It’s amazing the impact that three little words can have. For countless millions of people on Valentines’ Day, the most important 3 little words would have been “I love you”. For Financial Directors, Managing Directors, IT Directors, Production Managers or anyone involved with the purchase of Manufacturing IT, they may well be “Return on Investment” (ROI).
Manufacturing IT systems are often selected on the basis of projected ROI and evaluated in terms of achieved ROI. And with good reason, for in today’s business climate no manufacturer can afford to make any investment if it doesn’t deliver solid business benefits, whether that investment is £10k, £100k or £1million.
Getting hung up on ROI
Yet according to Steve Whitehouse of SSL WinMan, author of WinMan ERP, it’s all too easy to get hung up about ROI: “While we actively encourage each of our customers to measure ROI and to see the importance of doing so, the truth is ROI is often harder to measure than it is to achieve. You may in fact get a superb return on investment without ever really being able to quantify it.” He continues: “The reason ROI can be notoriously difficult to establish is because it involves comparing two or more different parameters or states over a given time. In the case of something like an ERP system, this would typically be before and after the implementation.”
As any manufacturer knows, some aspects of a business are easier to measure than others, for example financial information, stock levels, lead times etc. Others are much more complex including customer service, worker satisfaction, and information visibility levels.
As Whitehouse points out, they all have one thing in common and that is the availability and/or accuracy of relevant information prior to any investment: “Let’s take something simple like stock levels as these are easier to quantify and measure than something like customer service. A modern integrated ERP system can provide accurate and extensive stock level information in real-time, including hard and soft allocations, and even multiple-bin stock locations. But if you previously had no visibility of your stock levels or were concerned about the accuracy of the information, you can’t measure the degree or level of any benefits you might be achieving.”
In practice
He cites the example of Eborcraft, a well-established manufacturer of wood veneer office furniture, which had been relying on a system that offered no manufacturing capabilities that was therefore being supplemented by a variety of manual and spreadsheet-based means. Consequently information was often inaccurate, disjointed and not visible in real time which, combined with ongoing strong business growth, provided a very real threat to the company’s existence.
Whitehouse again: “Eborcraft knew from the outset that establishing a purely financial way of measuring ROI would be impossible because of inability to accurately measure any of the areas within the business that were failing and which the new system needed to address.”
Eborcraft’s Managing Director Chris Williams elaborates on this: “With any new system it’s very easy to forget the pitfalls and problems of the old system and to switch to seeing new problems. But the reality is you’re not comparing like for like. The benefits of WinMan weren’t there with our previous system and in terms of the way the business has developed and changed even since we’ve put WinMan in, our old system simply wouldn’t have been able to cope, let alone deliver any benefits. There’s no denying we’re now a lot more streamlined than we were and we’re in a position to continue growing the company. We wouldn’t have got this far without WinMan.”
This lack of an accurate starting point for ROI comparisons is further compounded by the increasingly multi-disciplinary and interconnected nature of modern manufacturing.
Multiple systems
Mike Novels, CEO of planning and scheduling software author Preactor International elaborates: “Measuring ROI is hard enough when you only have one system or process to deal with but the majority of Preactor customers already have an ERP system in place. Our planning and scheduling software invariably integrates with existing ERP software in addition to other Manufacturing IT solutions in order to deliver the required levels of detailed planning and scheduling typically absent in the first place. A lot of the benefits Preactor brings to the end user therefore come from performance gains achieved by helping any existing ERP investment to work more efficiently and more effectively.”
A corollary of this is that many Manufacturing IT investments are made in conjunction with other significant changes within a company. In the case of a best-of-breed solution like Preactor this may be the simultaneous implementation of a new ERP system. In the case of an ERP system this may accompanied by a radical process re-engineering exercise in order to take advantage of new ways of operating. In both cases, staff levels may be changed with key personnel brought into or taken out of pivotal positions. In a multi-site scenario, changes made in other inter-connected plants or at a parent company level may also have an impact on not just the ability to measure ROI but to accurately attribute measurable benefits to a specific investment.
Complicated but not impossible
Measuring ROI is complicated then, but not impossible says Novels and he cites some impressive examples: “At one extreme you have companies like Eliane that have achieved an annual inventory saving of $16m or CST Arcelor that generates an extra $70m of revenue per year – both directly attributable to their investment in Preactor. At the other end you have UK-based Cash Bases which while not aiming for particular ROI, monitored costs and returns which enabled the company to determine it had achieved an ROI of 128% in 2 years.”
He also agrees with Whitehouse that for many manufacturers ROI may be perceived in ways that are hard to quantify: “Take Waymouth Engineering for example. It had little or no shop floor visibility which meant planning and scheduling and optimising its resources was never as efficient as it could be. Precisely because the company had no accurate starting point in terms of efficiency it’s hard for it to measure ROI in this area. Yet the benefits are real nonetheless with the Managing Director describing it in terms of it being equivalent to having an extra 2-3 machines on the shop floor.”
The final word goes to Whitehouse who offers this advice to any manufacturer looking to invest in Manufacturing IT: “ROI should always be a consideration but like any business decision, it is best approached with a well thought through strategy. A foundation to achieving this, however, is ensuring you get the right system from the right vendor to meet your real business needs and have it implemented and supported as effectively as possible. This way, whether measurable or not, you stand the best chance of achieving the greatest ROI.”
Phil Burgess, Business Consulting Director for Infor recommends the following model which should be applied to each business function:
1. Business Benefit Analysis: Establish the economic value of the company's objectives
2. Identify Solution Costs: Include vendor and internal company costs
3. Review ROI Criteria: Discuss potential cost accrued through project delays
4. Generate ROI investment report: Include discounted cash flow analysis
