- September 29, 2016
- Posted by: Tom Ryan
- Category: Thought Leadership
We are often asked how do you cost justify ERP? What will be the payback? How will we measure it? Where can we get it? How do we convert it into dollars and cents? The reality is that justifying ERP in the F&B industry in the classical cost/benefit analysis with hard numbers is very difficult. There is often no quantifiable way to develop a credible IRR for a new ERP project.
Inventory Cost or Reduction:
If you are a food and beverage company, you are most likely buying commodities. Commodities which are grown and processed seasonally and often times these contracts must be negotiated in advance and the price can also fluctuate post-harvest. Sometimes you need all the inventory you can get, or you will get stuck buying on the “spot market” and pay a premium.
Investing in Inventory: What a concept! If you are a large buyer/processor of herbs, spices, coffee, tea, proteins, milk and dairy products, flower, eggs, oils, you may be better off speculating and buying when prices are favorable and holding inventory (subject to shelf life limitations of course). This could be far more favorable than working capital invested at less than 1% interest. Many enterprises with shelf stable raw materials have chosen this strategy.
While better tracking, locating, rotation and shelf-life management, and product segregation (allergens) considerations may lead to less volatility of both inventory levels and values, they are often difficult to quantify. An ERP implementation, when combined with lean techniques, could help reduce and better manage inventories of labels, packaging, and other components for which the supply is much more controllable. But, these are the lower value components in most F&B products. A solid integrated business planning or demand planning system will help better control the inventory of finished products, but these functions often come from third party solutions and not the ERP.
Process Re-engineering Efficiency Gains:
It is realistic to expect that an ERP implementation, with its embedded best practices, can deliver process gains. The challenge is if new/modified processes are actually implemented and the temptation to re-implement the old systems processes is resisted.
There is a common misconception that these process improvements will result in reduced staff. This is rarely true. Years ago this may have been possible when we were converting from paper systems to electronic systems, but those days are long gone. Often times when companies represent they will reduce staff they should be asked to “name names” or at least specific job roles. Until the full impact of the implementation of a new ERP system is felt, the impact of the staffing requirements for the new/modified processes cannot be assessed and the realization of reduced headcount cannot be predicted. In some circumstances, there may be an increase in headcount. This will certainly be true, at least temporarily. during the course of the ERP implementation and until the staff become competent in the new processes. It is fair to say that a new ERP system should help you leverage a higher volume of business over the same resource pool. The bottom line is that staffing reductions are hard to predict and difficult to quantify with any confidence.
Production efficiencies are more the outcome of better demand planning and forecasting. As stated above, these are not core modules of most ERP solutions but rather third party solutions or separately sold modules from the ERP provider. Many enterprises have fairly complex production lines which contain multiple package sizes and types and therefore must be scheduled carefully. Few enterprises have the luxury of dedicated lines. Producing the right product within the proper time windows driven by anticipated demand is the best way to control inventory of finished goods, efficiently manage shelf life, and optimize the consumption of limited raw materials. This is where the true money lies in inventory utilization and reduction.
The costs associated with making customers sick or exposing them to a foodborne illness can be catastrophic. The most functionally rich ERP systems today do not contain the necessary modules/components to prevent, or validate, that foodborne illnesses do not exist in the products you are producing. Many of these ERP systems have come a long way with regard to traceability and recall management, but that is reaction to a problem that has surfaced, not prevention of that problem from occurring.
If you look at the solution ecosystem we have developed (first published on Linked In on 8/19/2016), you will see that many of the solutions required for food safety prevention, certification, etc. are actually an addition to ERP and not contained within the core functionality.
Given that ERP vendors are busy with the changes in technology platforms resulting from Cloud, SAAS and so on, we do not believe that core ERP will contain these food safety components anytime in the near future. Their functionality development efforts will be more focused on capabilities that span multiple industries and not focused on the needs of one industry exclusively, like F&B.
Trade Promotion Management and Control:
If there is one area where a new system offers a pay back in a CPG company, that area is trade promotion management and its counterpart, earned distributor reimbursement. This capability strikes directly at a key cost of doing business for CPG companies where they make extensive use of promotions, discounts, and rebates to market their products. There is always an opportunity to improve control over trade promotion spending and its direct impact on a company’s bottom-line. This functional area even lends itself to better quantification. These modules also include tracking of promotion performance, thus a small percent increase in control over a very large spend can not only result in significant dollars saved, but it can be measured. But like food safety discussed above, most ERP systems available today do not contain these tools as a part of their core set of modules/capabilities. There are great tools available which support this capability, many of which are depicted in our ecosystem, and fully integrate with many of the available ERP solutions.
While there are areas within a F&B enterprise that can expect improvements from a new system and the associated changes/updates in business process, most of these areas are very difficult to quantify in the classic cost/benefit way. We believe that a new ERP is required to preserve your competitive position and operate the company. It has many core modules that are required for the most basic functions of an enterprise.
Separate from the core capabilities of the ERP solution, we have discussed briefly how other modules are needed to provide the real business growth and competitive differentiation. These solutions are often from third parties (integrated with the new ERP) or separately sold modules from the ERP solution provider. Our Solution Ecosystem for Food and Beverage Enterprises depicts what some of these systems are and graphically portrays which solution providers will offer which capabilities.
Many ERP implementations last 10-15 years. These systems represent the heart and lungs of the corporation and are essential to how your business functions. You can’t live without your heart and lungs. There is very little about core ERP functionality that enables true differentiation between you and your competition, but they are absolutely essential to your success.