"ERP Plus" in Process Industries

Transcription

1 "ERP Plus" in Process Industries Managing Compliance in the Pursuit of September, 2010 Cindy Jutras, Nick Castellina

2 Page 2 Executive Summary Manufacturers in process-related industries face many of the same business challenges common to all manufacturers. Data collected in August of 2010 for the Aberdeen Business Review found the top business goal of process manufacturers was growth of profits and margins and many viewed cost reductions as the clearest path to increased profitability. Yet while goals and challenges may be similar, rigid regulations, compliance requirements and variability of raw materials and manufacturing processes create unique requirements for special features in Enterprise Resource Planning (ERP) and the complementary applications which extend core ERP functionality to make it "ERP plus." Top performers in these related industries indeed leverage the power of ERP to lower inventory, operating and administrative costs and to also reach beyond the traditional boundaries to optimize both production and customer service. Best-in-Class Performance Aberdeen used the following key performance criteria to distinguish Best-in- Class companies, with top performers achieving the following results: 21% reduction in levels of inventory with 98% inventory accuracy 93% manufacturing schedule compliance 97% on-time and complete shipments 56% are able to do a mock (or real) recall in the time required by regulatory bodies Research Benchmark Aberdeen s Research Benchmarks provide an indepth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations Sector Definition Process related industries include, but are not limited to food and beverage, chemicals, pharmaceuticals, industrial products such as cleaners, paints and coatings, metals and metal processing, and pulp and paper. Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics, including: The Best-in-Class are 143% more likely to be able to respond to a necessary recall within the time required by regulatory bodies Top performers are 86% more likely to have integrated business applications serving as a complete and auditable system of record The Best-in-Class are 112% more likely to be able to automatically notify decision-makers when certain conditions occur Required Actions In order to achieve Best-in-Class performance, companies must: Use industry-specific features of ERP to automate the process of complying with regulatory requirements Make integration of enterprise applications a priority "We are convinced that without our ERP solution, we could not even operate." ~ Roger Bouvrie, Vice President, Puratos Group

3 Page 3 Table of Contents Executive Summary...2 Best-in-Class Performance...2 Competitive Maturity Assessment...2 Required Actions...2 Chapter One: Benchmarking the Best-in-Class...5 Process Industries: Similarities and Differences Coexist...5 Business Drivers Impacting ERP Strategies...6 The Maturity Class Framework...7 The Best-in-Class PACE Model...8 Customer, Growth and Cost Challenges...8 Best-in-Class Strategies...12 Chapter Two: Benchmarking Requirements for Success...15 Competitive Assessment...16 Capabilities and Enablers...18 Chapter Three: Required Actions...25 Recommended Steps for All Companies...25 Laggard Steps to Success...25 Industry Average Steps to Success...26 Best-in-Class Steps to Success...26 Appendix A: Research Methodology...28 Appendix B: Related Aberdeen Research...30 Figures Figure 1: Top Goals for Figure 2: Top Business Drivers Impacting ERP Strategies...6 Figure 3: Challenges to Reducing Costs...9 Figure 4: Challenges to Growing the Business...11 Figure 5: Challenges to Serving Customers...12 Figure 6: Top Strategic Actions of the Best-in-Class...13 Figure 7: Capabilities Achieved Through Automation...19 Figure 8: Knowledge Management Capabilities...21 Figure 9: Exception Management...24 Tables Table 1: Top Performers Earn Best-in-Class Status...7 Table 2: The Best-in-Class PACE Framework...8 Table 3: Levels of Automation...14 Table 4: The Competitive Framework...17 Table 5: Priorities and Adoption of ERP Features...21 Table 6: Business Benefits Achieved From ERP...23

4 Page 4 Table 7: The PACE Framework Key...29 Table 8: The Competitive Framework Key...29 Table 9: The Relationship Between PACE and the Competitive Framework...29

5 Page 5 Chapter One: Benchmarking the Best-in-Class Process Industries: Similarities and Differences Coexist Some would argue that the process industry is too broad of a category. Companies in this category think of themselves as food and beverage, chemical, pharmaceutical, metals or metals processing or other related industries. Yet in using ERP as a planning and transactional system of record they do have a lot in common. They deal with batch processes, oftentimes along with discrete packaging. Inexact quantities are prevalent where actual quality and characteristics vary by batch or lot, and compliance requirements are defined by government agencies. Each of these industries place unique requirements on ERP. Yet these companies face the same pressures to reduce costs and fuel growth as any other manufacturer Goals for Process Industries Although companies in the process industry think of themselves as individual and unique industries, they share common goals. The third quarter 2010 Aberdeen Business Review found the top business goals for 2010 of process manufacturers were profitability/margin growth and cost reduction, which obviously go hand-in-hand (Figure I). Organic revenue growth's third place finish in terms of goals validates Aberdeen's hypothesis that most process manufacturers today cannot rely entirely on top line growth to fuel the growth of profits and they must also contain or reduce costs. This is particularly challenging in many of these industries as the cost of raw materials, as well as energy and transportation have increased and also become much more volatile and harder to predict. Fast Facts Best-in-Class ERP implementations produce an average of 21% reduction in inventory in spite of B2B customers demanding faster turnaround for delivery, while carrying less of their own stock The Best-in-Class are 143% more likely to be able to respond to a recall in the time required by governing bodies Growth of operating margins is the top goal for 55% of process manufacturers even as 48% must deal with rising cost of raw materials Figure 1: Top Goals for 2010 Percentage of Respondents 60% 40% 20% 0% 55% Profitability / margin growth 41% Cost reduction All Process Manufacturers 36% 21% Organic Increase market revenue growth share 24% Sustain business through economic downturn Other variables may also introduce challenging complexities in the process world, including ingredients that can spoil, quality and compliance

6 Page 6 requirements, variability of ingredients and of the processes themselves and environmental issues. Dealing with contaminated product, which may ultimately result in a recall, can be costly not only in terms of time, effort and dollars but also brand equity and safety. All of these factors combine to make cost reductions that much more challenging. Yet these businesses need to be mindful of keeping costs low. Lowered costs mean increased profit margins. Similarly, for 22% of process manufacturers, increasing market share was determined to be one of their top two business goals for Growth can come from new products, new territories or simply better execution of sales and growth strategies. Although growth plans are finally back on the drawing board for many companies, 21% of process manufacturers are simply hanging on and attempting to sustain their business through the economic downturn. While 66% of process manufacturers participating in the Q Aberdeen Business Review survey believe the economic recovery has already begun, 76% believe the recovery will be either slow (but steady) or painfully slow, lasting multiple years. Yet in spite of this wariness about the recovery, process manufacturers are still anticipating an average 9% growth in operating profits over the next year. One of the best ways that process manufacturers can achieve these goals is through effective ERP strategies. "[As a result of our ERP implementation], we received better information/alignment across the value chain network and improved decision support." ~ Manager, Large Consumer Goods Manufacturer Business Drivers Impacting ERP Strategies The business drivers impacting process manufacturers' ERP strategies are closely aligned with their goals for 2010 (Figure 2). Figure 2: Top Business Drivers Impacting ERP Strategies Must reduce costs We need to be easier to do business with (improve overall customer experience) Need to manage growth expectations Interoperability issues across multiple operating locations Must improve customer response time 29% 29% 27% 27% 44% All Process Manufacturers 0% 10% 20% 30% 40% 50% Percentage of Respondents, n=208

7 Page 7 Aligned with profitability and reducing costs being the top business goals in 2010, 44% of process manufacturers have indicated that reducing costs is a top business driver impacting ERP strategies. ERP helps process manufacturers run more smoothly, eliminating waste. At the same time, ERP allows companies to get a full 360 degree view of their business which improves responsiveness to customers, improving the overall customer experience and also helping to manage growth expectations. The Maturity Class Framework Aberdeen used five key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard ERP implementations (Table 1). Four out of five of these Key Performance Indicators (KPIs) were chosen not only because every manufacturer should be measuring them, but also because a well executed ERP implementation can have a very significant impact on these metrics. The fifth (the ability to perform a recall in the time required by regulatory bodies) is critical to the majority of the industries included. Table 1: Top Performers Earn Best-in-Class Status Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Industry Average: Middle 50% of aggregate performance scorers Laggard: Bottom 30% of aggregate performance scorers Mean Class Performance 21% reduction in inventory levels 98% inventory accuracy 93% manufacturing schedule compliance 97% complete and on-time shipments 56% are able to perform a mock (or real) recall in the time required by regulatory bodies 11% reduction in inventory levels 94% inventory accuracy 89% manufacturing schedule compliance 93% complete and on-time shipments 29% are able to perform a mock (or real) recall in the time required by regulatory bodies 6% reduction in inventory levels 86% inventory accuracy 77% manufacturing schedule compliance 79% complete and on-time shipments 13% are able to perform a mock (or real) recall in the time required by regulatory bodies Reduction in inventory is reflective not of year over year changes, but of the results from implementing ERP. The length of time taken to achieve these results may vary from company to company, but the results reflect the true business benefits that such implementations can ultimately yield. Aberdeen

8 Page 8 also measured several other improvements that ERP implementations provided in the same manner. The Best-in-Class PACE Model Using "ERP plus" to achieve corporate goals requires a combination of strategic actions, organizational capabilities, and enabling technologies that can be summarized as follows in Table 2. Best-in-Class implementations combine the traditional planning, tracking and reporting capabilities of ERP with specialized features to provide full lot traceability, shelf life management, recipe formulation, actual costing and attribute based inventory. Table 2: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers Need to reduce costs Streamline and accelerate processes to improve efficiency and productivity Standardize business processes across the enterprise Integrated business applications serve as a complete and auditable system of record Decision-makers are notified in real time of exceptions in order to react immediately Ability to perform a mock (or real) recall in the time required by regulatory bodies From summary data, decision-makers can drill down to transactions that form the fiscal and operational audit trail Integrated ERP ERP features: - full traceability (internal and external) - attribute-based rules and routing - support for compliance and reporting - formula or recipe management - yield reporting and optimization - inventory optimization - actual costing by batch or lot - ability to deal with variations in quality - shelf life management - potency Workflow automation Event Management Product and nutrition labeling Material Safety Data Sheets (MSDS) Customer, Growth and Cost Challenges What are some of the challenges faced in achieving desired performance levels? Process manufacturers are interested in reducing costs, serving customers, and growing their businesses. Each objective involves challenges that must be conquered in order to achieve the goal. The challenges highlighted in the sections to follow are broken down by those from process only and those that combine process with discrete manufacturing (either a batch or continuous process is followed by discrete packaging or manufacturers may have a varied product mix). While at first glance the differences are not dramatic, there are some subtle differences that we can gain valuable insight from.

9 Page 9 Challenges in Reducing Costs For both hybrid and process manufacturers, the biggest challenge to reducing costs is the rising cost of raw materials (Figure 3). Figure 3: Challenges to Reducing Costs Rising costs of raw materials 50% 44% Impact of poor quality (rework, non perfect orders, recalls) 31% 36% Proliferation of product changeovers 31% 28% Rising energy costs impacting manufacturing operating costs Complexity of managing outsourcing (offshore and nearshore) 24% 28% Process Only 22% 19% Hybrid 0% 10% 20% 30% 40% 50% Percentage of Respondents, n=118 The ability to control these costs is dependent on a manufacturer's ability to forecast demand and negotiate price. If a supplier is assured of a predictable flow of orders it is far more willing to negotiate on price. The planning functions may be supported directly by modules included with the ERP solution or may be handled by complementary solutions interfaced or fully integrated with ERP (see sidebar). The impact of poor quality is a major challenge for both process and hybrid industries. For most discrete industries poor quality will result in rework, adding time and cost to the production process. However, in many process industries, poor quality or contaminated product can result in the product having to be destroyed, resulting in even more damage to the organization. If a product recall has to be made, public safety may be at risk, the company will incur major costs and is also likely to damage its brand or reputation as well. These issues have a major effect on the bottom line. In continuous or batch processing, changeovers in production must be handled very carefully as they may require significant time, effort and resources to clean out machines and prepare a line. Sequencing therefore is particularly important. In scheduling colors (of paint or coatings for example) through a line, it is important to go from light to dark. In processing chemicals, it is important to understand chemical reactions if prior materials are not completely flushed from the line. As consumers Planning functions of ERP The following functions may be supported through modules of ERP or complementary solutions Demand Planning Supply Chain Planning (SCP) Material Requirements Planning (MRP) Capacity Requirements Planning (CRP) Distribution Requirements Planning (DRP)

10 Page 10 become more accustomed to choice, product options proliferate and cause an increase in the number and the complexity of product changeovers. Further challenges to keeping costs low include the rising cost of energy impacting manufacturing operating costs and the complexity of outsourcing manufacturing processes. For asset intensive industries, energy consumed by machinery is simply a cost of doing business. The only way to reduce energy cost is to reduce consumption, and reducing consumption means reducing output - not a desired outcome. Process manufacturers therefore are often forced to "eat" the difference between planned and actual costs. ERP can help predict demand and schedule production, but cannot have a direct impact on the price or cost of energy consumed. However other complementary solutions such as Enterprise Asset Management (EAM) and Manufacturing Execution Systems (MES) can have a direct impact. The better integrated these solutions are with ERP, the more effective cost controls can be. As companies seek low cost sources for labor and materials, the cost of transportation may rise, which is further affected by the volatility of oil prices and other energy costs. Challenges to Growing the Business The next group of challenges faced is the challenges to growing the business (Figure 4). Unlike a discrete assembly process where capacity can be easily adjusted through overtime or adding shifts or workers on a production line, process industries tend to be capital intensive and therefore the capacity is not easily adjusted without the expenditure of capital. Therefore it is not surprising to see both process and hybrid manufacturers challenged first and foremost by the need to optimize the equipment and capital assets available. "To sustain learning and improvement of ERP, periodic audit and grading is in place." ~ Manager, Consumer Packaged Goods Manufacturer

11 Page 11 Figure 4: Challenges to Growing the Business Ability to optimize equipment and capital assets Rising input costs with limited pricing power New channels require new business models and processes Increased compliance requirements / regulations Increased complexity of supply chains Ability to optimize use of available inventory 9% 37% 37% 32% 34% 27% 26% 20% Process Only Hybrid 20% 31% 24% 23% 0% 10% 20% 30% 40% Percentage of Respondents, n=118 Rising costs are also seen as a significant challenge to growth. Input costs can include materials, labor and energy costs. And yet many have very limited pricing power (i.e. the ability to raise prices as their costs escalate) which translates to squeezed margins. While in the top three challenges we see little difference between the two segments of this industry, in considering compliance and the complexity of supply chains we see some divergence. Virtually any process related industry faces compliance requirements and as these requirements vary throughout the world, penetrating new markets often requires adherence to new regulations. On the other hand these process manufacturers tend not to face the same level of complexity as hybrid manufacturers. Aberdeen's sample of hybrid manufacturers included a large representation of industrial products. While retailers may be demanding, supplying directly to a retailer is more straightforward. Finished goods are shipped to be sold on a real or virtual shelf. In supplying industrial products, the manufacturer may be anywhere in the supply chain. This creates more inter-dependencies across multiple processing or manufacturing schedules, hence more complexity. As the world flattens, global trade is becoming the norm, even for smaller companies. The average process manufacturer operates from 5.3 locations. Increased complexity means greater challenges to growing the business. "The ERP system must provide a cost effective transaction engine that is fully integrated throughout the business. Data and reporting must be available for decision support." ~ Director, Small Medical Manufacturer Challenges to Serving the Customer Of course servicing the customer is an important factor in determining actual growth rates. For years now, we have seen the balance of power

12 Page 12 shifting from the vendor to the customer. Even the 800 pound gorillas in any market must listen closely to their customers. As customers become more demanding, inventory tends to be pushed back up stream. Many customers today are willing (and able) to carry less inventory. But in turn they expect a faster turnaround from their suppliers. This leaves fewer buffers all around, particularly in process only industries where limited shelf life of products and vendor-specific requirements for lots are prevalent. This places additional requirements on these manufacturers to manage expiration dating, provide better forecasts and more reliable and accurate schedules. ERP plays a role on both sides of the buying and selling equation. Figure 5: Challenges to Serving Customers B2B customers carry less inventory yet want fast turnaround for delivery Managing compliance issues (MSDS, FDA, etc.) Cost of servicing customers is rising Consolidating markets resulting in customers having more power Mass customization 59% 49% 41% 26% 36% 46% 17% Process Only 23% Hybrid 15% 34% 0% 25% 50% 75% Percentage of Respondents, n=118 Compliance requirements are not only a challenge to growing the business, but also impact process manufacturers in serving their customers, where customer specifications and traceability are specific requirements. Best-in-Class Strategies What are process manufacturers doing in order to counter these challenges and achieve their goals? It is not unusual that we find the actions being taken by Best-in-Class and all other companies (those not Best-in-Class) are pretty much the same. However, seldom are they this similar (Figure 6).

13 Page 13 Figure 6: Top Strategic Actions of the Best-in-Class Streamline and accelerate processes to improve efficiency and productivity Standardize business processes Provide visibility to business processes across functions and Optimize the use of current capacity Modernize technology infrastructure and applications 39% 41% 32% 36% 27% 24% 66% 65% 61% 59% Best-in-Class All Others 0% 20% 40% 60% 80% Percentage of Respondents, n=208 It is apparent that the need for streamlining and accelerating processes is universal and the role ERP plays in this is clear. It also can play a major role in the standardization of processes, providing a template as well as a common communication vehicle for data sharing and process workflow definition. Visibility is a prominent factor in effective communication and executives and middle managers should be able to turn to ERP for answers. While strategically all process manufacturers understand the need for visibility, we will find in Chapter Two that this still remains an elusive goal for the majority of companies. Aberdeen Insights Strategy Many of the challenges described in this chapter can be addressed through automation. Aberdeen defines three different levels of automation in much the same way as we categorize respondents by performance (the competitive framework). We use the word "fully" automated as a short hand. In fact it is more accurate to call the category "the top 20% in terms of automation" since none of our respondents have completely automated all functions listed. (continued)

14 Page 14 Aberdeen Insights Strategy Table 3: Levels of Automation Requirement/ Function to be automated "Fully" Automated Top 20% Partially Automated Middle 50% Little or No Automation Bottom 30% Full forward and backward traceability - internal 78% 37% - Full forward and backward traceability - external 50% 18% 4% Accurately forecasting demand 24% 4% 4% Promotion/deductions management 31% 11% - Variability in raw material (quality & attributes) 67% 14% - Compliance to regulatory requirements 50% 6% - Variability in raw material lead times 67% 14% - Optimizing inventory (safety stocks) 78% 24% 4% Ability to do actual costing by batch or lot 89% 27% - Market or commodity based pricing 44% 16% 4% Supplier compliance and collaboration 33% 6% - Production/Processing Planning & Scheduling 72% 15% 4% Managing compliance issues 39% 6% - We will use these categories to present some of the data in the next chapter and readers will find that increased levels of automation improve process manufacturers' ability to deal with the variability inherent in these industries, accelerate response and provide added visibility. In the next chapter, we will see what the top performers are doing to achieve these gains.

15 Page 15 Chapter Two: Benchmarking Requirements for Success The integration of ERP along with the complementary applications which extend its core functionality that process industries require, enable these businesses to execute their strategies and attain their goals of effectively serving customers, reducing costs, and growing their businesses. Case Study Summit Brewing Company Summit Brewing Company was founded in 1986 with the goal of bringing back the remarkable craft beers once brewed throughout the Upper Midwest. The company brews and ships 19 unique beers to 18 states. Today the company produces 100,000 barrels of beer each year, making it the 26th largest brewer in the nation. When Anthony Cayko, Controller, arrived at Summit Brewing Company in 2002, the company had not implemented a complete ERP solution. Previously, Summit had only implemented financial software but needed something more comprehensive to better run the growing business. There were several challenges that were unaddressed that Cayko knew he would need to keep in mind when selecting an ERP solution. He noticed that the company needed quicker decision making processes. He wanted more information at the fingertips of the solution s users. The company needed better access to historical data and they needed to become more analytical with the data that was available to them. For example, the company had no metrics based on brand performance, meaning that they could not properly forecast demand and set prices for individual brands. Other than the availability and quality of information, there were further problems in the day-to-day running of the business that needed to be solved. Cayko stated that the company had a problem with back ordering. We wouldn t know when we would be out of product until the trucks showed up. Since all transactions were being kept on paper, the company had the potential of losing orders, costing them income. Clearly, as a growing company, Summit needed an ERP that would provide better information and improve the process of running the business. continued Fast Facts 78% of "Fully automated" process manufacturers are able to respond to a recall in the time required by regulatory bodies; 33% are able to respond in 30 minutes or less "Fully automated" process manufacturers are 3 times as likely to have nonconformance alerts provide signals back to ERP to flag potential schedule interruptions The Best-in-Class are 53% more likely to be able to drill down to successive levels of detail while trouble-shooting, ultimately reaching individual transactions 93% of the Best-in-Class have integrated business applications that serve as a complete and auditable system of record

16 Page 16 Case Study Summit Brewing Company Cayko stated that his main goal when selecting Summit s ERP solution was to be able to, communicate seamlessly across all departments with full integration. The company did not require much customization because the solution that he selected had almost all of what they needed. He found a solution that made it very simple to integrate with any other programs that Summit was running. It was important that the software facilitated demand planning and capacity scheduling. With these criteria in mind, Cayko selected a solution that he felt would greatly enhance the business processes and profitability moving forward. Cayko, along with the 15 employees using the ERP solution, is extremely happy with Summit s ERP implementation. He listed multiple benefits that the company saw from almost day one. The company has greatly benefited from the capacity planning that ERP enables. Cayko states, Before we relied on a gut feeling, now we can run algorithms and graphically see where we re going to be, which helps us adjust budgets and forecasting. These trend analysis reports allow them to break data into cubes, see income by wholesalers and brands, and slice and dice data to make better decisions going forward. Since they now have financials based on brand performance, the company can now pinpoint where and why we are doing well or not doing well. It can see the profitability of brands and set different pricing structures. In order to maximize profits, the company can better fulfill orders and backordering has gone down. Additionally, the visibility that ERP provides means that the company knows ahead of time when they are going to miss a deadline and reschedule. As a process manufacturer, the company needed to be able to respond to variances in ingredients. Cayko said, A major benefit of our ERP system is that we now have lot tracking; we are not recalling as much and when we do, we are able to do it in a shorter timeframe. If there is ever an issue with compliance, Summit has the tools to minimize losses and adhere to all regulations. These benefits have allowed Summit Brewing Company to get a leg up on its competitors and will further facilitate growth through profits in the future. Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (standardization of business processes and the ability to respond to a recall);

17 Page 17 (2) organization (continued commitment to training and implementation); (3) knowledge management (providing visibility and supporting exception management); (4) technology (automation through features of ERP and complementary solutions); and (5) performance management (the ability of the organization to measure results to improve business performance). These characteristics (identified in Table 4) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Table 4: The Competitive Framework Process Organization Knowledge Technology Performance Best-in-Class Average Laggards Standardized enterprise-wide procedures for production planning and execution across similar businesses within the enterprise 76% 61% 41% Ability to do a mock or real recall in the time required by regulatory bodies 56% 29% 13% ERP implementation has the continued commitment and attention of senior management throughout selection, implementation and beyond (in support of upgrades and extension) 81% 77% 59% New employees are properly trained in using ERP after initial stages of implementation 69% 53% 36% From summary data, decision-makers can drill down to transactions that form the fiscal and operational audit trail 72% 50% 43% Ability to automatically notify decision-makers when scheduled activities fail to occur on time 42% 27% 10% Ability to automatically and immediately notify decision makers when certain conditions occur 47% 26% 15% Integrated business applications serve as a complete and auditable system of record 93% 53% 44% Return on Investment (ROI) for ERP projects is measured 42% 33% 14%

18 Page 18 Capabilities and Enablers Based on the findings of the Competitive Framework and interviews with end users, Aberdeen s analysis of the Best-in-Class demonstrates that ERP is a valuable tool used for attaining business objectives. ERP can help to provide multiple business benefits for the companies that can implement it effectively, including: Reduction in costs and correspondingly, increased profits Improvements in delivery time and accuracy Improved internal schedule compliance Better regulation compliance The ability to react effectively when products need to be recalled Process The essential ingredients of any well-designed ERP implementation strategy includes the standardization, streamlining, and automation of business processes, both in planning and production as well as in the back and front office functions of order management, procurement, cash collection, and financial reconciliation. This is true across all industries but can have serious implications when it comes to specific compliance requirements of process related industries. For many process related industries, the ability to respond quickly to a recall is essential, particularly when safety is at stake. While the Best-in- Class are 143% more likely to be able to respond in the time required by regulatory bodies, it is disturbing to note that even 44% of our top performers cannot respond within these limitations. Storage of and immediate access to data collected plays a key role in accelerating response time. Automation greatly enhances the ability to react to situations where it is important to recall products before a customer could get hurt (Figure 7). "We measure our ERP implementation by the percentage of transactions automated versus those that are manually processed." ~ Director, Medium Size Food and Beverage Manufacturer

19 Page 19 Figure 7: Capabilities Achieved Through Automation Percentage of Respondents, n % 80% 60% 40% 20% 0% 44% 28% 20% 15% 19% Non-conformance alerts provide signals back to ERP to flag potential schedule interruptions Fully Automated Partial Automation Little or No Automation 0% 100% compliance with regulatory requirements through automated queries and reporting 78% 43% 12% Able to respond to a mock or real recall in the time required by regulatory bodies 33% 17% 4% Able to respond to a mock or real recall in less than 30 minutes 78% 31% 22% Real-time visibility into the operational performance of manufacturing operations Those companies that Aberdeen determined to be "fully automated" are 81% more likely than those that are partially automated to be able to respond in the time required by regulatory bodies. Thirty-three percent (33%) are able to respond as quickly as 30 minutes. However, even those that are fully automated can still improve in terms of compliance reporting. Only 28% (of those fully automated) are able to achieve 100% of compliance with regulatory requirements through automated queries and reporting. However, this same group is still better equipped in terms of quick response to potential schedule interruptions. Those with "full automation" are more than twice as likely to be able to have alerts provide signals directly back to ERP to flag potential schedule interruptions. While manual intervention may still be required for a decision as to how to deal with the problem, these types of alerts are critical to prevent either shutting down a line or continuing to produce product that could be outside of specifications or out of compliance. Organization The commitment by senior management to ERP has been the hallmark of a successful ERP implementation for so long that one would think everyone would do it. While even 59% of Laggard companies share this capability, there is still room for more recognized commitment. Additionally, if the line of business ultimately owns the success of the ERP implementation, these employees will become more personally invested and actively commit themselves to making the program a success. Part of that commitment is to continue to train new users as new employees are hired (because of either growth or to replace employees that have left the company). The Best-in- Class are 1.38 times as likely as all others to properly train new employees in ERP usage after the initial stages of implementation. "[Our ERP] accomplishes what the users require, and has the flexibility to accommodate changes in processes." ~ Director, Medium Metals Manufacturer

20 Page 20 Aberdeen firmly believes an ERP implementation should never be viewed as "done," since business requirements and available functionality continues to evolve. However, process manufacturers that face certain compliance requirements such as FDA certification in the United States, significant changes to ERP may require recertification and this is often cited as the reason for limiting the implementation of new innovations. While this is a valid concern, it does not prevent companies from taking full advantage of the features and functionality available to them in the current (and possibly certified) implementation of ERP. If this doesn't happen, the value and benefits of an ERP system can actually decline over the life of the implementation. If new users are unaware of the features and options, there is a risk of underutilization. Knowledge Management There are multiple variables that process and hybrid manufacturers often must deal with, including: Inexact quantities Attributes which vary with heat or cold or any number of factors Materials that are defined by attributes and characteristics which can vary from lot to lot or batch to batch Tolerances and specifications which are defined by customers As the manufacturing process goes on, all these variables must be constantly monitored. The ability to identify and respond to variances in real-time or near real-time (defined as 'within minutes') enables rapid response to nonconforming product, allowing corrective action to be undertaken to prevent product deviation and minimize the impact on the plant s internal schedule. Forty-seven percent (47%) of Best-in-Class have the ability to automatically and immediately notify decision makers when certain conditions occur (Figure 8), 114% more likely than all others. Decision makers need to know what is going on throughout the company in order to effectively make informed decisions, which is what makes the ability for decision makers to drill down to transactions that form the fiscal and operational audit trail so critical. While summarized data is useful in identifying potential problems at an aggregate level, trouble shooting and root cause analysis of problems requires selective and successive levels of detail. "All the end users are satisfied with ERP functionality and operational results. Top management is driving the business via reports and statistics with true facts and data." ~ Consultant, Medium Chemicals Manufacturer

21 Page 21 Figure 8: Knowledge Management Capabilities Percentage of Respondents, n = % 75% 50% 25% 0% Best-in-Class Industry Average Laggard 72% 50% 43% 47% 42% 27% 26% 15% 10% From summary data, decision-makers can drill down to transactions that form the fiscal and operational audit trail Ability to automatically notify decision-makers when scheduled activities fail to occur on time Ability to automatically and immediately notify decision makers when certain conditions occur Technology Technology enables process and hybrid manufacturers to execute their strategies and achieve their goals. Ninety-three percent (93%) of the Bestin-Class have integrated business applications that serve as a complete and auditable system of record. They recognize which features of ERP are most important in their industries and use them to improve processes, gain visibility, and make informed decisions. Aberdeen asked process and hybrid manufacturers to rank on a scale of 1 to 5 the importance of features of ERP. Table 5 contrasts the relative importance of the feature against the likelihood of those features being implemented. Table 5: Priorities and Adoption of ERP Features Hybrid (Process & Process Only Required Feature Discrete) Importance Adoption Importance Adoption Integrated order entry, procurement, planning and production, financial management % % Forward and backward lot traceability-internal % % Forward and backward lot traceability-external % % Attribute based rules and routing % % Recipe formulation % % Actual costing by batch % % Actual costing by lot % % Support of co-products and by-products % % Catch weight % % Shelf life management % %

22 Page 22 Hybrid (Process & Process Only Required Feature Discrete) Importance Adoption Importance Adoption Promotion Management % % 21 CFR Part 11 compliance % % Material Safety Data Sheet (MSDS) Management % % Assay/Potency concentration % % RFID tags carrying Electronic Product Codes % % Supplier compliance and collaboration % % Advanced Planning & Scheduling % % Price and margin management % % Product and nutrition labeling % % Inventory optimization % % Inverse BOMs for production/costing % % Yield management % % Note the features of ERP that are most important to process and hybrid manufacturers, although closely aligned with their goals and actions, are not necessarily those that are most likely to be implemented. This may result from an implementation that is not yet complete (14% of survey respondents indicated implementations were "still in process") or because the ERP solution selected does not adequately support the requirements. As noted previously, process manufacturers have special requirements for "ERP plus" and yet may not have selected a solution that was designed to specifically meet those needs. For example, forward and backward lot traceability (internal and external) is of utmost importance to those companies that need to provide this in order to successfully manage recall situations when determining the source of potentially contaminated products along with identification of lots affected, and where those lots landed. Similarly, shelf life management is important to process manufacturers since products can spoil or lose potency. This list can serve as a checklist for Process manufacturers. While all are not equally important to all (as evidenced by the difference in relative priority even in comparing process only to hybrid manufacturers), each company should evaluate all specific features carefully. Determine the need and seek a solution that effectively meets the requirements. Performance Management The importance of measuring the business benefits from ERP cannot be stated strongly enough. Laggard process manufacturers are 4 times more likely to not measure cost reductions and schedule improvements as a result of implementing ERP than the Best-in-Class. Best-in-Class process "We reduced COGS and inventory turnover in just our second month of ERP implementation." ~ Director, Medium food and beverage manufacturer

23 Page 23 manufacturers are 62% more likely than all others to measure ROI for ERP projects. The more likely companies are to quantify the results achieved through the implementation of ERP, the more business benefit is actually achieved (Table 6). The Best-in-Class are seeing significant reductions in inventory, operating costs and administrative costs, and improvements in complete and on-time delivery and internal schedule compliance. Additionally, they are seeing a 9% growth in operating margin and a 34% improvement in time to decision. These business benefits achieved through successful ERP implementations allow the Best-in-Class to maintain their competitive position. Table 6: Business Benefits Achieved From ERP Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Industry Average: Middle 50% of aggregate performance scorers Laggard: Bottom 30% of aggregate performance scorers Mean Class Performance 21% reduction in inventory 17% reduction in operating costs 15% reduction in administrative costs 18% improvement in complete and on-time delivery 18% improvement in internal schedule compliance 11% reduction in inventory 10% reduction in operating costs 10% reduction in administrative costs 12% improvement in complete and on-time delivery 12% improvement in internal schedule compliance 6% reduction in inventory 3% reduction in operating costs.5% reduction in administrative costs 1% improvement in complete and on-time delivery 11% improvement in internal schedule compliance Aberdeen Insights Technology One sure way to measure the overall performance of a manufacturing operation is by determining the ability of the enterprise to identify variances in production in real or near real-time, thereby preventing a non-conforming product from being manufactured, minimizing the impact on schedules, and therefore improving customer service. Automation for data collection combined with event management, alarms, and the organizational and technical ability to shut down and restart production, are essential. (continued)

24 Page 24 Aberdeen Insights Technology Figure 9: Exception Management 60% Identify variances 15% 31% Fully Automated Respond to variances 13% 21% 34% Partial Automation Little or No Automation 0% 10% 20% 30% 40% 50% 60% Percentage of Respondents, n=118 Automation enables process manufacturers to be better able to deal with compliance and reporting, to be better able to respond to possible recalls, and to have better visibility to all business processes. If a recall needs to be made, it is important to be able to respond as quickly as possible. Automation simplifies this process and helps to avoid mistakes. Figure 10 demonstrates the greater ability of those that are "fully automated" to identify variances and respond to them before a problem can turn into a disruptive hazard.

25 Page 25 Chapter Three: Required Actions Whether a company is trying to move its ERP implementation from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements. Before listing the specific actions by maturity class, Aberdeen offers the following general recommendations. Recommended Steps for All Companies The majority of process manufacturers faces some level of requirement in terms of dealing with a potential recall and if so, faces either strict or recommended requirements for responding to this eventuality. Yet even 44% of our Best-in-Class are still unable to respond in the time required by regulatory bodies. We have correlated the use of automation to being better equipped to deal with such an event and in fact a third of those that are fully automated can indeed respond within 30 minutes or less. Compare this with the necessity of recalling all lettuce or tomatoes from grocery shelves because the suppliers were not able to identify and trace the source of the problem. Yet food products are not the only products at risk. Full forward and backward traceability is the first step in assuring compliance. Since ERP provides the transactional audit trail of inventory movement, implementing lot traceability as an ERP feature, while not the only option, is indeed the cleanest and most expeditious. If your current ERP solution does not provide this capability, and it is indeed a requirement of the industry in which you supply product, consider replacing it with a solution designed specifically for process manufacturers. Implement tools that provide visibility and transparency through the manufacturing process and even beyond, looking back at suppliers and forward to customer delivery. These may be in the form of reports within the ERP solution, or better yet, implemented as interactive dashboards that may provide a variety of different visual triggers. These may be in the format of a dial, thermometer or heat maps, but should easily signal performance issues that can prevent growth, customer service or cost reduction. Fast Facts The Best-in-Class are twice as likely to have implemented integrated solutions that form a complete and auditable system of record for their business These complete audit trails, along with full forward and backward traceability better automate the recall process. 78% of those that are fully automated are able to respond to a recall in the time required by regulatory bodies and 33% can do so in less than 30 minutes Laggards are on average 4 times more likely than top performers to not measure results such as cost reductions and schedule improvements Laggard Steps to Success Continually train new employees on ERP usage after the initial stages of implementation. It is important for employees to evolve with the system, continuously improving, making better and more complete use of the solution. If new employees are not trained properly, then the company runs the risk of underutilizing

26 Page 26 its ERP and not achieving the full benefits. The Best-in-Class are 92% more likely to do this than Laggards. Define a current baseline of performance and set goals for improvement. These goals can include cost savings, schedule improvements or quality metrics. Laggards are on average 4 times more likely than top performers to not measure results such as cost reductions and schedule improvements. As a result, Best-in-Class ERP implementations produce 2.5 times greater reduction in inventory and almost 5 times greater reductions in operating costs. Other business benefits for cost reduction and schedule improvements are similar. Often the first step to realizing these goals is defining the possibility and the objectives. Industry Average Steps to Success Reduce the dependence on spreadsheets and manual processes. Automation can improve backward and forward lot traceability and facilitate compliance reporting. Currently, only 13% of process manufacturers are automating compliance to regulatory requirements. Integrate enterprise applications to the fullest extent. Only 53% of the Industry Average operate integrated business applications that serve as a complete and auditable system of record. In this capability, the Best-in-Class have a 75% advantage. Whether connecting ERP to complementary solutions to provide basic industry-specific features such as recipe formulation, demand forecasting, or advanced planning, fully integrated systems enable better cohesion throughout the company. Provide visibility to decision makers so that they can make better informed decisions. Seventy-two percent (72%) of Bestin-Class decision makers can drill down to transactions that form the fiscal and operational audit trail from summary data. In comparison, only 50% of the Industry Average has this capability. Most modern ERP solutions have this type of capability. If you are stuck on an older release or are using a solution which does not provide this feature, consider upgrading or replacing your solution. When top goals include reducing costs and sustaining through the economic downturn, it is important to have full visibility to facilitate communication. "We measure the success of our ERP by improved throughput, user feedback and enhancements that will make our business more successful and FDA compliant." ~ Director, Medium Size Food and Beverage Manufacturer Best-in-Class Steps to Success Implement event management to monitor both transactions and conditions, looking for events as they occur or fail to occur. While this is more likely to be a capability of a top performer, 58% of the Best-in-Class still do not have the ability to automatically notify decision makers when scheduled