THE COST OF COMPLACENCY IN MANUFACTURING

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1 March 2015 THE COST OF COMPLACENCY IN MANUFACTURING ARE Y OU A SKING E NOUGH O F Y OUR E RP? Data Source In this report, Mint Jutras references data collected from its 2015 Enterprise Solution Study, which investigated goals, challenges and status and also benchmarked performance of enterprise application implementations used to actually run a business. A total of 365 responses were collected from companies across a broad range of industries, including 149 manufacturers, which were selected in analyzing the data presented in this report. Definition of ERP Mint Jutras defines ERP as an integrated suite of modules that provides the operational and transactional system of record of a business. The concept of ERP emerged from the world of manufacturing. It started out as Material Requirements Planning (MRP), a tool for manufacturing and production to use in managing the planning and procurement of material. It then evolved to Manufacturing Resource Planning (MRP II), helping to manage potentially complicated manufacturing processes, but finance and accounting were left on their own to find business software to help them take fiscal control. But then MRP II evolved further, bringing these two functions together under one roof, so to speak. MRP II became Enterprise Resource Planning (ERP), on its way to becoming a complete, integrated, end- to- end solution that runs your business. All too often manufacturers start their ERP journey with this goal in mind, but never reach the final destination. They achieve their first milestone, breathe a sigh of relief, stop implementing, and go back to business as usual. If they don t even take full advantage of what they have, they are even less likely to continue innovating. Sooner, rather than later, their ERP solution becomes less of an enabler and more of a liability. Do you find yourself falling into this trap? Don t succumb to complacency. If your current ERP isn t doing the job for you now, it is unlikely it will in the future. Are you just fooling yourself into thinking you can afford to wait? HOW FAR HAVE YOU COME? Mint Jutras has been benchmarking ERP implementations for years now, and throughout that time it has always defined ERP as an integrated suite of modules that provides the operational and transactional system of record of a business. However, manufacturers need it to do much more and should expect those manufacturing ERP solutions that evolved from MRP to live up to that promise. And yet it would appear that many of the manufacturers participating in our 2015 Enterprise Solution Study have not fully implemented an integrated suite that provides both fiscal and operational support of their businesses. Although we think they need more, many are actually operating with less. While the majority (86%) of manufacturers have installed a solution that is clearly marketed as ERP (we asked which solution they were using), less than half of them (45%) indicated they were running an integrated suite of modules that provides a full system of record of our business - what Mint

2 Page 2 of 7 Jutras defines as ERP (Figure 1). Clearly there is a difference between buying an ERP solution and fully using it to run your business. Figure 1: What runs your business? The remaining 14% of participating manufacturers didn t even start with a full ERP solution, but instead bought systems that are generally marketed as finance and accounting solutions (labeled as Accounting in Figure 1). These Accounting solutions might or might not have the facility to manage orders (purchase or sales) but definitely fall short of providing full operational support of production and manufacturing. And yet 23% of those that bought them think they have a full system of record and may therefore be thinking they are in full control. Are they really? Where do you fall in this spectrum? Have you purchased a solution that has the potential to provide you with full fiscal and operational control? Even if you have, did you reach your goals? Have you thought lately about what those goals are, or perhaps were? Have you re- evaluated them lately? Figure 2: What are your top 3 goals for the solution that runs your business?

3 Page 3 of 7 World Class Manufacturing ERP Implementations Mint Jutras measures improvements since implementing (currently implemented) ERP, as well as current performance Reduction of operating costs Reduction of administrative costs Reduction of inventory costs Reduction of obsolete inventory Improvement in % complete and on- time shipments Improvements in customer retention Improvements in Inventory accuracy Current performance in % complete and on- time shipments Current performance in customer retention Current performance in Inventory accuracy Improvement in profits year over year (most recent fiscal year) Progress against goals is also considered. World Class represents the top 15% with the remaining categorized as All Others. Amongst our survey respondents, efficiency and specific performance improvements, including costs savings, are top of the list (Figure 2). And yet we still find a disturbing number of manufacturers that don t measure results, and in doing so leave improvements (and money) on the table. Even the average ERP implementation produces 5% to 9% savings in cost categories such as operating, administrative and inventory costs, and 8% reduction in cycle time (Figure 3). And for many manufacturers, time is money. These are just average savings. Those with World Class implementations (see side bar), double, triple or even quadruple the savings. Figure 3: Cost Savings Measured Since Implementing ERP Has your implementation produced these kinds of results, or have you become complacent? While these cost savings impact the bottom line, most companies also see benefits that have the potential of impacting top line revenue (Figure 4). Figure 4: Other Improvements Realized Since Implementing ERP With the exception of profits, these are more outward facing, customer- centric metrics. Many of these are inter- dependent. Reducing cycle time can have a direct impact on complete and on- time delivery, and in turn, customer retention. An increase in production volume can have a similar impact and

4 Page 4 of 7 also fuel growth. Profit (operating margin) is the only metric that is not measured since implementing ERP. Because the age of these implementations can range from less than a year to over 20 years, often spanning downturns and upturns of the economy, Mint Jutras measures the change in profits over the past two fiscal years as a way to normalize these results. And you don t necessarily have to wait years for these kinds of results. In fact an impressive 20% of World Class implementations were not yet fully implemented, and had already recorded sufficient savings to earn them World Class status. While obviously not every ERP implementation will achieve World Class results, even those that do not, do realize very significant cost savings and other improvements that impact both the top and bottom lines. They will not happen overnight, but the sooner you get started on a new implementation, the sooner you will see the results. On the other hand, if you delay, think of the money you are leaving on the table. Can ERP change the game again? In retrospect, the introduction of MRP software was nothing short of revolutionary. MRP takes a combination of actual and forecasted demand, cascades it through potentially large and complex bills of material, netting exploded demand against existing inventory and planned receipts. It then creates a plan that includes the release of purchase orders, shop orders and reschedule messages. With any kind of volume at all, doing this manually is just impossible. ERP HAS EVOLVED. HAVE YOU? Even those running ERP need to evaluate where they are in their overall journey. In manufacturing, the first industry segment to embrace ERP, complacency is quite common. After all, it is hard for manufacturers to view ERP as the next new thing, having evolved from MRP. The original concept of MRP was developed in the 1950 s, although it wasn t until the late 1970 s that MRP software made its debut. When it first arrived on the software scene decades ago, MRP was a game changer, but the evolution to ERP was more gradual and less game- changing. During this transition, many implementations in manufacturing haven t kept up and as a result haven t changed much at all, particularly those still based on older technology, batch processes, clumsy user interfaces and limited functionality. And there are plenty of those out there. Newer ERP solutions have embraced the latest technology trends - trends like cloud and mobile access, social capabilities and the ability to handle big data in real- time through advanced analytics. They offer new ways of engaging with ERP, more innovation and better integration capabilities, along with more and more features and functions. Many manufacturers began the journey of ERP at a time when solutions were far less broad and deep. Those early solutions might have been considered state- of- the- art back in the 1980 s and 1990 s but now they have only a fraction of the capabilities available today and are built on technology that can only be considered old and outdated technology that could be holding manufacturers back. Yet, they still find many excuses to put it off.

5 Page 5 of 7 Mint Jutras often cautions consumers of ERP against treating it like brain surgery. You don t do brain surgery unless the patient is dying. But when your business is under duress is certainly not the optimal time to tackle a new ERP implementation. So we prefer ERP users to treat it more like joint replacement. You replace that hip or knee when the pain becomes too great or it prevents you from doing what you need or want to do. But even with joint replacements, consumers often delay the inevitable. They find excuses to put it off. IT S NOT THAT BAD One of the most common excuses for putting off joint replacement is, It s not bad. You can tell these people are in pain by the way they walk, or rather the way they limp. So what happens when you limp? You put undo pressure on another part of your body, eventually causing additional damage. When you favor your right knee, your left hip starts to bother. Put it off too long and you re a train wreck. Everything hurts and you wind up not only needing to replace your knee, but you also have to fix that hip the hip that would never have needed fixing if you had taken care of your knee problem. This is what you do to your business when you limp along, not really satisfying your needs. You limp along when you still rely on batch processes to plan your inventory, but your demand is fluctuating rapidly. Do you have immediate visibility to available- to- promise or capable- to- promise in real time, or are you operating from a snapshot in time with data that may have already changed? Without immediate and accurate visibility, you run the risk of overcommitting or losing opportunities. You run the risk of building inventory, but not being able to meet customer demand. An inventory problem can easily be the creaky joint that causes a problem elsewhere in sales or customer satisfaction. WE RE TOO BUSY Another excuse for not taking action is, We re too busy. It s true that joint replacement involves an invasive operation, some downtime and recovery. Fortunately implementing a new ERP solution does not require you to shut down your business. Whatever you are using to run it today will remain in place until you are ready to cut over. Yes, you will have to dedicate resources to the new implementation, and this will likely require time and effort from the same employees you can least afford to spare from your daily operations. But if you are using this as an excuse to delay replacing your ERP implementation, did you ever think that perhaps the reason you are so busy is because of the inefficiencies caused by a system that doesn t totally meet your needs? Allowing these inefficiencies to continue only costs you more in terms of time and money.

6 Page 6 of 7 WE CAN T AFFORD IT Delays are often blamed on cost. If you need a knee or hip replacement and you can t afford the potential for lost wages or the amount that is not covered by insurance, the best you can hope to do is negotiate a payment schedule over time that you can afford, and get back to work as quickly as possible. Unless you are so severely disabled that you are unable to work, a joint replacement operation never pays for itself. The good news: ERP replacements can and do pay for themselves. And if you do lose business, it is more likely your current, inadequate solution is to blame rather than a new implementation. When you delay replacing a knee or a hip, you often find yourself watching from the sidelines instead of actively participating in activities. The same thing happens when you handicap yourself with an inadequate or poorly functioning ERP solution. You don t improve systems and processes that would help you win new customers. You experience delays in introducing new products and watch windows of opportunity close. You can t transform your business to meet changing requirements simply because your old system is too hard, or impossible to change. The Mint Jutras 2015 Enterprise Solution Study finds the average ERP solution in manufacturing achieves a 100% return on investment (ROI) in about 2.58 years. World Class ERP implementations achieve this a little quicker (2.31 years) and then also go on to produce a far greater return over time, as we saw earlier. With any outlay of cash comes the need to cost justify the expense and this projected ROI is typically included in the justification process. Every manufacturer should tailor goals and expectations to their own needs, but those shown in Figures 3 and 4 are a good start. CASH, CREDIT, CAPITAL AND THE CLOUD But even if ERP can pay for itself, in the past it has always required an upfront expenditure of capital for software licenses and the hardware to run them on. If you didn t have the cash, you needed credit, which might not be easy to secure. Cloud- based solutions that are delivered through software as a service (SaaS) provide an alternative today. These solutions require no investment in hardware beyond the devices and network required to connect to the Internet, no upfront license fee, and often can be run with less information technology (IT) staff. You typically pay for these solutions through a monthly subscription, which can be accounted for as an operating expense, with no capital expense required. This monthly subscription fee can be appealing even if you have the capital. Keep it, invest it or use it to expand your manufacturing facility to fuel growth. You don t necessarily need it to pay for a new ERP.

7 Page 7 of 7 CONCLUSIONS AND RECOMMENDATIONS Will Rogers, humorist and social commentator, once said, Even if you're on the right track, you'll get run over if you just sit there. If you are a manufacturer that is not running your operations on a modern, technology- enabled, fully functional ERP solution you are probably feeling the pain of inefficiencies and you are not optimizing your business. If you think things aren t that bad, you are probably fooling yourself. They could be a lot better. If you re too busy, it is probably because of those inefficiencies. If you think you can t afford it, perhaps instead you can t afford to wait. A new ERP can pay for itself and the sooner you start, the sooner you stop leaving money on the table. Ask yourself, are you on the right track? Are you moving fast enough or are you about to get run over? About the author: Cindy Jutras is a widely recognized expert in analyzing the impact of enterprise applications on business performance. Utilizing 40 years of corporate experience and specific expertise in manufacturing, supply chain, customer service and business performance management, Cindy has spent the past 9 years benchmarking the performance of software solutions in the context of the business benefits of technology. In 2011 Cindy founded Mint Jutras LLC ( specializing in analyzing and communicating the business value enterprise applications bring to the enterprise.