Changes driven by the demands of the modern global economy are causing more and more companies to look at changing their Enterprise Resource Planning (ERP) systems. Many industries, especially manufacturing, are discovering that business intelligence and more efficient use of large amounts of data help them become more agile and better equipped to respond to ever-changing markets. As a result, many companies have concluded that their legacy ERP systems are simply not up to the task, and these same companies are finding the ideal business solution in cloud-based ERP systems.
A Brief History of ERP Software
Enterprise Resource Planning (ERP) software has been an important part of a manufacturer’s operation for decades. The primary purpose of ERP software has remained constant throughout its history — help businesses operate in the most efficient manner possible.
ERP systems evolved from Materials Requirements Planning (MRP) systems that first appeared in the 1960s. In the 1970s, several companies including IBM, SAP, JD Edwards and Oracle introduced hardware and software enhancements that provided the necessary backbone for the ERP software systems that became popular in the 1980s and 1990s. These later systems provided more than just organizational and scheduling functions for manufacturing; they began to integrate many different business processes within a company. For the first time, ERP software provided the information necessary for companies to manage such resources as business planning and management, production scheduling, inventory control and connecting to customers and partners in their supply chain. However, the available technology at the time required that these expanded ERP systems be installed and maintained on site.
Over the years, companies with these older, “legacy” ERP systems, especially manufacturing firms, have been trying to keep up with expanding global markets by continually updating and customizing their on-premise systems. But with the advent of cloud-based computing, these on-premise systems, some in place for as long as 15 or 20 years, are proving increasingly expensive to maintain and insufficient to the challenges of today.
According to analyst firm Gartner, “The net result of 15 years of continuous customization is that these ERP implementations are now extremely arthritic, incredibly slow and expensive to change.” The original single, integrated, on-premise ERP system “is being replaced by the emergence of cloud point solutions that deliver functionality business users want that the IT-controlled and centrally-mandated ERP mega-suite previously struggled to deliver,” Gartner analysts wrote.
Reasons for Replacing Legacy ERP Systems
Your business depends on your ERP system. In today’s economy, your ERP system must support the functions that are critical to your business, be flexible and easy to use, and support innovation and future growth.
If your company is faced with any of the following issues, then you are probably considering replacing your legacy ERP system with a cloud-based ERP solution.
● High operating costs - Your old legacy ERP system is getting very expensive to operate, especially if the software is no longer supported by the vendor, the hardware is old and unreliable, or if you are constantly installing modifications. Consider the total cost of ownership of your current legacy ERP system; often, it is cheaper in the long run to install a new cloud-based ERP system.
● Limited functionality - For years, your business processes have been driven by functionality of your legacy ERP system, but now your company is either growing or evolving faster than the system can support. You find your ERP system difficult to use, slow, and inflexible. It doesn’t support current business needs like business intelligence or collaboration. The result is that when new business processes appear in your market, your current system is preventing you from competing. Or perhaps your business model has changed; when you bought your current ERP, you might have been a job shop manufacturer. But now you are better known for your repetitive or customized manufactured products and your legacy ERP system was built to support your older business model.
● Limited information access - Older systems are often full of information that cannot be accessed without significant investment of time and energy. The decision-makers in your company are constantly frustrated by poor or no access to the information they need about the business. In many companies with legacy ERP system, people may still be using spreadsheets to get their jobs done. If a particular function in your business cannot be accomplished within your ERP system, then you are not getting the benefits you paid for and the system is not supporting your business needs.
● Outdated hardware - We all know that as technology becomes outdated, integration becomes difficult and can result in a loss of strategic advantage. You simply cannot succeed if you are falling behind the competition in market technology advances and industry sector standards. Support for your old hardware becomes unreliable and maintenance becomes increasingly expensive as your old equipment is discontinued or the supplier is acquired or worse, goes out of business. Another possibility is that the IT person who did much of the customization left your company a few years ago and the replacements don’t possess knowledge about those customizations.
● Outdated software - Your legacy ERP software may be so old that the provider who wrote the original software is out of business. The original software vendor might have been acquired by another company that no longer provides support for your ERP system. These kinds of software business developments can have a real effect on the capabilities of your system.
A report published recently by Manufacturing Performance Institute (MPI) indicated that only half of all manufacturers have business systems that adequately manage their business processes. In the report, manufacturers were asked to evaluate their ERP systems in several categories related to key business capabilities. In the category of customer-focused innovation, 47 percent of manufacturers surveyed in the report said that their current ERP systems either could not provide the function or were inadequate to the task. In the category of supply chain visibility, 31 percent reported that their current systems were inadequate. In the critical category of global engagement, 47 percent said their systems were inadequate.
Moving ERP to the Cloud
Companies with legacy ERP systems are moving the cloud to take advantage of the flexibility and agility that results from Cloud ERP’s centralized data storage, sharing of data-processing tasks, and internet-based access to services and resources.
One company that made the move to the cloud is Firstronic, a Michigan.-based manufacturer of circuit boards for the automotive and healthcare industries. First founded in 1980, Firstronic was acquired by a private equity firm in 2009. Two years later, the company looked to the cloud for a long-term ERP solution. They bought a cloud-based ERP solution in early 2012 and went live a few months later. The software gave Firstronic the capabilities of an on-premise system for less cost, and it has made the company a much more agile business. For example, Firstronic was able to open a new site in Mexico in less than 90 days to meet the needs of a new customer, a process that included installing more than 50 machines, training 20 operators and loading 500 components into the ERP system. With its newfound ability to respond to rapidly-changing business requirements, Firstronic experienced a 35 percent compound annual growth rate since the deployment of their cloud ERP system, a significant improvement over its previous performance.
Firstronic is only one company that discovered first-hand that cloud-based ERP brings core manufacturing tasks together anywhere in real time. Another company that has benefited from cloud ERP is Astrum Solar. Ranked Number Two on Inc. Magazine’s 2012 list of the fastest growing private companies, Astrum Solar is the leading full-service provider of residential solar solutions, headquartered in the Eastern U.S. Since 2012, their business grew from a single division to over eight divisions and because their ERP system was in the cloud, they were easily able to implement all of the divisions on a multi-site model within a single-instance cloud version.
Cloud ERP represents every critical function in the manufacturing process, including materials requirements planning (MRP), process manufacturing software, shop floor software, purchase order and inventory software, and supply chain management software. Manufacturers and distributors access the same system to coordinate multiple sites and services with centralized visibility across global operations. Cloud ERP software helps to increase efficiencies, control costs and ultimately increase revenue by integrating every function in the supply chain. Sales order management software converts customer quotes into orders for your products. Purchase order management software generates orders for suppliers. There are cloud ERP modules for production engineering, scheduling, lot and serial control, inventory management, and shop floor control. Manufacturing cost control and project control modules give companies finer control over costs.
Companies, especially manufacturers, are replacing their legacy ERP systems with cloud-based ERP system for everything from material requirements planning, inventory control and purchasing to accounting, quality and production control. Cloud ERP lets companies focus on delivering the customized products and services now in demand and rather than worry about the limitations of their aging legacy system.
Pat Garrehy is the Founder, President, and CEO for Rootstock Software.