Getting a Real Return on Your ERP Investment

Manufacturers expect more business value from their IT investments

By Tonny Dierckx

Manufacturers have invested huge amounts of time and money in implementing ERP (enterprise resource planning) systems. They see it as a way to get all the data they need to drive and support day-to-day business processes. That’s great, but there is a limit to how much manufacturers can benefit from knowing what happened in the past. The law of diminishing returns suggests that additional investments in ERP are likely to have an ever-decreasing impact on the bottom line.

As such, the best that can be said of these systems is that they make you as good as your best competitor. By definition, a system that standardizes everything is not going to make you better. To be a leader in business, you must be capable of doing some things differently from – and better than – the common herd.

Obsession with the minutiae of what happened in the past can in fact be a brake on innovation and creativity – which is perhaps more important in a competitive world than identifying opportunities for minor cost savings. One wonders how great inventors and innovators such as Benz, Marconi or Edison would have managed if their every decision were subjected to the intense scrutiny of accountants armed with ERP reports. A manufacturing R&D manager recently told me, “We are in danger of killing the goose that lays the golden egg in order to economize on corn feed.”

That’s not to say that ERP is a bad thing. However, manufacturing executives are right to expect more business value from their IT investments than can be delivered by surfacing the cost and impact of individual transactions. Businesses and decision processes are much more complex and nuanced than that. Interrelationships, both inside and outside the organization, are more important than one-off transactions.

It is only when you get insights into the underlying drivers of costs and revenues that information becomes a competitive weapon. In our current economy, it is not enough to know how much you sold yesterday, what are the stock levels of your most profitable products, how much revenue your best customer generated, or who is the most unreliable supplier. ERP systems contain all this elementary data on the past, but innovative companies want to know what will happen in the future, how they can benefit from a newly discovered trend, how they can anticipate events and how they can become more agile. Innovative companies are forward-looking, not backward-looking.

To cope with these complex business challenges, companies need to be able to focus their creativity by applying advanced techniques such as constraint-based optimization, advanced forecasting, strategic planning, business simulation and modeling. The umbrella term for these techniques is “business analytics,” which combine the capabilities of business intelligence solutions with strong forward-looking analysis that is designed to support and improve decision making.

A complete business analytics solution must integrate all of the corporate data coming from ERP, legacy and specialized systems. In addition, it must offer collaborative tools so that managers and employees can make decisions rapidly and in harmony.

Collaboration
The never-ending changes in the economic, political and social environment make today’s business decisions very complex – so much so that no single individual has all the knowledge necessary to make intelligent and fact-based decisions. That’s why knowledge workers, whose skills and experience must combine with factual information, lookto ERP systems containing the needed information in a common pool of knowledge. At SAS, we refer to the technology that makes this possible as an “enterprise intelligence platform.” Such intelligence-based collaboration brings the collective knowledge of an entire organization together, enabling it to make decisions.

Traditionally, collaboration has been characterized by meetings, committees and bureaucracy, whereas agile and smart companies want to make decisions quickly. Manufacturers, in particular, want to identify problems or new trends, analyze their impact, decide how to react and then disseminate this information to people who can act on it, all across the enterprise – and even outside the enterprise, with logistics or outsourcing partners. Subsequently, they want to monitor the impact of such decisions.

The overall speed of all these steps in the decision-making process determines your “time to intelligence,” which can make for a company’s success or failure.

Taking these realities into account, should we conclude that business analytics solutions compete with ERP systems? I don’t think so. They complement each other. One doesn’t make sense without the other. Their relationship is comparable to the interworkings of the human body. While ERP systems are the muscles and blood of your organization, business analytics are the brains and nerves. Any human being needs both, working together, to survive. Likewise, innovative companies invest in the best ERP software and the best business analytics. They have brains and brawn!
 
Total cost of ownership 
However, there are important differences between analytics and ERP. Business analytics deliver sustainable return on investment because they support innovation and creativity, while ERP is a blunt instrument. With the latter, the return on investment diminishes rapidly.

Some companies have, in the past, been urged to add a new ERP system or to build additional layers on existing ERP systems. But knowing that ERP systems require major investments of time and money to modify them to do precisely what you want, these same companies have found that it makes sense to step back and think about alternatives.

A major American logistics company recently gave up a project to replace its core transportation systems with a new ERP deployment. The motive behind the project was to deliver better customer intelligence. But after a year of effort, the company realized that ERP was never going to deliver the quality of information it sought.

For me, this is no surprise – because ERP was never designed to deliver customer intelligence in the first place; it was designed to execute transactions efficiently. Realizing this, the CIO of the company convinced the board to retain the existing operational systems and use business intelligence software to provide answers to the questions it had been exploring, questions such as, “Who are our most and least profitable customers?” The business-intelligence approach laid the foundations for the company to transform itself into a market-driven, customer-centric organization.

Perhaps more surprisingly, business analytics software has a lower total cost of ownership (TCO) than ERP software. This was demonstrated by a recent study from the HEC International Business School in Paris, which compared the TCO of ERP-based, business intelligence-based and business analytics-based solutions. The business analytics solutions were by far the most cost-effective.

By adding smart brains to brawn, by adding sophistication to raw power through the integration of business return on investment out of its ERP systems. It does not even need to cost a great deal. Business analytics can make efficient organizations even more innovative and agile without straining resources. In short, this powerful synergy of efficiency and adaptability generates the high business value that business users and executives expect.

Bio: Tonny Dierckx is the Director of the SAS Global Manufacturing Practice.