A discussion of modern manufacturing trends, the limits of legacy ERP systems, and what to look at when you consider cloud-based ERP
The manufacturing floor is undergoing fundamental changes, and they’re coming at an increasingly fast pace. For anyone who has been running an on-premises ERP system, it’s likely that you’re beginning to understand the reasons why legacy ERP is poorly suited to the demands you face today.
(By the way, if you’re trying to deal with the demands of modern manufacturing – and the modern customer – without any ERP system, you have our sympathies and you should still read this post.)
Customers want personalized manufacturing…
The traditional product-centric manufacturing model, where standardization is the norm and the goal is to win on cost or other traditional metrics, is quickly fading away. Rising in its place is a business model that puts the customer, and serving each customer’s unique needs, at the center of everything.
Whether you call it the servitization of manufacturing, or personalized manufacturing, or some other term, it’s clear this is the present and future of manufacturing. This change has been as drastic as it has been necessary. Whether they’re buying from Amazon or from you, people now expect to be treated in the same, personalized manner. Mass customization is replacing mass production.
…they know the enabling technology is available to you…
Industry 4.0 has gone from buzzword to reality in what seems like a relatively short amount of time. And even though the technologies that support personalized manufacturing continue to evolve, they’ve reached a level of maturity and proven performance that should make their adoption palatable to even the most risk-averse manufacturer.
That’s why the markers of Industry 4.0 – automation, the flow of data across processes, cloud computing, advanced data analytics, the Internet of Things (IoT), artificial intelligence (AI), machine learning (ML), 3D printing and other additive manufacturing techniques, cloud ERP – are showing up in more manufacturing environments every day. According to a 2017 IDC study, manufacturers were expected to spend more than any other single industry on IoT in 2018: $189 billion.
…and they won’t hesitate to go elsewhere to get what they want.
Today, anyone can do business with any manufacturer. And because so many manufacturers are adopting the technologies, processes and practices that support personalized manufacturing, it’s entirely likely that if you can’t deliver what a customer wants, exactly as the customer wants it, they can find someone else to fulfill that request. Yes, the quality of what you produce still matters a great deal, but speed, the ability to customize, and your overall level of service are also paramount.
Legacy on-premises ERP systems were designed for a simpler, slower time.
The first ERP systems were introduced in the early 1990s, evolving out of MRP systems that were developed over the prior two decades. These systems were used almost exclusively by very large corporations, which had the mainframe computing infrastructure to run them, the IT staff to maintain them, and the money to afford it all. For perspective, the Internet did not exist commercially until 1993, and the first iPhone wasn’t sold until 2007. ERP systems were built for a computing environment that, by today’s standards, was rudimentary at best.
It’s no wonder, then, that legacy ERP systems, many created during the era of dial-up Internet access, cannot keep up with the demands of today’s ultra-fast, ultra-connected world.
The early requirements for ERP software were pretty straightforward.
Dealing with the constraints of the computer systems they were running on, early instances of ERP had to keep things simple. Broadening out from the MRP software that came first, ERP software took care of a fairly narrow range of needs: resource planning, inventory management, visibility within a closed manufacturing environment.
Modest as these initial capabilities were, they were still a quantum leap from spreadsheets and other manual methods used to manage ERP needs. And yet, it didn’t take very long before people had exhausted the limits of early ERP systems, and began asking vendors for something more comprehensive.
When organizations asked for more capability from ERP systems, they also got more complexity.
ERP software users during the late 1980s and 1990s generally had two paths to follow if they wanted to add capabilities to their existing systems. Sometimes, as it still happens today with almost any legacy software, they would approach their existing vendor, who would develop the new capability – HR, finance, and order management, all of which intersect with ERP in meaningful ways, were popular additions – and bolt it onto the ERP system. Alternatively, users would approach a new vendor and then try to integrate the two solutions; add PeopleSoft’s Human Resource Management Systems to J.D. Edwards ERP, for example.
Unfortunately, neither approach could consistently deliver what manufacturing organizations really wanted, and still want: a comprehensive, seamlessly integrated suite of capabilities to manage every aspect of ERP. Even after the ERP software industry underwent major consolidation in the early 2000s, bringing wide-ranging capabilities under several brands (Oracle, Microsoft, and Infor absorbed many firms, including notable names like Seibel, Great Plains, Baan, JD Edwards, Peoplesoft, and Mapics), that goal went largely unrealized.
Today, faced with unanticipated circumstances, aging legacy ERP systems are plagued by several inherent limitations.
In summary, legacy on-premises ERP systems are built for a manufacturing environment that barely exists today. Moreover, regardless of the industry, these relics of the mainframe era exhibit four traits that make them a drag on your competitiveness and profitability.
- Operating & maintenance costs – it should come as no surprise that the older and more complex a software system, the more it costs to operate and maintain. If your ERP is a true legacy system (a minimum of 8-10 years old), the TCO could be as much as five times more than a cloud-based ERP solution.
- Outdated or limited functionality – some older legacy ERP systems lack even simple reporting capabilities. They certainly don’t have the speed, user interface, or flexibility to support modern manufacturing models.
- Your data is in silos, if you have it at all – today, you have data coming at you from multiple angles: IoT sensors, CRM, inventory, order management, partners, and more. Legacy ERP is not built to unify all that information, which is a critical requirement for modern manufacturing.
- Hardware costs – on-premises software requires on-premises servers. They’re expensive to buy, expensive to maintain, and expensive to replace. So is the IT staff you need to manage them.
Cloud ERP is the right choice for you. Unless it isn’t.
For almost any small or mid-sized manufacturer, ERP makes tremendous sense, but cloud-based ERP makes the most sense. Still, you want to be sure, because cloud vs. on-premises is a strategic business decision. Here are four binary, foundational questions, the answers to which will help you make the cloud vs. on-premises choice:
- Do you want to deal with ERP implementation as a capital expense, or an operational one? Cloud-based ERP is SaaS. You factor it into your operating budget and pay as you go. Initial training and customization aside, it’s a predictable cost, a real virtue for most manufacturers. An on-premise ERP implementation requires, at minimum, a software license, servers to run it, an IT staff to manage and maintain it, and training to teach them how. It’s a significant investment. Do you have the budget?
- Do you put more value on security or mobility? Cloud ERP is built for mobility. With a password and a smartphone, your people can access the system, and live data, from pretty much anywhere in the world. And even within your walls, mobile offers a benefit: manufacturing staff aren’t always comfortable with computers, but they know how to use an app on a smartphone. That comfort level enhances adoption. On the other hand, your live data is, theoretically, available to anyone with the technical savvy to hack your cloud provider’s network. You are depending on their security measures to keep your data safe. Of course, those security measures have to be remarkably robust; one successful hack could ruin a cloud services provider. And, as we’ve read time and again, keeping data inhouse is no guarantee of security from hackers.
Ultimately, security and mobility are both critical factors when you’re modernizing your ERP capabilities. Only you and your organization can decide if you consider one more important than the other.
- Do you have the resources to manage on-premises ERP, and the ability to keep all your data secure? Like any other in-house software system, you’ll need the budget, the IT staff, and the technology infrastructure to keep your ERP up and running. You’ll also need the expertise to customize your system to meet changing business needs, unless you’re willing to pay your vendor or a third party. Bottom line: on-premises is more expensive than cloud ERP. According to one estimate, the TCO over 10 years for “modern,” out-of-the-box on-premises ERP could be five times more than the TCO for cloud-based ERP. And with any ERP system, your data security needs are going to change. As you amass more (and more sensitive) information in your system, it becomes more valuable to you. But it also becomes a more desirable target for hackers. Do you have the expertise and money to erect more effective defenses?
- How much of a hurry are you in? This one’s not really binary, but it’s important to answer. We assume you’re in a hurry, because the need for a modern ERP that’s up to the demands of today’s manufacturing is pretty urgent. If you feel that urgency, and want to be up and running as quickly as possible, cloud is the way to go. An on-premises implementation will take months, at least. If it’s complex enough (or if you don’t plan well for it), months can easily extend into a year or more. And as your implementation project trudges on, you can be assured of two things: you’ll burn through even more money than expected, and you will continue to fall further behind your more agile competitors.
If you go with cloud-based ERP, keep in mind that some solutions are more “cloud-based” than others.
Some vendors have responded to the growing call for cloud-based ERP by adapting their non-cloud solution to the cloud environment. Often referred to as “cloud washing,” this approach almost always yields a compromised solution. Why? Because applications built for the cloud are built to support mobility; provide ongoing, seamless upgrades; scale on request; and otherwise take advantage of the cloud environment in ways that migrated solutions can’t.
In short, if you choose cloud-based, make sure it’s also cloud-native.
If you want a great primer on understanding cloud ERP, click here to download “Cloud ERP for Dummies.”