It’s been many years since manufacturers of all sizes and industry types started embracing the principles of going “lean.” Also commonly called Lean Manufacturing, these organizations purposely set out to focus on eliminating wasteful and redundant activities from their processes, procedures and resources, to ultimately be reborn as much leaner, more efficient companies. Today, that same desire for performance improvements, better customer service and a stronger balance sheet is gaining steam among wholesale distributors as well. Distributors are fast discovering the concept of lean distribution and how it establishes a framework for helping distributors operate at peak efficiency, exceed customer expectations, and strengthen their bottom line.
With this comes the fact that technology is the cornerstone of being lean and reducing costs. The speed, volume and complexity of business transactions now dictates the use of technology to efficiently support communication and information exchange across
departmental boundaries and the organization’s supply chain. Furthermore, companies can leverage appropriately applied lean-centric technology to eliminate the redundant entry of information from one department to another. In other cases, technology eliminates steps traditionally requiring human intervention and, therefore, time.
But using technology brings up a very important question that needs to be answered about the technology itself. Should the technology and infrastructure be included in the lean audit process as well, and, if the goals are to lower costs and become more streamlined, should looking for ways to lower technology costs be part of the process? The answer to both of these questions is yes. Paying a large amount of money for technology to support being lean is in direct conflict with going lean in the first place.
Subsequently, the many processes and costs associated with the technology infrastructure, including hardware, software and people costs, implementation set up costs, updates to the system, maintenance costs or even charging for additional users on the system should not be left out of the lean audit process. It is important for distributors to question if they are using the most efficient, yet lowest-cost order entry system, inventory control system, purchasing system or financial system to support reducing costs. Part of the decision to reduce cost and to go lean is to also choose technologies and technology infrastructure that embody these goals.
Searching for Lower Cost Systems
Choosing which relevant technology to address the needs of distributors is an important task, but adding the aspect of being the most cost-effective to support a lean strategy is also mandatory for the goal. So the question is, what is the best way to start looking at ways to lower IT costs? A good starting point is taking a side-by-side look at traditional, on-premise ERP systems against the new software-as-a-service (SaaS) ERP systems in the market today. A comparison of the two offers a fast, high-level look at different technology platforms that represent real and embedded costs that can easily be seen. With this comes a good way to help determine the technology needs to reduce costs in the IT area.
To start the discussion of traditional, on-premise ERPs versus SaaS-based ERPs, a definition of each is in order. Most people are familiar with traditional ERP systems that have been implemented in the distribution environment for the last 25-plus years. These are on-premise systems that distributors use to run their businesses, such as order
entry, inventory control, purchasing, accounting, warehousing and shipping. Linked together within a network, the traditional on-premise systems allow users throughout the organization to effectively manage their piece of the business via hardware and software that is under complete control and responsibility of the distributor.
SaaS-based systems run a distribution business the same way the traditional systems do – with every feature and function found in the on-premise systems – except these systems are Web-based and there is no on-premise IT infrastructure present. These systems use “SaaS” as their delivery model and “Cloud” as their processing infrastructure. SaaS, sometimes referred to as “software on demand,” allows an application to be delivered to the end-user via an Internet browser, such as Microsoft Internet Explorer. With SaaS, distributors can purchase their ERP solution usage as a subscription or on a pay-as-you-go basis. The Cloud is a host site where the ERP applications and data are stored and the computing takes place. Even though applications delivered through SaaS look and perform like desktop applications, the computing is performed off-premise and is referred to as Internet-based computing.
There are also hybrid implementations that mix elements of these two models. For example, a distributor can purchase a software license and outsource the deployment and operation of the software to a third party. This provides the ownership of a traditional system with the operations of an SaaS model.
Traditional vs. SaaS . . . Which is Better to Lower Costs?
To help answer this question, try a simple side-by-side cost comparison of traditional on-premise ERP solutions with SaaS solutions over a 3-year to 5-year period. Take into consideration items such as hardware costs, ERP software costs, implementation costs, customization costs, training costs, support costs, maintenance update costs, and other costs specific to the business. It should be noted here that different models work best for different companies and all processing factors need to be taken into consideration. What becomes incredibly clear, however, is the new SaaS/Cloud offerings are far less expensive than the traditional on-premise systems when businesses lack existing infrastructure and information technology resources. For this reason, even the traditional on-premise ERP vendors are realizing the value of SaaS and Cloud computing by coming out with their own offerings in this area. Beyond this initial discovery, it is also important to do a side-by-side comparison among the SaaS/Cloud vendors as well (new vs. traditional, on-premise vendors with new SaaS/Cloud offerings), to receive a firm
understanding of the costs involved to help support the cost reduction, going lean plan.
Taking a Deeper Look
What you will notice is SaaS/Cloud based systems have a lower cost because there is not a need for an IT infrastructure (computers to run the applications, client side software to be installed or maintained and people that know how to run the systems), which eliminates acquisition costs, longer term costs for hardware and software upgrades and ongoing operational costs. There are also the benefits of shorter rollout times for new applications, faster update and improvement cycles resulting in more up-to-date functionality and support expertise, and the ability to scale up or down based on demand. Additionally, SaaS/Cloud applications are usable anywhere via the Internet, eliminating the need for the expenses usually associated with networking the on-premise system. Costs are also predictable, allowing for easier budgeting.
On the other hand, even though the traditional systems provide less cost savings, they do provide important operational benefits, such as having the data and computing of applications stay on premises, or the ability to monitor system performance or uptime with the same tools used internally for traditional systems. They can also benefit from being able to customize their applications in house and not having their functionality change without notice. There is also the circumstance that business stops if the company loses its Internet connection. Not having to entrust backup and recovery to an outside vendor is also important to some distributors.
It should be noted that some SaaS vendors allow their applications to be deployed on-premise as well, creating a “private” Cloud within the distributor’s business in order to keep their data, applications and computing in house. Others allow the distributors to choose where they want their data and applications hosted. Both of these options lower the security risk fears of distributors not wanting to process on the Web. Some vendors also allow the distributor to switch from their SaaS implementation to on-premise (and back) based on the distributor’s changing needs. This would be helpful if there is a concern about the monthly payment going higher over the course of the subscription or the distributor does not want to continue to pay a monthly fee for as long as there is a need for an ERP solution. Customization and integration with other on-premise systems is also available with some SaaS-based offerings.
Today, distributors have a choice to make to find the best possible solutions that support their goals of reducing cost or going lean. A simple comparison of technology platforms helps distributors make this decision, as it can clearly show which solution reduces costs. Other operational factors may also come into the decision, however, and it is up to the distributor to determine the importance of these factors to the way they process their information. Whether the choice is a traditional on-premise ERP system or a SaaS/Cloud ERP system, the system must handle the complexities of distribution and they must do so in the most efficient manner with the least amount of costs.
Gary Rippen is the director of marketing for Acumatica, a global provider of Cloud ERP solutions for wholesale distributors. Rippen has more than 15 years in the distribution industry and is responsible for marketing Acumatica’s comprehensive distribution solutions to distributors looking to drive measurable business growth. For more information on Acumatica’s Cloud ERP products and how distributors can lower their ERP costs, please visit: www.acumatica.com.
This article originally appeared in the Jan./Feb. 2011 issue of Industrial Supplymagazine. Copyright 2011, Direct Business Media.