Hard Choices For Software Spending

Oct. 8, 2010
The quest for cost reduction, profitability and customer fulfillment are driving manufacturers' enterprise software purchases.

Earlier this year, Lopez Foods Inc. made a six-figure investment in Infor PLM Optiva software. The Oklahoma City, Okla.-based meat processing company, whose beef, pork and chicken products are sold in retail stores and supplied to restaurants such as McDonald's, purchased the software with the goal of formalizing its product development process and gaining "tighter control" of product specifications and customer requirements, explains Aaron Beasecker, vice president of information technology.

"As we grow and expand more and more into the retail market, it was becoming obvious that one of the things we didn't do well as an organization was manage new product developments and rollouts," Beasecker says.

When deciding whether or not to go forward with an IT investment, Lopez Foods considers the potential "value of information" provided by the software. In other words, will the information improve measures such as food safety ("that's always top of mind for us," says Beasecker), quality and productivity?

In the case of the Infor Optiva PLM product, Lopez Foods concluded that the software would have a positive impact on such measures by capturing and managing the information associated with the product development process. In terms of productivity, for example, codifying the processes from previous product formulations should save time for R&D personnel, who no longer have to "recreate the wheel that [they] had to create before," according to Beasecker.

"What I'm hoping is that as much as anything it will allow us to get more work done with the people that we currently have, because those people are swamped," Beasecker says. "So I'm hoping that it not only improves their quality of life a little bit, but that it also gives us the ability to expand as an organization and keep the same number of resources in place."

In the midst of a fragile economic recovery, enterprise software spending is on the rise. Gartner Inc., a Stamford, Conn.-based IT research and advisory firm, forecasts that companies in the U.S. manufacturing/natural resources sector will spend $17.4 billion on software this year, and expects that number to grow by 7.3% in 2011. From 2009 through 2014, Gartner predicts that software spending in the U.S. manufacturing/natural resources sector will increase at an annual rate of 6.2%.

Total worldwide IT spending in the manufacturing/natural resources sector is on pace to grow by 2.6% this year, according to the research firm.

A survey conducted earlier in the year by the Menlo Park, Calif.-based IT staffing firm Robert Half Technology found that more than one-third of chief information officers said they planned to go forward with software and hardware upgrades that had been deferred due to the recession.

That isn't surprising to Mike Meikle, a Richmond, Va.-based IT consultant. With many manufacturers deferring IT investments during the recession, companies now are "reaching the end of life on a lot of these solutions."

Another reason for the uptick in software spending, Meikle asserts, is that more manufacturers now view IT as a tool that can be leveraged to help meet their business objectives.

"Before the recession, IT was always looked upon as a place that was just a cost, and it was never really equated with a way to drive productivity and profitability," Meikle says. In the past, CIOs and other IT executives weren't even invited to the proverbial "adults table," he adds. "Now the new CIO role that seems to be emerging -- at least in more innovative companies -- is the CIO and the CFO work with the CEO to use technology to drive their competitiveness and their profitability."

No Middle Ground in Spending Philosophies

While overall enterprise software spending is rebounding after two years of declines, Gartner analyst John Lovelock notes that the research firm has observed a "polarization" taking place in the market.

John Lovelock:
Larger companies are viewing IT either as a way to make money or as an expense -- with not much middle ground in their spending philosophies."Organizations are really falling into one of two camps, with the middle ground being eroded: Either you're viewing IT as a way of making money, saving money or increasing your profitability; or you're viewing it as an expense to be trimmed," Lovelock says. "We're seeing it globally -- running across most industries -- and it's definitely occurring in manufacturing in North America."

Perhaps counter-intuitively, larger companies have been the most polarized in their views, Lovelock adds, with one camp "actually increasing their spend in a down revenue [period]" and the other "absolutely retracting their IT spending in order to save money."

"As we get into the small and mid-sized manufacturers, we don't see that level of polarization occurring," Lovelock says. "We still see a good spread of revenue-to-IT spend ratios, and increases in IT budgets."

Ebara International Corp., a Sparks, Nev.-based manufacturer of pumps and expanders for the liquefied natural gas industry, supports Gartner's theory. Ebara, which has about 250 employees, has maintained its IT budget as a percentage of sales throughout the recession, according to Frank Lowery, information systems director for the company. In 2007, Ebara made a multimillion-dollar investment in the IFS Applications ERP system, and is upgrading to the newest version of the software this fall.

Lowery notes that cost reduction and collaboration with suppliers are among the key objectives for the company's recent software investments, particularly when it comes to software development. For example, Ebara's IT staff recently developed an online portal that gives its suppliers access to project drawings, purchase orders and other key information, which is pulled from Ebara's ERP system. The portal is helping the engineer-to-order company achieve both of the aforementioned objectives.

"Cost can come in many forms," Lowery says. "It could be related to the quality of our products, of the parts that come in the door, because we're on very tight schedules to hit deadlines for testing our equipment that we've built. So, for example, if a supplier gets a wrong drawing and manufactures to a wrong [revision] level for a part, that can come back to us and lead to increased production times, which in the end can cause us to miss a test date, which then leads to liquidated damages.

"By giving the suppliers quicker access to accurate data right out of IFS, it helps eliminate errors in what they produce for us."

The Age of a New Normal'

In an effort to get a better handle on the post-recession priorities and strategies of the manufacturing sector, IBM and Infor Global Solutions recently sponsored a global study that asked more than 700 small and medium-size discrete manufacturers about their top business concerns and initiatives and about their thoughts on the role of IT in their organizations.

The study, conducted by the Framingham, Mass.-based research and advisory firm IDC Manufacturing Insights, concluded that manufacturers are "struggling with increasing complexity, global competition, rapidly changing business environments and volatile raw materials prices" -- all while facing pressure to reduce costs, improve productivity and deliver greater customer satisfaction.

Andrew Kinder, Infor's director of solution marketing, asserts that the survey results indicate that "we're in the age of a new normal."

"The preconceptions and ideas that we had two or three years ago about what was selling in IT are different now, and I think there's a whole range of factors that influence that," Kinder says. "Some of it's technology, some of it's the economy, some of it's fear."

The latter two factors may be contributing to what Kinder describes as a "very conservative business strategy" guiding manufacturers' decisions at the moment. According to the IDC Manufacturing Insights survey, the top three business initiatives that manufacturers expect to pursue over the next two years are improving customer fulfillment; improving bid and project profitability; and cutting operational costs.

In the survey, the top three non-ERP software applications that manufacturers said were most supportive of their "operational excellence initiatives" were business intelligence and analytics; manufacturing execution systems; and financial budgeting and forecasting applications.

"As we saw through the survey results, discrete manufacturers are [striving] to improve demand planning and forecasting and are intensely focused on optimizing manufacturing operations and cutting costs over the next few years," IDC Manufacturing Insights noted in a white paper based on the survey results. "In addition, discrete manufacturers are pressured to achieve profitability targets, and these tools will help more accurately predict revenues and costs."

Because of the increasingly "global nature of the way products are being developed and delivered," the quest for more collaboration between manufacturers and their external partners has been one of the driving forces for a resurgence in PLM software spending, according to Bill Carrelli, vice president of strategic marketing for Plano, Texas-based Siemens Product Lifecycle Management Software Inc.

"Companies are relying more on partners and outsourcing more of their product development," Carrelli explains. "So the idea of collaborating with other partners around new product design is a very key aspect."

Carrelli notes that the desire for better internal collaboration also is driving PLM software sales, as manufacturers seek to establish "a better tie between engineering and manufacturing" and "build a bridge between what had been oftentimes two disparate organizations."

Among other factors contributing to an increased interest in PLM software, Carrelli says manufacturers are seeking tools that will help them use more of their existing parts in new product development, comply with government regulations and react faster to changes in the marketplace.

"Companies are not necessarily reinventing themselves, but they're enhancing their processes and business performance and really trying to become a leaner, more efficient type of organization that can respond more quickly and deal with more of an outsourced or global model in ways that they could not do before," Carrelli says.

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About the Author

Josh Cable | Former Senior Editor

Former Senior Editor Josh Cable covered innovation issues -- including trends and best practices in R&D, process improvement and product development. He also reported on the best practices of the most successful companies and executives in the world of transportation manufacturing, which encompasses the aerospace, automotive, rail and shipbuilding sectors. 

Josh also led the IndustryWeek Manufacturing Hall of Fame, IW’s annual tribute to the most influential executives and thought leaders in U.S. manufacturing history.

Before joining IndustryWeek, Josh was the editor-in-chief of Penton Media’s Government Product News and Government Procurement. He also was an award-winning beat reporter for several small newspapers in Northeast Ohio.

Josh received his BFA in creative writing from Bowling Green University, and continued his professional development through course-work at Ohio University and Cuyahoga Community College.

A lifelong resident of the Buckeye State, Josh currently lives in the Tremont neighborhood of Cleveland. When the weather cooperates, you’ll find him riding his bike to work, exercising his green thumb in the backyard or playing ultimate Frisbee.  

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