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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Business
Benefits and Return of Investment (ROI) by David Cullis -XeBusiness
"The challenge facing apparel, footwear and soft goods supply companies
today is doing more with less and having to do it faster and more effectively."
Synopsis
It is clear that the take on of Enterprise Resource Planning software
has had the potential for significant cost saving advantages for all business
sectors that have taken up the challenge. This is true for both the "big
players” - the blue chip multinationals - and for SMEs – small
to medium sized enterprises.
ROI (Return on
Investment or Payback) for ERP is intuitively understood - but difficult
to quantify and extrapolate. For this reason, when MD’s ask their
IT or Finance staff to draw up an ROI model for an ERP system, they find
it difficult to do so.
Although we know
intuitively that faster turn around of customer orders will lead to improved
customer satisfaction, leading in turn to repeat orders and therefore
increased profit, it is not easy to put a value on the expected sales
and consequent bottom line profit improvements. However, there are quantifiable
savings to be identified and achieved based on empirical evidence from
users of these systems and from the extensive industry domain knowledge
and applied IT awareness possessed by XeBusiness consultants.
Based on 'real world'
industry sector research, we have established a ROI or payback period
of between 5 to 8 months on the cost of deploying an effective ERP/MIS
system like Xe-ERP to underpin the various aspects of an apparel/soft
goods company's business model.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Part 1 - Defining a Framework for Establishing ROI on Deploying Xe-ERP
The
Xe-Business Enterprise Resource Planning system is divided into two main
areas, Customer Relationship Management (CRM) and Resource Management.
CRM is further divided into Sales Order Processing
(SOP) and Distribution.
Resource
Management is further divided into Materials Requirement
Planning (MRP), Outsourcing and Shop Floor Production Control.
Below are detailed
some of the business benefits of deploying the Xe-ERP system, together
with examples of typical cost savings linked to ROI that can be expected
to accrue from these benefits.
The main areas of
sales revenue increases and operational cost savings can be summarised
as follows: -
CRM
- Customer Relationship Management
Sales Order Processing
Objective: Streamline the Fulfilment Functions
Improved Customer
Service
Reduced Administration Costs
Improved Cash Flow
Distribution
Objective: Pick and ship right product in right quantity on time to right
place at optimum cost
Reduction in Overtime
Reduction of Stock Holding / Quicker Stock Turnaround
Identification of Product Age Concerns / Identification of Stock Shortages
Reduction of Lost Customer Orders
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Resource Management
MRP –
Plan and Schedule Manufacturing Capacity
Objective: Optimise manufacturing and sourcing of raw materials for competitive
advantage.
Quicker Response
to Demand Changes
Reduced Inventory & Redundant Stock
Just in Time (JIT) Ordering
Reduced Administration Costs
Sourcing of Finished Product
Objective: Optimise the sourcing of finished product for competitive advantage.
CMT - Cut Make
and Trim Manufacture
Sourcing globally
Shop Floor Production Control
Objective: Optimise the manufacturing process to optimise productivity,
WIP and quality.
Improved Efficiency
Time Saved by Clocking at the Needle Point
Reduced Downtime
Reduced Supervisor Checks on Performance and Balancing
Improved Quality
More Accurate Wages
Reduced Administration Costs
Reduced Overtime Working
Reduced Work in Progress
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Apparel Software, Enterprise Resource Planning (ERP)
General
Actual cost savings will vary depending on the size and nature of the
organisation. If manufacturing is taking place on site, current efficiency,
performance and utilisation, levels of work in progress and staffing and
wage costs will affect the calculation.
At the distribution end, numbers employed in the warehouse and the average
value of stock held will be relevant. Such factors as customer purchase
patterns (contract or ad hoc), whether goods are manufactured on site
or elsewhere (including from overseas) will affect the level of cost savings
achievable.
Management ROI Summary – Impact of Xe-ERP
Assumptions
The cost savings quoted are those which can typically be expected based
on a UK company with a Turnover of £15m per year, a Gross Margin
of 20% and a Net PBT of 5%. The cost of employing a typical office clerk
is estimated at £14,000 per year (£5.40 per hour plus overheads
for a 37.5-hour week). A Warehouse employing 5 operatives each earning
£260 for a 40-hour week, working 45 weeks per year is factored into
the warehousing productivity equation. For the ERP impact on Manufacturing/Production
Control, a sewing unit employing 100 operators is assumed. In the model,
each operator works a 39-hour week (single shift) with an average performance,
efficiency and utilisation of 90%. The cost of employing a Production
Supervisor is estimated as £16,000 per year.
Xe-ERP System Investment
The typical investment of deploying the fully loaded XeBusiness Enterprise
Resource Planning System (Xe-ERP) excluding the real time shop floor control
module would be around £30,000. This includes applications software
and implementation services covering support, training and consultancy.
Recurring ‘help desk’ software support and maintenance costs
would be from £4000 per year depending on which applications software
modules were deployed.
The typical investment in deploying the XeBusiness Real Time Production
Control System covering Software, Implementation Services and RT hardware
(100 data capture terminals – one for each machine operator –
plus Capdrive concentrator devices) would be approximately £45,000.
Plus recurring software support and maintenance costs of £4,500
per year.
This ROI summary based on deploying Xe-ERP includes the above assumptions.
CRM – Order Fulfillment
Sales Order Processing
Improved Customer Service – sales revenue increase £7,500
Reduced Administration Cost £4,000
Improved Cash Flow £2,700
Distribution
– Pick and Ship
Reduction in Overtime £4,400
Reduction of Stock Holding / Quicker Stock Turnaround £7,500
Identification of Aged Stock / Stock Shortages £3,000
Reduction of Lost Customer Orders £3,000
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Resource Management
MRP – Plan Production Capacity
Quicker Response to Demand Changes £7,500
Reduced Inventory & Redundant Stock £5,000
Just in Time (JIT) Ordering £2,500
Reduced Administration Costs £3,000
Sourcing
Finished Product
CMT - Cut Make and
Trim Manufacture £10,000
Sourcing from Overseas £5,600
Shop Floor Control
Improved Efficiency £31,600
Time Saved by Clocking at the Needle Point £7,000
Reduced Downtime £3,100
Reduced Supervisor Checks on Performance and Balancing £6,000
Improved Quality £620
More Accurate Wages £6,300
Reduced Administration Costs £10,000
Reduced Overtime Working £3,900
Reduced Work in Progress £2,000
Annual savings for your installation would depend upon the mix of modules
employed. For example a company sourcing all it's Product from overseas
with no UK manufacturing base would not require the Shop Floor Control
software.
However, all the
remaining modules could be installed at a cost of £30,000 leading
to total annual savings in the region of £65,700, giving a "Pay
Back" period of 5.5 months. Similarly a Shop Floor Control system
using the Real Time software together with the Planning and Materials
control modules at a cost of £50,000 would lead to annual savings
of £88,520, giving a "Pay Back" period of 6.75 months.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Part 2 - Proving Return on Investment (ROI) and Payback
CRM
– Improve Customer Service
Streamline Order Processing and Fulfilment to Increase Sales
Using an integrated ERP system means all the critical data related to
your business is stored in one place and is easily accessible. In Xe-ERP
data storage is open ended and effected in "real-time" - there
are no limitations on data volumes and records are updated as soon as
transactions are recorded. This leads to fast access to relevant information,
which leads in turn to improved customer service. Timely and relevant
formatted reports tailored to meet your Customers specific needs can be
produced in response to enquiries and despatched by any method including
e-mail.
Using
the XeBusiness ERP system in your Sales office means that your staff will
have instant access to stock availability and the status of outstanding
purchases and work in progress. Firm orders with achievable delivery commitments
can be taken instantly. There should be no need to keep customers hanging
on for an answer nor any need to call them back. This improvement in service
levels will result in repeat orders and a stronger price negotiating position.
Users of the XeBusiness
ERP system can reasonably expect to be able to increase turnover by around
1% due to orders not missed due to shortage of information at the order
taking point or to repeat orders that would otherwise have been missed.
Profit of 5% on this increased turnover would be £7,500 per year.
Reduce Administration
Costs
The XeBusiness ERP has standard interfaces with electronic front-end ecommerce/EDI
options and links to a number of popular Accounts/Financial Management
Packages. Because of this and the use of centralised data files, users
can expect a significant reduction in data entry with the concomitant
reduction in human error and reduced reliance on human resources. The
use of paper audit trails can be significantly reduced thus saving on
stationary, printing and copying and paper storage systems. However, by
far the largest saving that can be expected in administration costs is
in staff time spent supporting paperwork systems. It has been estimated
that clerical staff spend 20% of their working days on general filing.
It should be possible to reduce this by a half leading to a saving of
3.75 hours per week per clerk. In a sales office with 4 sales clerks this
equates to a saving of around £4,000 per year.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Improved
Cash Flow
The XeBusiness ERP system enables swift processing of orders taken. The
process of turning an order taken against available stock into a picking
instruction on the warehouse can be virtually instantaneous. It is not
unrealistic to be able to offer same day delivery on stock items. Just
as the order can automatically generate a picking list, confirmation of
the picking list can automatically generate an invoice. So not only will
the goods go out of the door the same day as the order is received, an
accurate invoice will too. The order entry routine automatically checks
credit balances and prevents over commitment. At the same time the system
allows you to keep tight control over invoices falling due for payment
to allow early and effective chasing of due debts. Users have found that
the system can help them speed up Cash Flow allowing considerable reductions
in working capital. A typical example would be where about 20% of due
invoices are paid late by at least one week and of these 1% are late because
of late or non-presentation of the invoice. This will tie up working capital
of £300,000. If 20% of working capital is serviced by an overdraft
at 4.5% then eliminating the causes of these late payments will save £2,700
per year.
Distribution And Warehouse Management
Ship the right products in the right quantities to the right place –
fast.
Reduction in Overtime
Having the correct information to hand regarding the location and quantity
of goods within the warehouse will improve the productivity and efficiency
of the warehouse. This will also reduce the need for costly overtime working
resulting from the necessity to get orders out of the door at short notice
or meet deadlines in terms of deliveries which would otherwise be missed.
If we assume that
the average warehouse in an effort to meet customer deadlines works 10%
of its contracted time as overtime experience shows that the deployment
of Xe-ERP will reduce this by up to 50%. This is estimated at £4,400
per year.
Reduction
of Stock Holding / Quicker Stock Turnaround
Warehouse managers hold less stock if they have better, quicker and more
reliable information about what is in stock at any given time. Most warehouses
without a warehouse management system hold a safety stock of say 10%.
Assume the value of the stock holding per season is £7.5m (two seasons
per year) of which 80% is quickly turned round and 20% is used to replenish
orders or is sent out over the remaining six months of the season. Then,
a stock holding of £1.5m at any given point is realistic.
The deployment
of Xe-ERP could reduce this by 10%. But if only a 5% reduction was achieved,
this would equal £75,000. Based on a financing cost of 10%, the
value of the saving would be £7,500 per year.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Identification
of Product Age Concerns / Identification of Stock Shortages
At the end of every trading year every company will be left with an amount
of redundant stock which they can not sell at full value as a result of
missing despatch or delivery dates or having despatched goods returned
through not delivering in ratio, etc. A warehouse management system will
not only reduce the occurrence of the above by identifying the need to
react to stock shortages it will also highlight any ageing issues with
stock allowing the sales force to pursue the sale of these items.
If the yearly holding
of redundant stock is 2%, the value of this stock is £300,000 and
the write down value on this stock is 50%, then, if by deploying Xe-ERP,
2% of this can be prevented, this will result in a saving of £3,000
per year.
Reduction
of Lost Customer Orders
Many orders are lost to businesses through not being able to meet delivery
dates, either through stock shortages, stock not being available in ratio
or orders being returned through incorrect deliveries.
If 1% of business
is lost on a turnover of £15m and only 2% of these orders can be
saved by deployment of Xe-ERP, this will result in a saving of £3,000
per year.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Raw Material
Sourcing and Manufacturing
Quicker Response to Demand Changes
Because all modules of the XeBusiness ERP system are dynamically linked,
any changes to a customers' order requirement can be instantly reflected
in the production plan and therefore in the raw materials requirements.
This enables production management to respond to changes virtually instantly
reducing the chances of being left with unwanted materials or unable to
supply product due to materials shortages. The ability to respond in this
way is the only way that UK manufacturers can compete against the low
labour cost foreign competition. It has been estimated that retailers
can offer home manufacturers up to 50% more for products than they could
to overseas sources and still meet their target margins. In order to receive
a quick response service they will be increasingly willing to pay a premium.
If margins were increased by as little 1%, on turnover of £15m,
profit of 5% on this would yield £7,500 per year.
Reduced Inventory
& Redundant Stock
Immediate reaction to demand changes will reduce inventory levels. This,
together with the generally improved control of redundant and slow moving
raw stock items can lead to reduction in stock write off by up to 80%.
Typically, annual stock write offs due to redundancy are in the region
of 0.5% of the total materials spend, which in our example company would
be around £2m. This could easily be halved yielding a saving of
£5,000 per year.
Just in Time (JIT) Ordering
Accurate prediction of the timing of raw materials requirements based
on accurate production and sourcing schedules together with quick access
to accurate visibility of stock levels allows the user of the XeBusiness
ERP system MRP module to stage deliveries to coincide with requirements.
Thus reducing the value of stock being held at any one time. A typical
materials store without such a system would hold a safety (or buffer)
stock of around 10%. Given an annual materials spend of £2m and
assuming a level demand curve and given that many of the most valuable
items such as fabric will need to be brought in bulk, a stock holding
of £250,000 at any given time is realistic. Thus a reduction of
£25,000 can be achieved. Based on a financing cost of 10% per annum
the value of the saving would be £2,500 per year.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Reduced Administration
Costs
As with the Sales Order Processing module, the use of centralised data
files means that, users of the MRP module can also expect a significant
reduction in data entry with the concomitant reduction in human error
and reduced reliance on human resources. The use of paper audit trails
can also be significantly reduced thus saving on stationary, printing
and copying and paper storage systems. As before, the largest saving that
can be expected in administration costs is in staff time spent supporting
paperwork systems. With 20% of office staff's working days on general
filing and a staff of 3 in the planning and purchase functions a saving
of 10.25 hours per week can be expected. This equates to a saving of about
£3,000 per year.
Sourcing of Finished Product
Increasingly UK apparel manufacturers are turning to CMT contractors and
the cheaper labour of the Middle and Far East, Africa and Eastern Europe
for the supply of finished goods. The Xe-ERP system has responded by expanding
existing facilities and building in new functionality to meet the new
challenges this development presents us with.
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Apparel Software, Enterprise Resource Planning (Apparel ERP)
CMT - Cut Make and Trim Manufacture
The Xe-ERP system can be used to control CMT suppliers both at home and
abroad. Product can be loaded against Suppliers' predefined capacities
to facilitate quick decisions at the planning/order taking stage. Once
orders are placed, there is a detailed record, driven by Bills of Material,
of available materials at each Supplier, which is updated as product is
received. At any time, the actual utilisation against estimate can be
seen for each order and a firm hold can be kept on the use (or misuse)
of your materials.
Control of raw materials on remote sites is always a problem, especially
so with more and more remote locations being brought into use. Whilst
2% loss of fabric due to loose costing and unexpected faults may be seen
as acceptable in a UK manufacturing environment, many companies sourcing
abroad have to accept levels of 5% and higher. Experience of using the
Xe-ERP has shown that this can be cut down to around 3% to 4% on average.
In our example, if we assume that all Products are sourced in this way
and that a saving of 0.5% can be made on raw materials usage of £2M
per year, this represents a saving of £10,000.
Sourcing Globally
As manufacturing declines in the UK, traditional apparel companies are
moving over to sourcing off shore whilst businesses which traditionally
filled this niche are expanding. The Xe-ERP system has the facility to
record purchase orders, which feed data back into the CRM system to give
up to the minute "stock and coming round" availability data
at order entry. There is also a full product costing system that will
allow users to keep track of actual cost variances. The Xe-ERP system
will allow users to respond quickly to changes in requirements, adjusting
commitments with suppliers to minimise the risk of overstocking. Continuous
costing feedback will enable them to maximise margin. It has been estimated
that the above factors can reduce overstocking by up to 5% and increase
margin by around 1.5%. Using our example company and halving these figures
will still give a considerable saving.
If the annual redundant
stock holding is 2%, valued at £300,000 and with a write down value
of 50%, then, if 2.5% of this can be prevented, a saving of £3,750
will result. If margin were increased by as little as 0.25% on a turnover
of £15M, the increase in profit at 5% would be a further £1,875.
This gives a total projected saving of £5,625.
Shop Floor
Production Control
The XeBusiness ERP system can include shop floor control at varying levels
of sophistication, from man readable bundle tickets with manual entry
to the wages Build-up-to-Gross, through bar coded tickets, to a real-time
system with electronic shop floor data capture devices. The following
ROI costs are based on a Real Time system.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Improved
Efficiency
The chief cost justification in installing a Real Time System comes from
overall improvements in the efficiency of the factory; this comes from
better management control and increased motivation of operators. Successful
manufacturing strategies require that you have timely, useful information
on how your company is performing. The use of the XeBusiness Real Time
System provides an up to the minute method of acquiring this. Employees
will benefit from less paperwork, more accurate information, Real Time
help and most important of all motivational feedback. Users of the XeBusiness
Real Time System have assessed that the performance of their labour force
has increased by between 10% and 25%.
If (based on the
initial assumptions) the factory experiences an increase in efficiency
of only 5% per operator, this means the production of standard minutes
per operator will increase from 1,872 per week to 1,965. For 100 operators
working 45 weeks per year this means there will be an additional 418,500
standard minutes produced per year. If the contribution per standard minute
is 7.5p without an increase in factory overheads this 5% increase in efficiency
results in an additional contribution to profit of £31,600 per year.
Time Saved by Clocking at the Needle Point
A Real Time System means that operators clock on at the Real Time Terminals.
This removes the need for clock cards and also ensures that the time spent
between clocking in (i.e. going to the cloakroom, early morning discussions
with friends, etc.) is kept to a minimum. Operators not sat at their machines
are not clocked in and this creates a move away from the idea that operators
work their set minutes. The fact is that they may "shave" total
attended time by taking unauthorised breaks or not starting work straight
away after clocking in, or queuing at the clock ten minutes before their
actual Finish Time. It has been estimated that, from experience of factories
that have already installed the system, "walking and queuing time"
will be reduced by 5 minutes per operator each day.
The saving of 5
minutes will save 94,500 standard minutes per year for the factory. This
increase in productivity results in an additional contribution to profit
of approximately £7,000 per year.
Reduced
Downtime
The system will provide, on a Real Time basis, all the information required
to allow management to spend time controlling the floor rather than correlating
information. Areas such as Off Standard Labour Analysis, i.e. who is on
Down Time, what categories are they on, what is this costing, how is this
affecting performance, can be monitored and dealt with as and when they
happen.
It has been estimated
that unproductive downtime in a factory can be reduced by 20% by the introduction
of Real Time monitoring systems. If downtime were paid at 6p per minute
reducing it by only 5% would result in a reduction in downtime of 52,650
minutes and a cost saving of approximately £3,100 per year.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Reduced Supervisor Checks on Performance and Balancing
The system removes the need for unnecessary two hourly checks on performance
and balancing. In addition the tracking of production problems should
become more efficient. If 3 supervisors were employed it should be possible
to save 10 minutes per hour per supervisor. This will result in a saving
of 20 hours of supervisory time per week or approximately £134 per
week. This equates to a saving of £6,000 per year.
Improved
Quality
Greater supervisory control will allow a factory to decrease its quality
faults and also ensure that garments with quality problems can be quickly
traced back to the operatives who caused those problems. Such a reduction
can save unnecessary payment for repairs; this should result in a further
saving of at least 5% of downtime payments associated with repairs. This
will result in a saving of approximately £620 per year.
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Apparel Software, Enterprise Resource Planning (ERP
More Accurate Wages
The introduction of a Real Time System means that the company only pays
for garments that are actually completed. If a garment is removed from
a bundle all subsequent operators are paid for one less. The improved
level of information to operators ensures that everybody knows what their
pay will be without spending costly productive time keeping their own
records. Within the Real Time System there is no possibility of operators
saving or holding back tickets and no possibility of paying for work twice.
The accurate payment
of operators and the associated savings in operator time resulting from
providing them with more accurate, timely information has been estimated
to save at least 1% of the total wage bill. If calculated as only 1% of
the pay for standard minutes based on a yield rate of 7.5p this will result
in a saving of approximately £6,300 per year.
Reduced Administration
Costs
The introduction of a Real Time System will vastly reduce the administration
time required to process work tickets and build up the gross to net payroll.
Associated savings on overheads include the elimination of clock cards
and any paper work currently associated with the payment process, together
with the reduction in time spent printing work tickets.
This should result
in the cost saving associated with the salary of one wages operative and
the saving on the elimination of clock cards and adhesive work tickets.
This is estimated at £10,000 per year.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
Reduced Overtime Working
The correct handling of production scheduling, line balancing and down
time made possible by Real Time Production Control will reduce the need
for costly overtime working. Absenteeism is highlighted and can be reacted
to, the absence of key workers can be costly in terms of workflow, bottlenecks
and overall productivity, and the system allows immediate reaction to
such problems. In addition future Production Planning due to increased
feedback should be more efficient.
If we assume that
the average factory in an effort to meet customer deadlines works 5% of
its contracted time as overtime experience shows that the introduction
of an efficiently run real time system will reduce this by up to 50%.
If overtime is reduced by only 25% this will mean a reduction of 131,625
minutes per year. If the overtime premium is 3p this will save approximately
£3,900 per year.
Reduced
Work in Progress
The more effective scheduling and line balancing available through the
system reduces the need for high levels of Work In Progress to keep the
Labour Force fed with work. The tracking of production problems should
become more efficient (utilising fewer staff) and should prevent bottlenecks
from occurring. The Real Time information regarding Payroll and Stock
will mean that the costs incurred through payroll "claims in error"
and through "lost" stock will be vastly reduced. The implementation
of a highly accurate Real Time System will reduce the need for stock taking
due to accurate stock and Work In Progress information being generated
by the system.
The savings resulting
from the above are hard to quantify but the reduction in Work In Progress
will free up capital and the reduction in stock taking costs will give
definite savings. In our example experience shows it would be realistic
to estimate a saving of £2,000 per year.
Conclusion
An
effective management information system like Xe-ERP allows corporate performance
over a number of indicators to be measured as a precursor to planning,
deploying and optimising corporate resources.
You cannot control what you don't measure. Anything that isn't being measured
therefore is probably out of control.
The challenge facing
apparel, footwear and soft goods supply companies today is doing more
with less and having to do it faster and more effectively.
Xe-ERP allows companies operating in this sector to respond to the challenge.
Based on the clear ROI benefits contained in this paper, any company operating
without an effective ERP or management information system is at a serious
competitive disadvantage.
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Apparel Software, Enterprise Resource Planning (APPAREL ERP)
The message is: "Have lunch or be lunch"
Rich
& Pure Limited 17
Green Pastures, Stockport, SK4 3RB, United Kingdom.
Tel. +44 (0)161 442 1204, Fax. +44
(0)161 442 3286 Email. sales@styletexpro.com
We
work closely in Association with Colour Matters U.K Ltd, XeBusiness Ltd,
Polytropon Automation Systems Ltd - our Strategic Business Partners
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