In addition to reducing manufacturing costs and focusing on inventory reduction, CEO’s and CFO’s of manufacturing companies are continuously striving to improve the operational performance of their companies. In our previous article, we discussed the benefits of an ERP system, including its ability to reduce manufacturing costs up to 20%. While it is true that companies employing ERP systems derive significant operational benefits to help manage their businesses, the age of the ERP system can have a continuing impact on the benefits that companies can achieve.
Companies that run ERP systems have many distinct and measurable operational benefits; however, there are distinct differences in operational benefits depending on the age of the system. A 2011 report shows that ERP systems operate at their best between the two and seven year range. In fact, ERP systems that are between two and seven years old have almost 30% more reduction in costs than systems older than 15 years. In order to receive all of the operational benefits ERP system can provide, companies should replace their systems every seven to ten years.
The largest cost and inventory reductions are seen within the first two years of an ERP system’s life. In fact, inventory reduction is 25% greater in systems that are two years old than systems that are two to seven years old. Newer systems also see an improvement in time to decision and a reduction in administrative costs.
Research shows that a key aspect to consider when comparing the age and performance of older ERP systems is how they are being used and how often they are being used. Users with newer systems (less than two years old) use over 10% more module functions than the oldest ERP users. Since most modules were not available 15 years ago, this makes sense. In fact, the following modules have only been available in the past 10 years:
- Human Resources
- Project Management
- Supplier Management
- Event Management
- Workflow Technology
Technology-specific modules, such as workflow and event management, are especially lacking in the older systems. However, less mainstream and more recent ERP modules show significant disparity in areas such as project management, supplier management and human resources. These are areas that ERP companies were just starting to offer 10 years ago and are just now perfecting.
Where Do You Buy Your ERP Extensions?
40% of users of newer ERP systems buy their extension applications directly from their ERP vendors, while users of the oldest system are five times more likely to depend on third party vendors not associated with their particular ERP system. Why the disparity in how companies view ERP extensions? There are several reasons:
- Greater availability of extensions from ERP vendors
- ERP vendors consolidating the enterprise application market
- ERP vendor release of messaging, integration and middleware systems
- Lack of on-going support for older, legacy ERP systems
An important aspect in a company’s decision-making process around ERP strategies is the time it takes to get the system up and running. Newer systems take 30% less time from install to operation than the oldest systems (7 – 15 years old). Over the last 15 to 20 years, ERP vendors, user companies and implementation partners have become more efficient in getting an ERP system up and running effectively.
As you can see, an older ERP system has several drawbacks. It limits the ability to extend functions through modules and extensions and slows the access to critical information for decision-makers. Not only do older systems require twice as much customization as newer systems, they are also 40% less likely to be tailored to the system without programming. This leads to higher IT support costs and more difficult system upgrades in addition to the greater support and staffing levels already required for older systems.
By keeping your system current, your operational costs should improve between 3% and 5% for several years on average. If your system is currently between two and seven years old, limit customization and stay as current as possible in order to maintain those benefits.
So What Should a Company Operating an Older ERP System Do?
If your system is more than seven years old, you should consider implementing a newer ERP system. Not only will you reap the benefits that a newer system has to offer, but you will also significantly reduce your manufacturing costs. Download your copy of “Aging ERP: When Old ERP is Too Old” now to discover the benefits your companies could reap from a newer system.
If you are ready to take action and need practical advice on the next steps toward reducing costs, click here to sign up for a free 30-minute business consultation.