The State of Manufacturing ERP Systems

The State of Manufacturing ERP Systems PRESENTED BY: SPONSORED BY: Written by Jon Minnick, Associate Editor, Manufacturing Business Technology The State of Manufacturing ERP Systems page 2 INTRODUCTION Enterprise Resource Planning (ERP) systems are incredibly important to manufacturing today. Looking back at the history of manufacturing solutions, the in- dustry started with Manufacturing Resource Planning (MRP)-type systems for basic planning and optimi- zation. These early systems focused on simple goals like reducing work-in-process and inventory, while increasing on-time shipments. Today’s ERP systems have expanded beyond that basic manufacturing planning into enterprise optimi- zation — which is critical to survive. According to Rick Veague, chief technology officer with enterprise software vendor IFS North America, “The reason why that’s so critical today is that global competi- tion has reached unprecedented levels and, unless you’re good at absolutely everything you do, your competition is going to eat you alive.” Manufactur- ing Business Technology (MBT) recently surveyed its readers to understand their ERP usage and needs. Knowing that ERP systems are crucial to manufac- turing today may be troubling news for the 31.5 percent of respondents in that MBT survey who said they currently don’t have an ERP system in place. This report looks at those results and includes industry insights and trends from ERP systems and software vendors including: where these solutions are today; how companies prefer to have their sys- tems hosted; the biggest challenges for ERP systems; and where the systems are headed. SECTION 1: WHERE WE ARE Back in the year 2000, ERP was still considered quite strategic for manufacturing companies. Many midmarket companies didn’t have much technology in place, so around that time manufacturers were just beginning to implement their first truly integrated systems. Now ERP systems have evolved to become a core piece of business infrastructure like electricity and communications. “I don’t know how a small- or mid-sized man- ufacturer can stay in business without an ERP system today,” says Pete Zimmerman, manufactur- ing Segment manager for the enterprise software provider VAI. “The ERP application really touches every aspect of the production of a manufactured item — anything from labor tracking to component utilization — so it’s crucial for a company to have an ERP system in place.” It wasn’t all that long ago that companies didn’t have sophisticated email systems. Today, emails are imperative to business and technology allows them to chase us wherever we go in the world. Likewise ERP has grown to become a fundamental part of the fabric for manufacturers. The challenge for ERP vendors is to help manufacturers understand that ERP systems aren’t just handling inventory, orders and accounting any- more. They’re essential to keeping up with competitors who have taken advantage of the technology software and systems are bringing to them. Evolved Systems Of the readers surveyed, almost 63 percent have a system that is four years old or older, with just over 34 percent of overall respondents indicating a system that is seven or more years old. Since ERP systems have been evolving at a record pace in the last ten years, some manufacturers may be surprised to find out just how robust systems can be nowa- days. So what has been the biggest evolution? “My instinctive answer would be ease-of-use,” indi- cates Zimmerman. “I think the older systems were much Do you currently have an ERP system in place? YES 68.5% NO 31.5% What size is your company? 30.4% 50 or less employees 11.5% 51TO100 3.4% 3.4% 301 TO 400 201 TO 300 4.7% 401 TO 500 5.4% 101 TO 200 41.2% More than 500 employees The State of Manufacturing ERP Systems page 3 The demographics of the manufacturing workforce is changing too. An aging workforce is carrying a lot of valuable information around in their heads that isn’t represented, and is difficult to capture, in older systems. “Modern ERP systems begin to provide tools that capture that soft knowledge from the aging work- ers — not so much the transactional knowledge, but content,” explains Veague with IFS. “Then, of course, we see the rise of social networks and social type features within ERP software. This is because the next generation coming in, the millennial genera- tion, has a really different idea about how software and IT works and how they interoperate and interact with complex systems. The so-called digital natives have a very different set of expectations about what tools they are going to have to do their job.” Largely, modern ERP systems have evolved way beyond those abilities to do things like product data, lifecycle and human capital management. Manufac- turers, especially in North America, are developing and growing technical talent to run more sophis- ticated manufacturing facilities. It is one of the real pain points they have encountered in having the ability to tie systems together all the way from data collection on the shop floor, all the way up to human resources. “How we’re going to constantly grow and train the next group of employees is all part of the pur- view of the system now,” says Dick Schultz, director of product marketing-manufacturing with ERP solutions provider Epicor. “What we’re capable of providing is significantly broader than systems that haven’t largely been touched or upgraded from ten years ago — especially in the way that they look and functionally compare today.” Top Trends Behind modern ERP systems are trends pushing innovation of capabilities and functions. Some of the big changes to these systems concern analytics, automation and mobility. Manufacturers that survived the Great Recession that had traditionally been in one environment and one supply chain – like building parts that go into products somewhere else – have had to change their focus in order to survive. They’ve had to evolve their business outside of traditional areas to try to drive new revenue. Some companies have done this by entering into new supply chains — putting new pressures on new methods of providing commerce. For these companies, the pain point is dealing with Electronic Data Interchange (EDI), where before they more rigid and inflexible in terms of a user interface. I think manufacturers would be very surprised to see how easy the systems are to use today — not only from an end-user perspective, but also the ability to analyze the data that the modern ERP systems contain.” User interfaces years ago started as green screens that were unable to represent a process like an onscreen drawing with measurement points. These older systems couldn’t display graphical representa- tion of what is going on within an individual process. Likewise, reports were processed in batches and didn’t allow companies to see real-time information. Today’s ERP systems have advanced capabilities that not only allow a more complex interaction with real-time data, but a lot of that data is mobile, allowing individuals to be device independent. So how does that help a manufacturer? “Manufacturers today are moving beyond just product manufacturing by expanding into services to enhance their customer experience and drive new revenue streams,” explains Larry Korak, direc- tor of industry and solution strategies for industrial manufacturing with software solutions provider Infor. “Modern ERP systems give field services personnel re- al-time visibility into things like replacement or spare parts and let them know when a customer’s machine has gone down and needs servicing. All of this is possible today, and companies are making use of that real-time information on a daily basis.” Supply chain visibility in modern ERP systems allow companies to look at real warehouse levels and predict where those levels need to be. Manufac- turers can manage virtual warehouses to see what they’ll need for production and make sure that raw materials needed have been ordered. Parts can be as- signed lot numbers and traced from upstream source materials to the end user. “The fact is, we’ve gotten much smarter systems that are tracking material and part movement in real-time,” adds Korak. “An individual swiping a badge to check out inventory can automatically re- order materials based on orders placed in the system. Real-time inventory visibility and replenishment manufacturing execution helps manufacturers plan better and takes a lot of the guess work out of it.” Today all business is global and so a good ERP system needs to be able to support a business operat- ing over international borders. M&A activity is very active, therefore manufacturers need an agile system that allows them to incorporate new processes, po- tential new divisions or divest divisions or work that are no longer profitable. “ Supply chain visibility in modern ERP systems allow companies to look at real warehouse levels and predict where those levels need to be.“ The State of Manufacturing ERP Systems page 4 SECTION 2: HOSTING METHOD From an ERP perspective, companies still large- ly host their systems on premises; that’s where a majority of manufacturers are today. As indicated by the MBT survey, 76.1 percent of companies still have an on-premise only solution, with approximately 24 percent taking advantage of a cloud, SaaS or hybrid of systems. But that is changing as companies are seriously looking at either a hosted, single-vendor cloud system or multitenant SaaS. The drivers to these platforms are a reduction in infrastructure, fear built up in technology laggards and the ability to have someone take care of the system and hardware for the small and mid-market manufacturer. It also reduces the need for big capital investments needed to upgrade machines and systems to newer, more dynamic platforms. But there’s still hesitation to quickly move to a cloud-based system. “Manufacturers today are still uncomfortable about letting go of the company’s crown jewels and putting them in an environment in the cloud or a SaaS deliverable,” says Schultz with Epicor. “I think that will evolve over time as companies look at new ways to deploy their systems and get close to their customers. Also, the level of security that software vendors are able to provide to a manufacturer’s data is likely multiple times better than anything compa- nies can afford to do on a local scale.” While cloud-computing is the big industry term these days, a lot of companies still like that warm, fuzzy feeling of having the server in-house. VAI sees that trend with its customers. Manufacturers will have a server in-house, but then have a vaulting solution (an never had to worry about that. Now these manufac- turers have a big learning curve to contend with, in order to get closer to their end customer. Having e-commerce components allow manufactur- ers to improve order taking, respond to orders and get closer to the consumer. For instance, Walmart has re- cently focused on disintermediation, forcing manufac- turers to do things that have not been traditionally in their wheelhouse. About ten years ago companies could count on a process of just manufacturing and shipping products up the supply chain. “How it got to the end consumer they didn’t really have to trouble themselves with,” explains Schultz with Epicor. “Now, as that’s all being pushed back down the supply chain, even small- and mid-market manufac- turers are having to deal with some of those supply chain complexities of getting their product to the end customer.” Additionally, manufacturers want the ability to analyze their data continuously, according to Zimmerman at VAI. Whether that’s in the area of production and employee productivity or customer trends for payment, “People just don’t want to be tied to a desk or a specific device,” says Zimmerman. “They want to do their job in a mobile way. The web, and more specifically portals, give our customers one central place to go that gives them their key performance indicators and information they need everyday to manage their part of the business.” Finally, manufacturing software and processes are a pretty mature area. Because of the level of automation seen in factories now, as well as the level of automated planning, there’s not much to be gained any longer by continuing to make manufacturing processes efficient. “I think we’ve squeezed as much as we can out of that, so that the real trend in ERP is all the supporting things that drive manufacturing,” explains Veague. “What we see is increasing reliance on complex supply chains and distribution channels. Front end systems like CRM allow you to reach potential customers with better product information, quoting and things like that. “Overall, advance scheduling and synchronization make sure that your supply chains are lined up with your manufacturing processes which are aligned with your customer needs. That way you can deliver the right product when your customers need it at the lowest price. “So what we see is less reliance on optimizing manufacturing per se — meaning the shop floor — but the real focus has turned to front-end sales supply chains and aftermarket service, because you want to build that long-term relationship with your customers.” What is the architecture of your ERP system? 76.1% On Premises 8.5% Cloud 1.4% SaaS 14.1% Hybrid “ From an ERP perspective, companies still largely host their systems on premises. That’s where a majority of manufacturers are today.“ The State of Manufacturing ERP Systems page 5 replacing, up-to-date or using a relatively new prod- uct. That means that almost 63 percent of respon- dents are using older system that are potentially hindering or hurting their business. “As a vendor we’d say that they should update all the time of course, but that’s impractical because even with the best modern technology, change man- agement is a difficult process,” explains Veague with IFS. “And any change comes with risks.” Most software vendors look at upgrades in one of two ways. They recommend that companies don’t fall more that one software upgrade away, or make sure to upgrade every 2 to 3 years. That gives com- panies time to implement new software and features; get some return on their investment; and consider what improvements they need in the next upgrade. In between those major upgrades, some vendors will also release smaller product add-ons or extensions to help their customers drive value in their companies. “The driving factor for our customers to upgrade is that they identify some value in the current release,” says Zimmerman. “That could be anything from being able to use a mobile app to better data analytics becoming available.” SECTION 3: BIGGEST CHALLENGES Misconceptions One of the biggest misconceptions about ERP sys- tems today is that implementations can take years — and that’s not necessarily true. Older systems tended to have a lot of customization build specifically for a manufacturer, creating a longer implementation timeframe. “Fifteen or 20 years ago, when ERP systems were just coming on, a lot of functionality was being e-vault) where they’re copying their data at the end of the day and backing that up over the cloud. While the trend in the market generally is undoubtedly towards cloud, one must look at the rate of adoption to cloud. And yet, despite what may have been a group slower to imple- ment these types of solutions, the lower costs and requirements should hold particular appeal to manufacturing. “Manufacturers don’t differ- entiate themselves by having a world-class IT staff typically,” says Veague with IFS. “The reality is most manufacturers are not in the business of IT. It’s just a necessary expense. As ERP and manufacturing solutions advance, there’s an increased cost pressure to optimize manufacturing and increase IT budgets to deal with these complexities. That can be hard to reconcile. “At the end of the day it’s a specialization and volume type of question. We see more and more of our customers turning to cloud as a way of getting out of the IT business. They know that we’re the software experts and we know how to support the complexity and IT infrastructure, so they just want us to deal with it for them. That way they can focus on just using the software and running their business.” For a manufacturer looking for their first ERP solu- tion, going directly to a cloud-based system could be ideal since they’ve got nothing invested in infrastruc- ture for an on-premise solution. For manufacturers looking to expand globally, a cloud-based system can be appealing because it can be quickly implement- ed, carries lower risk in unstable regions and can be monitored from the home office. Upgrading Your System Among companies surveyed that have ERP systems in place, 37.2 percent are either currently The Blended Deployment Option QAD Inc., provider of cloud ERP solutions and services for global manufacturers, announced in October 2014 that nearly half (45 percent) of QAD Cloud ERP customer sites exist as part of a blended deployment. Customer-defined security allows users to easily transact across business entities with complete visibility, consistent functionality and the same user interface. In addition, in a blended deployment the finance team can view both individual business unit results and run consolidations that cross their cloud and on premise sites seamlessly. Automotive industry customers with a larger number of sites or sites in emerging regions are the most likely to take advan- tage of the blended deployment option. Blended deployment allows them adequate time to transition to the cloud or to enable opening their new facilities quickly. How old is your current system? Currently replacing <1year 28.6% 1 to 3 years 28.6% 4 to 6 years 15.7% 7 to10 years 18.6% 11+ years 2.9% 5.7% The State of Manufacturing ERP Systems page 6 be a matter of time before millions of devices can be connected. Sensors will need to be able to commu- nicate part information to the main system. Devel- oping that connectivity requires communication protocols that still need to be established. “I’ve been working with ERP software for quite some time, and many of the main issues custom- ers have been dealing with haven’t changed in that period of time,” says Zimmerman with VAI. “For me, it’s in and around inventory control. Specifically for manufacturers, it’s making sure they’ve got the right, raw materials when they need them, and it’s making sure they’re producing the finished goods when they need them. That’s still a hot button issue because, let’s face it, the biggest assets that a manufacturer has is its inventory. “What gets people excited nowadays is this concept of mobility — and really depending on how you define it. If it’s operating an application via a web browser, there’s that component of mobility. But the other thing that I think really excites people now is apps that are interfaced with their ERP system. You know it’s those things that I think manufacturers want to do and are struggling with in their older, outdated systems.” SECTION 4: MOVING FORWARD Finding the Right Solution “The very first thing when looking for an ERP system is to make sure that the top line executives are on board with their business systems in start- ing an evaluation,” cautions Schultz with Epicor. “IT-driven evaluations typically don’t end up in a good place and even if they do move forward imple- mentations aren’t nearly as successful. You need to align the system gaps you currently have with your current and future business plans — then go out and really looking at a system that fills those gaps.” It’s important for a manufacturer to identify those things that are strategic to their business today and in the future, making sure that the system they choose will support those goals. It’s important for companies to focus first on the important things that are going to change their business and then the day- to-day things second. While identifying those requirements, employees should indicate what they need applications to do for them on a daily basis. Then they should define what types of dashboards and reporting they need on the backend to get their job done. “Define your primary processes and functions that are fundamental to your business first,” advises Korak with Infor. “Then ask yourself if they can be found in a developed while they were being implemented,” says Infor’s Korak. “There was just a ton of consultancy requirements and IT industry expertise required to implement an ERP system. That’s just not the case anymore. We’re able to take a new system live across a company in four to six months with really robust functionality and capabilities. That’s because of all the refinements that have taken place over 20 years.” There’s also a perception that companies have to buy different pieces of software from different ven- dors in order to come up with a solution. There are ERP vendors that offer a single-source solution for hardware, software and professional services. “I think that there’s a perception that by using a single-source solution, you’re going to be reliant on that vendor forever to make any personalization or changes,” says Zimmerman. “I think there’s a miscon- ception that companies can’t have any self-sufficiency or independence with an ERP application.” In some cases there is also a misconception about ERP being a silo system that exists independent- ly. The reality is, while some ERP solutions cover numerous things and others are more narrowly focused, all the systems have to work together in a carefully orchestrated manner to support a modern business. “The idea that engineering can design something and throw it over the fence and somehow manufac- turing picks it up and makes it, that’s not the most efficient way of doing things,” explains Veague. “It leads to problems in product quality and missed customer expectations. If you have an integrated engineering and manufacturing solution, you cut down the potential for errors. A modern ERP system, built on modern technical standards, is a very open platform for exchanging data or integration with other solutions.” Pain Points Of course, every company wants things cheaper, but that’s not necessarily a pain point for companies. Manufacturers are looking for greater connectivity, inventory control, mobility and a solution that not only meets the needs today, but drives them towards their goals of tomorrow. Manufacturers want greater connectivity and they want ERP vendors to continue to push the envelope in terms of connectivity especially in this age of the Internet of Things (IoT). Communication protocols can take time to develop themselves and are based on industry participation. RFID took years to develop a protocol for communicating. Companies need standards that they can all use. With IoT, it will only “It’s important for a manufacturer to really pick those things that are strategic to their business today and in the future, making sure that the system they choose will support those things.“ The State of Manufacturing ERP Systems page 7 be achieved in an app. To address this, vendors are building things like location transfers and warehouse functionality — typically done with RFID devices or paper — into an app. The trend for manufacturers is to be more mobile by completing more functions and interfacing with apps on smartphones and tablet devices. With ERP systems being critical to today’s manufacturing industry, imagine how more robust they’ll be in tomorrow’s world. It seems that, for the most part, companies understand how important these systems can be and are already preparing. According to those surveyed by MBT, 57.2 percent of companies are either currently investing in ERP or will be doing so within the next 12 months, while an additional 14.3 percent will be investing in more than 12 months. “ERP systems will continue to support global busi- ness, drive better ease-of-use and ease-of-value and I think a lot of that has to do with changing a rather tra- ditional, transactional model to a more of a knowledge, content model,” indicates Veague with IFS. “We certainly see mobility everywhere. More and more businesses are on the move. People that are making decisions aren’t necessarily sitting at their desk all the time. ERP is a very vibrant system today, running 24/7. If you’re not con- nected to that information flow you don’t know what’s going on in your business.” *This data is based on the results of a survey sent to the Manufacturing Business Technology subscrib- er base. These readers are comprised of CEOs, pres- idents, owners, engineers, managers and directors across all manufacturing industries. standard ERP or if some rationalized capability creates a need to look at some bundled package. Start with how you make money and then work from there.” Moving Forward ERP systems, like any successful business, are always innovating and expanding their usefulness. So what will the future bring for ERP systems then? Epicor sees the industry at the beginning of a con- tinuous evolution of systems deployments moving largely into single- or multi-tenant hosted systems. “There will be a segment of the market that will always want to have their hands on their system and not allow it to go someplace else, but I do think that will be a trend in this business as financial drivers in the industry continue to push back. Companies don’t want to see that stuff on the capital side of the busi- ness. They prefer to see it built into the P&L where it belongs,” says Schultz Companies are also dealing with growth initia- tives that drive themselves to either e-commerce or efficiency and collaboration through mobile deploy- ments of software. This allows the next generation of employees and leaders that come in to consume the information and data in way they want to see it in a different manner than what was initially built into ERP systems. ERP vendors are also getting a lot of interest from customers in functions and capabilities that can When are you looking to invest in an ERP system? 42.9% Currently looking 14.3% In the next 12 months 14.3% In more than 12 months 28.6% Unsure The top 10 requirements for a new or upgraded ERP system as indicated by surveyed manufacturers Production Management 39.7% Inventory Controls 28.6% 27.0% 22.2% 22.2% 20.6% 20.6% 20.6% 19.0% Financial Management Forecasting & APS Sales Order Management Engineered-to-Order Materials Management Supply Chain Management Wharearehouse Management Project Management 20.6%