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1. ERP in Industrial Machinery and Components November 2007
ERP in Industrial Machinery and Components Manufacturing Page 2 Executive Summary Industrial Machinery and Components (IM&C) manufacturers face some Research Benchmark unique challenges in dealing with complex products and manufacturing Aberdeen’s Research processes. This report is a roadmap for IM&C manufacturers that desire to Benchmarks provide an in- achieve growth while balancing the need to improve customer response depth and comprehensive look times through Best-in-Class use of Enterprise Resource Planning (ERP). into process, procedure, methodologies, and technologies with best practice Best-in-Class Performance identification and actionable Based on input from over 420 IM&C manufacturers, Aberdeen used four recommendations key performance criteria to distinguish Best-in-Class companies. These companies achieved significantly better results in the following metrics: • 22% reduction in levels of inventory and 96% inventory accuracy • 96% manufacturing schedule compliance • 96% on-time and complete shipments Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics: • Best-in-Class are 177% more likely to make a rigorous commitment to Lean methodologies • Top performers implement 26% more functionality and are 68% more likely to deploy enterprise or desktop project management applications • 73% of Best-in-Class have standardized enterprise wide processes to support the bid to cash cycle As a result Best-in-Class companies produce more than three-times the reductions in cycle times as Laggards for bid preparation, manufacturing, and order to delivery. Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies must: "We knew it was time for a change. We were running out • Establish specific goals for obtaining business benefit from ERP of people with knowledge of including reductions in inventory levels as well as cycle times the legacy systems." throughout the bid to delivery process - measure progress ~ Manufacturing Project Manager, equipment division of • Implement selected Lean methodologies large multi-national • Provide visibility to enterprise data through use of configurable manufacturer dashboards and portals © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 3 Table of Contents Executive Summary....................................................................................................... 2 Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2 Chapter One: Benchmarking the Best-in-Class.................................................... 4 Business Context ..................................................................................................... 4 The Maturity Class Framework............................................................................ 5 The Best-in-Class PACE Model ............................................................................ 6 Best-in-Class Strategies........................................................................................... 7 Chapter Two: Benchmarking Requirements for Success .................................... 9 Competitive Assessment......................................................................................10 Capabilities and Enablers......................................................................................11 Performance Management .........................................................................14 Chapter Three: Required Actions .........................................................................16 Laggard Steps to Success......................................................................................16 Industry Average Steps to Success ....................................................................16 Best-in-Class Steps to Success ............................................................................17 Appendix A: Research Methodology.....................................................................19 Appendix B: Related Aberdeen Research............................................................21 Figures Figure 1: Market Pressures Driving ERP Strategies............................................... 4 Figure 2: Complexity of Manufacturing.................................................................... 5 Figure 3: Manufacturing Modes .................................................................................. 5 Figure 4: The Strategic Actions of Best-in-Class ................................................... 7 Figure 5: Selective Use of Lean Methodologies ..................................................... 8 Tables Table 1: Companies with Top Performance Earn Best-in-Class Status ........... 6 Table 2: The Best-in-Class PACE Framework ....................................................... 6 Table 3: The Competitive Framework...................................................................10 Table 4: ERP Modules and Extensions - Adoption Rates ..................................13 Table 5: The PACE Framework Key ......................................................................20 Table 6: The Competitive Framework Key ..........................................................20 Table 7: The Relationship Between PACE and the Competitive Framework .........................................................................................................................................20 © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 4 Chapter One: Benchmarking the Best-in-Class Business Context Fast Facts Like most manufacturers today, Industrial Machinery and Components (IM&C) manufacturers must balance growth expectations against customer √ Best-in-Class are 117% more demands for improved service and responsiveness. In comparing the likely to make a rigorous business drivers impacting ERP strategies of more than 420 IM&C commitment to Lean manufacturers against the aggregated pressures felt by 1,700 companies methodologies surveyed in Aberdeen's July 2007 ERP in Manufacturing Benchmark, we find √ Best-in-Class produce 733% insignificant differences. Cost sensitivity and interoperability across more reductions in inventory distributed manufacturing locations round out the top issues IM&C and all levels than Laggards manufacturers face (Figure 1). √ Best-in-Class achieve 96% inventory accuracy, Figure 1: Market Pressures Driving ERP Strategies manufacturing schedule compliance, and complete and on-time shipments Must improve customer service 49% and response time 43% 47% Our own growth expectations 46% 41% Must reduce costs 38% IM&C Manufacturers Interoperability issues across 23% All Manufacturers multiple manufacturing locations 24% 0% 10% 20% 30% 40% 50% 60% Source: Aberdeen Group, November 2007 Despite these similarities, IM&C manufacturers face some unique challenges, potentially dealing with: • Complexity in both products and manufacturing processes • Customer specific products and orders producing some flavor of “to-order” manufacturing, including engineer-to-order, configure-to- order, assemble-to-order or make-to-order • Long service life cycles of products requiring after-market service • Bidding processes and project oriented manufacturing This level of complexity increases along the spectrum of low value, high volume manufacturing to high value, low volume products (Figure 2). © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 5 Figure 2: Complexity of Manufacturing “Neither our vendors, who are too small, nor our customers, Low Value High who do not plan ahead, use Lean concepts, so we cannot forecast demand except Assemble-to- Configure-to- Engineer-to- through history, which is so Repetitive Make-to-Stock Order Order Order non-repeatable that it does not lean to Lean. We build large Make-to-Order machinery for the corrugated box industry. Lean does not work for us because we build so few a month that inventory High Volume Low is automatically lean since parts Source: Aberdeen Group, November 2007 are bought for that specific job." In benchmarking IM&C manufacturers, survey respondents represented a ~ ERP Data Base cross section of all "to-order" types of manufacturing, ranging from the Administrator, Manufacturer of relative simplicity of an assemble-to-order environment to the more Machinery for the Corrugated complex engineer-to-order world (Figure 3). Box Industry Figure 3: Manufacturing Modes 30% 25% 25% 23% 20% 20% 18% 15% 10% 10% 5% 0% Assemble-to- Make-to- Configure-to- Engineer-to- True Hybrid Order Order Order Order Source: Aberdeen Group, November 2007 The Maturity Class Framework Aberdeen used the four key performance criteria identified in Table 1 to distinguish the Best-in-Class from Industry Average and Laggard organizations. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 6 Table 1: Companies with Top Performance Earn Best-in-Class Status Definition of Competitive Framework Key Mean Class Performance Maturity Class The Aberdeen Competitive 22% reduction in inventory levels Framework defines enterprises Best-in-Class: as falling into one of the three 96% inventory accuracy Top 20% of aggregate following levels of practice and performance scorers 96% manufacturing schedule compliance performance: 96% complete and on-time shipments Best-in-Class (20%) — practices Industry Average: 12% decrease in inventory levels that are the best currently being Middle 50% of 91% inventory accuracy employed and are significantly aggregate performance 87% manufacturing schedule compliance superior to the industry norm scorers 91% complete and on-time shipments Industry norm (50%) — practices that represent the Laggard: 3% decrease in inventory levels average or norm Bottom 30% of 83% inventory accuracy Laggards (30%) — practices that aggregate performance 72% manufacturing schedule compliance are significantly behind the scorers 83% complete and on-time shipments average of the industry Source: Aberdeen Group, November 2007 Recognizing the "to-order" nature of industrial equipment manufacturers, Aberdeen also benchmarked ERP's impact on the several time-critical metrics including the reduction in bid preparation, order to shipment, and manufacturing cycle times. Survey results showed Best-in-Class achieving 120% to 320% more reductions in cycle times. Details of these performance categories are presented within the context of Aberdeen's competitive framework in Chapter Two. The Best-in-Class PACE Model Using ERP to achieve corporate goals in the manufacture of industrial machinery and components requires a combination of strategic actions, organizational capabilities, and enabling technologies that are summarized in Table 2. Table 2: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers To balance Implement Lean Standardized enterprise-wide Integrated ERP: order entry, stakeholders' methodologies to procedures for order management, procurement, production control, expectations of support pull-based “to- production planning and execution, and financial management growth against order” manufacturing followed by cash collection, applications the need to Standardize and automated financial reconciliation, Advanced planning and scheduling improve accelerate both and performance analytics Configuration management customer manufacturing and non- Standardized implementation of After-market service management service and manufacturing processes ERP across distributed response times Enterprise and desktop project Provide visibility to manufacturing locations planning and execution project and order status Line of business ultimately owns Product life cycle management / across functions and the success of the ERP product data management departments implementation © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 7 Pressures Actions Capabilities Enablers Optimize the use of Real time visibility into all Forecast and planning applications production capacity processes from bid to cash Application to manage Requests for Quotes (RFQs) and a bidding process Source: Aberdeen Group, November 2007 Best-in-Class Strategies Aberdeen found the strategies of our Best-in-Class companies to be “Lean fanatics don’t understand remarkably similar to those of all other IM&C manufacturers, with one it is not a good fit for complex notable exception. Best-in-Class IM&C manufacturers are 117% more likely products. The customer demand may be sporadic and to make a rigorous commitment to Lean methodologies. However we still we have long lead times. You observe resistance to Lean concepts. The need to standardize both can’t be constantly ramping up manufacturing (64%) and non-manufacturing processes (60%) reflect the or running down. You need an reality facing the “to-order” world of complex manufacturing, where time to even flow through the factory.” market can mean the difference between mere survival and operational excellence. ~ VP Logistics/Supply Chain, Durable Goods Manufacturer Figure 4: The Strategic Actions of Best-in-Class Standardize and accelerate manufacturing 64% processes 64% Standardize and accelerate non-manufacturing 58% processes 60% Rigorous commitment to Lean methodologies 50% 23% Provide visibility to business processes across 47% functions and departments 54% Aberdeen Observation Optimize the use of current production capacity 42% 42% Several IM&C manufacturers Aberdeen interviewed Link global operations to improve interoperability 24% mistakenly believe they are and collaboration 24% BIC automatically Lean simply Rationalize / consolidate disparate enterprise 20% All Others because they take a pull-based applications 21% "to-order" approach to manufacturing. Others limited 0% 10% 20% 30% 40% 50% 60% 70% their thinking only to Lean Source: Aberdeen Group, November 2007 inventories. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 8 Aberdeen Insights - Strategy Twenty five percent (25%) of IM&C manufacturers surveyed make the mistake of believing that Lean manufacturing does not fit their business model and another 33% make limited use of Lean methodologies. Yet we find 50% of Best-in-Class making a rigorous commitment to Lean, as compared to 23% of the rest of survey respondents. Recognizing some elements of Lean may not directly apply to the manufacture of industrial equipment, Best-in-Class make judicious use of selected Lean methodologies (Figure 5). Figure 5: Selective Use of Lean Methodologies Value Stream Maps 86% 47% 86% Lines/Workcell Manufacturing 67% 71% "Kanban – we’ve tried to use it Kaizen (continuous improvement teams) 50% effectively. It sounds simple – 5S (Sort, Set in order, Shine, but we have18 different sizes 71% Standardize, Sustain) 57% and 8 models, and 4,000 unique BIC part numbers. We lost cards, All Others Mistake-proofing 37% 57% people didn’t turn them in. You only have to lose a few to bring Total Productive Maintenance 29% you to your knees. So we have 10% automated." Theory of Constraints Production 29% Planning 20% ~ ERP Project Manager, Manufacturer of agricultural 29% Kanban 43% machines 0% 20% 40% 60% 80% 100% Source: Aberdeen Group, November 2007 The two major tenets of Lean are “waste removal” and “continuous improvement” as reflected in the Best-in-Class' adoption of value stream mapping and Kaizen. The goal of value stream mapping is to eliminate waste by removing steps in processes which add no value. This exercise can be applied to any business process, manufacturing or non-manufacturing, across any industry. In the manufacture of industrial equipment, the concept of work cells takes on a new dimension. In this case, a work cell forms around the production of a product, bringing a team of production workers to the product instead of the product to workers. Best-in-Class companies are also 25% more likely to leverage the 5S’s (sort, set in order, shine, standardize, sustain and safety) to train and guide the transition to a more orderly work environment and are 54% more likely to mistake-proof processes. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 9 Chapter Two: Benchmarking Requirements for Success The implementation of selected modules of and extensions to ERP systems Fast Facts plays a crucial role in the ability to turn overall strategies into profit. √ 73% of Best-in-Class IM&C manufacturers have Case Study - Standex International standardized enterprise-wide Standex International is a diversified manufacturing company with processes to support the bid- operations in five product segments: food service equipment, air to-cash cycle distribution products, engineered products, and engraving and hydraulics √ Best-in-Class use 26% more products. These divisions run the full gamut of standard to custom functionality available in ERP engineered products. Having grown through acquisition, the enterprise had collected a variety of legacy applications. In 1999 it launched a project to √ Best-in-Class are 68% more replace most of its legacy systems running on older technology, many likely to deploy enterprise or COBOL and DIBOL based. Today the enterprise has selected a single ERP desktop project management applications solution as a "system of choice," with 31 divisions fully implemented and another four using selected modules. √ Best-in-Class produce more than three-times the "In the old days, we were much like a VC [Venture Capitalist], allowing reductions in cycle times as each acquired company to retain its own brand and operate autonomously. Laggards But that was back when we had little competition. With the emergence of global competition, corporate executives have taken away some of the independence. Standex is re-inventing itself. Today our approach to IT is very structured and standardization is key," said Andrew Lippo, CIO. The company sees enormous benefits in implementing shared services, particularly for accounting and purchasing. It currently operates six shared service centers but is consolidating to three, recognizing that the different levels of complexity and customization of products require different operating environments. But all share a common general ledger structure and operate under a Lean manufacturing directive. "We are spending a lot on technology right now. But we are not going to spend corporate cash unless we can get a Return on Investment (ROI). Our goal is to produce savings within the first 12 months. Our challenge is to reduce labor, but we also produce an inventory aging report and keep a close eye on obsolescence month to month so that we never take a big hit. Our current plans to consolidate to three shared service centers will reduce our IT spend for a cost savings of over $1 million." Standex works with its ERP provider to identify any gaps in its solution necessary to meet its needs. They do "work-arounds" until the enhancements are available in the standard product and have also implemented several best-of-breed extensions including a product configurator, shop floor automation, and electronic payments. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 10 Competitive Assessment The aggregated performance of surveyed companies determined whether they ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (standardization of business processes and ERP implementation); (2) organization (IT focus on business processes and collaboration among stakeholders); (3) knowledge management (real time visibility into business processes); (4) technology (the selection of appropriate tools and the intelligent deployment of those tools); and (5) performance management (the ability to utilize ERP to reduce bid preparation, manufacturing, and order to ship cycle times ). These characteristics (Table 3) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Table 3: The Competitive Framework Best-in-Class Average Laggards Standardized enterprise wide procedures for order management, procurement, production planning and execution, cash collection, and financial reconciliation Process 73% 63% 59% Standardized implementation of ERP across a potentially distributed enterprise 72% 60% 52% Manufacturing operations are integrated and coordinated with service, logistics, and delivery organizations 57% 51% 43% Organization Line of business ultimately owns the success of the implementation 63% 47% 34% Real time visibility into all processes from bid to cash Knowledge 47% 36% 25% ERP usage: average of 12.4 average of 10.9 average of 9.8 modules modules modules implemented1 implemented1 implemented1 78% of function- 72% of function- 69% of function- ality available ality available ality available Technology deployed deployed deployed 40.3% weighted 32.7% weighted 28.2% weighted average of ERP average of ERP average of ERP usage2 usage2 usage2 Use of enterprise or desktop project management applications 57% 38% 27% © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 11 Best-in-Class Average Laggards Improvement in cycle times: "We are a small, fast-growing 22% reduction in 13% reduction in 6% reduction in manufacturer of diesel engine manufacturing manufacturing manufacturing controls. Most in-house work cycle time cycle time cycle time is design, assembly and test. 25% reduction in 16% reduction in 11% reduction in Most assembly is make-to- Performance order to order to order to order, although some is build- shipment cycle shipment cycle shipment cycle to-stock. Components are generally fabricated by time time time contractors, although we do 22% reduction in 12% reduction in 5% reduction in some low-volume fab in-house. bid preparation bid preparation bid preparation We anticipate doubling or time time time tripling revenues in a few years. Currently we use an ERP 1. The number of modules is based on a set of 24 generic ERP modules system that is no longer 2. Calculated as the average number of modules divided by 24 then multiplied by the adequate and anticipate percent of functionality used replacing it. The accounting and limited integration to job Source: Aberdeen Group, November 2007 control make every financial analysis difficult. Having lived with these problems as well as Capabilities and Enablers ones we created ourselves, I Based on the findings of the competitive framework and interviews with end want to 'get it right' from the start." users, Aberdeen’s analysis reveals that Best-in-Class IM&C manufacturers embrace Lean methodologies for “to-order” manufacturing, assign cross ~ CIO, Small manufacturer of functional teams throughout the duration of implementation, and engine controls standardize enterprise wide integrated processes. Process The essential ingredients of any well-designed ERP implementation strategy includes the standardization, streamlining, and automation of business processes, both in planning and production as well as in the back and front office functions of order management, procurement, cash collection, and financial reconciliation. In fact, Best-in-Class IM&C manufacturers distinguish themselves by coordinating manufacturing operations with the up front quote to order functions, as well as the back end service, logistics, and delivery organizations (73%). IM&C manufacturers at the high end of the complexity scale include those which customize, configure, or engineer industrial equipment to customer "Standardization is key. Everything must flow specifications. This environment naturally lends itself to a project automatically to its final orientation. While the end result of these projects may be unique, custom destination." designed or configured products, the projects themselves benefit directly from standardized processes which better facilitate communication, ~ Andrew Lippo, CIO, Standex coordination, and collaboration between departments and functions. As International companies advance from Laggard to Industry Average to Best-in-Class, manufacturing operations are progressively more integrated and coordinated with service, logistics, and delivery organizations. However, even 43% of Best-in-Class have not achieved full integration and collaboration. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 12 Fifty five percent (55%) of our survey respondents have manufacturing processes distributed across multiple manufacturing locations, adding another dimension to the standardization of processes. A single ERP Aberdeen's 24 Generic implementation may support one or more of these locations, or there may Modules be multiple implementations, particularly where growth has resulted from √ General ledger mergers and acquisitions. In cases of multiple instances of ERP, Best-in-Class IM&C manufacturers are 26% more likely to standardize implementation √ Accounts payable across the distributed enterprise to better facilitate coordination and √ Accounts receivable collaboration. √ Fixed assets Organization √ MRP Given the true cross-functional nature of complex manufacturing, CIOs today must blend an understanding of business processes with technical √ CRP expertise. Best-in-Class companies demonstrate the commitment to solving √ DRP real business problems by assigning the ownership of the ultimate success of the ERP implementation to line of business professionals and not IT. √ MPS √ Forecasting and demand Knowledge Management planning A key element of successful coordination and collaboration across multiple √ Human capital management disciplines and potentially multiple locations is visibility to all business processes from bid to cash. The Best-in-Class have 30% better visibility than √ Order management the Industry Average and 88% better visibility than Laggards, but almost half √ Project management (47%) still have not achieved this business capability, leaving significant room for improvement. Since ERP forms the system of record for any transaction- √ Shop floor control based business, immediate access to this enterprise data through portals, √ Purchasing dashboards, or summary reporting is a critical component to visibility which leads to timely and effective decision-making. √ Inventory control √ After market service Technology √ Engineering change Best-in-Class performance requires the use of both ERP modules as well as management extensions to ERP. Overall results show that the Best-in-Class are making more extensive use of ERP. Aberdeen measures ERP usage by the number √ Enterprise asset of ERP modules implemented and the percentage of functionality used in management those modules. In July, Aberdeen's 2007 ERP in Manufacturing Benchmark √ Supplier collaboration study found companies using an average of 10.5 out of 24 generic modules deployed with an average of 71% of functionality used within those modules. √ Event management This yields a weighted average use of 31.2%. Best-in-Class companies in the √ Workflow technologies 2007 study, however, distinguished themselves by utilizing more modules (12) and more of the available functionality (76%) for a weighted average use √ Sales and marketing of 38%. √ Product configuration The averages across IM&C manufacturers were similar, with a slightly √ Payroll higher average of 10.8 modules deployed, using an average 72% of functionality for a weighted average of 32.8%. Best-in-Class IM&C manufacturers also distinguished themselves by using 12.4 modules and almost 78% of the functionality available for a higher weighted average of 40.3%. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 13 Yet these aggregate percentages don't tell the whole story. IM&C manufacturers have some special needs. Although these requirements will vary depending on the specific equipment and/or components manufactured and the level of customization and complexity of the product offering, several modules take on a higher level of importance. In addition, the IM&C manufacturer must choose between purchasing this functionality as a module of ERP or as an extension to ERP. Aberdeen is careful to distinguish between a “module” and an “extension.” All the modules of ERP use a single database model. Integration is built in and there is little or no redundancy of data elements, except where there is a specific need. A module is built with the same development tools, on the same architecture as core ERP. While a module can be implemented incrementally, its release cycle is in lock step with the remainder of the core ERP modules. The simplest definition of an extension to ERP is an enterprise application that extends the functionality, but is separate. Not all modules are available from all ERP vendors, but when both are available from a single or multiple vendors, the choice between a module and an extension will involve the trade-off between integration and best-of-breed functionality. Table 4: ERP Modules and Extensions - Adoption Rates BIC ERP Modules IM&C IM&C Forecasting and demand planning as an ERP module 44% 58% Forecasting and demand planning as an extension to 21% 14% ERP Project management as an ERP module 28% 34% Enterprise or desktop project management as an 39% 57% extension to ERP After market service (field service / depot repair) as an 21% 26% ERP module After market service as an extension to ERP 21% 29% Enterprise Asset Management (EAM) as an ERP module 8% 15% EAM as an extension to ERP 10% 14% Product configuration as an ERP module 28% 36% Product configuration as a extension to ERP 29% 43% Source: Aberdeen Group, November 2007 Table 4 compares adoption rates of ERP modules and extensions selected for their specific application to the manufacture of industrial machinery and components. IM&C manufacturers are more than twice as likely to use an ERP module as an extension for forecasting and demand planning. And Best- in-Class companies are 31% more likely to use an ERP module and 33% less © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 14 likely to use an extension. This highlights the importance of fully integrating these functions with ERP which manage materials, components, and production, as well as the robust feature sets offered by many of the major ERP players in this functional area. However, we see the opposite in adoption rates of all other specialty applications. While core ERP functionality has, in many ways, become a commodity, there remain significant differences in the product offerings of ERP providers in the areas of Enterprise Asset Management (EAM), after market (field) service and product configuration, with some ERP providers choosing to partner rather than develop these solutions. Performance Management Given the pressures to improve customer satisfaction and response times, Key Performance Indicators (KPIs) measuring time from request for bid to the ultimate delivery of product can provide a means of differentiation in competitive markets. In this context, Aberdeen measured reductions in the following cycle times: • from the request for bid to the delivery of proposal • total manufacturing lead time • total time from receipt of order to shipment of product While the application of Lean methodologies such as value stream mapping and work cell manufacturing can have a significant impact on lowering cycle times, simply paying attention to the various elements goes a long way. While all of the Best-in-Class measured at least two out of three of the cycle times listed above, 64% of Laggards measured only one in three of the metrics and 45% measured none. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 15 Aberdeen Insights - Technology Given the complexity of products and production in the world of industrial equipment manufacturing, project oriented environments are prevalent, leading many of these companies to seek out tools to manage these projects. Often times IM&C manufacturers are presented with a choice to use a "project" module of ERP or an extension. Extensions can be enterprise applications, providing a vehicle to share project schedules, budgets, and actuals throughout the enterprise, or they may be desktop tools. Not only are all IM&C manufacturers almost 40% more likely to use an extension rather than an ERP module, but the Best-in-Class are 68% more likely to do so. This can result from companies requiring more robust or specific feature functionality than is available in their ERP solution. But it can also result from cultural issues where engineering departments are not well integrated and form functional silos, making software decisions that are not well coordinated across the enterprise. Additionally, even the Best-in-Class are almost three-times as likely to use desktop project management tools over enterprise project management applications. This can pose significant problems in sharing data securely across the enterprise, made even more risky with distributed manufacturing locations. Whether extensions are enterprise applications or desktop tools, project management should be integrated with ERP and support the secure sharing of data. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 16 Chapter Three: Required Actions Whether an IM&C manufacturer is trying to move its performance from Fast Facts Laggard to Industry Average, or Industry Average to Best-in-Class, the √ 86% of those Best-in-Class following actions will help spur the necessary performance improvements: which adopt Lean implement value stream mapping and work cell manufacturing in Laggard Steps to Success their implementation of Lean • Assign ownership of the ERP implementation to line of business methodologies professionals √ 61% of all Best-in-Class Successful CIOs today must blend a clear understanding of business implement Kaizen processes with technology. However, to ensure business issues are (continuous improvement) adequately addressed, ownership of projects and sub-projects of the and 5S Lean methodologies ERP implementation should be assigned to the line of business √ Best-in-Class are 85% more professional who owns the issue. likely to assign ownership of ERP implementation to line • Establish specific goals for obtaining business benefit from ERP – measure of business professionals progress Because ERP is frequently considered a necessary infrastructure, specific goals for implementation are often ignored and ROI is not estimated prior to major projects or calculated after project completion. Our Best-in-Class KPIs provide a logical starting point for these goals – inventory and cost reductions, inventory accuracy, and schedule and delivery compliance. To achieve Best-in-Class performance, establish a baseline metric for cycle times for bid preparation, manufacturing, and order to delivery and then follow up with periodic and frequent measurement. Frequency will vary based on the volume and duration of projects, but should never be longer than the length of the shortest project. • Use ERP as a vehicle to standardize and automate business processes For companies that have yet to implement ERP, this will be an important step in providing an automated system of record from which to produce operational and financial audit trails and an enterprise wide system of record. Make sure you have the most basic functionality implemented including general ledger, accounts payable, accounts receivable, order management, purchasing, inventory, and shop floor control. Industry Average Steps to Success • In managing manufacturing across distributed locations, standardize the ERP implementation While operating from a single instance of ERP is the most simple approach, this is not a requirement for a standardized implementation. Even when confronted with disparate ERP implementations, best performing companies will adhere to © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 17 standard product, customer, and account identification conventions, as well as standardized business processes that will support internal company collaboration and consolidation. This may be supported from a centralized or decentralized IT installation. • Implement selected Lean methodologies Embrace the major tenets of Lean manufacturing for continuous improvement and elimination of waste. These include value stream mapping to remove non-value added steps from both manufacturing and non-manufacturing business processes and Kaizen (the formation of continuous improvement teams). In addition, leverage “We are replacing legacy the 5S's (sort, set in order, shine standardize, sustain, and safety) to systems with our corporate train and guide the transition to a more orderly environment. standard ERP. While the • For the production of large equipment and machinery, implement work systems we have installed might have most of the functionality cell manufacturing of the corporate standard, they Reorganize work cells around the production of a product, bringing are not as integrated or connected. Six months before a production team to the product instead of the product to the we started our implementation workers. we formed a team, co-led by me and someone from IT, to answer the question, “How are Best-in-Class Steps to Success we going to pay for this?” We • Provide real time visibility into enterprise data through the use of identified four areas: lower configurable portals and dashboard inventory levels, less premium labor, less expedited freight and Provide decision makers with an aggregated view of data at a less time to create financial summary level and give them the ability to drill down to successive exhibits at month-end.” levels of detail – ultimately into transactions in the system of record ~Manufacturing Project formed by ERP. Manager, Construction and Forestry Equipment • Carefully evaluate functionality offered by your ERP solution provider for Manufacturer forecasting and demand planning In manufacturing long lead time equipment, the ability to accurately forecast and plan for raw materials and components can shave days or even weeks off delivery times. The ability to collaborate with suppliers can further reduce time from bid to ship. Forecasting and planning applications and supplier collaboration tools can be purchased as stand-alone extensions to ERP. However, without tight integration with ERP, these tools lose their effectiveness. • Implement project management applications Given the project orientation of industrial equipment manufacturing, Best-in-Class firms must equip program and project managers with ample tools in order to sustain their competitive advantage. Evaluate project management offerings from your ERP solution provider. Where these are not deemed to be adequate, consider third party extensions. These may be enterprise or desktop applications. Both can and should be integrated with ERP. When using desktop tools the challenge will be in safely sharing data and synchronizing updates for collaboration. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 18 Aberdeen Insights - Summary In the manufacture of industrial equipment and machinery, it is critical to provide visibility across the enterprise to all phases of the project or contract from the initial bid preparation process to the submission of the proposal, as well as the management of the processes involved from the award of a contract, project, or order, to final delivery. For these companies, the manufacturing processes often represent the lion's share of both time and effort, but also must be well-coordinated with all other front and back office functions. Where manufacturing is distributed across multiple manufacturing locations, as it is in 56% of our survey respondents, interoperability becomes the fourth critical success factor after the traditional metrics of price, delivery, and quality. ERP forms the backbone of this coordination and collaboration. Important extensions to ERP in managing this process include project management, demand and forecast planning, and configurable portals and dashboards which allow executive decision-makers to access summary data and drill down to successive levels of detail until they reach the transactions that form the system of record in ERP. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 19 Appendix A: Research Methodology Between May and June 2007, Aberdeen surveyed 1,700 manufacturers Study Focus benchmarking their use of ERP. Over 420 of these survey respondents were Industrial Equipment Manufacturers. Responding executives completed an online survey Aberdeen supplemented this online survey effort with a re-survey of the that included questions IM&C manufacturers as well as telephone interviews with select survey designed to determine how respondents, gathering additional information on ERP strategies, integrated ERP can be used to experiences, and results. gain the following benefits: Responding enterprises included the following: √ Standardize, streamline, and automate manual processes • Job function: The research sample included respondents with the √ Provide visibility to data and following job functions: procurement, supply chain, or logistics business process status manager (13%); manufacturing (14%); IT manager or staff (39%); finance (12%); business process management (7%), and other (15%). √ Better control inventory and manufacturing schedules • Job title: The research sample included respondents with the following job titles: C-level (23%); vice president (6%); director A follow up survey was (15%); manager (34%); staff, consultants, and Other (22%). conducted with the 420+ IM&C manufacturers who completed • Industry: The research sample included respondents exclusively from the original survey to industrial equipment manufacturing determine: • Geography: The majority of respondents (80%) were from North √ The extent to which Lean America. Remaining respondents were from the Asia-Pacific region methodologies were used (6%) and Europe, Middle East and Africa (14%). √ The reductions in cycle times • Company size: Thirteen percent (13%) of respondents were from achieved through ERP large enterprises (annual revenues above US $1 billion); 37% were implementation from midsize enterprises (annual revenues between $50 million and $1 billion); and 50% of respondents were from small businesses (annual revenues of $50 million or less). • Headcount: Thirty-one percent (31%) of respondents were from small enterprises (headcount between 1 and 99 employees); 45% were from midsize enterprises (headcount between 100 and 999 employees); and 24% of respondents were from large businesses (headcount greater than 1,000 employees). Solution providers recognized as sponsors of this report were solicited after the fact and had no substantive influence on the direction of the benchmark report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge. © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 20 Table 5: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Source: Aberdeen Group, November 2007 Table 6: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises In the following categories: as falling into one of the following three levels of practices Process — What is the scope of process standardization? and performance: What is the efficiency and effectiveness of this process? Best-in-Class (20%) — Practices that are the best Organization — How is your company currently currently being employed and are significantly superior to organized to manage and optimize this particular process? the Industry Average, and result in the top industry Knowledge — What visibility do you have into key data performance. and intelligence required to manage this process? Industry Average (50%) — Practices that represent the Technology — What level of automation have you used average or norm, and result in average industry to support this process? How is this automation integrated performance. and aligned? Laggards (30%) — Practices that are significantly behind Performance — What do you measure? How frequently? the average of the industry, and result in below average What’s your actual performance? performance. Source: Aberdeen Group, November 2007 Table 7: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most impactful pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions. Source: Aberdeen Group, November 2007 © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
ERP in Industrial Machinery and Components Manufacturing Page 21 Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report includes: • The 2007 ERP in Manufacturing Benchmark Report, July 2007 • ERP: The Last Bastion of Resistance to Software as a Service, June2007 • When Replacing ERP – Size Matters, July 2007 • Taking the ERP Plunge for the First Time, July 2007 • The Total Cost of ERP Ownership, August 2007 • The Total Cost of ERP Ownership in Small Companies, August 2007 • The Total Cost of ERP Ownership in Mid-Size Companies, August 2007 • The Total Cost of ERP Ownership in Large Companies, August 2007 • Two Worlds Converge: Enterprise Applications Meet the Desktop, September 2007 • ERP in the Mid-Market: Serving the Needs of 1.2 Million Businesses, September 2007 • The Role of Enterprise Project Management in Productivity, October 2007 Information on these and any other Aberdeen publications can be found at www.Aberdeen.com. Author: Cindy Jutras, Vice President, ERP Research email@example.com Founded in 1988, Aberdeen Group is the technology- driven research destination of choice for the global business executive. Aberdeen Group has 400,000 research members in over 36 countries around the world that both participate in and direct the most comprehensive technology-driven value chain research in the market. Through its continued fact-based research, benchmarking, and actionable analysis, Aberdeen Group offers global business and technology executives a unique mix of actionable research, KPIs, tools, and services. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provides for objective fact based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com © 2007 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897