If you purchased a new manufacturing equipment asset costing millions of dollars and then let it run at only 15 to 25% capacity utilization, you’d run the risk of getting fired. Yet many organizations do not hold their enterprise resource planning (ERP) system to the same utilization standard, even though it is often one of their most expensive assets. An ERP system is meant to be the central nervous system of your business, driving all your supply chain, operations, and finance activities. But in a recent study by Reveal, 94% of companies said they were not effectively utilizing their existing SAP ERP technology to meet their business goals. (See Figure 1.) Now, you may think you’re off the hook because you don’t run SAP, but you can extrapolate that to almost every ERP, regardless of size. Based on our experience over the last 17 years with more than 200 clients, most companies are only leveraging a quarter or less of their ERP system’s capabilities, no matter what type of business they are in or what type of ERP they are using.
Why is this the case? One of the biggest reasons is because organizations don’t view their ERP as an asset. They see it instead as merely a tool. What’s the difference? An asset is something you invest money, time, and resources into that will ensure an economic return. A tool, on the other hand, is no different than a hammer; it is something you spend money on to “just get the job done.” When organizations don’t see their ERP as an asset, they end up making poor decisions about how to use it, enable bad habits to form, and ultimately allow the system to be significantly underutilized.
Think ROA, not ROI
One of the major reasons companies don’t view their ERP system as an asset is because of what we refer to as the “implementation trap.” When ERP systems are implemented (and this is true for legacy ERPs, modern ERPs, cloud-based ERPs, or composable ERPs), many companies focus primarily on getting the system transactions to work. For example, can we use the system to create a purchase order? If yes, then the implementation has been a success. That means we concentrate on IT success factors: whether the system is live and working, whether the data has been transferred error free, whether testing is complete, whether the implementation was on time and in budget, and so forth. The success of the project is a pure return on investment (ROI) play. The “benefit” is most likely calculated as an IT savings, such as from having a single unified platform rather than multiple platforms or the reduced cost required for supporting various skills, among other factors.
To ensure that you are getting the most out of your ERP system, however, you need to start thinking in terms of return on asset (ROA). ROA is an indicator of how profitable a company is relative to its total assets and how efficiently management is using its assets to generate earnings. High ROA is achieved with high asset utilization, operational excellence, efficient capital expenditure, and technical integrity. In other words, you will want to know to what degree your equipment, manufacturing plant asset, or other technology is being utilized to produce a profitable income. The income generated is return on asset. In simple terms:
Return on Asset = Net Income/Total Asset.
The ROA metric has been used in the investment community for many years. When considering acquiring an asset, the ROA measures to what extent you can generate more efficiencies to produce a return. ROA, in essence, indicates asset efficiency, or in layman’s terms, “squeezing the most out of limited resources.”
Thinking about turning our ERP into an asset, though, is only partially about value-based financial formulas. Mostly, it is a mindset that helps organizations maximize the use of their ERP to increase profitable income and business performance.
Typically, after a new ERP system has been implemented, IT gives the system over to the business and leaves it up to them “to figure it out.” That rarely works out well. Limited training, limited change management, no best practices, limited business ownership, no active business rule management, and more prevent the new system from actually being helpful. Over time, the ERP system reverts back to being just a tool, along with spreadsheets and other decision-making tools used to run specific tasks. That is where it all gets lost. Rather than seeing it as an asset to be understood, refined, nurtured, and maximized to get real business outcomes (such as improved inventory turns, increase service levels, increase throughput to enable revenue, and increased profitability), the business defines ERP as merely another tool. Essentially, it’s like purchasing a high-performing car that’s stuck in first gear.
What is your ERP asset utilization?
Knowing what your ERP utilization really is starts with discovering what your current business maturity level is. The five-step Business Maturity Continuum1 (see Figure 2) is a benchmark developed by Reveal that measures your organization’s ability to meet and exceed business goals by leveraging your ERP investment. An organization with a lower business maturity rating is typically very dependent on spreadsheets and other tools to run its business, while a higher-rated organization has mastered the ability to use its ERP to drive specific optimization goals and continuously meet its business objectives. The steps are:
- Stabilization: At this level, the company is beginning to use the ERP system to run transactions but is still also using spreadsheets and other tools. The company is focusing on getting the transactions to work as intended within the system.
- Data integrity: At this level, the company is working on making data in the ERP system accurate and complete. It is also focusing on getting all core business processes into the system. The ERP is integrated with other systems and is being used as a single source of the truth.
- Business rules: For this level, the company is using ERP for planning purposes and not just for running transactions. The business rules that determine the right process performance and outcomes are defined and maintained within the system. Exceptions are reduced and data is grouped properly for better decision making.
- Optimization: At this level, the company is using analytics and metrics to improve decision making and optimize processes performance. The ERP system provides end-to-end visibility of products and processes. The company is monitoring and automating processes in the system and using it to enable advanced business processes and collaboration.
- Business value: Here, the ERP is being fully used to create business value such as increased service levels, better customer retention, and reduced operating costs. It is providing real-time visibility of performance goals, aiding collaboration across departments, and reducing risk.
According to a recent poll conducted by Reveal, 88% of those surveyed viewed themselves at step one (ERP is doing what it’s supposed to do) to step three (we are planning within the system). None of the respondents—not a single person surveyed—believed their organization was at step five of meeting their objectives on a continuous basis. Based on our experience with clients, we believe that even at step three, organizations are utilizing only 45 to 55% of their ERP’s power, allowing the rest of it to sit idle.
To assess what level your company is at, review honestly the various bullets in the five-level maturity continuum in Figure 2, and ask yourself, “Where do we fit on this continuum?” Not as a department or a team, but rather as a whole organization (or at a minimum the supply chain and operations function collectively). If unsure, you can take the self-assessment survey on our website, and it will give you a clear measure.2
How to get a return on your ERP
If you are less than a level four on the Business Maturity Continuum, here are some suggested actions you can take to get a full return on you ERP asset.
Step 1: Utilize your ERP. If you are on levels one (stabilization) and two (data integrity) of the Business Maturity Continuum, then you need to ensure that users are actually working inside your ERP system. A common mistake that companies make is implementing an ERP system, but then allowing their teams to continue to use spreadsheets and other third-party tools. When you rely on other tools to make process decisions, you are not able to fully utilize the ERP’s integrated capabilities. At the end of the day, the ERP becomes nothing more than just another record-keeping tool, and you will never achieve the aspirational goal of utilizing it as an asset to generate business value.
To ensure that transactions and work can be done inside the ERP system, you need to establish the fundamentals:
1. Commit to getting your data in order. You must recognize that the ERP is only as good as the data is relevant. Quite simply, if the ERP is not working off real-time data, none of its features and priorities will work. At the core of utilizing the ERP is maintaining the cleanliness of your data and making sure the data remains timely and relevant.
2. Integrate the business and work together as a cross-functional team. The ERP is blind to individual departments and functions. It presents an integrated view of the roadblocks to supply chain agility and encourages you to think likewise. Through active use of the ERP, you can view recurring exception messages and react as an integrated organization to resolve these messages. But you cannot take full advantage of this integrated view if you are still operating as independent silos rather than as a cross-functional team.
Step 2: Optimize your ERP. Once you begin to properly utilize your ERP, your next step is to optimize it by using it to address the process, system, and organizational inefficiencies that too often torpedo the supply chain. These inefficiencies can come in many sizes and shapes: overstocking, stock-outs, low manufacturing schedule attainment, overbuying, consistently late shipments, weak supplier performance, and so on. If you are seeing 1,000 or 10,000 of these exceptions throughout your supply chain, you will become overwhelmed, and you will likely ignore the process problems. The natural inclination is to build high inventory levels to put a bandage on the problem instead of striving to achieve a predictable, stable, and optimal process.
One way that an ERP can be used to help optimize a process is by first grouping and prioritizing the materials used and then creating business rules that dictate how the material should perform in the supply chain. In other words, having “a plan for every part” identified by the system. As an analogy, let’s consider how we purchase regular household items. We consume milk a lot, and we buy it every time we go to the supermarket, which is similar to a “make to stock” environment. Although eggs are high on our list, we tend to only buy those when we are down to the last two eggs—that is our “reorder point.” We purchase chilled white wine on special occasions and on demand and that would be considered a “make to order.” Finally, refrigerator lightbulbs typically last a long time, so we only buy them when the light bulb goes out. That would be an “unplanned purchase.”
These strategies—not limited to the ones listed above in the analogy—can be managed effectively by the ERP system if it knows what you want (the rules to live by) and then effectively groups the materials and adjusts coverages. When that occurs, the ERP system ensures you only hold enough of the material you need at any given time. If demand changes for the end product, the consumption patterns will immediately recognize the problem and notify you to increase or decrease inventory. That gives you agility.
Keep in mind, as you move from utilizing your ERP to optimizing it, education is key—and goes beyond individual, fast-paced training. Education should be team-driven, business-specific, ongoing, and steeped in the philosophy of “learn by doing.” Only by making education an organizational priority does true transformation and optimization take place.
Step 3: Maximize your ERP. After utilizing and optimizing your ERP asset, you arrive at a crucial part of your journey—maximizing the ERP system to really make the supply chain more agile. Increasingly, organizations are expecting to be able to quickly change their business models to respond to disruptions. As new business models take shape to support much-needed growth, supply chain leaders must be willing to revisit and align the supply chain with the new business models. These changes may require implementing more digital processes, shifting to a “product as a service” strategy, and/or enabling end-to-end supply chain resilience.
Fortunately, ERP companies have anticipated and identified this need for agility long before it surfaced in the minds of most CEOs. The advanced planning and execution capabilities provided by many ERP systems allow organizations to respond faster to changing market conditions and capitalize on new opportunities. However, these features and functions will mean very little if you are still stuck in levels 1 to 3 of the Business Maturity Continuum. The potential for organizations to capitalize on these new technology enhancements is immense—but there lurks a big “if.” You will benefit if you understand you need to do things differently and ensure step 1 and step 2 are completed. And that means dedicating yourself to a higher level of business maturity.
Make the most of what you have
There is so much hype over the latest technologies, advanced plannings solutions, artificial intelligence, and machine learning that it’s easy to lose sight of the capabilities already existing within your ERP system. These capabilities have the potential to make a real difference in your business, but many companies are not making smart use of their already existing technology.
Changing how you think about, use, and approach your ERP system will lead you to the creation of an agile supply chain. But to get there, you must take three important steps:
1. Understand and remediate the breakdowns that prevent you from utilizing the ERP as an asset.
2. Begin to optimize the asset and invest in the people that run the supply chain to ensure that a high level of knowledge and discipline is in place.
3. Allow the organization to expand capabilities to help maximize the asset.
Only then can you handle any supply chain challenge that comes our way, with confidence and agility.
Notes:
1. Business Maturity Continuum is a registered trademark of Reveal. You can find out more about the model at www.revealvalue.com/approach/business-maturity.
2. The survey can be found at www.revealvalue.com/self-assessment.
