The book and movie, Moneyball tells the story of how Billy Beane, the General Manager for the Oakland Athletics, utilized a rogue statistical strategy to get the maximum value out of his minuscule baseball team budget. With severely limited resources, Beane put his strategy to work and successfully competed against teams with star players and budgets twice the amount as his. When we think about a manufacturer managing risk with multiple Enterprise Resource Planning (ERP) systems, there are significant parallels with Billy’s predicament.
The Basis of the Moneyball Strategy
Of all the player statistics that are tracked in Major League Baseball, Beane’s formula states that the only stats that truly matter are how often a player gets on base (on-base percentage) and how many bases they advance to in one at-bat (slugging percentage). Simply put, getting on base soon and often, while advancing multiple bases during an at-bat, puts the team in scoring position more often than the opposition. He posits that a team filled with undervalued base hitters is typically more flexible and adaptive than a team with just a few home run hitters. So, with that in mind, is your ERP adding to your team’s success (economies of scale) or hitting into foul territory (diseconomies of scale)?
What are Diseconomies of Scale?
In microeconomics, economies of scale can be defined as proportionate cost advantages gained by an increased level of production. Diseconomies of scale are the features that lead to an increase in average costs as a business grows beyond a certain size. In this case, the decision to stick with too many ERP systems can cause a business to ignore a growing back office that is creating workarounds and spending inordinate amounts of time maintaining old instances of legacy ERPs. This leads to significant waste, and institutes a high cost structure in an environment that does not tolerate it. Multiple legacy ERPs in a growing enterprise can essentially drag the team down.
How Does this Apply to Automotive ERP?
The parallel is essentially this; the Tier-1 Auto industry is hyper-focused on the heavy hitters of product development and manufacturing operations while ignoring the “deeper bench” of supporting legacy ERP systems and the inefficiencies they create in the back office. This is mainly due to the complexity and cost of integrating or migrating ERPs, not to mention the potential 28% failure rate of ERP projects.
But what if management does decide to consolidate ERPs? Product development and manufacturing operations are hitting home run after home run to drive down production costs while the rest of the team is striking out. So the tendency is to bring on another big name, home-run hitting ERP with a hefty price tag and a years-long implementation. Unfortunately, they, too, are expensive to recruit, take a long time to adapt to the team, and are so inflexible you need a deep support network (admins, consultants, specialists, servers, and infrastructure) to keep them healthy; this player does little to decrease the back office or risk for that matter. Ideally, your ERP is supposed to be your expert clean-up batter, base stealer and bunter, giving the team flexibility and adaptability to fit within your limited resources. You’re then back to square one, and much like baseball before Billy Beane, there was no clear way around this status quo.
Put Your ERP to Work and Compete Better
The equation is simple. If your legacy ERPs are generating inefficiencies in the back office, they negate some of the economies of scale you’ve achieved on the production line, leaving wins, and money, on the table. What is needed is a robust ERP with a shorter implementation time that gets your team on-base faster (in months, not years), is agile enough to power hit your current production/finance challenges, and can adapt to the curve balls thrown by tough competition and a fickle market. Does such a player exist?
Tom Roberts, QAD VP of Automotive and Mobility discusses this strategy more fully in his white paper, “Achieving Cost Synergy in Automotive Supplier M&A: The Diseconomies of Scale.” See what a cloud-enabled, next generation ERP can do to help you compete against big-budget teams full of big-name hitters.