Companies can save on ERP operational costs this year by taking a look at shelfware, improving data integrity and checking out third-party maintenance, according to interviews with several analysts.
ERP software may be the most expensive and time-consuming IT investment a manufacturer will make. But there are several fast-payback ERP projects that are helping cut IT costs, find faster ROI and leverage the existing ERP system to the fullest.
Cutting ERP license and maintenance costs
First, review the ERP contract and try to eliminate shelfware -- purchased but unused software. Many companies are paying license and maintenance fees for multiple modules included in their ERP systems but are not actually using all of them.
"Many ERP customers are only leveraging about 60% of the software they own," said Steve Phillips, ERP practitioner, former consultant and author of the Street Smart ERP blog.
It's not uncommon for manufacturers to end up spending money on software they don't need -- or even don't know they own. Manufacturers go into the ERP selection and implementation processes with a limited scope; they know what capabilities are important to them and choose the system that meets their needs. But most ERP systems are not tailored to a specific user, Phillips said, so new ERP customers may end up with additional software capabilities they don't need, and ERP vendors often throw in tempting discounts in exchange for the purchase of more software.
"Often, software salespeople will throw in an extra discount if you buy more licenses," said Ray Wang, a partner with the consulting firm Altimeter Group. "So if you needed 800 and would have gotten a 50% discount but got offered a 60% discount, you'd fall for the shelfware trap. You now have 200 licenses [for which] you will pay 20% maintenance every year of ownership, whether or not you use them. At that rate, you now have paid for the software once every five years in maintenance costs."
Customers should look at their ERP licenses carefully and figure out what they're actually paying support for, Phillips said, adding that ERP license costs are often based on the number of software components purchased rather than on a flat fee for the entire system.
"Be aware of what components you own," he said. "Look for areas you could cut; and, depending on your contract, you may be able to reduce costs by getting rid of modules that you don't need."
Perfecting ERP inventory management
A second area to explore is automated purchasing. The supply chain is the centerpiece of any manufacturing organization, so make sure the ERP system is helping the supply chain run smoothly.
"The world has changed for manufacturers," said Sandeep Walia, president of ERP/CRM consulting firm and e-commerce provider Ignify. "Most are moving to a lighter manufacturing mode by outsourcing much of the pre-production process, such as manufacturing of materials and parts."
Manufacturers can automate the purchasing of the parts needed for production; this saves time and money and reduces human error rates. Most ERP systems should have this capability already built in, Walia said.
Making sure that there are enough parts on hand is critical to production because one missing part can cause catastrophic delays. One of Walia's customers, a top helicopter manufacturer, learned this the hard way. An order for a $2 million helicopter was delayed for weeks because of one missing part -- worth less than $100.
When every cent needs to be well spent, however, buying more parts than needed for production is inexcusable. Walia suggests using the "ABC categorization," by which parts are ranked according to value and cost. "A" and "B" parts are very important but also very expensive. These parts require frequent runs on the ERP system to check inventory levels and make sure they are planned for but not overstocked. The lower-priced "C" parts don't need to be monitored as closely, since having extra inventory there will not be as costly.
Data cleanups boost performance of ERP software
Improving the integrity of data is also a fast-payback ERP project. An ERP system is only as good as the data that feeds it. The everyday software functions that drive manufacturing -- bill of materials (BOM), inventory assessment, order processing, routing -- depend on quality data, Phillips said.
"A lot of people go get expensive new ERP systems," he said, "when in reality all they need is to clean up their data structure."
Data cleanup projects can help manufacturers improve the performance of the ERP system they already own -- and they cost next to nothing.
"These projects are low-hanging fruit," Phillips said. "They're easy things that you can get done in a few months." And the faster the project is done, the faster the ROI is realized.
In turn, manufacturers keeping applications in maintenance mode should consider third-party maintenance. In this model, a customer goes off vendor maintenance and support and hires a third-party maintenance provider to maintain applications and provide necessary tax and regulatory updates. Some providers promise to cut support costs in half.
"Instead of paying 18% to 25% for maintenance on stable products along with potential inflation adjustments, you pay 9% to 12% for the basic bug fixes, regulatory and legislative updates, and additional optimizations," Wang said. "So if you have $1 million in licenses and pay $200,000 in maintenance, you could save $100,000 a year -- and over five years, that's $500,000."
Customers looking to add new functionality should look into SaaS ERP options. Software as a Service (SaaS) reduces ERP costs by eliminating the upfront license fees that come with in-house systems. SaaS ERP is also faster to implement, with projects ranging from one month on the low end to four to six months on the high end. In-house ERP implementations can take well over a year, according to Wang.
Another benefit of SaaS ERP is less pre-implementation preparation.
"You don't have to stand up an environment on Day 1," Wang said. "The long-term costs may come out the same over 10 years, but at least you've reduced capital expenditure and avoided an upgrade cycle that often is equivalent in costs to a reimplementation."