A Q3 survey by Aberdeen found that 69% of industrial equipment manufacturers said their customers had deferred capital spending, and 64% said that customers were more demanding as a direct result of the downturn in the economy.
The entire manufacturing sector has been hit hard by the economic recession that began late in 2008 and continued in most sectors through much of 2009, and even into 2010. Heavily impacted by the credit crisis and the resulting reductions in capital spending, the downturn in the economy brought about profound changes for industrial equipment manufacturers (IEM) in particular.
Aberdeen surveys a panel of over 1500 members from a diverse mix of industries from around the world on a quarterly basis in order to keep a pulse on business goals, challenges and strategies. For the past year this quarterly Aberdeen Business Review has been paying particular attention to the impact of the recession. The Q3 2010 survey found 71% of responding companies from all industries were negatively impacted by the downturn in the economy. This impact is even more prevalent across all of manufacturing with 80% of manufacturers impacted negatively. But this percentage rises to 89% in the industrial equipment sector. This is not surprising due to the capital intensive nature of the industry. Indeed 69% of industrial equipment manufacturers told us their customers had deferred capital spending and 64% said that customers were more demanding as a direct result of the downturn in the economy. Also contributing to the general malaise of the industry is the fact that credit was more difficult to obtain.
All these combined factors resulted in cost cutting measures. Eighty percent (80%) of industrial equipment manufacturers cut discretionary spending and 69% were forced to reduce personnel costs. In 2009, the majority (75%) reduced headcount, primarily through a combination of layoffs and attrition (not replacing individuals who left the company). We are finally seeing positive signs of recovery. Sixty five percent (65%) of all Aberdeen Business Review panel members and 69% of industrial equipment manufacturers believe that the recovery has indeed already started and we now find many companies, including these industrial equipment manufacturers optimistically planning for growth of revenue, profitability and market share.
While budgets are beginning to loosen up and headcount reductions have finally slowed in the first half of 2010, still a third has suffered further headcount reductions so far this year. So growth is not necessarily going to be fueling or fueled by significant increases in manpower. Instead manufacturers in general and industrial equipment manufacturers in particular will need to see improvements in efficiency and productivity in order to realize this growth. The state of the economy caused many to defer spending on tools to improve their businesses. However, as the economy struggles to recover, this sector will need all the help it can get to streamline and accelerate business processes and reduce or contain costs.
It is not surprising therefore to see several of the major ERP solution providers giving particular attention to this industry. Industrial equipment manufacturing is a key focus of Microsoft Dynamics. According to Bob Aronson, Director of Manufacturing Industry at Microsoft, “Microsoft Dynamics and our partners have a very flexible and cost effective solution to offer our customers that will address the complexities of today’s industrial manufacturing needs.” Infor is targeting small to mid-size manufacturers of heavy equipment, industrial equipment and machine tools, along with metal fabricators and other project-based businesses with a new offering, InforEXPRESS. Epicor for Aerospace and Defense embeds CRM, Demand Management, EDI, Project Management and aftermarket field service capabilities to address this closely related sister industry.
While the majority of industrial equipment manufacturers has invested in enterprise applications, including ERP solutions, often for the express purpose of achieving these goals, the majority are not maximizing the return on that investment. Best-in-Class ERP implementations in IEM averaged 16% reduction in operating cost, 18% reduction in administrative costs while slashing inventory by 23%, yet still improved the percentage of orders shipped complete and on time by 20%. Aberdeen defines Best-in-Class as the top 20% of aggregate performance scores, Industry Average as the middle 50% and Laggards as the bottom 30%. The Best-in-Class criteria was applied across all 445 manufacturers participating in our annual ERP 2010 survey and in doing so Aberdeen found industrial equipment manufacturers tracked quite similarly to all manufacturers with 19% of IEM achieving Best-in-Class, 51% Average and 30% Laggards. Table 1 lists the criteria used for determining Best-in-Class and compares performance across the competitive framework.
Table 1 also illustrates just how dramatic the difference in results can be across our competitive framework. While even an average ERP implementation can yield impressive reduction in operating costs, those not Best-in-Class are leaving precious cost reductions and schedule improvements on the table.
Those industrial equipment manufacturers with Best-in-Class ERP implementations start by focusing attention strategically on standardizing business processes. Industrial equipment manufacturers are at the high end of the complexity scale and often must customize, configure, or engineer products to customer specifications. This environment may naturally present some challenges to standardization. While the end result may be unique, custom designed or configured products, the planning and execution processes themselves benefit directly from standardization to better facilitate communication, coordination, and collaboration between departments, functions and possibly discrete business units. The ERP solution itself can provide valuable guidance in this standardization, particularly if the vendor bundles workflows and best practices as part of its ERP solution. Following these guidelines increases the likelihood that the ERP implementation is optimized and best able to streamline and accelerate processes.
All IE manufacturers have a common goal of streamlining and accelerating business processes with the end goal of improving efficiency and productivity, but top performers place a higher emphasis on optimizing capacity, while those not Best-in-Class focus more attention on providing added visibility and as a result, have achieved better visibility and transparency.
Better visibility is less the cause than the effect of a Best-in-Class ERP implementation. However modern architectures and features provided by innovative ERP vendors better enable exception management and therefore create more visibility and transparency for decision-makers. A top performing ERP solution should provide the opportunity to stay at a summary level of investigation until such time as it is necessary to dive into the detail for trouble shooting.
A complete and robust ERP implementation captures each transaction from quote to cash in real time or at least near real time (within minutes of the actual transaction occurring). Therefore, the more complete the implementation, the more complete the view.
The final and perhaps the most important characteristic of a Best-in-Class ERP implementation is the level of measurement that occurs. The phrase, "you can't manage what you don't measure" might be common, but is just as commonly overlooked in terms of measuring the performance of an ERP implementation. Not only do top performing ERP implementations quantify the business benefits such as those shown previously in Table 1, they are also equally likely to measure time to value. Setting realistic but aggressive goals, estimating the expected return on investment (ROI), and then measuring that return leads to the impressive results achieved by our Best-in-Class IEM.
For more information on lessons learned from Best-in-Class ERP implementations in industrial equipment manufacturers click here:
https://www.aberdeen.com/Aberdeen-Library/6966/SI-industrial-equipment-manufacturing.aspx
