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Summer 2011
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In-House ERP Systems vs. Cloud Computing

Software as a Service is a time- and cost-saving alternative for metal centers.

For metals service centers, on-premise or traditional ERP systems have limitations in handling certain supply chain activities including inventory visibility, traceability and syncing material information with orders. With these systems, suppliers are required to manually update and constantly check the status of material, leading to inaccurate data. Inaccurate information creates inventory discrepancies and long lead times for customers. Adding remote inventories to the mix leads to a messy and cumbersome paper trail. Both require folders, copies and manual entry of information. This information must be faxed and copied for accounting, shipping, lab facilities and customers.

Traceability of material is difficult when it is moved from facility to facility. Paperwork often lags behind after the material physically reaches its final destination, and specs must be updated manually. Consequently, when quality issues surface, managers have to wait for the paperwork to move through the channel in order to make decisions. Finally, accounting has to manually reconcile the invoices, shipping and receiving documents. From this example, it is easy to see where there is room for improvement in the traditional ERP approach.

One example of the changing service center environment is the transition to consignment, brokered or remote inventories. Instead of storing customers’ material on-site, remote inventories are stored at the customer site. This way, material is reconciled only when taken for production. Moving to this environment is a logical choice for specialty metal owners. Inventory is costly to keep, and when finances are tied up with warehousing fees, it takes away from implementing necessary system upgrades.

Adding to costs, document handling continues to increase year after year. Production growth equates to more paperwork and the hiring of more employees to handle the workload. The more paper-intensive the operation, the greater the likelihood of errors.

Aside from increasing document-handling costs and lack of traceability, on-premise systems also require upgrades, patches and modifications in order to handle the frequent changes in the metals industry. For companies with a diverse business model, building an ERP system with flexible supply chain features may be a solution. However, with this comes a high price tag. A second option is to use two or even three different systems, known as a best-of-breed approach. But this often results in duplicate entry of information, as well as long training periods on all the systems. Either way, both options are costly, cumbersome and require a long list of customizations, training and upgrades.

Cloud-based alternative

An alternative to an on-premise enterprise system is a supply-chain, web-based, software-as-a-service model. Through SaaS or cloud computing, a company’s applications and data reside on highly secure remote servers that are accessed via the Internet. Outsourcing the information system allows a company to better utilize its human and technical capital internally. The service center’s IT staff can focus on core competencies rather than fixing system problems or dealing with installing system upgrades and patches. The SaaS provider regularly upgrades the system, with little support required from service center personnel, so users continually gain the latest capabilities with minimal learning curve or disruption. Such upgrades typically are included in the fees, so there is no need for the service center to budget big dollars for system upgrades every three to four years.

Obviously, before moving to a SaaS system, service centers should consider the time to implement, the level of security, flexibility and responsiveness. But in most comparisons, the cloud computing model offers the best return on investment.

Time to implement depends on the level of customization desired. Most companies have a niche or do one thing particularly well. Accounting for this niche requires some level of customization to make sure the system fits the service center’s way of doing business. 

A valid concern that is often voiced is the level of security when using Web portals and Internet domains. A SaaS provider that has control measures (firewalls and private lines) can easily address any issues that may arise. SaaS providers generally offer more in-depth controls and disaster recovery features than any individual service center could realistically achieve on its own.

Supply chains are constantly changing with small companies growing, larger companies merging, government bodies imposing new regulations and the economy ever shifting. Having a system that can easily adapt to these changes is important. On-premise systems typically are too rigid to handle these environments and require massive amounts of redesign and customization.

The responsiveness of a service center’s staff is key to a flexible, lean supply chain. With the real-time data available from a SaaS system, customers and vendors receive the most up-to-date information, creating better relationships with everyone involved.

From EDI to e-Kanban

Another advantage to using a SaaS system is the ability to further connect the supply chain with the use of electronic data interchange, or EDI. This application can be used by suppliers, processors and customers to rid the system of paper dependency. When the decision is made to implement lean techniques, the major question is: “How do we go about it?” Planning, finding the right partners, and knowing which technologies are most effective are the first steps.

Continual improvements of these applications need to occur in order for them to work effectively. Barcodes increase the success of a pull system by sending information that was once transferred by paper documents electronically through the supply chain. An improvement in this area is the development of pull signals or e-Kanbans. Scanning the Kanban instead of manually moving cards from place to place is a more proficient way of using business-to-business communication. Along with Kanbans, forecast models give a better picture of material demand and inventory levels while e-Kanbans track and store the information in real-time, eliminating the manual process of traditional Kanbans. E-business solutions like e-Kanbans, AS2 connections and the use of SaaS-based ERP systems create a full-circle lean approach to managing the supply chain.

While lean supply chains are pertinent for a company’s survival, it is equally important that a company remains easy to do business with. This is accomplished by having greater control of the supply chain, decreasing inventory levels and becoming more responsive to the customer. Lean systems reduce inventory and uncertainty with RF scanners and e-Kanbans, forecast models give more accurate data for demand, while new technologies allow better tracking of outside processes and remote inventories. Exchanging real-time e-commerce information gives greater visibility across the entire supply chain. Suppliers, vendors, service centers and mills can make this happen by using various internal and external solutions. External solutions that include cloud computing or SaaS generally provide the best financial return.
 
Editor’s note: This article was contributed by the experts at Northrop Grumman.

Northrop Grumman Information Systems, Canonsburg, Pa., offers OpenTrac ERP systems for the metals industries. For more information, visit www.opentrac.com.

  
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