Manufacturers Face ERP Challenges
Manufacturers should be aware of differences that can make their ERP implementations even more challenging than those of non-manufacturing companies.
ERP implementations can be challenging for any company. That's clear from Panorama Consulting research that found 53 percent of companies it surveyed went over their allotted budget for ERP implementations and 61 percent exceeded the planned schedule.
But manufacturing companies face greater challenges in some areas than their non-manufacturing peers. Panorama found that 63 percent of manufacturing companies exceed their ERP budgets – and they tend to experience bigger overruns. While implementation costs run over budget by an average of $1.7 million in all industries, according to Panorama, in the manufacturing vertical the average cost overrun rises to $3 million.
Manufacturing also has a larger gap than other verticals between expected ERP costs and actual costs. When evaluating proposals from software vendors or consultants, it's important to remember that software is just one cost component, said Eric Kimberling, a managing partner at Panorama. Manufacturers should be mindful of "hidden" costs, such as those associated with re-engineering processes, training users and integrating applications, he advised.
Even without budget overruns, ERP implementations at manufacturing companies typically cost more than those at non-manufacturing companies. For manufacturers, the average cost is $11.4 million, 14 percent higher than the average of $9.8 million across other industries.
Two factors that often drive up ERP costs for manufacturing companies, according to Panorama, are customization and technical integration.
ERP and Change Management
Thirteen percent of manufacturing organizations undertake an extensive amount of customization -- over 50 percent of their ERP systems’ code – compared to 6 percent of organizations across all industries that implement ERP with that level of customization.
Because manufacturers deal with purchasing, procurement, logistics, global supply chains and distribution, they do tend to have more complex business processes than non-manufacturing companies, said Kimberling. However, he added, the higher percentage of customization among manufacturers underscores two points: the importance of selecting the right ERP software and the need for organizational change management.
"You want to make sure you find the right software. If you are implementing a product that cannot handle the complexities of manufacturing, that will lead to more customization, which can really drive up costs," he said.
Excess customization often signals the need for change management, Kimberling said. "If companies aren't spending the right amount of time, focus and money on organizational change management, they will naturally gravitate toward more customization to make the software fit their existing processes."
While customization is appropriate to accommodate specialized processes that yield a competitive advantage, Kimberling added, companies should rarely require customization for processes such as accounts payable or accounts receivable. "If you are customizing there, often you haven't adequately addressed the issue of organizational resistance," he said.
Regarding integration, many manufacturing firms keep some core systems in place and integrate them with their new ERP software, according to Panorama. For example, many of its manufacturing clients opt to keep existing product lifecycle management (PLM), manufacturing execution systems (MES) and quality assurance systems as separate bolt-ons to their ERP systems.
Manufacturers are also more likely than non-manufacturers to have unrealistic expectations regarding ERP implementation times, though they are actually more likely to complete their projects within their expected timeframes. While nearly 90 percent of ERP implementations exceed their expected duration, this is true of only 60 percent of implementations at manufacturing companies. However, Panorama found that the gap between expected and actual duration is larger among manufacturing organizations (3.8 months longer than planned) than it is among all industries (two weeks shorter than planned).
The two most common reasons cited by respondents regarding schedule overruns are organizational issues and expansion of the initial project scope. Kimberling believes manufacturers often put "an operational, execution-focused person" in charge of ERP projects.
"They are used to having control over how to make a new product or build a new plant. They transfer those expectations over to ERP, thinking they can manage it solidly on their own and predict exactly how implementations will go," he said. "They tend to be overly confident about their ability to implement ERP because they are so good at execution in other areas."
The remedy for this overconfidence, Kimberling added, is for manufacturing organizations to strive to be realistic about the time, budget and resource needs required for ERP projects and to benchmark against other manufacturers.
Kimberling again stressed the need for change management, noting that because manufacturers traditionally focus on products and on developing world-class processes as they relate to products and logistics, "they are not always as focused on organizational issues."
In addition, manufacturers also often hire consultants that focus primarily on the manufacturing vertical and thus may not have a lot of experience with organizational change management. "It ends up being a huge blind spot for the combined organization," he said.
ERP and ROI
When it comes to payback, 50 percent of manufacturers told Panorama they had not yet recouped their investment. Of the remaining half that had recouped their investment, most attained ROI within two to four years. Top three benefits cited by respondents were: more availability of information/faster information response time; better integration of business processes and operations across the enterprise; and improved interaction with customers.
While those are great benefits, Kimberling said, they are tough to quantify, which can make it difficult to identify potential ROI. He urged manufacturers to try to quantify benefits at the outset of an ERP project.
"Even though it may not be an exact science, it at least gives you a framework and a benchmark to look at. If you are going to spend millions of dollars on an ERP implementation, you want to make sure are getting the maximum benefit from it," he said.
The top three ERP modules implemented are, not surprisingly, manufacturing/MPS, financials and sales and distribution/order processing, followed by warehouse management and materials management. Far fewer manufacturers choose to implement advanced modules such as advanced planning/supply chain.
Kimberling encouraged manufacturers to consider adding some of the more advanced modules.
"I'd argue that it might give your more bang for your buck than sales and distribution or warehouse management," he said. "If you spend $5 million on those first five modules listed then spend an additional half million on advanced planning/supply chain, you are generally going to get a huge return on that investment. You've got the foundation in place and now can bring in some more sophisticated processes to, for example, help you drive down inventory costs and decrease cycle time."
Noting that many manufacturing companies do not budget for the added modules or just get fatigued after the initial ERP implementation, Kimberling called omitting the advanced modules "a pretty significant mistake."
You can download the full report by visiting Panorama's website.
Ann All is the editor of Enterprise Apps Today and eSecurity Planet. She has covered business and technology for more than a decade, writing about everything from business intelligence to virtualization.