the need for customization. But it can also result from the desire to reduce or minimize the level of customization. In parallel to these top 2 challenges, are the 2 most common responses either align the business process to the software, or align the software to the business process. These 2 approaches often co-exist in a company, and the proper balance between the 2 can be a challenging juggling act, particularly given the emphasis many companies are placing on the elimination of customization. Table 1: ERP Implementation Challenges and Responses Challenges % Selected Responses to Challenges % Selected 1. Customization Related Challenges 45% 1. Aligning business processes to software capabilities 2. Redesigning Business Processes 41% 2. Aligning software capabilities to business processes 54% 48% 3. Cost of upgrades/updates 34% 3. Eliminating customizations 43% 4. Training 33% 4. Deploying newer more modern applications 34% 5. Little flexibility in adapting to business processes 29% 5. Use external consultants 28% 6. High integration costs 26% 6. Move to standards based hub and spoke integration methodologies 7. High maintenance costs 26% 7. Wrap existing applications with web services 8. Lengthy or incomplete integrations 18% 8. Replace legacy applications with applications enabled by Service Oriented Architecture (SOA) 22% 20% 17% Source: AberdeenGroup, August 2006 Goss International is an example of a company that has mastered this balancing act. Because it has chosen a single ERP platform, maintains a single instance of the software and a single data base, and sticks to plain vanilla software as much as possible, this forces standardization across all divisions and careful scrutiny before any change is made. AberdeenGroup 11

18 Goss has a formal review and roll-out process it applies to each project. The first step in the process is a business process review and a fit gap analysis, starting with the 10,000 foot view. The second step is the blue printing phase, which involves reviewing all identified issues in detail. Where this process uncovers a better way of doing things, the company considers changing the implementation template. Because Goss runs all divisions from a single instance, this must be a very careful consideration and a consensus decision. What is involved in changing the template? The answer is, Unnatural acts, according to Mike Masters, Director of Business Systems and Solutions. The Information Technology (IT) group under Bill Rogers, Vice President and Chief Information Officer, includes business analysts who might be assigned to a specific functional application area or assigned as site mentors. When even a minor change is suggested, all site business analysts must agree that the change will either be beneficial to their site, or that it will have a neutral effect. Once the site analysts have approved the change, it goes to the steering committee. All in all, change is very tightly controlled and must indeed produce a business benefit. 12 AberdeenGroup

19 Chapter Three: Implications & Analysis Key Takeaways Best-in-class ERP implementations have achieved significantly more business value and use more functionality The pendulum swings back to single vendor solutions Functionality remains the top priority in ERP selection The importance of Total Cost of Ownership is significantly more important for smaller, resource constrained companies. A s shown in Table 2, survey respondents fell into one of three categories Laggard, Industry Average, or Best in Class based on their characteristics in four key categories: (1) process (what business value has been gained from the implementation of ERP); (2) organization (corporate focus/philosophy, level of collaboration among stakeholders); (3) knowledge (visibility across manufacturing and the order-to-fulfillment process); and (4) technology (scope of ERP implementation and use of technology.) In each of these categories, survey results show that the firms exhibiting best-in-class ERP characteristics also produce a more significant impact to top and bottom line results (Table 2). Table 2: Field Service Competitive Framework Process Laggards Industry Average Best in Class Business benefits not measured; success is measured on time to first go live milestone; commitment lags after first milestones are achieved. Business benefits are measured and some quantifiable gains have been achieved but significant additional opportunities exist for further payback. Significant and quantifiable business benefits achieved from ERP implementation. Milestones achieved within reasonable timeframes; Upon completion of milestones, new objectives are defined. Organization IT drives ERP decisions with little or no involvement or commitment from Line of Business. Both IT and Line of Business involved in ERP initiatives, but IT owns the projects. Both IT and Line of Business collaborate on ERP initiatives, with Line of Business owning the success of the project. AberdeenGroup 13

20 Knowledge Laggards Industry Average Best in Class Limited visibility into manufacturing operations and the order-tofulfillment process. Some visibility into manufacturing operations and the order-tofulfillment process. Real-time visibility into manufacturing operations and the order-tofulfillment process. Technology Less than the fundamental basics of ERP modules implemented, using less than 50% of functionality in those modules implemented; ERP implementation based on older technology. Basic fundamental modules of ERP implemented, using more than 50% of functionality in those modules implemented. Beginning to wrap existing technology with web services and first steps taken towards upgrading technology infrastructure. All fundamental basic modules of ERP implemented along with other specialty functions, employing more advanced technologies such as event management and workflow technologies and using more than 70% of functionality in those modules implemented. Implementations make use of advanced middleware and integration technologies such as SOA. Source: AberdeenGroup, August 2006 Measuring Success Everyone has their favorite story about an ERP disaster, an implementation that has failed so miserably that the story bears repeating in the hope that new deployments can learn from past mistakes and avoid the same calamity. Yet, while failed implementations are easy to identify, what constitutes success? Generally speaking, a successful implementation is one that met the original business objectives. Yet this definition can be nebulous, particularly if these business objectives are not well-defined up front. Were the objectives to reduce operating costs, streamline or automate manual processes, or connect with customers and suppliers? Is success measured in time or cost to implement? In many ways ERP is now viewed as a necessary infrastructure. This has been good news for ERP solution providers, but lets business executives off the hook in terms of defining the objectives of the project up front. Aberdeen asked survey respondents for improvements achieved for 5 representative key performance indicators. Best-in-class manufacturers excelled compared to both average performers and laggards (Figure 9). 14 AberdeenGroup

21 Figure 9: Performance Improvements Achieved with ERP Implementations Improved manufacturing schedule compliance 1% 12% 32% Improved complete and ontime shipments Reduction of administrative costs Reduction in manufacturing operational costs 2% 4% 1% 8% 15% 11% 33% 26% 23% Laggard Average Best in Class Reduction in inventory costs 13% 10% 28% 0% 10% 20% 30% 40% Source: AberdeenGroup, August 2006 Generally speaking our respondents had a hybrid approach to measuring success (Figure 10). Most individuals selected a combination of metrics that measured business value but combined these with some measurement of cost and time to gain those benefits. Figure 10: Metrics Tied to Success Streamline business processes Automation of manual processes Visibility it provides to my business Cost of software and services Length of time to initial go live ROI Length of time for full implementation Process Cost Savings Ability to meet compliance requirements 13% Ability to connect with customers & suppliers 11% 30% 27% 27% 25% 24% 52% 44% 37% All respondents 0% 10% 20% 30% 40% 50% 60% Source: AberdeenGroup, August 2006 Because it is generally viewed as basic plumbing, potential benefits of ERP are often overlooked. Yet with proper attention to full integration and proper controls, best-in-class companies are able to achieve very impressive results. Ralco Industries is an example of a company that has measured and documented results from its ERP implementation. Several years ago Ralco s inventory accuracy was only about 50% in spite of the fact the company was conducting physical inventories every month. They never knew if they had AberdeenGroup 15

22 We were looking for a two year payback, but it only took just over a year. We ve significantly grown our business in a down economy, which says a lot We want to differentiate ourselves from our competition, and we ve done it. -Jim Piper, President, Ralco Industries the parts to build a setup and they had no consistency in their production. This resulted in lost time, inconsistent product quality, scrap and expedited shipments. President Jim Piper and CEO Tom Gitter had a vision of a totally integrated system, and they went through a grueling and exhaustive search that started with ERP companies, both large and small, a 6 page systems requirements document and a 15 page flow chart. Diligence paid off in terms of searching for the proper fit. Within a year of implementing Plexus Plexus Online Online they they had had reduced inventory by 15%, employee training hours by 50%, scrap by 60% and premium freight by 20%. Today the company maintains a world class defect rate of 0.16 PPM (parts per million) and a customer rejection rate of zero. We were looking for a two-year payback, but it only took just over a year, says Ralco president Jim Piper. We ve significantly grown our business in a down economy, which says a lot. We wanted to differentiate ourselves from our competition, and we ve done it. ERP Usage There is a generally accepted view that ERP is grossly underutilized in most manufacturers today. Statistics get tossed around liberally estimating that most companies use only 20% of the features and functions available. Our survey sought to quantify these statistics by capturing which modules were used and the extent to which the functionality within those modules was utilized. Aberdeen listed 24 generic modules of ERP, spanning all functional areas within a manufacturer. Table 3 depicts the percentage of respondents using each of these modules. 16 AberdeenGroup

23 Table 3: ERP Module Adoption rates Technology Solution Area % Implemented General Ledger 93% Accounts Payable 93% Accounts Receivable 92% Fixed Assets 43% MRP (Material Requirements Planning) 79% DRP (Distribution Requirements Planning) 23% MPS (Master Production Scheduling) 19% Forecasting and Demand Planning 37% Human Capital Management 49% Order Management 80% Project Management 17% Shop Floor Control 56% Purchasing 94% Inventory Control 92% After Market Service (e.g. Field Service/Depot Repair) 13% Engineering Change Management 28% Enterprise Asset Management (EAM) 6% Supplier Collaboration/scheduling 14% Event Management 5% Workflow Technologies 18% Sales and Marketing 42% Product Configuration 20% Payroll 24% Source: AberdeenGroup, August 2006 Aberdeen s further analysis indicates that on average our participants use ERP modules, which represents an un-weighted average of 43.8% of the full range of 24 generic modules. 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 100% 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 or a stand-alone best of breed application. For core functionality required by any business (those modules shown in bold letters) core financial applications, purchasing, order management, inventory control and payroll only the AberdeenGroup 17

24 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 application integration or rationalization. Our survey then delved a bit deeper in quantifying the average use of ERP. Recognizing that the implementation of a module does not necessarily indicate full usage of its functionality, we asked what percentage of the functionality was used of those modules implemented. On average our respondents indicated they used about 63%. When we apply this percentage to our un-weighted average usage, we find participants use on average 27.6% of ERP functionality, higher than the generally accepted view, but still a relatively low level of use. Beyond ERP In spite of the fact that the depth and breadth of ERP solutions has grown significantly over the past several years, there are still applications that definitely fall beyond the boundaries of a comprehensive ERP solution. The pendulum has swung back and forth over the years, with companies first leaning towards selecting best of breed point solutions over those offered by their ERP vendors, then swinging back as companies sought to rationalize vendors. As heterogeneous environments began to cause integration issues and finger pointing exercises, the philosophy of one throat to choke became popular. This pendulum has swung back and forth several times in the past 2 decades, and until recently it seemed to stabilize at the apex, right in the middle. As new and replacement ERP sales waned after Y2K, ERP vendors began to look to their installed bases of customers for the majority of their revenue. And as they did, they looked to fill solution gaps, first by offering modules that competed against these pure play vendors. While these modules did not offer best of breed functionality, they were fully integrated and, for many companies, offered a solution that was good enough. This strategy produced moderate results and some of these modules provided some differentiation across the ERP landscape, allowing entry into particular vertical markets. But these pure play vendors were still nipping at the heels of the ERP vendors with the promise of best of breed functionality, and as Service Oriented Architectures (SOA) began to emerge with alternative integration strategies, the balance between integration and best of breed functionality shifted. As a result, ERP vendors began to either acquire or develop best of breed extensions such as CRM, Supply Chain Planning and Execution, Electronic Data Management (EDM) and Product Lifecycle Management (PLM). Few ERP vendors have the internal resources to fully develop these strategic extensions, but the acquisition trail is hot, and as a result the pendulum is swinging widely in favor of purchasing many of these extensions from a single vendor, which means a purchase from an ERP vendor. Figure 11 indicates a predominance of customers with extension solutions currently implemented purchased them from their ERP vendor. Figure 12 indicates few of those planning to implement these extensions are unwilling to consider the purchase from their ERP vendor. 18 AberdeenGroup

25 Figure 11: Did you purchase this from your ERP vendor? Business Intelligence Quality Assurance 51% 65% 49% 35% SRM 90% 10% Supply Chain execution Transportation Management Supply Chain Planning 88% 64% 86% 12% 36% 14% ERP vendor Pure play vendor EDM/PLM/PDM 59% 41% Advance analytics 51% 49% CRM 63% 37% 0% 20% 40% 60% 80% 100% Source: AberdeenGroup, August 2006 Figure 12: How likely are you to purchase this from your ERP vendor? CRM 37% 40% 24% Advanced Analytics 32% 37% 31% EDM/PLM/PDM Supply Chain Planning Warehouse Management 34% 44% 36% 36% 41% 35% 30% 15% 29% Most likely to purchase Somewhat likely to purchase Transportation Mgt 44% 32% 24% Not at all likely to purchase Supply Chain Execution 38% 45% 17% SRM 30% 28% 41% Quality Assurance 34% 41% 25% Business Intelligence 38% 37% 24% 0% 20% 40% 60% 80% 100% Source: AberdeenGroup, August 2006 Eaton Corporation was faced with a classic ERP versus best of breed decision when it diversified. Once known as a vehicle components supplier, it has now become a leader in the design, manufacture and distribution of a comprehensive line of high efficiency hy- AberdeenGroup 19

26 draulic systems and industrial components. Today its business is comprised of 4 distinct segments: electrical, fluid power, truck and automotive. With this broader focus, Eaton s distribution facilities make a very large number of products, many of which must be available to customers on short notice. These distribution operations deal with diverse types of orders. Its largest customers may order thousands of an item at a time, picked in full cartons. Smaller customers often need hundreds of different items, picked and shipped in small quantities, with multiple items packed in the same carton. These requirements typically stretch beyond the limits of inventory management and control modules within core ERP. When Eaton acquired a new facility, it came with its own ERP implementation linked to a separate warehouse management system (WMS) that had been highly customized. The link between the two systems was based on batch updates and multiple application interfaces. To simplify and streamline operations, Eaton chose to replace the acquired ERP and customized WMS with its standard ERP. Eaton already had over 70 sites using QAD s MFG/PRO. The company decided against replacing the WMS with a product The transactional-level integration of QAD AIM with QAD MDG/PRO gives us the increased reliability and throughput we need as opposed to the independent third party solutions we ve had to integrate in the past. -Gaylord Seemann, Director FGP IT Manufacturing Systems, Eaton Corporation from a pure play vendor, and instead chose QAD Advanced Inventory Management (QAD AIM). This decision was based on a centralized strategy and the tight integration of QAD MFG/PRO and QAD AIM. According to Gaylord Seemann, Director FPG IT-Manufacturing Systems, The transactional-level integration of QAD AIM with QAD MFG/PRO gives us the increased reliability and throughput we need as opposed to the independent third-party solutions we ve had to integrate in the past. There are no middleware issues that cause a WMS to get out of sync with the core manufacturing system. It s all one system. TOMASCO mulciber, Inc. is another company that made a decision to rationalize software vendors. A Japanese joint venture company for the Honda supplier system, in early 2002 TOMASCO found themselves with 14 different software products on 4 different platforms. When they were unable to secure ISO 9000 certification and had trouble meeting EDI requirements for Honda, they sought a different approach and selected Plexus Online, an integrated on-demand manufacturing performance system that also includes ERP. In addition to traditional core ERP components TOMASCO implemented a shop floor data-collection system, along with traceability, quality management, EDI and Document Control. We first started working towards our ISO certification in the mid-90s, notes Assistant Manager QMS Deb Reining. There was one issue after another. We were con- 20 AberdeenGroup

27 vinced we needed to go to another system platform. With the Plexus Document Control module, approved process changes flow automatically. We now can have SPC (Statistical Process Control) on all the lines. We were actually meeting ISO procedure requirements without realizing it. TOMASCO continues to streamline its business systems as it progresses further along its ERP implementation. Software Selection Criteria Given the level of planned activity by manufacturing companies, we sought to determine the criteria most often being used as selection criteria. These criteria varied little by performance (Best-in-class versus Industry Average and Laggards) but did vary rather significantly by size of company. Not surprisingly, feature functionality remains at the top of the list for any size company, in spite of the fact that many of the features of ERP have become relatively commoditized over the last several years. However for larger companies, the software license is far less important than the Total Cost of Ownership (TCO), even more so than in smaller companies. Smaller companies are more sensitive to ease of use than their larger counterparts and seem more reliant on outside professional services. Industry specific fit is also more of a concern to small and mid-size companies, a finding that is consistent with other Aberdeen studies. Figure 13: Software Selection Criteria Functionality Total Cost of Ownership Ease of Use Ease & Speed of Implementation Professional services capabilities Industry specific capability Integration Technologies & capabilities Software license price Large Mid-size Small Maintenance Options and Price Referrals & References SOA Enablement Software licensing options Thin client deployment 0% 20% 40% 60% 80% 100% Source: AberdeenGroup, August 2006 AberdeenGroup 21

28 Given the level of pain manufacturers are feeling in terms of integration and customization, it is both surprising and disappointing to discover that integration technology and Service Oriented Architecture (SOA) enablement seem to hardly be on the radar screen. These capabilities can play a very significant role in the evolution of any ERP implementation and most every ERP vendor today has a published SOA strategy. Yet these seem to be largely ignored in the software selection process. Enterprises considering upgrades, replacement or consolidation would be well advised to consider these criteria more carefully R&M Energy Systems employed some very specific selection criteria in its search for a replacement for its non-integrated legacy systems. R&M Energy Systems is a leading manufacturer and supplier of equipment used in the oil exploration, discover and recovery industry. In it various plants across the world, the company must support maketo-order, make-to-stock, engineer-to-order and assemble-to-order operations. Their goal was to find an ERP system to accommodate the company s complex multimode production processes and some unique processes, without costly customization. So, like many companies evaluating ERP packages, functionality was high on the list of selection criteria, But in this particular case, they were looking for specific functionality to meet the needs of specific vertical industries and specific customers. Beyond functionality, the evaluation team also carefully examined the business and technical skills of each vendor s implementation team. It also assessed the technology platform. According to Jim Moore, Business System Manager and leader of the software selection team, In implementing enterprise applications many organizations neglect to assess the technology platform, only to discover after the fact that the hardware and networking infrastructure is insufficient to support the software. That s a In implementing enterprise applications many organizations neglect to assess the technology platform, only to discover-after the fact-that the hardware and networking infrastructure is insufficient to support the software. -Jim Moore, Business System Manager, R&M Energy Systems mistake we were determined not to make. Ultimately the company selected Movex from Intentia (now known as M3 from Lawson, since its acquisition in May 2006) and implemented it on a new IBM as/400. R&M s goal was to implement a system that promoted simplicity, reliability, speed and affordability common goals of not only mid-size companies like R&M but many replacement strategies and software selections today. 22 AberdeenGroup