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Return of Investment on Apparel ERP...click here

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Case Study - Cookson & Clegg - Apparel ERP Benefits

 
       
 

... 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.

... 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

... 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

... 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

... 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.

... 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.

... 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.

... 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.

... 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.

... 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.

... 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.

... 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.

... 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.

.... 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.

... 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.

... Apparel Software, Enterprise Resource Planning (APPAREL ERP)

The message is: "Have lunch or be lunch"

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