Need to Cut Costs? Midrange Shops Should Do ERP Well

September 22, 2008 Timothy Prickett Morgan

In a toughening economic environment, which many companies and individuals are facing these days in the Western economies, there are a lot of knee-jerk reactions to the stress. One of them is to look around to try to cut personnel, to streamline processes to try to cut costs for manufacturing or distribution of a product, or to argue harder for discounts from suppliers. While IT projects often are the first things to get cut, maybe the smart thing to do is to invest in a better ERP system. Or be grateful for the good one you might be lucky or smart enough to have installed already.

Aberdeen Group, the IT consultancy owned by IT market researcher and direct marketeer Harte-Hanks, has just put the finishing touches on its 2008 ERP in the Mid-Market report, a study that was based on feedback about ERP systems and strategies from over 500 midrange shops. Aberdeen surveyed these midrange shops between April and July using online surveys, and then supplemented the data culled from the survey with in-depth interviews. The resulting report was financed in part by Infor, Sage, and Plexus Systems, all of which peddle ERP systems aimed at midrange shops. Infor is the only one that sells ERP suites for the System i platform. (You can get a copy of the report at this link.)

The report breaks down midrange shops into three groups–best in class the top 20 percent by score, the middle 50 percent, and the 30 percent who are laggards. And they all agree that in 2008, the need to reduce costs was a big driver affecting ERP strategies this year. Some 34 percent of best breed companies cited this reason, while 41 percent of the middle and laggards (added together as Others) cited this factor as important. The best breed companies cited the need to be easier to do business with as an important pressure on ERP (compared to 30 percent for others), and needing to improve customer response time and manage growth are also big factors. Globalization issues for multinational operations and partnerships and interoperability among multiple manufacturing operations were cited less frequently as important factors affecting ERP setups. A decade ago, this was a big reason why companies started going whole hog for ERP systems rather than a hodge-podge of financial and MRP systems cobbled together to give ERP-like functionality. Amazingly, according to the Aberdeen survey, 13 percent of companies surveyed do not have a third-party ERP system, but rather use homegrown software or legacy applications. (Oh, the horror!) As if a bunch of programmers working hard over 15 years could not do what software houses do. (I happen to think that there is a lot more homegrown code out there than Aberdeen is able to find–particularly RPG applications running on AS/400, iSeries, and System i boxes.)

Here’s the interesting bit you can glean from the study. Everyone should aspire to be a best of breed company, wringing the most out of ERP investments. Among the best midrange shops as ranked by ERP sophistication by Aberdeen, the top 20 percent of shops had an aggregate of 22 percent reduction in inventory levels, a 19 percent reduction in operational costs, and a 22 percent reduction in administration costs. (Over what term, Aberdeen does not say, but this is surely not over the course of one year.) Also significantly, these best-in-class midrange shops running ERP software had an average of a 95 percent order completion rate–and on time–and 95 percent accuracy on their inventories. While the middle 50 percent of those surveyed had only slightly lower stats on order completion and inventory accuracy, they had a rate of cost cutting that was half that of the best companies. And the laggard 30 percent at the bottom barely cut costs at all. Clearly, doing ERP well seems to cut costs, at least based on Aberdeen’s methodology for calculating costs.

Another interesting part of the study shows the correlation between company size, the number of ERP packages installed, and the number of locations using the ERP software. Across all ERP companies surveyed, the average midrange shop supports more than four locations; 63 percent of companies have only one ERP package, but 19 percent have two ERP packages, and the remaining 18 percent have more than two ERP packages installed. For companies with under $50 million in sales, the average comes to 1.3 ERP packages and 1.9 locations. Moving up to companies with between $50 million and $100 million in sales, the average number of ERP setups across the company is 1.5 and the number of locations jumps to 2.6. Moving up to companies with between $100 million and $250 million in annual sales, the averages jump to 1.8 and 4.2, respectively. The averages grow a little in the $250 million to $500 million tier, and for my money, that is really the end of the midrange. For companies with sales between $500 million and $1 billion, the average company in this tier had 2.5 ERP packages and supports an average of 6.6 locations. This seems more like a small enterprise than a big midrange shop to me, and if you looked at the systems installed, you would see that.

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