Cloud ERP provides an attractive alternative to on-premise systems

By Frank Scavo

Cloud-based Enterprise Resource Planning (ERP) systems have been gaining market share in recent years. Business leaders appreciate cloud applications for their speed of implementation, reduction in on-premise IT infrastructure, and scalability.

Cloud ERP, however, has achieved most of its success to date in services businesses, with manufacturing firms slower to embrace cloud computing for delivery of their mission-critical ERP systems. There are exceptions, of course, but until now there have been several challenges facing cloud ERP providers in gaining market share among manufacturers.

Conservative attitude. Manufacturing companies are generally not early adopters of new technologies. They prefer systems that are tried and true, those that have been broadly adopted by their peers. They may not have heard of the cloud ERP systems that are gaining ground, and they may not be sure they can trust cloud providers to ensure the privacy of their data.

Availability concerns. ERP in manufacturing companies is more than a back-office system. In many manufacturing firms, ERP is the basis for time-sensitive business transactions such as order promising, receiving and put-away, and shipping. Whereas many professional services firms, for example, can continue to deliver services to customers when their ERP systems go down, in manufacturing companies ERP downtime can bring production and shipping to a screeching halt. This is especially true when ERP systems are integrated with real-time warehouse management, manufacturing execution systems, or shipping systems. Entrusting mission-critical ERP to a cloud provider hundreds of miles away takes a certain amount of trust in the provider’s ability to maintain system availability and ensure rapid response time.

On-premise orientation. The benefits of cloud applications such as CRM and expense reporting are easy to see in that they can be accessed by employees anywhere, anytime through an Internet connection. As such, the applications support a mobile workforce. But most manufacturing ERP users are not mobile. They work on-premise in factories and warehouses. Because most of the ERP users are on-premise, manufacturing executives have naturally thought it logical to have their ERP systems on-premise as well.

Integration challenges. Our research at Computer Economics shows that when it comes to cloud computing, “difficulty in integration” is the top concern of manufacturing executives, as shown in Figure 1. Manufacturing CIOs often need to integrate ERP with real-time data collection, warehouse management, logistics, and manufacturing execution systems, for example. CIOs have, in the past, viewed these integration requirements as difficult to accommodate with cloud ERP systems.

Functionality gaps. Because ERP systems originally grew out of the manufacturing MRP systems of the 1970s, on-premise ERP systems have had more than 40 years to build out their functionality for all kinds of manufacturing industries and sub-industries. Today, you can find on-premise ERP systems that not only serve process manufacturers, but also those that meet the needs of metal fabricators and even manufacturers of rolled products such as wire. Today’s cloud ERP systems, in contrast, do a good job of meeting common requirements of manufacturers. But they have not had the time to build out every last piece of niche functionality that is available in on-premise systems.

These objections to manufacturing systems in the cloud may have been true in the past, but cloud providers today are rapidly overcoming them.

Cloud computing has become mainstream. Even the most grizzled plant manager by now is using Google, Facebook, or Orbitz—all cloud computing applications. Moreover, many manufacturers are already using business systems in the cloud such as Salesforce.com for CRM or Concur for expense management. As a result, some manufacturing executives are asking: If cloud systems work so well for other parts of our businesses, why can’t we have our ERP system in the cloud?

Cloud applications are highly available. The leading cloud providers now publicly report their system uptime, and they often report levels of availability that exceed what most in-house IT organizations can provide. Many manufacturers, especially small and midsize firms, cannot afford the investment in redundant infrastructure or support staff that is required to deliver high availability. Cloud providers, because of their scale, can now be seen as the safer choice for mission-critical systems.

Cloud benefits go beyond mobility support. Manufacturing users tend to stay in one place and, therefore, seem to be a good fit for on-premise systems that are local to their facility. But cloud computing is not just about supporting remote users: it is also about supporting remote facilities. Manufacturing companies that have implemented cloud ERP can quickly bring new facilities online around the world, without having to add IT infrastructure or support staff onsite in each new plant or warehouse, especially smaller ones. Manufacturers that are growing their operations in international locations or acquiring other companies are finding cloud ERP a strategic choice.

Integration challenges are being overcome. In recent years, cloud ERP providers have made great advances in integrating their systems with on-premise factory automation, data collection, and logistics systems.

Through web services and application programming interfaces (APIs), the leading cloud vendors argue that their systems are easier to integrate than traditional on-premise ERP. Where system availability requirements demand it, some manufacturing firms have established multiple network connections, such as a T1 line plus DSL or ISDN back up through independent ISPs. In other cases, cloud vendors provide on-premise, store-and-forward appliances that allow real-time systems to continue to operate in the event of a network disruption.

Manufacturing functionality in the cloud is growing. Although on-premise manufacturing systems had the edge in the past over cloud ERP, the gap is narrowing. This is especially true for the “cloud-only” ERP providers, which do not have to support a legacy installed base of multiple versions of databases, middleware, or operating systems. The cloud-only ERP providers can invest all their development budgets into a single version of their systems. The rapid development tools of modern cloud systems also expedite the functionality build-out for manufacturing systems.

Are cloud ERP systems the right choice for all manufacturers today? Not at all. Manufacturers with installed systems that are up-to-date and have the functionality, scalability, and extensibility that they are happy with have little need to change. Any new ERP system—whether on-premise or in the cloud—can be a significant investment of time and money.

But a manufacturing organization that is in the market for a new ERP system or thinking about making a change, should put cloud ERP systems on its short list. Many of the challenges to cloud ERP for manufacturing have been overcome, and in many cases, the functionality of cloud ERP matches or exceeds what is available from on-premise vendors.

The manufacturing ERP landscape is changing rapidly. Do your homework and check the references of other manufacturers that have taken their ERP systems to the cloud. You may be surprised at what you find.

About Author

 

Frank Scavo is Principal Analyst, Constellation Research, Inc. and President of Computer Economics, Inc. Frank has more than 20 years of experience in advising manufacturing companies selecting ERP systems. He has been an APICS Fellow since 1981.