The value proposition of ERP

Posted on 11 May 2011 by The Manufacturer

Total cost of ownership should be the overriding criteria for ERP selection, not short-term financial savings, as Ronan Martin-King reports.

Manufacturers have long been used to assessing total cost of ownership when they are evaluating options for equipment and machinery. Fewer however, use the same thinking when making software purchases despite the ease of application.

There is little doubt that a modern ERP system can breathe new life into any sector of manufacturing, but what if the business is struggling to raise the necessary funds to invest? Total cost of ownership should be a key factor in the decisionmaking process, says Craig Such, head of the manufacturing division at consultancy-led business software supplier Access. A typical ERP solution may be replaced every seven or eight years, he says, so manufacturers should calculate the cost of ownership over that period. However he also warns that businesses should be aware that the most significant investment is often their time and the potential disruption to their business.

There are various rental options on the market but these may not provide the best long-term value, even if the initial offer appeals. “Quite often, some of the rental models may appear attractive at first,” says Such, “particularly if you can stop paying for it if you decide you don’t like the product. What many fail to take into account though is that this doesn’t address the investment of your time.

“Once you have invested time and effort, you are unlikely to want to throw that away and so will persevere with the system, even if it isn’t proving to be the best fit. The price may have looked low at the outset, but the full cost of ownership may mean that renting is not the best solution. The bottom line is, do your homework first, and compare offerings on a like-for-like basis.” Return on investments is a critical part of the total cost of ownership equation, no more so than now as the economy recovers. Businesses are straining to release precious funds and senior management teams must make a call on investment requests across the organisation.

There are recognised methods with which to justify payback on any capital purchase, but the biggest barrier to the capex model for a new ERP system is the fact that there are so many finance options on the market. While it’s commonplace for manufacturers to fund investment from cash reserves, there are others for whom a £50,000 purchase, for example, is impossible without finance from an external source.

“ERP vendors have to recognise that they need to offer a range of finance options to suit different situations,” says Such. “Because of this we have flexible financing options available.” For any reputable supplier, their objective is to help the customer realise swift return on investment – and this is achieved by ensuring the purchase or finance option aligns with the anticipated improvements to efficiency and productivity.

For a system as critical as ERP or supply chain software, one size definitely does not fit all. Reliability, affordability and, most importantly, choice are vital. Enter cloud computing, which has been a hot topic within the IT sector for some time. Such is keen to point out that a pragmatic approach is required if this is to pay dividends: “Cloud can play a key part in your manufacturing IT strategy but don’t automatically think this has to apply to all of your systems,” he says.

“Manufacturers need to carefully review each area of their business and where a cloud application might be the most appropriate option. It’s could be the case that a combined cloud and on-premise solution is the ideal answer.” One of the underlying concepts of cloud is the provision of software as a service (SaaS) and, while there is an increasing number of software providers offering ERP on demand, the fact remains that for many manufacturers, core ERP functionality is just too business-critical to relinquish control in this way. A company may have invested a great deal in their IT infrastructure, on-premise manufacturing solutions and, for example, robotic control systems that need to be physically on site. As a result, the cloud may not be a suitable alternative for certain manufacturers.

The combination approach, therefore, may prove fruitful with core ERP remaining on premise and specialist areas provided on demand via the cloud. “Areas such as CRM, document management and HR are ideal for cloud,” agrees Such. “They lend themselves to the cloud environment; it removes the need to have this software installed on in-house servers, so avoiding need for hardware investment. It also provides manufacturers with flexibility over future capacity, so they only pay for what they use.” Access, in fact, has recently announced its cloud computing strategy for document management and HR. This means not only is there a finance option to spread the initial outlay, but the solutions themselves will be managed in the cloud, removing any potential hardware or infrastructure headaches for the customer.

It’s vital, says Such, for suppliers to be able to offer the breadth and depth of technology, service and finance to suit manufacturers who, themselves, have to offer flexibility and responsiveness to secure and retain contracts. As the manufacturing sector continues its slow climb out of recession, businesses will need to invest in equipment and technology to ensure they are sufficiently agile, highly efficient and capable of seizing new opportunities and fulfilling customer demands. This is enabled by true company-wide visibility which, in turn, comes from accurate, real-time data.

Putting off an ERP purchase or upgrade may in fact damage competitiveness which is already fragile.

Investing in a top-class ERP solution through one of a variety of cost models could be the catalyst to a more secure future.