Many (Mostly) Happy Returns

Dec. 21, 2004
Payoffs vary according to the type of software application.

Why is it that some enterprise applications software takes what seems like forever to install and then often yields uncertain results, while other systems can be up and delivering measurable value in a few months?

Enterprise-resource-planning (ERP) systems are notoriously slow to install and get up and running. In fact, some information-technology analysts question whether these sweeping "backbone" systems provide any measurable return on investment at all.

"No one has been able to demonstrate any payback from ERP," says Bruce Richardson, vice president at AMR Research Inc. in Boston, a research firm that specializes in the manufacturing-software arena. "The problem is that a lot of ERP purchases are premised on the need to just stay in business." In other words, if your competitors got it, you need it, or if your systems cant handle the Year 2000, you need new ones.

In many cases, the gains resulting from a new ERP system often can be attributed to changes in the work processes of those who use the new software. "Most of the time, the technology is a waste of money," says Buzz Adams, president of Peak Value Consulting Inc. in San Francisco and formerly senior vice president for process improvement at McKesson Corp. "If you simplify the processes, youll be fine. Attack the problem, not the symptom."

But with some types of applications, it is possible to quickly recover the investment in the form of measurable gains derived from the new systems. Take advanced-planning-and-scheduling (APS) software. These packages not only can be installed in a few months, but they start returning immediate benefits that can be measured.

Fairfield Manufacturing Co. Inc. began using a new constraint-based scheduling system from Thru-Put Technologies, San Jose, last February and got almost immediate results. The $200 million Lafayette, Ind.-based maker of gears and gearboxes for a variety of industrial applications saw inventory costs fall 24% in two months, while throughput climbed 10% and the company achieved a record quarter as measured in goods shipped.

Fairfield got another 10% gain in output in the second quarter, half of it resulting from new equipment aimed at relieving materials congestion in the plant. The firm was able to use Thru-Puts Resonance system to simulate the results of installing three new pieces of manufacturing equipment to resolve parts and component bottlenecks. "With the software we were able to simulate the results of adding new equipment," says John Coward, project manager. "It enabled us to get the benefit of the new equipment without creating a problem somewhere else. Were getting better flow of materials with less expediting."

Another Thru-Put customer, the Heavy Vehicle Systems unit of Meritor Automotive Inc. (formerly Rockwell Automotive), got the new scheduling systems up and running in eight months at seven plants and achieved impressive benefits. The $1.9 billion supplier of drivetrain components and systems for heavy-duty and medium-duty commercial trucks, trailers, and other large vehicles has seen average throughput at these plants jump 42%. Meanwhile, work in process has fallen 55% and cycle times have plunged 61%. In addition, as the Resonance system has smoothed out the flow of materials through the plants, expediting costs have fallen by 75%. Finally, scrap and rework costs have fallen 45%. These improvements have contributed to a 9% gain in Meritors net income.

Thru-Put claims that its system can be installed in 120 days in a single plant. At Dixie Iron Works in Alice, Tex., where the scheduling system was installed in less than three months, the company was able to double both inventory turns and on-time delivery.

Those figures arent surprising. AMR Research reports that APS systems generally offer some of the fastest paybacks among all enterprise software applications. Companies that have installed APS systems -- typically manufacturing firms -- often recover anywhere from 30% to 400% returns on their investment, AMR reports. "They allow you to do things you couldnt do before," says AMRs Richardson. "You can have visibility into supply-chain issues, you can decide whether you can accept a particular order, when it can be shipped, and whether you have the parts to make it."

Executives at manufacturing firms that have purchased and installed APS systems point out that the ability to optimize production so that a company can expand its throughput and take additional orders is in itself an immediate payoff.

"We will have a new capability of being able to react to broken machinery or sudden new orders and to come up with the best schedule for the production floor," says John Burroughs, CEO at Cascade Designs, a manufacturer of specialty sporting-goods equipment that is installing new supply-chain and optimization software from SynQuest Inc., Norcross, Ga. For the Seattle-based manufacturer, which has some 500 different products and annual sales of $50 million, "Keeping track of production and orders is a big job," Burroughs says. "We believe this new system will do a much more sophisticated job of optimizing production."

"APS systems promise greater return on investment than ERP systems because they can increase revenues by improving plant throughput and slashing inventory costs," adds AMR analyst John Bermudez.

Dont think the ERP vendors havent noticed that APS is stealing some of their fire. PeopleSoft Inc., SAP AG, and Baan Co. NV all have acted to add APS systems, either by creating their own, as in the case of SAP, or through acquisitions, with Baan grabbing Berclain and PeopleSoft gobbling up Red Pepper Software.

Indeed, many consultants believe that although ERP systems may serve as an information backbone for an organization, other "niche" or bolt-on applications may provide greater payoff to the business. "We believe that while many companies are getting a payoff in terms of productivity with their ERP systems, thats only the tip of the iceberg when compared to advanced-planning-and-scheduling, customer-care, and support-center applications," says Michael Travis, partner in charge of the enterprise-software practice in the U.S. for Arthur Andersen LLP. For instance, the payback for an APS system can be double or quadruple that of an ERP system, he says.

In fact, there are a host of different kinds of software packages that, more often than not, pay for themselves a lot quicker than the average ERP system. These include scheduling software, sales-force-management packages, and expense-report-management systems, to name only a few.

Contrary to what one might expect, systems that help manufacturers cut costs tend to provide a bigger bang per dollar invested in software than those that boost sales or increase output, according to at least one consulting firm. "The reason is that every dollar of cost taken out of the equation goes straight to the bottom line," says Barry Rosenbaum, managing director of Cambridge Technology Capital, an investment unit of Cambridge Technology Partners (CPT). An IT consulting and systems integration firm based in Cambridge, Mass., CTP specializes in fast implementations of software at a fixed price, with the emphasis on return on investment for clients.

Cutting costs with the help of software isnt new, but some of the latest applications and their capabilities are. At Rhone-Poulenc Rorer Inc., for instance, a new package called Xpense Management Solution (XMS) from Portable Software Corp. is being installed to help the company reduce both corporate travel costs and the associated expense of processing travel requisitions and vouchers. For most large companies, travel and travel-expense processing is an expense item running into millions of dollars annually.

"Business travel is our third largest controllable expense," says Gary DiVincenzo, senior manager of corporate transportation at Rhone-Poulenc Rorer. "We think we can save 5% with XMS, but even if we only save a fraction of that, its a significant amount of money." Adds John McCarry, manager of accounts payable, "We will receive two significant benefits from XMS, one from process efficiencies and the other the ability to understand where, how, and why we are spending travel dollars. Through XMS we have a great opportunity to make a difference to the bottom line."

But what about the flip side? Whenever a business is involved in an ERP project requiring sweeping business-process changes, theres always the possibility of a negative return. Thats what happened recently at Snap-On Tools Corp., Kenosha, Wis., which blamed reduced earnings on troubles associated with its ongoing installation of new ERP software from Baan.

Similarly, FoxMeyer Drug Co. claimed it was driven into bankruptcy court as a result of a failed implementation of SAPs R/3 system by systems integrator Andersen Consulting. Fallout from the latter fiasco continues as the bankruptcy trustee appointed to oversee FoxMeyers case recently filed a $500 million lawsuit against Andersen, claiming the firms botched implementation of the SAP software contributed to FoxMeyers liquidation in 1996.

Of course, for the most part, companies installing new ERP systems do in fact derive benefits, but the results can be hard to measure. The ability to process a customer order faster in many cases can be measured by a metric such as cost per order processed.

For Northern Telecom Ltd. (Nortel), the benefits the company has obtained from a new ERP system for order processing and materials management enable it to pay less for materials while leveraging customer information for a variety of uses. The US$15.5 billion Canadian manufacturer of telecommunications equipment installed Baans ERP system to help the company revamp its supply chain. "We changed from a build-it-all-and-put-it-on-the-shelf approach to one that says, be sure somebody has bought it before you build it," explains John Smits, director of data standardization in the IS group at Nortels Brampton, Ont., headquarters.

Nortel is using the Baan ERP system to integrate its huge base of suppliers. "There are a lot of benefits to be had from integrating these suppliers," Smits says. For Nortel, the supply chain encompasses most of what the company does. "Our supply chain is everything we do from the time we take an order to the time we bill and receive the cash for that order," adds Muriel Prentice, assistant vice president for global process improvement.

The Baan software is used to handle order fulfillment and to manage materials and supplies, with all Nortel factories either using Baan or moving to it. The company also is considering implementing the Berclain advanced-planning-and-scheduling component. In materials procurement alone, the new software has enabled the company to achieve significant benefits, Smits says. "There is a tremendous benefit for us in contract negotiations, because we now know how much business we do," he says. Similarly, with its customers, Nortel now has a wealth of information to draw from. "If a customer asked how much business did you do with us last year, we really couldnt answer. The information is where the benefits are."

Finally, management expectations are important when assessing the payoff from various kinds of business applications software. A Compass America Inc. global survey of CEO opinions on information technology, conducted by the London School of Economics, found that just 33% of investment in IT resulted in a measured profit contribution. In the manufacturing sector, just 28% of investment in IT resulted in some measurable contribution to the bottom line.

"Whether enterprise-resource-planning systems are worth the expense remains to be seen," the report states. As one CEO wrote, "Simply to say Can you afford not to spend when you look at your competitors? will quite frankly not be enough in the future."

If theres a lesson here, its to make sure that you understand before implementation begins exactly what kind of payoff, if any, youre likely to get from a new enterprise application.

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