Insights & White Papers

Improving the Odds of Delivering Measurable ERP Benefits

By Alex Jay

Transformation & Assurance

ERPs help manufacturers achieve measurable benefits, but deploying such a solution does not guarantee improvements. To increase the likelihood of realizing quantifiable outcomes, Liberty developed a simple method to identify and validate benefits that ERPs can facilitate.

Deriving value from an ERP is not a controversial statement.  What is troubling, however, is how many firms fail to see top and bottom-line improvements; according to Gartner, up to 75% of ERP transformations do not meet their objectives.  Based on this disconcerting trend, Liberty developed an ERP benefit process and asset to consistently identify, scrutinize, and validate opportunities.

Regardless of how successful a go-live milestone is, an ERP alone will not bring about incremental growth and savings.  Achieving value targets requires careful analyses of revenue, profit and cost centers at the onset of an engagement; specifically, this activity is part of the planning and strategy development stage.  Taking this into account, resource planning systems should be viewed as a tool that facilitates value creation.

Before reviewing Liberty’s method to deliver benefits, several terms require definitions to prevent misunderstandings due to differences in vernacular/corporate-speak:

Table 1: Benefit Definitions

Term Definition
Hard Benefit Direct and measurable benefits that impact top and/or bottom lines; e.g., average annual cost of goods sold reduced by 2%
Soft Benefit Intangible benefits that improve operations, administration, etc.; e.g., time spent on paperwork decreased by 25%
Recurring Benefit Continuous benefit that is realized on a specific time interval; e.g., renegotiated contract resulted in an annual savings of $1M
One-Time Benefit Benefit is not continuous and results in a new baseline once established; e.g., Reduced days sales outstanding creates a one-time working capital uplift of $600K

Liberty’s Method to Identify and Validate Benefits

The goal after reading this section is straightforward: the process and use of the asset should come across as simple and intuitive.  And to help illustrate the approach, an automotive supplier example will be discussed throughout the procedure and the paper will conclude with a client case.

1. Identify Departments/Functions that Stand to Realize Benefits from an ERP

ERP software packages have been in the market for decades and, as a result, departments that will likely benefit from such a solution are well understood.  Considering a manufacturer’s supporting operations, e.g., Purchasing, Inventory/Warehouse Management, QC/QA and Finance, ERPs are well suited to track and record transactions emanating these activities because they are structured and repetitive tasks.

Sales & Marketing, Product Engineering, and Manufacturing are considerations as well, but they have two distinguishing factors from the abovementioned secondary operations – one, their activities tend to be more dynamic and complex and, two, their outcomes are uncertain and may not materialize for months or even years.  Therefore, they have tailored solutions designed for their specific workflows:

        • CRM (customer relationship management) enables Marketing to manage the entire sales lifecycle – from a fledgling opportunity to a successful booking, and the evolving meta data that accompanies the progression of deals.
        • PLM (product lifecycle management) facilitates the complete development of products – from an idea and concept, to engineering validation and commercialization, up to providing in-market feedback for revisions and future generations
        • MES (manufacturing execution systems) are designed to run factories at the workstation level, manage multiple shopfloor configurations, and enable the flow of data across equipment. This provides granular visibility into process, discrete and assembly procedures, and the ability to increase WIP and EOL yield at optimal costs.
          • To learn more about MES, please refer to Liberty’s 2020 publication here

2. Confirm Departmental Stakeholders and Make them Integral Team Members

Without the support of each department, validating benefit targets will be difficult.  Senior leadership can mandate compliance but this increases the likelihood of resentment, leading to unnecessary iterations and resistance to outputs.  Once potentially affected functions are known, Liberty works with program sponsors and department leadership to integrate stakeholders.  This upfront effort promotes inclusion and encourages members to contribute to the benefit process.

3. Propose Value Drivers

Liberty’s combined ERP and industrial experience enabled the firm to create a repository of functional value drivers, which serve as a starting point for this phase of the engagement.  The complete list, however, will come from the stakeholders based on their knowledge of departmental operations, current issues, and potential opportunities.  And, similar to brainstorming, Liberty documents ideas without analysis to ensure maximum input from participants.

4. Investigate, Categorize and Prioritize Value Drivers

Not all proposed value drivers are equally plausible or beneficial and, as such, Liberty uses a system to gauge and rank each proposal.  The definitions in Table 1, coupled with timing to realize benefits and their relevance to the client, establish a consistent and repeatable basis of comparison.  With the framework in place, Liberty’s first step is to analyze costs or revenue for each driver; examples of this may include:

        • Purchasing: Annual vendor spend per category across product lines
        • Warehouse Management: Annual excess & obsolete inventory expense
        • Quality Control / Quality Assurance: Work-in-progress (QC) and end-of-line (QA) scrap rates and associated expense
        • Agency Management: Annual agency spend
        • Sales & Marketing: Lost sales of an available product/SKU
        • Manufacturing: Maintenance, repairs and operations inventory expense due to reactive maintenance
        • Manufacturing: Overtime (OT) production spend per year
          • If manufacturing OT stems from increased demand where customers are willing to pay the incremental labour charge, this value driver is not applicable
          • Conversely, if OT is required to meet normal demand levels and regular production schedules then this is an appropriate driver for the benefit analysis

Stakeholders are responsible for providing the value driver data, and Liberty calculates the total cost and revenue numbers based on the timeframe under investigation.  12 or 24 trailing months is, generally, acceptable to reflect current operational conditions and support projected benefits.

Once calculated, Liberty discusses benchmark improvement ranges with stakeholders.  This is an important step because these ranges set the foundation for projected benefits, and Liberty ensures that the client’s input is reflected in all yardsticks.  Furthermore, Liberty has compiled benchmarks from previous projects and can provide guidance.  The following automotive example demonstrates the approach:

        • A wire harness auto supplier procures a connector from 3 different vendors whose products’ technical attributes and performance specs are equivalent
        • Total connector spend for the last 12 months was $25M, and signed commercial contracts run for five years
        • Benchmarks suggest that consolidating the supply base to two vendors may lead to a piece-price savings of 3% to 5%
        • Projected annual benefit range is $0.75M to $1.25M

With proposed benefits calculated, each value driver is categorized using the comparison method noted at beginning of section 4.  And, based on the results, a priority ranking is recommended.  Continuing with the automotive example, the purchasing value driver would be classified and ranked as follows:

Table 2: Categorizing the Purchasing Value Driver

5. Recommend Actions to Deliver Benefits

As mentioned at the start of this paper, ERPs enable benefits but they do not deliver them.  Achieving outcomes requires tactical planning with an understanding that benefits may not materialize until after the stabilization period.  The following plan depicts recommended actions and timelines to realize a lower connector piece-price for the automotive example, and re-emphasizes that a majority of the work is done outside of the enterprise solution.

Figure 1: Recommended Plan to Realize a New Piece-Price

Sample Gantt

A final point for this section – the above plan is not etched in stone; rather, Liberty uses it as a level-set for clients to understand the entirety of what is likely required to attain a targeted outcome.

6. Review and Iterate to Achieve Alignment with Stakeholders and Sponsors

Liberty’s ability to help clients achieve realistic outcomes is a result of two factors:

      1. Hands-on ERP and industry experience
      2. Collaborating with client stakeholders

Addressing the second bullet, once Liberty’s proposed benefits and corresponding plans are available, stakeholder events are held to review the approach and underlying assumptions, and revisit benchmarks.  These conversations ensure that there is general consensus around forecasted numbers, along with the proposed activities and timeframes to support financial objectives.

It is important to recognize that stakeholder feedback is an iterative process.  In Liberty’s experience, three to four rounds are the norm where clients largely concentrate on computed benefits; this is expected given that stakeholders will own the targets at the end of the day.  To achieve alignment with its customers, Liberty is transparent about the calculus and, where appropriate, modifies inputs and assumptions to better emulate stakeholders’ operational experiences.

To bring this into focus, the proposed benefit range from the auto example is revisited.  During the iterative review process, purchasing stakeholders mention that previous negotiations for similar categories led to price reductions of <1%.  Not wanting the client to “leave money on the table”, it is noted that prior to this company-wide ERP engagement it was not possible to determine complete category consumption across all product lines.  At the end of the stabilization period, however, a thorough connector volume-pricing scenario analysis will be feasible and better position the client to achieve a lower piece-price.  The client agrees and modifies the range from 3% – 5% to 2% – 4%, a benefit of $0.5M to $1.0M.

The final step in Liberty’s procedure is to review the agreed-to benefit ranges and recommended plans with the program’s sponsors.  Senior leadership typically defaults to stakeholders as they perform the day-to-day operations.  There are occasions, though when leadership disagrees with the findings and, based on Liberty’s previous ERP projects, directs the team as follows:

      1. Straight override where stakeholders are required to meet leadership’s targets
      2. Revisit value drivers and determine what is required to increase benefit ranges
      3. Determine how to realize benefits on a tighter timeline

For the second and third scenarios, Liberty will work with the stakeholders to restart the process where assumptions, benchmarks, and plans are scrutinized for improvement opportunities.

7. Document Future Opportunities and Rejected Value Drivers

As mentioned earlier in the paper, Liberty documents and maintains the value drivers and their underpinning assumptions, inputs, benchmarks, and outcomes in its ERP benefit asset.  Over the course of the engagement, a portion of the proposed value drivers will be deemed out of scope (OOS), rejected due to infeasibility, or disqualified because the effort to realize the benefit is too costly.

Regardless of whether a value driver is precluded, Liberty captures these proposals for two reasons:

      • They serve as lessons learnt, which continually enhances the client and Liberty’s understanding of value drivers and related benefits
      • Those deemed OOS are captured as future opportunities that the client can pursue once its stabilization period concludes

Beyond recording future prospects, Liberty takes an additional step and details recommended actions to realize OOS benefits.  Returning to the automotive example, the following is an OOS value driver that could deliver a future benefit:

      • Engineering and Product Management identify a sub-assembly standardization initiative across several product lines that requires a technical/commercial trade-off study
      • ERPs are not designed to manage engineering specs and, consequentially, the driver is deemed OOS
      • To support the client, a proposed post-stabilization action plan is prepared where:
        • At the end of stabilization, 12 months of commercial data are extracted from the ERP for in-scope variants of the sub-assembly
        • An engineering study is executed for sub-assembly functional specs and application-level performance requirements across in-scope product lines
        • Based on outcomes, sub-assemblies that met functional specs and delivered performance requirements across in-scope product lines are placed on a shortlist
        • Based on a commercial data analysis, the most expensive sub-assemblies are eliminated from the shortlist
        • A new piece-price analysis is performed to identify a cost target for the reduced number of sub-assembly variants that have increased volume levels
        • RFQ process is executed with vendors
        • Once the new, lower piece-price is agreed-to, commercial contracts are signed
        • ERP vendor and product masters are updated, along with applicable fields in the procurement module
        • New contracts in the ERP system are executed

Client Case

Framing a problem or an opportunity and recommending a procedure to address either one is an important aspect of Liberty’s operating model.  That said, Liberty’s clients expect quantifiable results that cut costs and/or boost toplines.  To demonstrate that the ERP benefit process is actualized, the following case depicts how Liberty applied its methodology to substantiate “hard benefits” once a central ERP program is implemented and stabilized.

Background

A manufacturer of durable goods – whose global annual revenue is approximately $1B USD – had grown through acquisitions over several years.  When Liberty was contracted to assess their enterprise footprint and operations, the client was running multiple business units (BUs) with disparate ERPs.  Compounding matters, several legacy ERPs were no longer vendor supported and the staff responsible for maintaining the solutions was nearing retirement.

Liberty’s objective was to identify the right, centralized ERP for the BUs to manage their operations.  Further, the client was cost sensitive due to the pandemic’s impact and wanted to understand which benefits an ERP would facilitate.

Actions and Outcomes

Liberty analyzed each BU’s operations to establish a baseline and understand differences across the divisions.  It became apparent that complexity extended beyond incongruent ERPs as there were notable differences in manufacturing – specifically:

      • One BU adhered to a lean production methodology
      • Another was a mix of process, discrete, and assembly manufacturing
      • And there were shops that dealt solely with discrete and assembly procedures

The supporting departments were equally complicated and pertinent functions, such as inter-company transfers and S&OP, were chiefly done outside of the varied enterprise systems.

Given the client’s centralized ERP objective, Liberty and the stakeholder-partners followed the benefit process to identify and validate value drivers.  After several months of iterative and collaborative work, the following outcomes were agreed upon and secured approval from the CFO and VP of Operations:

Table 3:  Summary of Hard Benefits (000s)

ABOUT LIBERTY ADVISOR GROUP

Liberty Advisor Group is a goal-oriented, client-focused, and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists, and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. We collaborate, integrate, and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named as Great Place to Work, to the Best Places to Work in Chicago, and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.

About the Author

Alex Jay is a Principal at Liberty Advisor Group.  Alex spent 14 years in the automotive industry, nearly 13 of which were with the Ford Motor Company.  His automotive roles include Dimensional (GD&T) Engineer, Product Development Engineer, Six Sigma Black Belt, Business Analyst, and Engineering Change Management Lead.  As a consultant, he focuses on product lifecycle strategies, with an emphasis on commercialization, and improving supply chain operations with tech-based solutions that lead to measurable outcomes.  Alex earned his B.A.Sc. (Chemical Engineering) from the University of Waterloo and his MBA from the Ross School of Business at the University of Michigan.

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