In the latest of our Expert Roundtable Series, we're focused on the state of the manufacturing ERP software industry. March was the eighth consecutive month of economic growth in manufacturing – the fastest growth the industry has seen since July of 2004 (source). Here, our roundtable of ERP industry insiders share their observation on how this light at the end of the tunnel is impacting IT purchase and implementation activity.
We had such great responses from our peers that we decided to turn this into a two-part post. In part one we'll report on buying activity, spending patterns by business size and industry, and the primary motivations behind current buying activity. In part two, we'll take a look at activity in the software as a service (SaaS) market, how vendors are adjusting prices to compensate for the economy, and whether manufacturers are implementing integrated ERP systems or best-of-breed applications.
About the Experts
Jonathan Gross is Vice President at Pemeco, an independent and impartial IT advisory firm. He provides the following services: IT-business alignment, systems selection and systems implementation. He is an IT/ERP columnist for Manufacturing AUTOMATION, an expert at Focus Research and a blogger at IT-Toolbox.
Ned Lilly co-founded xTuple, originally called OpenMFG, in October 2001, with the aim of bringing the worlds of open source and ERP software together to solve the unmet needs of small to midsized manufacturers. Before that he was a co-founder of Great Bridge, an early attempt to build a business around the PostgreSQL open source database, in 1999; PostgreSQL is the core technology for xTuple today. Ned is also well known for his ERP Graveyard blog.
Nancy Phillippi is the senior sales consultant at Custom Information Services (CIS). She has 13 years experience in helping Process Manufacturers, Distributors and companies that have complex accounting or manufacturing processes. You can read her articles on manufacturing on the CIS website or on the ERP Software Blog.
Randy Smith is the CEO and co-founder of Vicinity Manufacturing. Vicinity was founded in 2002 with the focused goal to build a manufacturing system written specifically for and to serve formula-based manufacturers.
Manufacturing Software Trend Summary
Market activity Small and medium enterprise spending Large enterprise spending Food, chemical and consumer packaged goods manufacturers Aerospace, semiconductor and automotive manufacturers
Manufacturers are Starting to Invest Again
This year is already proving to be more active than 2009. Buyer interest and purchase activity is up across the industry, from large sophisticated companies to smaller companies implementing an enterprise system for the first time. The increased activity can be attributed to two primary reasons:
- the 10-year anniversary of purchases made as a result of the Year 2000 (Y2K) date problem; and,
- many companies are restarting buying processes that were deferred in 2009.
Leading up to the year 2000, fear of the Y2K problem drove migration from legacy manufacturing ERP systems to modern systems that used four-digit year fields. Now, ten years later, those systems are ready for replacement.
Jonathan Gross – "We are now entering an ERP acquisition sweet-spot. With the 10th anniversary of Y2K now upon us, the sun is setting on a large number of legacy ERP systems. We continue to see significant demand for ERP upgrades and replacements."
Randy Smith – "The wave of companies that implemented around Y2K are starting to replace their systems. The apps that were available at that time are becoming out of date and new technologies are taking over. So we are seeing a number of companies that are looking more for performance increases over addressing specific functional requirements."
Meanwhile, pent-up demand exists due to projects that were deferred in 2009.
Jonathan Gross – "In 2009, the Great Recession created pent-up demand as companies delayed their ERP projects. In 2010, improving business conditions and lower ERP costs are causing some of that pent-up demand to be released."
Nancy Phillippi – "Pre 2009, manufacturers were purchasing industry specific software at a steady rate; no significant deviation in buying patterns. In 2009, purchases were deferred. This has changed in 2010 due to several factors, one being that the need to improve processing is still there and in fact the urgency of procuring software and hardware to reduce redundant overhead processes has increased since companies did not spend budget money in 2009. They are ready to spend."
Large Enterprises are Extending Existing Systems
Most large manufacturing companies have already implemented an ERP system and have invested to such an extent that there is limited appetite for large replacement projects. Instead, these firms are consolidating plants onto their corporate standard ERP system and adding new application functionality.
Jonathan Gross – "Historically, many large companies implemented separate ERP systems for each of their facilities. Now, they are looking to consolidate systems and facilities. With respect to adding-on, many large companies are looking to extend their enterprise systems to the furthest reaches of their businesses. For example, many large manufacturers are now automating manufacturing operations, customer relationship management and business intelligence. With respect to manufacturing operations management, the intent is to use systems to help improve overall equipment effectiveness, process efficiency, material movements, productivity and performance."
Meanwhile, many small and medium enterprises (SMEs) are implementing their first business-wide system. With limited budgets and technical resources, these companies are looking for quick and easy deployments; SaaS solutions are therefore popular. As Jonathan Gross points out, "these alternatives give smaller and less IT savvy companies opportunities to leverage the power of ERP without needing sophisticated internal resources."
Finally, a range of companies are giving serious consideration to implementing open source ERP software.
Ned Lilly – "We're definitely seeing more overall activity from the SME market than the enterprise. But, there are some interesting examples of enterprises who are making moves from tier-one ERP systems and are taking a fresh look at commercial open source ERP."
Food, Chemical, CPG are Most Active Industries
Among process manufacturers, most purchase activity is from chemical and food manufacturers according to our experts. Randy Smith reported food as "the big one that is hot right now," while Nancy Phillippi points to chemical manufacturers as leading the way.
Nancy Phillippi – "Chemical manufacturing and distribution seems to be the industry that has sustained the most growth through the slow economy. Chemical companies are buying or adding functionality to their existing software to improve their business software and processes which often includes server hardware, software and network services."
Among discrete manufacturers, we see activity among consumer packaged goods (CPGs), aerospace, semiconductor and automotive manufacturers. Increased ERP software adoption among CPGs is fuelled by "the need to manage global supply chains, distribution networks and targets acquired through mergers and acquisitions activity," observes Jonathan Gross. While aerospace, semiconductor and automotive companies are "more active with upgrades, replacements and add-ons."
Industry-Specific Functionality Tops Selection Criteria Lists
Functional requirements (as opposed to technology, services, for example) appears to be the most highly weighted ERP selection criteria. Given that every manufacturing business is unique (e.g. industry, mode), requirements continue to be very specific to the buyer. Therefore, prioritizing feature requirements is a key step in selecting the right manufacturing software.
Jonathan Gross – "Functionality is the most highly cited reason justifying an ERP purchase. There is nothing controversial about this result. Companies want to buy systems that best fit their needs. The important lesson for prospective ERP customers is that they first need to assess their business and system needs. Only then will they be able to determine best-fit ERP features and functionalities."
Total cost of ownership (TCO) also remains high on the list of buying criteria since companies remain cost conscious. Moreover, the return on investment (ROI) case for new software is also predicated in large part on cost reduction benefits. We hear two recurring goals: reduce operating costs and increase efficiency.
Nancy Phillippi – "Reduce overhead processes. Basically do more with less resources and redundancy. Manual redundancy/date entry in processing is not only labor intensive it also is very error prone."
Randy Smith – "Inventory control, access to cost data (varying rapid manufacturing costs) and technology shifts seem to be the big motivators."
Finally, customization and accessibility make their way into our list of buying criteria.
Ned Lilly – "We're seeing more interest in customers having flexibility for where and how they can run their software (e.g. onsite or off, multiple platforms such as Mac and Linux as well as Windows), and of course, whether they're able to make changes to the software."
Stay Tuned for Part Two
This ends part one of our "2010 Manufacturing Software State of the Industry Report." Be sure to revisit our blog on May 1st when we publish part two. In the meantime, we'd love to hear from you. You can join the conversation by leaving a comment below.