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Cloud ERP for Manufacturing: 6 Considerations

Written By: Aleksey Osintsev
Published On: February 20 2012

While cloud computing is still hot, the conversations I’ve been having with people who are in the process of selecting an enterprise resource planning (ERP) system for their manufacturing business express a lot of skepticism, uncertainty, and concern about the applicability of cloud software to their business.

There is no shortage of software-as-a-service (SaaS)–based manufacturing ERP software offerings nowadays, for almost any vertical manufacturing market segment, but while cloud and hosted solutions are routine for many types of business software across various industries, TEC data shows that they are not in wide use among manufacturing businesses.

To analyze the data, I combined TEC Advisor project numbers of ERP for discrete manufacturing, ERP for process manufacturing, ERP for engineer-to-order manufacturing, ERP for the apparel industry, ERP for mill-based and material converting environments, mining industry ERP, and ERP for mixed-mode manufacturing. For the sake of simplicity, I grouped together SaaS and hosted solutions—a set of applications that are not deployed on the manufacturer’s premises and can be accessed via the Internet. Note also that interest in SaaS-based ERP software for manufacturing (and other industries) varies by country and geographical area and can be seriously affected by political climate and general development capabilities, as well as lines of communication and local business and Internet rules and practices, but such level of detail is beyond the scope of this analysis.

The graph below demonstrates which server platforms TEC Advisor users from manufacturing companies indicated as preferred for their future ERP systems.


Server platform preferences of manufacturing businesses
*Totals may exceed 100% as multiple server platforms may have been selected.

Cloud and hosted solutions demonstrate stable growth—in the manufacturing sector the level of interest more than doubled since 2007, from 9.4% to 19.4% of all respondents in 2011. In fact, all other platforms showed a decline in interest.

However, the preference for SaaS and hosted solutions together is a fraction—only one-fifth of all respondents in 2011—of that for traditional in-house server platforms. This shouldn’t be too surprising given that the market for cloud-based or SaaS ERP systems for manufacturing is still relatively immature and is in a stage of active development.

Despite the rush for the cloud with other types of business software, such as customer relationship management (CRM), human resources management (HRM), and project and process management (PPM), there are valid reasons for manufacturing companies to avoid off-premise ERP systems. Some of these issues are to do with the nature of SaaS-based software products, and others are specific to the manufacturing industry.

There are six major issues over which manufacturers hesitate to move to the cloud:

  1. Multiple modification requirements. Since manufacturing is generally a complex process, which includes a wide range of operations and a high volume of transactions, many of which are unique, there is a high level of possibility that modifications or customizations of standard out-of-the-box ERP software will be required. But software modification requirements interfere with the main idea of multitenant SaaS ERP—delivering exactly the same application to all the clients. Certainly, some SaaS software products can accommodate low-level changes, such as screen customization or those related to features not requiring source code change. But this model cannot accommodate serious changes in business logic and processes.

Handling exceptions in common business processes and making modifications to ERP systems has always been frustrating and expensive, so if a cloud product reflects all of a manufacturer’s specifics within its standard functionality, it should be given serious consideration.

  1. Data ownership and overall increased dependency on a third party. Any usage of an ERP system implies a level of dependency on a business that is out of your direct control. However, in the case of cloud computing this dependency will be absolutized. The issue goes beyond temporary service outages, or the theoretical possibility that a service provider may file for bankruptcy. Fundamental differences may exist between the service user and the service provider—strategy, approach to routine operations, provision of information, reaction speed, etc. In addition, manufacturing companies will have logistical concerns regarding data availability in cases of contract expiration or termination for any reason.

Obviously, not all businesses feel comfortable putting their private data and related infrastructure into the hands of others, especially into remote services that you can’t control. But on the flip side, modern businesses already depend on a huge number of service providers, such as banks, consultants, and suppliers, who outsource various business functions, thereby sharing their private data to a greater or lesser degree.

  1. Strict compliance requirements. Many manufacturing businesses operate in market niches that are held to severe compliance regulations with multiple-level government standards, or various requirements from nongovernmental certification authorities. ERP software systems are often designed with functionality to help ensure compliance.

Cloud ERP vendors aren’t always able to support the requirements for specific regulations because of the nature of the deployment method or its technical limitations. For instance, some compliance activities may require dedicated servers, but cloud solutions generally rely on shared server power. Certain compliance legislation may even require information storage and processing to be internal.

  1. Security concerns. Despite the tremendous efforts of cloud providers to minimize security concerns, this remains one of the strongest impediments to the adoption of cloud-based ERP systems. Cloud application vendors argue that the security level of SaaS is even higher than for on-premise systems—the cloud service providers’ staff is highly trained and more experienced with preparing for and dealing with security and access issues, and dedicated data centers are built and managed with more focus and control.

It would be wise, however, to remember that the weakest element of security has never been the data center but rather the software end user—and this element remains the same, whether the user is accessing an on-premise or off-premise system. Some cloud ERP vendors may address end user security risk within their service level agreement but the price of such a service should be factored into the system’s total cost of ownership.

  1. Leasing versus purchasing. Although leasing may seem to be more affordable in the short term than purchasing, this method may not be suitable for some manufacturing companies. The final decision to purchase or to lease greatly depends on several factors, including accounting, geography, taxation, and established corporate policies. Note also that the SaaS delivery model is not always less expensive than owning—from a long-term perspective, buying your software outright will likely be more cost-effective.
     
  2. Integration with other corporate applications. Operational issues at the junction of two or more software products are frequent, and an ERP system has to integrate with the other cloud and on-premise systems that a company uses—a manufacturing company may run dozens or even hundreds of various systems simultaneously. Technically speaking, all potential integration issues can be resolved, but what it will look like from an organizational or administrative point of view is an open question. Geographic remoteness may bring an additional level of complexity to an already complicated issue. In addition, the total cost of such integration work may make this deployment model less attractive.

In fact, the cloud solutions landscape is further complicated by the different types and classes of offered applications, including private cloud, platform as a service, infrastructure as a service, software hosting, and so on—the variety of possible combinations of delivery methods for a single manufacturing business is huge. To navigate the software evaluation and selection process, companies need to clearly identify and understand their business priorities and strategy.

Most of the above-mentioned concerns are surmountable; with the exception of specific compliance issues and cost considerations, there’s no longer any reason for manufacturers to stay away from the cloud.

 
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