Cost of erp system

The Cost of Delaying an ERP Upgrade

A new piece of plant equipment will always trump a new ERP system to grow your business – or will it?

In all my many years of introducing new ERP systems to manufacturing companies, the number one reason why the project did not go ahead is not because we lost out to a competitor’s product. It is almost always because the investment required lost out to other investment opportunities that the manufacturer could pursue. New or improved plant, extra staff, R&D expenditures, a delivery truck, there are so many ways a manufacturer can spend their limited capital to grow their business.

There are many reasons given why manufacturers postpone the implementation of an ERP system, or an upgrade to an existing one. Typically, they are:

  • We are too small.
  • We’ve done all right without so far.
  • We believe we can continue on without it.
  • It will cost too much.
  • Too much effort and disruption to implement an ERP system.

Those last two reasons point to a common misconception – that a new manufacturing ERP system or an upgrade is simply seen as a cost. This is not to minimize that there is a cost, and many companies are terrified about what that total cost could be in terms of both the software cost and the disruption to the business. The reality is, there are massive savings which can be made. Those savings can pay for the other investments you want to make, while delivering a system that can help you manage the growth you are looking for.

What does this mean in the real world?

Cost of Delaying ERP- White Paper for Manufacturers

Take a manufacturer that has revenue of $5 million and is turning over their inventory just 4 times a year. That means they are sitting on around $1 million of inventory, with 91 days of inventory on hand at an annual carrying cost of $200,000. If that manufacturer can implement inventory best practices with a good ERP system, they should easily be able to achieve 8 inventory turns a year (the industry average for North America is 9.2 turns per year). That can lead to a one-off cash injection to the business of $500,000, and a carrying cost saving of $100,000 every year. You only then have 45 days of inventory on hand, that releases storage space to put into production space, maybe meaning you don’t need that bigger factory after all. While growth may push the inventory value over the $500,000 level in time, it will be in control, and you can manage that growth.

Other best practices also make a big difference. Aberdeen Group states that companies with no ERP system, or an old system, are likely to have inventory accuracy of only 88%. Those on the latest version of a modern ERP system have accuracy between 92% and 98%. The cost of that inaccuracy is reflected in high safety stock, obsolete stock, and stock-outs which delay production.

Improved accuracy can further reduce overall inventory values by up to 20%. A new or latest version ERP can reduce days outstanding for your accounts receivable from 43 to 33 days. On $5 million revenue, that’s a cash flow improvement of almost $100,000 a year. Aberdeen also says that non-adopters only have 89% financial reporting accuracy, and the amount of time that information is available when you need it is only 82%. A modern ERP should improve that to 96% accuracy available in time at least 90% of the time. That makes a big difference to your decision-making. On-time & in-full deliveries also improve, lifting customer satisfaction to over 90%. Those are the real costs in purely monetary terms but the return on investment (ROI) occurs quickly and the value to the business is long term.

ERP software for the future of your manufacturing business

What about the other reasons for adopting a modern ERP system? Industry-specific best practices aren’t the only things being built into the latest ERP systems, they also include support for all the emerging technologies that make up “Intelligent ERP”. The business environment is changing rapidly, as is the way we communicate with our customers and suppliers. In order to compete we need to analyze lots of data, and our workforce is increasingly mobile.

Access to almost everything from an intuitive user experience, access to your ERP system from mobile devices, business analytics and intelligence embedded in the ERP system, integrated e-commerce, cloud computing, and connection to social media, are all technologies crucial to survival in today’s business environment.

Add in the Internet of Things (IoT), and the game changes dramatically for manufacturers. Inexpensive sensors on plant feeding data to ERP-Embedded analytics supports:

  • Predictive maintenance
  • Automates the transactions of materials out and finished goods completed.
  • Tracks the progress of work orders through the plant.

Sensors in machinery sold introduces a whole new service model, retaining service revenue and lifting customer satisfaction when the machine can tell when it needs a service or is about to fail. Substantial productivity gains can be made simply by being able to automate tasks that your staff spend too much time on.  Why spend wages on tasks that your ERP system can do quicker, more accurately, and without human input? Those wages are better spent on the things that result in output that generates revenue, and the opportunities to grow your business. Another intangible benefit relates to employees. As the manufacturing workforce ages, you need to get the ‘tribal knowledge and experience’ of those workers recorded before it is lost. The new generation of employee’s demand, and rely on, technology to do their work. They want the system to be user-friendly and work the way the apps they use in their daily lives work, to support how they like to work. The lack of an ERP system, or an outdated one, literally means they are lost.  

Attracting new blood into such an environment is virtually impossible. Often, we find it is the new hires who are charged with finding and leading the implementation of an ERP system that meets the needs of the both the business and the new generation of workers that is taking over.

Small and medium sized businesses have even more reason to adopt a modern ERP system than many larger companies. In a large company, unproductive time gets averaged out over very many employees. In a small to medium company, there is nowhere to hide. Time is precious, too precious to waste on non-productive activity. Staff in these companies are truly busy, and they need the real benefits that a latest-version ERP system can offer:

  • Accurate data available instantly to everyone who needs it.
  • A clear picture of the inventory – how much and where it is, so staff aren’t spending time running around trying to find it.
  • Up-to-date reporting, preferably user-driven and interactive, with drill-down to underlying transaction details.
  • Easy-to-use, responsive computing that relieves frustration with old clunky systems.
  • Removal of double (or more) entry of the same data, eliminating transposition errors and chasing employees because you can’t read their writing.
  • Simply knowing what everyone else is working on, and what stage that work is at.

Imagine if you had one extra employee whose job was to remove non-productive time from everyone else, and eliminate the frustration of outdated systems? That employee is a modern, intelligent ERP system, and it is, at the grass-roots level, actually more valuable and important to a small or medium size business than to a large one. Without it, you cannot grow. Without it, you will become progressively less competitive and irrelevant in today’s business environment.

It’s time to join the real world!

Are you a manufacturer delaying an investment in a new ERP solution or upgrade of an old implementation? Download this white paper to understand the direct & indirect costs of delaying your ERP decision.