The next-generation of manufacturing and supply chain operations is based on the Demand-Driven Supply Network (DDSN) concept. In it, end-user requirements will drive all supply chain activities among trading partners. The demands of servicing this end-user demand are straining in-house manufacturing models and traditional manufacturing technologies. In February and March of 2005, AMR Research and Managing Automation conducted a joint study to understand the impact that this new operational model will have on current and future ERP investments -- the traditional backbone of manufacturing information and intelligence.
Many organizations, particularly smaller manufacturing shops, have realized that they do not have the IT architecture to compete in the new demand-driven world. The result is rapid greenfield adoption in the lower end of the manufacturing market. In addition, companies with existing ERP systems are taking a renewed look at their capabilities. Many are making substantial changes: adding functionality, upgrading to gain access to a broader, integrated suite of products or evaluating replacement of their existing ERP systems.
ERP is rapidly becoming mainstream, as penetration and adoption in the large enterprise-class (2,500+ employees) market reaches almost 70%, consistent with other AMR Research studies. (See Figure 1, next page.) What is new is the acceptance of ERP technology in the mid- and low-end of the market. Sixteen percent of respondents are evaluating an ERP system for the first time in 2005. Today, small and mid-tier businesses are readily evaluating systems to help them manage their organizations. In fact, companies with fewer than 2,500 employees are two to three times more likely than their larger counterparts to be considering an ERP system in 2005.
In a demand-driven world, the IT strategy of the typical small- to medium-size business is often determined by larger OEM customers. While there still exists an "if it ain't broke, don't fix it" mentality with respect to the older legacy manufacturing infrastructure, many smaller organizations are finding that if they wish to capture emerging business opportunities, collaborate with customers and suppliers and compete in an increasingly global supply chain, they need to add capabilities to their enterprise backbone. They are increasingly expected to share operating information -- quality, production, supply or logistics information -- with their upstream partners.
Yet today, fully one in three manufacturing organizations, and half of smaller companies in our survey, indicated that they are not using, and are unlikely to consider, an ERP system. We expect this to change rapidly. And while these respondents indicated that there are not enough benefits to compel investment in a complex technology tool to support manufacturing operations -- either their business is not of sufficient size to merit the purchase of a major piece of technology or they have existing technology (MRP or similar) that works to their satisfaction -- time, and the increasing demands from supply chain partners, will eventually force most manufacturing organizations to invest. Consider the amount of activity that has taken place over the past 24-36 months: Nearly 40% of survey respondents stated that their company's initial ERP implementation has been completed since 2003. (See Figure 3, next page.)
To maximize the benefit from a new or existing ERP deployment, common goals and objectives need to be aligned across the organization. Selections and decision-making on the ERP system are clearly seen as not just IT-related activities. Many organizations have defined formal Program Management Offices, or project teams, to set clear goals and align IT strategy with business objectives. (See Figure 2, next page.)
Companies with existing ERP systems are also re-thinking their IT strategies to align with this new demand-driven world. Almost half of the respondents indicated that they would be making some substantial changes to their existing ERP systems over the next 12-18 months. (See Figure 4, next page.)
Survey data identified three major trends in regards to why these changes to ERP strategies are taking place:
(1) ERP operating costs managed through consolidation/standardization.
- In an increasingly global environment, efficiency across multiple divisions, departments and countries comes from standardizing business processes. Typically this means fewer, more robust centralized systems. Many organizations surveyed indicated that they are working toward an "end state" with fewer ERP instances, frequently toward a single global instance of ERP, while reducing regional instances of ERP. The result is a consolidation of IT spending, of which ERP is a major portion, around a fewer number of vendors.
- ERP is an evolution. Of those organizations that have operational systems in place, almost two-thirds indicated that they are working toward some future state and are not satisfied with their current ERP landscape. Mergers and acquisitions, new lines of business and legacy systems continue to plague the drive toward standardization.
(2) Optimize the utility of existing ERP systems through upgrades and new functionality. This new functionality is aligned with the new requirements of demand-driven manufacturing -- better access to information and improved collaboration capabilities.
- Twenty-five percent of users indicated that they will be upgrading their systems. The most common reasons include access to new functionality and to improve the access to and accuracy of information. The most frequently cited functional modules being added include manufacturing, CRM, portals and business intelligence.
- Another 14% of users indicated that they will be adding functionality to their existing system. Portals were the most common addition, to gain improved access to enterprise data, as was the need to improve communication and collaboration (See Figure 5, below.)
(3) Replacement of an ERP system is increasingly seen as a viable means of consolidating and standardizing existing processes and gaining access to new functionality at the same time.
- Some 14% of current ERP customers will consider replacing their ERP systems over the next year. The most frequently cited reason is that their current system(s) cannot support business growth; companies have simply outgrown their existing legacy manufacturing applications.
- Those organizations that are replacing their ERP systems are typically doing so to gain one-stop shopping access to a host of new functionality. To evaluate the priorities of these organizations, we compared the functional profile of their existing ERP setup to the profile of functionality that these organizations will be evaluating as part of their new ERP system. These organizations are much more likely to be adding new functionality such as CRM, HCM, BI, portals and supply chain planning and execution (See Figure 6, below.)
The bottom line is that functionality rules and the technology industry has not caught up with these new demands. A small organization does not necessarily have a simpler set of needs. In fact, smaller manufacturing organizations are increasingly turning to technology vendors for more robust solution sets that can be used broadly throughout their enterprises. While users continue to define these new sets of requirements to compete in demand-driven manufacturing, technology vendors have not stepped up to adequately meet their needs. Our survey finds large gaps between importance and satisfaction along the three key metrics of functionality, usability and cost.
"The new ERP" has significantly more functionality -- product development, enterprise quality, health and safety, specification management, human resource management, product/recipe management, CRM, portal technologies and business intelligence -- and improves access to enterprise information and intelligence. It becomes the core data management and collaboration hub to manage effectively in a demand-driven organization.
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David O'Brien is vice president, quantitative research, and Eric Klein is a research analyst at AMR Research Inc. (Boston).