Feature article - Linking KPIs to ERP in speciality chemicals
Sergey Nozhenko, a solution expert in SAP’s chemicals industry business unit, explains how value management can help speciality chemicals businesses assess and continually improve upon the ROI of their core IT outlays
Show me the money. It seems a simple enough request – or, perhaps better, demand - but it is one that has been asked imperfectly over the decades of enterprise resource processing (ERP) system implementations in the speciality chemicals business.
That ERPs have delivered value is beyond question. The user base serves as a testament to that – and try running a modern chemicals business without one. What can and should be questioned, however, is whether the value ERPs deliver on their substantial investments is being accurately quantified. That may sound like an accounting exercise. It should be a strategic imperative.
Such quantification must derive from business outcomes, and those are typically spelled out in key performance indicators (KPIs). For speciality chemical companies, KPIs span the business: sustainability, customer experience, R&D, asset management, capital project management, manufacturing, finance, procurement, supply chain and human resources count among the main focus areas.
Some KPIs are well entrenched. For example, in asset management, you have mainstays such as unplanned downtime, days in inventory, wrench time and asset maintenance-related KPIs. In speciality chemicals, where value trumps volume, KPIs may include innovation and product-development targets for higher added value. The rise of sustainability-related KPIs across the chemicals industry – but in particularly in speciality chemicals – serve as testament to KPIs changing over time as business priorities evolve.
ERPs deliver KPI values and outcomes in real time
The relationship ERPs have to KPIs is similarly evolving. In the past, ERPs have served largely as sources for raw or partially distilled data inputs for the spreadsheet-based derivation of KPIs. Now and going forward, cloud-based ERPs that tap into real-time databases can pull from diverse data sources and constantly track KPI status against goals.
Such immediate visibility can be powerful, both as a business driver on many fronts as well as in justifying the investments speciality chemicals companies continue to make in ERP systems themselves. That can trigger a virtuous cycle of ROI-justified IT investment, which, in turn, further improves business outcomes. But to get there, chemical companies must rethink how they go about vetting, justifying, and evaluating their IT investments.
Traditional value assessment
Investing millions of dollars in ERP integrations and enhancements has never been a trivial act in the chemicals business. Up-front ROI calculations have always been part of the story. The approach went roughly as follows:
* Define the scope of the IT programme
* Estimate the programme costs over time
* Come up with KPIs and their expected value
* Run the numbers (in terms of IRR, ROI & NPV)
* Approve the programme (or not)
An ERP is an investment that should be evaluated like any other production and business asset based on its estimated future impact. While the problem with this approach has also technology, the people and process aspects of business transformation have been bigger issues.
Too often, the breakdown in show-me-the-money happens because the executives who greenlight the project based on expected outcomes do not take responsibility for measuring and attaining those outcomes down the road. Rather, they see it as the project managers’ purview. As a result, the expected values of the KPIs that helped justify the ERP project in the first place may never actually get measured.
Technology also comes into play. The ERP functionality should ideally also include the data collection and algorithms that let the system itself produce the KPI results upon, which not only the business, but also the ROI of the ERP investment, is to be measured.
In other words, a properly planned ERP can do a lot to justify itself. But you have to do the people-process work up front. Otherwise, understanding KPI status after the fact can involve rooting out data from various shop-floor systems and dedicating time to massaging it into meaningful information using spreadsheets. The work involved is often taxing enough to dissuade the effort, and even when completed, the results tend to be stale.
It is no surprise that executives lacking evidence of the value of ERP functionality can mistake it for just another administrative system. There is an element of tragedy to that, especially because there is a better way.
The value management cycle
To understand and grow the value of their ERP investments, SAP’s chemical customers are embracing what we call the continuous value management cycle. The concept works with any ERP. It boils down to not only defining KPIs to justify the technology investment, but also making clear up front how that data will be collected, calculated and presented, with the ERP doing the heavy lifting.
Let’s say that a speciality chemicals maker decides that improved equipment-utilisation percentage and first-pass yield are its target KPIs. The ERP and associated systems should provide shop-floor integration for data gathering, a manufacturing data lake for data processing, and a business-analytics tool for converting equipment utilisation data and yield into efficiency-related and financial outputs for presentation in management dashboards.
Once operational, the progress informing those KPIs feed into the assessment of the ERP’s ROI and, vitally, are factored into the compensation of the executives who approved the IT investment in the first place. That ensures that they keep paying attention to the system they approved. With automated KPIs being delivered by ERP systems, executives can push for continuous improvement of the business functions those KPIs measure, and the positive reinforcement begins.
Given that none of this would be possible without ERP-derived KPIs, their contribution to the business is quantifiable. Along the way, ERPs take on importance to the business more than commensurate with the investments in them and the C-suite recognises as much. Finally, the ‘cycle’ in value management cycle is crucial.
Value management is an ongoing process; one that can apply to new ERP features as well as to existing business and production processes whose KPIs management dashboards show to be falling short. In those cases, too, people and process steps precede technology investments. Business process improvement or excellence teams deploy to unearth inefficiencies and their root causes using business-processes intelligence, propose solutions, and develop KPI improvements those solutions should yield.
Speciality chemical businesses must quickly, consistently, and accurately measure their effectiveness across multiple dimensions if they hope to continuously improve their businesses and stay competitive, profitable and sustainable. Not long ago, doing so would have been incredibly difficult – if possible at all – and certainly cost-prohibitive. Now we have the technologies and methodologies to make it real.
ERPs developed and augmented using a value management approach can deliver KPI-related insights quickly, transparently, and with real business impact. Not least, the ERP’s delivery of KPI-based insights shows management the money in terms of concrete return on ERP investment – and that’s a lot more satisfying than the marketing soundbites someone promised them before the ERP transformation project began.