Is SaaS ERP a viable model for manufacturing?

A new generation of SaaS ERP applications has been winning attention among manufacturers. But is SaaS a valid deployment model for manufacturing?

Most of the growth in Software as a Service (SaaS) implementations is attributable to adoption of SaaS applications

for human resources, customer relationship management (CRM) and financial solutions. More recently, a new generation of SaaS ERP applications has been winning attention among manufacturers. But can SaaS be considered a valid deployment model for complex and business process-centric functions like production scheduling, warehouse management, and supply chain logistics? And more importantly, when does the promise of SaaS ERP for manufacturing make sense?

True SaaS applications are not on-premise applications simply re-jiggered by a solution provider and offered as a Web service. No, SaaS applications are written and developed to be provided over the Web, using a browser-based interface. The applications are owned by the service provider, which also manages all the infrastructure and architecture overhead -- all the development, licensing, maintenance, and backup/recovery work needed to keep the servers and solutions running. The SaaS customer shares the applications and servers with other customers, though each customer will often have its own data separated into secure databases. The latest catch-all term for the virtual location of all these services is "the cloud."

And the cloud, it turns out, is becoming increasingly popular.

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"Thirty-nine percent of respondents in last year's AMR midsized enterprise ERP spending study indicated a desire to acquire their ERP applications on-demand," noted Simon Jacobson, a senior research analyst for Boston-based AMR Research.

"I think a lot of interest was sparked by SAP's Business ByDesign piece. Overall, there's clear market traction, and I expect increased interest in leveraging applications this way," Jacobson added.

In addition to SAP's SaaS efforts, other companies are jostling for attention and business. Plexus, Glovia, Workday, and NetSuite are making noise in the SaaS market, and Oracle is working on delivering its Fusion Applications on-demand (though the company has been beset with delays). Similarly, Coda and Salesforce.com have been working together and may end up with viable end-to-end SaaS ERP solutions as well.

Gartner Dataquest's most recent predictions indicate that SaaS will constitute 16.7% of the total ERP market by 2011, and of that 16.7%, 86% will be from small and medium-sized businesses (SMBs). Accordingly, Gartner says SaaS ERP for larger enterprise rollouts just isn't ready for prime time -- unless it's a highly focused application.

If ERP on-demand isn't ready for large manufacturing organizations, what about SMBs?

SaaS ERP: Pros and cons for SMB manufacturers

"The pros of SaaS ERP are similar to any SaaS -- pay as you go, expense vs. capital, spreading the support and operation overhead across a much larger user base, and the ability to scale at your own pace," explained Dan Miklovic, vice president of Gartner's manufacturing industry advisory services.

"The cons for SaaS ERP are just like any other SaaS -- it is best for processes where you have little differentiation from industry 'standard' practice, it needs highly reliable and cost-effective access to the cloud and, perhaps most importantly, the ability to integrate with bespoke applications," Miklovic added.

On the other hand, there are plenty of pros to consider when evaluating SaaS ERP. Aside from the cost savings that SaaS typically promises -- customers don't have to buy their own server hardware, for example -- the real value of SaaS manufacturing solutions might be time saving.

"In this economy, spending the time and money on cost implementations to deploy software isn't always the best use of an organization's dollar," Jacobson said.

"If a lot of the application functionality is pre-configured and can be deployed from the cloud vs. on-site tailoring … time-to-value can be the difference in the ability to survive in a global business scenario where you can still meet customer demands rather than taking yourself out of the game for three months to deploy the first phase of a traditional ERP project," he explained.

Indeed, the Catch-22 with SaaS right now lies with the benefits of instant-on service and the need for business process re-engineering. Even organizations that can use an industry-standard application with little customization may have to alter their in-house business processes to match the SaaS application. In this case, the benefits of instant-on can be eroded by the time and effort required to change how humans process the company's business.

SaaS ERP customization is key for manufacturers

Scott Baxter, founder and CEO of SA Baxter Architectural Hardware -- a company that manufactures ornate doorknobs and hinges that are used in high-end homes and hotels -- stumbled upon his SaaS solution the hard way. A few years ago, he started with an on-site traditional ERP solution because he couldn't find a suitable SaaS-based offering. The on-site solution failed miserably -- installation dragged on and customization costs skyrocketed. "Basically we were just writing checks," Baxter lamented. "It was awful, and we went back to QuickBooks."

Baxter's second solution was an SaaS offering, but it lacked the ability to customize business processes, and the workarounds for entering orders took hours. "It was a big company system with a wrapper put around it and called SaaS," he said. He prefers not to name the solutions that failed for his small manufacturing business -- which has more than 130,000 product configurations -- but he's happy to call out the surprising solution that succeeded: NetSuite.

The manufacturing-specific capabilities of NetSuite were underdeveloped at the time of implementation, but the customization abilities and stability of the SaaS ERP solution let Baxter set up his manufacturing plant as a vendor, which in turn allowed him to generate invoices and work orders that he can use for production scheduling, manufacturing, pick orders, and shipping. And all of it rolls up into integrated financials.

"They've made their solution sophisticated enough that a lot of different types of businesses can use this thing – however, they don't shove it down our throat, in that we can turn functionality off and on with a click of a button," Baxter explained. "Customization becomes an interactive event and not a consulting project or development effort," he added, noting that he expects to utilize some of the new manufacturing-specific functionality that NetSuite recently announced.

Another SMB manufacturer having success with on-demand ERP is College Park Industries. The company is a leading prosthetic limb manufacturer that can create custom prosthetic feet that cover a wide range of applications. A foot for an extreme sports athlete, for example, will be quite different from a foot for a person who simply wants to walk the aisles in a grocery store.

College Park Industries may be a small business, but its manufacturing process is far from simple. The company uses Plexus Online to cover end-to-end business and manufacturing implementations that can get astoundingly complex. One of the company's prosthetic feet can be custom built 450,000 ways. And, because the company produces a medical product, it must meet industry regulations for strict device and component traceability.

"So far, I have not been able to throw anything at the option configuration tool that Plexus hasn't been able to handle," said Kimberly Light, program manager for College Park Industries. Still, over the last couple of years, Plexus has delivered a variety of customizations for College Park, and the most important point has remained the same: Plexus handles the IT end of the solution while College Park handles the business.

"And that," Light said, "is exactly what we needed."

Chris Maxcer is a freelance writer.

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