In the Cloud: How cloud computing is changing the manufacturing ERP landscape
The introduction and success of cloud computing in recent years has dramatically changed how businesses run. Nowhere is this more apparent than in the manufacturing industry, as manufacturers have been traditionally slower to adopt new technology platforms that affect mission-critical operations. With cloud computing, we are seeing a seismic shift in the manufacturing landscape moving to business applications delivered as software as a service (SaaS) via the Internet.
A 2009 International Data Corp. (IDC) study shows that the Software as a Service (SaaS) market had worldwide revenues of $13.1 billion. IDC forecasts the market to reach $40.5 billion by 2014, representing a compound annual growth rate of 25 per cent. By 2012, IDC expects that less than 15 per cent of net-new software firms coming to market will ship a packaged product (on CD). By 2014, about 34 per cent of all new business software purchases will be consumed via SaaS, and SaaS delivery will constitute about 14.5 per cent of worldwide software spending across all primary markets.
Why are manufacturing companies shifting to the cloud? How is the recent introduction and adoption of Platform as a Service (PaaS) solutions impacting manufacturers? What makes PaaS a better solution for manufacturing rather than the traditional on-premise, other SaaS or other ‘on-demand’ offerings? We explore some of the main drivers behind this shift to new technology platforms—and why it is critical to build competitive edge for the future.
Cloud Computing 101
The basic argument in favor of cloud computing remains the same across all industry verticals. Specifically, cloud computing significantly reduces the costs and complexity of evaluating, buying, configuring and managing business applications. Rather than requiring companies to manage all the various software applications and hardware required, cloud computing initially has promised (and delivered) these solutions as a service via the Internet. It has evolved even further to now include platforms for building and running custom applications, commonly referred to as ‘Platform as a Service’ (PaaS). This new ability to provide customized solutions on a common cloud-computing platform delivers new possibilities to companies of all types. It simplifies deployment and encourages innovation across all business solutions, while lowering overall costs.
Manufacturers in particular benefit from the move to PaaS. Traditionally, manufacturers have been hesitant to jump on to the latest technological ‘bandwagon’ that promised better, faster, and cheaper solutions. In essence, they have been burned in the past and don’t want to take on any additional risk from unproven and unknown software solutions. This has resulted in many manufacturers – mid-market manufacturers in particular – having antiquated, dated systems that are simply taking too many resources to just keep up and running.
The move to cloud computing finally delivered solutions that provided manufacturers with improved visibility and management capabilities into their global operations at lower overall costs. While these benefits were clear, some manufacturers still resisted because the standard SaaS solutions did not provide the critical capability or functionality for their particular business. This left the complexity of integrating and maintaining new SaaS solutions with legacy ‘mission critical’ applications. The move to PaaS radically changes this ‘problem’ for manufacturers. With a standard platform for building and running applications in the cloud, manufacturers can now easily maintain mission-critical customized business applications. PaaS simplifies development and encourages innovation of new cutting-edge business solutions, removing the need to build ‘from scratch’. This standardized infrastructure also creates a new ecosystem of developers that can now build customized applications quickly and easily for manufacturing companies.
Now, manufacturers can run the entire business in a cloud on a platform that lowers costs, improves visibility, simplifies operations, and – possibly most important – lowers overall business risk. Manufacturing executives are no longer burdened with the overhead associated with managing IT resources. Also removed are concerns over technological obsolescence associated with ERP systems that don’t keep up with times. Given the strong PaaS ecosystem that encourages software companies to develop their solutions with ease of integration in mind, businesses are provided with more choices for software solutions.
Almost every mid-size manufacturer outsources or partners with other manufacturing companies during their routine operations. Whether this is due to efforts to save costs, focus on core competencies, or gain access to industry expertise, we have seen a dramatic move in the last decade to more outsourced operations. In simple terms, ‘outsourcing’ can be defined as the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. It is a management strategy by which an organization outsources major, non-core functions to specialized, efficient service providers.
Manufacturers in particular have embraced outsourcing as a critical way to remain competitive in the global marketplace with the benefits of lowering costs and improved flexibility. Outsourcing can be more challenging than expected, however, due to the need for better collaboration throughout the extended supply chain.
Cloud computing solutions, and in particular supply chain management (SCM) solutions, finally give manufacturers the visibility and agility they need to better run their outsourced operations. With SaaS supply chain management (SCM) solutions, manufacturers have the ability to easily add new partners, better monitor product quality, and be more agile to respond to change quickly.
With an increased reliance on outsourced manufacturing, the need for collaboration has escalated. Cloud computing now enables manufacturers with inter-enterprise collaboration. Manufacturing companies and their outsourcing partners have access to business applications to support critical visibility and collaboration, but mission critical processes sometimes slip through the cracks. Manufacturers need not only SaaS but an entire platform to build and run any customized applications – thus the need for PaaS. History has taught us that manufacturing companies will always need customized software solutions that easily integrate to their core ERP software. PaaS delivers the robust ecosystem and ease of integration to support this requirement.
Manufacturing is currently experiencing a major shift to relying on communities of trading partners to fulfill outsourced manufacturing services. Cloud computing, and in particular PaaS, is the catalyst for this explosive change and it is the trigger that will deliver a new collaborative, community supply chain management model. Manufacturers with outsourced operations are moving to the cloud for obvious benefits today and the promise of additional benefits tomorrow. The move from ‘on-premise’ to the Internet based ERP systems allows the manufacturer easy access (24 x 7) to a single system in the cloud.
Multi-Plant Environment now the Norm
Multiple plant operations add complexity. Whether manufacturing plants are located across town, across the country, or across the world, companies today need to have sound business processes and systems in place for successful global operations. The need for systems that provide you with increased operational efficiencies, increased productivity, and costs savings must be balanced with the need for increased collaboration and visibility.
One clear example of this inherent complexity is effectively capturing manufacturing costs. Different operations, different sites, different plants, different divisions, different business units usually capture and maintain their own ‘sub-ledgers’ of cost accounts. The complexity of accurately capturing these costs and then rolling up into the main ledger for the company’s overall financial statements is clear. Just doing this roll up activity manually may take days, weeks, or months to complete. Manufacturers would not know what their real costs were for months after the fact, let alone have any real understanding of costs they are occurring today to make better business decisions.
With cloud computing, solutions are now available to deliver global real-time business solutions to manufacturers. Companies gain improved visibility and business intelligence to better manage the entire business as a whole rather than as separate plants. They now have access to dashboards of information that instantly show what is occurring throughout their global operations to make better business decisions today. But again, SaaS solutions sometimes fall short in providing unique applications or business solutions needed to run each distinctive business.
PaaS finally delivers the platform to support the multi-company business processes inherent in any supply chain. It provides the visibility, flexibility, and simplicity to enable manufacturers to better run their multi-plant operations. A successful manufacturing company can now have business-critical apps specific to particular sites, plants, divisions, and business units running in the PaaS environment simply and easily linked to all their other cloud-based solutions. You get the benefits of customized expert systems for your unique needs running in a simple, cost efficient platform.
Building for the Future
As with any investment, business application purchasing decisions are not only about what your company needs today but what will be best position them for tomorrow. The momentum towards cloud based solutions by manufacturers strongly illustrates this point. The cloud, delivering both software and platform as a service, provides cost savings, standardized business processes, and the operational efficiencies companies need today to remain competitive. Even more important, though, is what the cloud promises for the future for manufacturers.
Arguably the most valuable benefits of moving to the cloud are the simplicity and flexibility to be responsive to all sorts of change. Now, real-time visibility is no longer a myth, but an actuality, providing valuable dashboards of information in order to make more informed business decisions. As customer demand shifts, or supply availability changes, manufacturers now have the tools necessary to respond accordingly. In addition, this more flexible platform enables customized solutions, when needed for business critical operations, to be added simply and easily by an entire ecosystem of developers. As a new business opportunity emerges, manufacturers can quickly identify and take immediate action with any solutions necessary to best position them against competitors.
What is also interesting to watch in the coming years is the expected significant increase in merger and acquisitions (M&A) in the manufacturing industry. Despite the recent global economic slowdown, M&A activities are expected to grow due to many manufacturers taking advantage of an increase in market share or new market growth. An established cloud based computing platform may be critical for either those companies that wish to be acquired as well as the companies doing the acquisitions.
For those companies that wish to be merged into another organization, having established cloud computing solutions can make you much more ‘attractive’. An existing systems infrastructure that is simple and flexible that can be easily consolidated with other companies’ systems eases the complexity that comes from traditional M&A activities. It is one less headache that the acquirer has to deal with knowing that they are not acquiring a legacy software system and additional IT infrastructure costs.
For companies looking to grow via an M&A strategy, having an established cloud based platform not only gives you the visibility that you need to run your current business but it also provides the flexibility to add new sites, plants, divisions, and business units as the opportunities arise. Also, the key to most successful mergers is maintaining a lower cost of ownership for business solutions. With cloud solutions, the usual obstacles of antiquated legacy systems and costly integration disappear.
There is little doubt that manufacturers are moving to the cloud. More enterprises consider cloud computing a viable technology, with nearly 60 percent saying they view it as a business enabler versus less than 40 percent who say the technology will take years to mature. That’s a big change from 2009, when just 37 percent saw it as an enabler and 63 percent were taking a wait-and-see attitude or considering the cloud more marketing hype than reality. “Cloud computing is on the cusp of broad enterprise adoption,” said Sheryl Kingstone, Research Director at Yankee Group.
More and more companies are realizing the dramatic costs savings and operational efficiencies gained today as well as improved visibility and flexibility gained for tomorrow. Critical to this move is the emergence of Platforms as a Service that provide a robust, yet simple way to enable customized solutions unique to specific business needs. This all points to a seismic shift in the manufacturing landscape to cloud based solutions that are critical to building competitive advantage in the future.
Pat Garrehy is the founder, president and CEO of Rootstock Software. For more information, visit www.rootstock.com.