Part 3 of 3: Can Your Small Business Afford ERP?

This is the third of a 3-part series exploring the question many small companies ask themselves: Can we afford ERP?  If you missed either Part 1 or Part 2, Click here  to download all three parts in one report. Note: registration is required.  Or Part 1 or Part 2

 

Reap the rewards

In cost-justifying the investment in ERP it is important to recognize all the potential business benefits. Some of these benefits can be directly measured in cost and time savings (and often time is money). Some may be directly attributed to the implementation of ERP and some may be indirectly linked. While some of the business benefits listed in the sidebar to the left, such as increased revenue and increased value delivered to customers, are more indirectly related, inventory costs and production throughput can be directly tied back to business processes that are streamlined and improved by ERP.  Reductions in administration and operating costs can also be the direct result of improved efficiencies and productivity, but are not as universally and specifically measured and therefore easily missed.

 

Cost savings

Cost savings are often the number one goal of an ERP implementation, particularly for manufacturers, partly because the cost and visibility of inventory reductions can be so visible. But any type of company can reduce indirect and administrative cost for tasks as common as processing customer invoices, matching vendor invoices and making payments on a day-to-day basis, as well as reconciliation, reporting and compliance and month end close. There is a cost associated with each of those manual tasks, whether or not it is adequately measured.

Control and Efficiency

Just as importantly, ERP allows a measure of efficiency and control over your business that is not possible to achieve otherwise. Without ERP, often business is managed through spreadsheets, manual processes and paper, possibly augmented with disparate business applications such as stand-alone accounting software, often based on older closed architectures that limit interoperability.  The number of times pieces of paper pass from desk to desk and hand to hand is a measure of inefficiency that is hard to measure but impossible to ignore. Elimination of paper and automation of those processes are exactly what ERP is intended to do.

Case in Point: Advanced Ventilation Ltd.

Take for example the case of Advanced Ventilation Ltd, a family owned business providing ventilation installation and services. It began its implementation of SAP Business One in 2006. It was a time of growth and the solution allowed the company to expand without taking on a multitude of people to absorb the added work.

According to Jamie McCann, Managing Director, “Perhaps where we have saved the most has been in the printing of stationary [or not] by communicating electronically. We have essentially gone paperless. The engineers receive notice of jobs on their mobile devices. We save on paperwork and the time saved also scales. The solution also allows us to speed up our invoice process. We know in seconds when a milestone or project has been completed. So we have also improved our cash flow.

“The solution also helped facilitate expansion and allowed us to take on new projects. It also afforded us with a way of differentiating ourselves in a service business which requires us to measure the performance of our employees and comprehensively track job progress and customer satisfaction. “

The solution also supported a launch of a completely new business. U-CLOCK is a spin-off company which not only provides services but also manufactures a product, which was entirely new for Advanced Ventilation. The manufactured product is a small device which is used in conjunction with mobile phones to manage time and attendance as well as project updates (including material requests), report health and safety issues and accidents and provide an audit trail of all of the above. The company operates U-CLOCK in an entirely separate instance of its ERP. Its experience with its initial implementation made the deployment in the new company not only a no-brainer, but also a smooth implementation.

Visibility

The net result for Advanced Ventilation, Ltd was not only improved efficiency and productivity, but also a measure of visibility that is equally difficult to achieve from paper, spreadsheets and manual processes. By having all involved operating from a single source of data that is available in real time, you reduce the risk of errors and omissions.

Collaboration and connectivity

But internal efficiencies are just the beginning in terms of business benefits that await companies embarking on ERP implementation today. Remember that fourth metric that is increasing important today – interoperability?

Collaboration and connectivity within a business network was a specific challenge for Barron’s Wholesale Tire, Inc., one of the largest wholesale tire distributors serving the southeast United States. Founded in 1989, it now has nine distribution points, 24-hour online ordering, and over 150 employees and offers an assortment of brands of tires ranging in applications from passenger to medium truck and beyond. For years it had run what might be viewed as a legacy application running on an IBM iSeries (AS/400). The all-in-one nature of the iSeries had always been appealing to Barron’s but the batch orientation and limitation in functionality of its existing application was beginning to hold the company back.

Richard Barron, Vice President and Chief Operating Officer explained, “Towards the end of 2008 and early 2009, demands from our business partner network started coming at us pretty fast. Up until then 60% to 75% of our suppliers were completely domestic, but then that percentage started to shift. Many began to do business with and from overseas. Some were also upgrading their own internal systems and were demanding that we plug in to them in order for the supplier to build better to real demand. Vendors also wanted us to manage their inventory at our site – not really consignment; it was owned by our suppliers. We were really struggling with how to do it. Here we had some tires at our site that we could use as inventory if we could just figure out how to separate it and trigger the appropriate back end response. We just couldn’t make our old system do it.

“We continued to pay the maintenance fees and started to question what we were getting out of it. We were developing and maintaining processes and programs that worked outside of the system and we wound up spending as much, if not more on those as we were spending on our legacy application. And so we decided to evaluate alternatives. When we started the project back in 2008 we honestly tried to avoid the expense of switching, but we also had to look five to ten years out and we were nervous. We determined it would have cost us four to five times as much to stay where we were. “

Ultimately Barron’s wound up replacing its legacy application with SAP Business One. It deals directly with eight major suppliers that happen to be running three different ERP applications. All eight of these suppliers are able to directly see Barron’s demand today.

While this interoperability is critical to its business today, it is the direct cost savings that are generating the Return on Investment (ROI). Richard Barron anticipated a return within two years and he is a bit behind plan, but is already 45% to 50% of the way there and has confidence in achieving the expected ROI.

The largest quantifiable savings have been a reduction in spend on its legacy maintenance agreement. In addition, Barron’s had had to overcome the shortfalls of the old system and that typically meant paying third party programmers to fill those gaps. In replacing its solution, it was able to eliminate about 35% of those add-ons because it now had functionality built in. Other extensions, such as a third party demand planning system, were plugged right in to the new system.

Beyond these IT-related savings were operational cost reductions. “We saved a ton on pre-printed documents. Today we simply create documents with a laser printer. Given we conduct about 1200 to 1500 transactions a day, this represented phenomenal savings.”

A third area of savings was in web integration. About 60% to 70% of these transactions come in online through e-commerce. “We were paying a pretty hefty penny on integration efforts. We saved a fortune because now we can do it ourselves, whereas before we needed to pay DB2 programmers, which were expensive. Now savvy business users can do a lot all on their own with plug in pieces.  For the little remaining work we can get bright young SQL programmers right out of school, which are far less expensive.”

Another significant advantage was in moving from a batch-based system to real time. “We now take an order online and it is synchronized every three minutes. This is a big advantage because we never have to shut down, whereas before we would be down several hours every day for backups. That wasn’t a big deal five years ago, but it is today. We deal with 11,000 customers, ranging from large retailers down to ‘mom and pop’ shops. About 35% to 40% of our orders come in after 5:00 PM. And we buy from seven or eight countries. So now when we are doing backups, our trading partners are not impacted and when we come back online everything is automatically synchronized. “

Summary and Recommendations

If you are a small business operating without a technology-enabled modern ERP solution, ask yourself the following questions:

  • Are you focused entirely on running your business? Or are you focusing more on pulling together inconsistent and incomplete information?
  • Do the various departments in your organization collaborate effectively with data driven decision or do they spend more time exchanging reports or waiting for data?
  • Are you able to support the level of interoperability your business networks are demanding?
  • Are you able to close your month in three to four days? Can you easily and effectively produce all financial and compliance related reporting?
  • Do you have the technology platform that will support change that you can and cannot anticipate today?

If you answered, “no” to any of the questions above, then instead of asking if you can afford ERP, the better question to ask is, “Can you afford to operate without it?” The cost of fully integrated ERP solutions have come down, while at the same time both ease of use as well as feature functionality have improved significantly. A well-executed ERP implementation can enable change and provide on-going savings that can help you sustain and grow your business. Not only will you be operating at a competitive disadvantage but you can severely handicap growth and profitability.

 

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