The Distribution Challenge: Are You Asking Enough From Your ERP?

September 2014

THE DISTRIBUTION CHALLENGE: ARE YOU ASKING ENOUGH FROM YOUR ERP?

As a distributor of goods in today’s challenging economy, you face increasingly global competition, growing complexity of supply chains and trade regulations, and continued volatility of oil prices impacting transportation cost. And to top it off, you most likely operate on razor thin margins. World Class Enterprise Resource Planning (ERP) implementations have been shown to address these challenges and produce amazing results. Yet many implementations fail to produce the expected benefits and too many distributors are still “making do” with a less than optimal solution. Think there’s nothing better? Think again. If your current ERP (or lack of one) does not support productivity and enable growth, or if you struggle to achieve a competitive edge, perhaps it is time for a change. Maybe you aren’t asking enough of your enterprise solutions.

WHAT’S DIFFERENT TODAY?

Today’s technological advances and an increasingly connected, global economy have resulted in change that extends deep into the very foundation of distribution. The profile of a wholesale distributor is changing today as the lines blur between manufacturing and distribution. On the one hand this blurring of boundaries started with the outsourcing and offshoring of a significant portion of manufacturing functions to lower cost countries. Although we are seeing a trend back towards on-‐shoring and near-‐shoring, especially in the United States, many manufacturers today do less manufacturing and more final assembly, configuration and distribution.

At the same time, more traditional wholesale distributors are looking for new ways to add value through services (light assembly, packaging, warranty, etc.) and/or by offering product for sale directly to the consumer through eCommerce or retail outlets, including direct counter sales.

At the very least, distribution of a physical product requires you to build and maintain an audit trail of inventory movement, making ERP, the transactional system of record of the business, an absolute necessity. Satisfying the basics are table stakes today, but the basics aren’t so basic any more. These blended roles place new demands on supporting systems. This means the ERP solution you bought a few years back may not have the features and functions or the advanced technology you need to stay competitive. The most basic of ERP solutions does a good job of tracking inventory in a warehouse, but as a distributor, you also need to manage the activity in the warehouse, the

Data Source The 2014 Mint Jutras ERP Solution Study collected more than 800 qualified responses. The purpose of this study was to investigate ERP goals, challenges and status and also to benchmark performance of ERP implementations.

Survey respondents represented companies from many different industries, including 120 from wholesale distribution, providing the data used in this report.

However many manufacturers face the same type of challenges and therefore manufacturers with distribution functions are encouraged to read on.

The Distribution Challenge: Are You Getting the Most Out of Your ERP? Page 2 of 9

transportation, eCommerce and supplier collaboration across a potentially complex supply chain. You need to accurately forecast demand. And in this new world of blurred boundaries, you may need to manage product configuration and/or light assembly.

What’s in your ERP? Does it satisfy all these requirements, or are you “making do” with something less?

“MAKING DO”

About 70% of wholesale distributors have something they call ERP1. Mint Jutras feels this percentage is optimistic at best. While we believe all 70% are using some type of business applications, these solutions might not be what we would call ERP. This is partly because the acronym is used rather loosely and many find it difficult to define it. Mint Jutras defines ERP as an integrated suite of modules that provides the operational and transactional system of record for your business. Bear in mind though, most ERP solutions today do much more.

This definition allows for a lot of variability in the scope of solutions. Some of that variability results from different types of companies having different needs. But a key word in our definition is “integrated.” If you are running a collection of disparate commercial or home-‐grown applications that are tied together with the software equivalent of duct tape, bailing wire and a prayer, your solution may not be ERP at all. There have been significant technology advancements that allow very tight integration between ERP and surrounding applications, but chances are if it’s been a while since you’ve invested in your ERP solution, you are not taking advantage of these improved integration tools.

Of course, even if you do have a “real” ERP solution, it may not be comprehensive enough to meet the special needs of distribution, even if you have filled gaps with other applications that may (or may not be) interfaced to ERP. Or you might have stopped short of a full implementation.

If you find yourself in any of the situations described above, chances are you are leaving money on the table instead of taking full advantage of the applications and technology available today. Perhaps you think what you have is “good enough.” But if it doesn’t help you achieve a competitive advantage, maybe it isn’t. Even worse… you also run the risk of putting yourself at a severe competitive disadvantage.

ERP has come a very long way in the last few years in terms of functionality, largely because of supporting infrastructure and enabling technology that

Definition of ERP Mint Jutras defines ERP as an integrated suite of modules that forms the operational and transactional system of record of your business.

While this is our minimal definition, most complete and modern ERP solutions do much more than this today.


allows for more rapid innovation. If you haven’t kept pace with this innovation, you aren’t just marching in place; you are actually losing ground.

The majority of wholesale distributors that are seeking to replace whatever they have today either lack needed functionality or they need to replace sorely outdated technology. And a significant percentage are seeking a cost advantage through lower total cost of ownership (TCO). Of course there are other contributing factors (Figure 1) but one of these three motivations (or all three) fuel the vast majority of decisions to replace existing solutions.

Figure 1: Reasons for Replacing Current Solutions

Source: Mint Jutras 2014 ERP Solution Study

Does this mean the majority of wholesale distributors intend to replace their current solutions? No. In fact we find the exact opposite.

Figure 2: Reasons for Replacing Current Solutions

Extend: leverage what we have today, adding new components of functionality, including embedded features and new modules of our current ERP and other applications

Replace entirely: replace our existing ERP solution with one based on updated technology that provides us better options for extensibility

Replace disparate applications: replace multiple disparate applications with embedded functionality (now available from my ERP solution provider)

Replace embedded functionality: replace selected components of embedded functionality with new features, modules and applications


World Class Distribution ERP Implementations

Mint Jutras defines World Class based on performance of an ERP implementation. This does not refer to the “best” or largest companies, but instead those that have achieved the most business benefits from ERP. This determination is made based on:

√ Reduction of operating costs

√ Reduction of administrative costs

√ Reduction of inventory costs

√ Reduction of obsolete inventory

√ Improvement in % complete and on-‐time shipments

√ Improvements in customer retention

√ Improvements in Inventory accuracy

√ Current performance in % complete and on-‐time shipments

√ Current performance in customer retention

√ Current performance in Inventory accuracy

√ Improvement in profits year over year (most recent fiscal year)

Progress against goals is also considered. World Class represents the top 20% with the remaining categorized as All Others.


The larger majority plan to extend the functionality they have today, while only a small percentage intend to replace it entirely (Figure 2). This may seem like the easiest and least expensive path to take. But is it?

If your solution lacks needed functionality, perhaps you have simply fallen behind in upgrading and newer releases might offer more. But more likely, your solution simply doesn’t have the necessary features and functions required to compete today. This means you will need to extend it with other applications. How easy (or hard?) will it be to integrate those with your current solution? If you are also suffering from outdated technology, chances are it will be hard. It might even be very hard or impossible to make the integration seamless. Your outdated technology could be the software equivalent of a weak and crumbling foundation. Are you willing to bet your future on it? In fact, those with seriously outdated technology may be fooling themselves in thinking they can simply extend what they have.

Does this small percentage planning to replace their ERP solutions relieve you of the pressure to replace underperforming solutions? No. This means there is significant opportunity for you to take charge and grab some competitive advantage. Oddly enough, it is those with the implementations that are performing the best (World Class) that are most likely (twice as likely in fact) to have plans to replace them. Those who have produced the most benefits also see the potential for further improvement, so the best will keep getting better, further widening the performance gap between competitors.

Without the right underlying infrastructure, you may be left with no choice other than whole scale replacement of what you have; but in reality, this might be the easier route, relieving you of the burden of decisions you were forced to make back when solutions were far less technology-‐enabled and feature-‐rich. But a new system will require an initial investment of time, effort and money, which will also require cost justification.

THE COST OF DOING NOTHING

Of course there is another side to the coin here. If you are still thinking you can “make do” with a solution that doesn’t give you a competitive advantage, perhaps the better perspective is to consider what that decision (or lack of a decision) is costing you.

In order to quantify the lost opportunity cost of doing nothing, we look to the cost savings realized by ERP implementations in wholesale distribution. We compare “World Class” implementations to all others. When we refer to “World Class,” we refer to the implementation of the ERP solution. We capture cost savings and other improvements measured since the current ERP solution was installed and combine those results with progress measured against a set of possible goals. Of course not all distributors have the same

Possible goals and benefits of ERP

√ Better visibility from quote to cash

√ Sustained growth without additional headcount

√ Reduction or redeployment of headcount

√ Reduction in operating cost

√ Reduction in administrative cost

√ Reduction in inventory cost

√ Reduction in obsolete inventory

√ Better utilization of resources

√ Reduce time-to-decision (better decision-making)

√ Positively impact bottom line profits

√ Reduction of waste

√ Increase value delivered to customers


specific goals for ERP, but the more goals that are set and the more progress that is achieved against those objectives, the higher the probability the implementation will achieve “World Class” status. Possible goals relevant to wholesale distribution are listed in the sidebar to the left.

Finally, we temper those results with some universal measures of current performance. Each company receives an aggregate “score” and the top 20% are categorized as “World Class.”

We start by looking at cost and inventory savings. Figure 3 presents the average savings across the full sample of wholesale distributors (All WD). These should provide a very realistic and achievable objective. We also show the savings achieved by World Class ERP implementations, and perhaps these should be a secondary, or “stretch” goal.

Figure 3: Cost and Inventory Reduction Since Implementing ERP


Inventory costs and obsolete inventory should be self-‐explanatory, quite straightforward and easily measured. While the categories of operating and administrative costs are quite broad and leave some room for interpretation, a precise definition is less important when we measure the savings as a percentage of total costs.

To put this in perspective, let’s use a mid-‐size distributor that is carrying $10,000,000 worth of inventory on its books. By reducing that inventory by 5% it realizes a savings of $500,000 of cold, hard cash. This doesn’t even take into account any operating or administrative cost savings. If that same distributor achieves World Class status with its ERP implementation, it sees an additional savings of $400,000.

Think about your own operating costs, administrative costs and inventory costs. Think about inventory on your books that is obsolete and simply will not move. Take 9% and do the math. You might have your return on investment right there. These are the average savings produced by wholesale distributors. Those that go on to achieve World Class status achieve that much more.


Cost savings, while very important in terms of cost justification and profitability, are very internally focused results and impact only the bottom line. In order to stay competitive and achieve a competitive advantage, you also need to produce results that are more focused on your customer and can, in turn, impact your top line performance. In order to measure this type of success, we use a variety of metrics, shown in Figure 4.

Figure 4: Other Improvements Measured Since Implementing ERP


As in measuring cost savings, with the exception of profitability, we measure the improvement since implementing ERP. Profitability is the exception primarily because of the wide range of maturity of ERP implementations. Yet profitability is extremely important in wholesale distribution, as operating margins are razor thin as compared to other industries, leaving little or no room for error.

While profitability is certainly a valid means of measuring performance, it can also be adversely affected by external factors such as economic and market conditions. For those who implemented ERP right before the most recent recession, profitability may have taken a hit, from which they needed to recover. New implementations might have been undertaken when profitability was already on the upswing. And yet improving profitability should be a sustainable goal. So we use the improvement in profitability over the most recent fiscal year as a way of normalizing it.

The remaining metrics are intimately dependent on one another. Complete and on-‐time delivery is a critical metric and can directly impact customer retention. Cycle times can directly impact your ability to deliver, not only as promised, but also as the customer requested. One symptom that indicates you need (a new) ERP is not being able to meet customer demand, even as your inventory levels rise.

SPECIAL NEEDS OF WHOLESALE DISTRIBUTORS As noted earlier, the most common reason for replacing an existing ERP is its lack of needed functionality. If your current ERP doesn’t meet your needs, it

Metrics Defined üComplete and on-‐time delivery are delivered 100% complete, on or before the promised delivery date

üCustomer retention is the percentage of customers retained from the previous year

üProfitability is measured via operating margin

üCycle time for distributors: receipt of order to fulfillment


may be because your options were limited by budget or limited functionality available at the time, your solution never lived up to promises made, or your business has changed, adding new requirements not previously anticipated.

By definition, any “real” ERP will be able to track inventory movement, although some will do a better job than others in actually controlling it. This is true particularly if you must track it by lot or serial number, or be concerned about controlling hazardous materials or co-‐mingling different types of products.

Early versions of ERP treated every unit of measure the same and knew nothing about space or warehouse capacity constraints. If you told ERP you put 100 cubic feet of material in 10 cubic feet of space, it believed you. It couldn’t optimize your picking or put away. It expected you to know that traversing the entire expanse of the warehouse each time you put an item away was inefficient. It didn’t know how many pallets fit on one forklift, so it had no idea how many trips it would take to move a truckload of goods off the receiving dock and into the warehouse.

But these are very real issues for distributors that make a living from moving inventory – hence the need for better inventory control and for warehouse management solutions (WMS). And of course, if you want to optimize your inventory levels to their lowest levels without adversely impacting customer response, you’d better have tools for forecasting and demand planning. And the closer the relationship with your trusted suppliers, the more reliable your supply, but the higher likelihood of needing tools for supplier collaboration.

Table 1: Tightly Integrated or Embedded Specialized Functions

World Class

All Others

Warehouse Management 100% 51%

Forecasting / Demand Planning 89% 52%

Business Intelligence/Analytics 89% 40%

eCommerce / online store 89% 37%

Transportation Management 89% 23%

Event Management (triggers and alerts) 78% 38%

Enterprise portal 78% 28%

Trade Promotions 78% 18%

Supplier Collaboration / Scheduling 67% 29%

Product Configurator 67% 23%

Workflow Technologies 67% 21%

Process Modeling 56% 18%

Distribution Requirements Planning (DRP) 22% 9%


Modules or Apps? Survey respondents were presented with a long list of software categories and asked to indicate if they had implemented them as:

üAn embedded module of ERP (included)

üA separate application tightly integrated with ERP (included)

üA separate application either loosely integrated or not integrated at all with ERP (not shown)


We presented 2014 ERP Solution Study participants with a long list of software categories and asked if they had implemented them as embedded modules of ERP or as other applications. If implemented as other applications we distinguished between those tightly integrated and those loosely integrated or not integrated at all. Table 1 shows adoption rates as embedded modules of ERP or tightly integrated applications for several of these categories, selected for their relevance to distribution. We also added a few that might not be specific to distribution, but are indicative of more advanced technology (event management, workflow and portals) that moves the needle beyond the range of old and outdated technology.

It is quite clear that World Class ERP implementations have extended far beyond the original basics of ERP. Not only are these organizations more likely to have implemented these specialized functions, but they are also more likely to have this functionality embedded directly in their ERP solutions or tightly integrated them, generally through advanced integration technology.

Perhaps you have the basics covered, but have you even evaluated what other extended capabilities you may not have today? If your ERP solution provider cannot satisfy these, then you need to weigh carefully the trade-‐offs between tacking on additional solutions piecemeal and replacing what you have with a solution with a broader footprint. If your current solution is based on old and outdated technology, then the cost to extend it may be prohibitive.

THE IMPACT OF NEW TECHNOLOGY ARCHITECTURES

Throughout this discussion we have been alluding to the value of newer, modern technologies, but what really is the impact? One of the biggest challenges in making an ERP implementation truly successful is the ability to handle change. The majority (65%) of wholesale distributors rate this potential barrier to success as moderately to extremely challenging. Older, outdated technologies relied very heavily on logic hard-‐coded into source code. Changing it meant invasive customization that built in barriers to upgrades and innovation.

Newer, modern solutions are built for change. They are more extensible and much of the logic is built into business rules that can be changed as required, without ever having to muck around in source code.

They are also designed for people. There was a reason why a very small segment of the employee population ever put their hands directly on early ERP solutions. Traditionally users engaged with ERP through a hierarchical series of menus, which required at least a rudimentary knowledge of how data and processes are organized. Navigation was not intuitive and there were no guarantees that business processes were streamlined and efficient.


Modernized ERP provides user interfaces that are more intuitive, more personalized. They provide “Google-‐like” enterprise search capabilities and web-‐based access, making ERP accessible anywhere, anytime. And an increasing number of functions are becoming available through mobile devices. Even touch technology is making its way into the hands of ERP users.

ERP based on this new, modern technology, looks and feels nothing like those early ERP solutions.

KEY TAKEAWAYS AND RECOMMENDATIONS

If you are like most wholesale distributors today, you are operating on a tight budget. You face increasingly global competition, tighter global trade regulations and unpredictable transportation costs. This puts added pressure on operating margins that were already thin. A well-‐run ERP solution can provide the type of controls and visibility to achieve both operational excellence and a competitive edge, while also producing cost savings.

But that won’t happen unless you set the bar high enough in terms of expectations. If you continue to expect less of your ERP than those running World Class installations, that is exactly what you will get: less value and fewer results. Are you “making do” with solutions that don’t help you achieve a competitive advantage? If so, you are actually losing ground competitively while also leaving money on the table.

Competition is only going to continue to intensify and grow on a global scale. If you are running on old, outdated technology, if you don’t have the kind of specialized functionality required for world class distribution, if you aren’t asking enough from your current ERP, it may be time for a change. Are you up to the challenge?

1 Note this adoption rate does not come from our ERP survey, but from our Understanding SaaS study, which captured adoption rates of all deployment models of 22 different enterprise applications, including ERP.

About the author: Cindy Jutras is a widely recognized expert in analyzing the impact of enterprise applications on business performance. Utilizing over 35 years of corporate experience and specific expertise in manufacturing, supply chain, customer service and business performance management, Cindy has spent the past 8 years benchmarking the performance of software solutions in the context of the business benefits of technology. In 2011 Cindy founded Mint Jutras LLC (www.mintjutras.com), specializing in analyzing and communicating the business value enterprise applications bring to the enterprise.

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The Distribution Challenge: Are You Asking Enough From Your ERP?