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Will manufacturing embrace cloud-based ERP?

Manufacturing companies are slow to adopt cloud-based ERP applications. A new generation of manufacturers may change this trend.

Although adoption of cloud-based ERP applications may be picking up, one industry -- manufacturing -- is slow to take up the banner.

When it comes time to replace legacy systems, manufacturing companies turn their backs on cloud-based ERP applications for many reasons: not only for the usual cloud-related concerns around security and availability, but also for considerations specific to each manufacturer. Their highly tailored workflows, business rules and data structures -- particularly those with multiple sites -- require a level of customization not yet found in multi-tenant applications.

"The complexity of running a multisite manufacturing business generally doesn't lend itself well to being in the cloud," said Robert Kugel, senior vice president and research director at Ventana Research.

There's also the matter of those pesky legacy systems. Manufacturing is an industry ripe with mature companies that have had complex ERP systems in place for decades. Many have invested millions in those systems and their subsequent upgrades, as well as in the processes those systems support, and they're loath to walk away from those commitments.

Mature manufacturers prefer on-premises ERP

In a survey of companies ranging from $10 million to $10 billion in annual revenue, Gartner found that nearly half of all organizations plan on bringing their core ERP systems into the cloud within five years. But of the 30% that said their ERP systems will remain on-premises, almost all were from the manufacturing sector.

What may change this picture is a young generation of domestic manufacturers forging a new path for an industry that hasn't seen substantive change on the IT front in many years.

"The new manufacturing that's starting up will be predisposed to move into the cloud because they don't have the legacy of old systems," said IDC analyst Christine Dover.

One such company is Firstronic, a Grand Rapids, Mich.-based maker of electronic circuit boards for the automotive and healthcare industries, among others. Firstronic had all the justification it needed when it ported its core ERP system to a public cloud provider in 2012.

Although founded in 1980, Firstronic is, from an IT perspective, more like a 5-year-old company, having been acquired from its previous parent, Germany's Paragon, by a private equity firm in 2009. CEO John Sammut said the company, which was struggling mightily at the time amid an auto industry slump, was given 30 days to cut the cord from Paragon's systems, forcing management to select an off-the-shelf ERP product as a stopgap measure.

One manufacturer chooses cloud-based ERP

Two years later, once it had established its own footing, the company began the search for a long-term ERP solution. Even though the cloud was outside its comfort zone, Sammut and his leadership team realized that the clean slate they were operating from represented a significant opportunity to get away from buying -- and babysitting -- a cadre of servers. They made the decision to try something new.

"We definitely had some reservations about the idea of cloud-based systems, basically because we didn't have any experience with them," said Sammut. "If we had all that infrastructure in place, it might have made sense to take that hardware approach."

Instead, the company chose Plex's cloud-based ERP offering in early 2012 and went live on the system in June. The software gave Firstronic the capabilities of an on-premises system without the up-front price tag, and it's helped the company become a much nimbler business. For example, it enabled Firstronic to open a new facility in Mexico in less than 90 days to meet the needs of a new customer, a process that included installing more than 50 machines, training 20 operators and loading some 500 components into the ERP system.

"This is about as fast as it gets in terms of pulling the trigger," Sammut said. "[Plex] gives us the ability to ramp up and scale the business quickly."

With its newfound ability to respond to fast-changing business demands, Sammut said Firstronic has achieved a 35% compound annual growth rate since deploying Plex, a significant improvement over its previous performance.

That said, what really excites Sammut is the supply chain visibility Plex provides, not only to Firstronic but also to its customers. Ironically, while the complexity of multisite manufacturing operations is thought to be an obstacle to cloud adoption, Sammut believes that complexity also makes the cloud an ideal fit. Customers want access to as many details as possible when it comes to the status of their parts, and Firstronic has tied its Plex environment into its customers' ERP systems to give them just that.

"They want to know what batch it came out of, what reel was it on, what was the scope of the exposure, etc.," he said. "To be able to provide that degree of traceability for a product with this kind of complexity is no simple task."

Firstronic's experience aside, clearly not every manufacturing firm will find itself building an ERP platform from the ground up. Many of their on-premises systems are huge and complex and represent enormous investments they're not about to scrap. A time will come when such companies will consider wholesale change, but the justifications aren't there yet.

"There isn't a company on the face of the earth that would decide to replace their ERP system just to be able to move to the cloud," said Ventana's Kugel. "A tipping point will only come when there's some breakthrough in ERP system design that enables a large number of manufacturing companies to configure and script in a multi-tenant environment without having to make too many concessions."

Sounds like something for manufacturing CIOs to look forward to.

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Is your organization ready to move ERP to the cloud?
At the moment, the decision regarding whether to move our ERP suite to the cloud is up in the air, so to speak. On one hand, having a management/planning team that is scattered across the city means that cloud functionality would be useful, but on the other hand, given that a fair chunk of said staff is a little slow on the uptake regarding new technology. At this point, the only reason we've not gone forward with having our resource planning suite on the cloud is because of concerns about security and the time needed to teach senior staff how to access it safely.