For decades now, ERP systems have been an integral part in the technology landscape of food companies. But what should an ERP system be able to do, how do you select it, and what role does it play in the digitalization? A broad overview of the software that is gaining its position as the central nervous system in food processing.
- What is an ERP system, and why do you need it in the food production?
- What role does ERP play in the digitalization of food companies?
- Which functions does ERP need so it would be a real help for a food company?
- What do food companies need to consider in the selection of their ERP system?
- Cloud ERP, On-Premise ERP, hybrid ERP? What is the right setup for food companies?
What is an ERP system, and why do you need it in the food production?
ERP stands for Enterprise Resource Planning and refers to a software system for business management. An ERP system enables food companies to manage and optimize their business processes – from purchasing, accounting, finance, human relations, and production to logistics. In short, ERP is the software that keeps your business up and running. Ordering raw materials, processing orders, managing and optimizing recipes, billing, production planning, and a lot more.
Good ERP systems do not need any third-party software in key areas, and they are capable of supplying all departments and players in a food company with consistent data. What sounds good in theory ensures fast and efficient processes in practice: when a customer order comes in via an online shop or EDI, the system automatically verifies the stock availability, notifies the production scheduler, and initiates goods picking. Without any media disruptions or interruptions.
For manufacturing companies, it is highly advantageous if their ERP additionally covers the processes in production, thereby taking over the function of a Manufacturing Execution System. These systems are able to capture and process operational data automatically, to improve machine performance or to determine OEE measures and, as a result, to uncover areas for optimization.
This combination of commerce, product management, and production technology intelligence makes the ERP system a central building block for Industry 4.0 in the food industry. It’s no surprise that ERP systems are widely used: according to our digitalization survey in 2020, ERP has by far the highest degree of maturity in the IT and technology landscape of the companies. About 58 percent of the companies are using it. Another 31 percent plan to use ERP or show great interest in it.
What role does ERP play in the digitalization of food companies?
The ERP system is the central software for data processing. It has always been - and it has never been more important than today. The megatrend of digitalization entails a shift in the importance of ERP: what used to be a tool for operational business support has now become an important strategic building block:
As a data and process hub, the ERP system is involved in every digitalization project. When dairies want to trace their batches with RFID, when you want to build a B2B online store for your customers, or when sausage manufacturers want to enhance the control of their filling machines: improvements in your supply chain, administration, production, or sales are usually sustained by ERP data. The same is true if you want to tie blockchain and artificial intelligence into your digitalization strategy, or if you want to build the smart food factory. Without the ERP software in the background, none of this would ever become reality.
Good data management with ERP is the ideal basis for a continual improvement process. Data-centric companies like Californian manufacturer Courage Production lead the way. They use ERP not only for routine tasks, but also to rationalize their day-to-day operations based on digitized information from production: for example, deciding which product goes into which smoking chamber, using advanced planning and scheduling, or minimizing losses in the operation. By linking the ERP data with data from other systems, decisions could even be automated, as is the case with machine learning.
And not forgetting cost reductions. A glance at the margins in this industry reveals the importance of this topic: according to CSIMarket, the gross profit margin for the food-processing industry in 2019 was 22.05% - significantly below the total market average of 49.4%. If you do not utilize all digitalization opportunities in this and without understanding the ERP system as a cost reducer, you are facing difficult times. Looking at the industry’s value-adding processes, many companies are only at the outset. About 68 percent of the companies still use paper when working with the ERP system (CSB Survey 2020) – a situation that consistently digitalized companies have turned their back on many years ago.
Conclusion: whether bakery products, dairy products, meat, or beverages - with ERP, you have the ideal basis for your digitalization. For whipping your processes into shape, expanding your business model, or simply making your production more agile. It is also true that up to now, only 22 percent of the food companies control their information and material flows at shop-floor level with the ERP system (CSB Survey 2020). What is the reason for this? Surely, one reason is that many outdated or unsuitable systems are still in use. Digitalization would therefore force one or the other company to change, because transformation is hardly feasible without a modern ERP software.
Which functions does ERP need so it would be a real help for a food company?
There´s no business like food business – and ERP must optimally represent the multitude of the industry’s special aspects. But requirements of the companies are high, and the differences within the industry are plenty: while meat companies need a cutting calculation function, dairies benefit from integrated milk payment statements, and large bakeries attach importance to silo management.
Despite these differences, there are a few must-haves that every company needs
- The ERP software must be able to supply precise cost information for all components, such as finished products, joint products and byproducts. This is essential for the calculation of material and manufacturing costs as well as for pricing.
- Make sure that the system does not have any problems with portraying and optimizing recipes, bills of materials, and product calculations.
- Evaluations, gross margins, monitoring of processes and products: only if essential information and key performance indicators can be retrieved from the ERP system at the press of a button will decision-makers be able to get the most out of their business.
- The software must allow automated handling of variable weights. Otherwise, you will run into problems in weigh price labeling, especially with non-equalized products.
- Production planning must take requirements of the fresh goods production into account. Additionally, the data from every value-adding stage needs to be included in forecasting and in the calculation of optimal batch sizes. This mitigates the disadvantages resulting from the fact that sales data from retailers as the most important touch point frequently remain a black box.
- In the wake of the Covid-19 outbreak, mobility has become even more critical to success. When only a few employees are supposed to work on site, the others should still be able to access the core data in the ERP system. Work processes, document workflows, evaluations: all this has to continue at all times, also via remote access.
- Another killer criterion is the organization of traceability within the software. Market observers expect that consumers will attach greater importance to transparency as they want to know the full story of their food. ERP needs to visualize these flows of goods and data, also for the consumers at the shelves in the retail stores.
Speaking of food retailers. Besides EDI, most companies need a comprehensive set of functions and technologies before they can start doing business with food retailers. The food retail sector demands a lot of its suppliers – and never hesitates with financial penalties in case of delivery problems. Effective means to prevent this include integrated tools for planning and material requirements planning, consistent data capture, as well as special picking solutions.
With these functions, the ERP software ultimately helps all parties involved: executive managers and supervisors can make better decisions with the help of central data processing, because they have quick access to analyses and reports. At the shop floor, the product quality and the process quality benefit from the consistent data flow. And the customers are happy with the reliability and the delivery precision in the supply chains of their suppliers.
What do food companies need to consider in the selection of their ERP system?
The choice of the optimum ERP solution is one of the biggest challenges the decision-makers in the food industry are facing. The risk of backing the wrong horse is much higher than with any other capital goods. If you need to, you could always replace an isolated machine with another one, but an ERP software interferes with all areas - which makes changing to another system quite difficult. What is more, the offers of the providers are difficult to compare. But how can you safely achieve your goals?
The industry orientation of the software is the decisive factor for the selection. An ERP system that covers the business processes of the food industry well in the standard is always at an advantage. This is evident in faster implementation, daily operation and, last but not least, release upgrades. Moreover your ERP partner should have expertise and experience in the food industry. The main point is qualified staff: nothing is possible without the right consultants on site. The best consultants are at home in two worlds - information technology and the food industry. Only then do all parties speak the same language.
These are the questions you should ask when speaking with a potential ERP partner:
- Has the software originally been developed to meet the requirements of the food industry? → This guarantees that the software has the capabilities you need, including best practices that can be implemented immediately.
- Which qualifications do the consultants have? Are there people among them who are bakers, butchers, or food technologists by trade? → In that case, you not only purchase the software, but also procure personal experience and the necessary industry expertise. Ultimately, it is this combination that enables the provider to understand and to solve your problems.
- Which references does the vendor have specifically in your industry? Are (virtual) reference visits possible? → In this way, you could clarify the most important issues in a direct dialog with the users.
Integration is another key criterion. The fewer the number of interfaces in the core processes, the faster and the more secure will you obtain important data from inventory, production, or calculation. There are, therefore, strong reasons why many food companies still take this approach. Companies like Naabtaler, Beckers Bester, the EDEKA production facilities, as well as many comparatively small ones like Juffinger.
With the increasing availability of highly specialized software, the meaning of the keyword “ERP integration” has changed significantly. What meant “everything in a single system” before, now refers to the capability of the ERP software to integrate external IT solutions via interfaces: CRM systems for grocery stores, shop systems for e-commerce, marketing automation tools, route optimization software, and much more. No ERP vendor in the world could develop a solution that matches every single use case - which, after all, would not be up to modern standards, would it?
There are many other criteria that you should consider when you pick your ERP. We have summarized these points in our white paper. You might also want to watch the video of our expert webinar on this topic.
Why does size matter particularly for the ERP?
The ideal ERP solution for a company also depends on the company’s size. As a rule of thumb:
- In SMEs or food start-ups, a simple, preconfigured standard solution (Basic ERP) would most likely be the best fit. This would keep the investment costs low and ideally save them from hiring own IT staff.
- Medium-size companies tend to need more customized solutions in order to cover the food production processes they have developed over the past decades (Industry ERP). The standard version of an industry ERP comprises essential industry-specific features and could be tailored to the individual needs.
- The best fit for food manufacturing groups would be special systems for their production facilities (Factory ERP), while a superordinate ERP handles all functions related to HR, finance, and controlling.
The bottom line is that if you acquire an ERP solution that does not fit the size of your company, it will be virtually impossible to achieve your project goals or the goals associated with the software. Whether it is because you have to live with its high degree of complexity, because the software is not flexible enough, or because it cannot grow with your business.
Cloud ERP, On-Premise ERP, hybrid ERP? What is the right setup for food companies?
Now the great question is, which operating model suits my company best: a cloud-based system, on-premise software, or a combination of both?
Looking at the current market trends, everything seems to speak for the cloud. Not only the analysts of SoftSelect refer to the acquisition of software from the cloud as one of the biggest growth areas in the field of IT. SAP’s offensive marketing strategy could also be interpreted in that sense. Titled “Rise with SAP”, the ERP vendor’s campaign aims to pave the way for its customers to move to the cloud.
Yet, are the typical pro-cloud arguments really true for the food industry? A look into the practice of manufacturing raises some doubts. Unlike in other industries, fast and stable data processing in the factory is essential - for example, when labels, weight, and price information have to be printed automatically. Still, ERP from the cloud has its advantages:
- Cost reduction: you can save the investments in an own server, other expensive hardware, and skilled staff (which are quite hard to find these days)
- Savings in time: you do not need to worry about keeping your ERP system and the hardware up to date. This will save you precious time.
- Scalability: you can add or remove IT resources cost-efficiently and in a very short time
With every opportunity comes a challenge:
- Functional weaknesses: cloud solutions often have functional limitations because they are more standardized. As a result, business users have less flexibility in “tailoring” the system to their own – and often very complex – processes.
- A false sense of security: moving your IT to the cloud does not automatically mean you achieve maximum security. Secure data centers are the prerequisite for secure data. Therefore, you should verify the concept of the vendor thoroughly. Geo-redundancy, i.e. storing backup copies at a geographically remote data center, is an important key word here.
- Precise costing: If you take it for granted that a cloud solution will always reduce your IT costs, you might be in for a surprise.
Cloud or not cloud - this is the question you should ask yourself with regard to your overall IT strategy. The answer varies, depending on who takes the decision. An IT manager will have a different view than a data-driven CEO who wants to be on top of things, anytime and everywhere. The way I see it is that start-ups, trade companies, and businesses with largely standardized processes are more likely in a position to consider a cloud ERP than companies with complex value chain stages and processes. In that case, on-premise would be the better option. The same goes for food companies where the shop-floor information technology is a key differentiator.
Alternatively, you take a hybrid approach by combining the flexibility of the cloud with the performance advantages of an own server: in production, you stick with your traditional on-premise ERP, while you offload data management in sales or marketing to the cloud. Get the best of both worlds with hybrind ERP systems.
What is essential in the implementation of an ERP system?
If you invested a lot of time and work in the selection, you should also allow for sufficient time and resources for the ERP implementation. This phase has its pitfalls, which might lead to a costly project stop. Even the big players in the industry like Lidl and Haribo know how quickly overwhelming enthusiasm can easily turn into disillusionment. The two companies have emerged from large-scale ERP projects, and both faced tremendous problems. This is not an exception. According to the estimates of Gartner analysts, up to 75 percent of projects fail.
These are some basic tips how food companies should tackle the introduction of a new ERP system:
- Right from the start, get everyone involved on board, including your management. Ask the different departments about their wishes and give them the right to make a choice. In this way, you create commitment while ensuring that the existing process knowledge is incorporated into the solution.
- Plan the implementation strategically: define scope, budget, resources, time, and quality of the project so you can benchmark it against your requirements. Use the previously defined core processes and core business fields as a guideline. Ask your consultants for agile methods, which will help you to save time.
- For a fast and successful migration, data has to be prepared, cleaned up, and converted. As this applies to all master data and transaction data, your plans should allow for sufficient time. Keep the revision-proof archiving of non-transferred data in mind!
- Good documentation from the outset is essential. This starts with a requirement specification and goes all the way to documenting the transition to the new system with regard to tax law requirements.
- Clarify the responsibilities and make sure everyone is aware that the introduction of the new system is a top-level issue.
- Make sure that sufficient resources are available for the implementation. Controlling, monitoring, and managing the project also cost time and money. It is not uncommon for staff shortages to delay the go-live.
- Test the system before you go live, ideally starting with one subarea. Alternatively, you could keep your legacy system running in parallel for a while.
- Don’t start training too late - and intensively train your power users early on.
- Plan for optimizations. Sometimes reasonable adjustments and add-ons only come up during implementation phase.
What is true for choosing the right ERP solution also applies to the implementation: a strategy that works for one company is not necessarily a universal recipe for success. When you choose your ERP system, you should therefore make sure that an experienced team of consultants is in place to help you overcome the initial hurdles.
There are definitely still some things you can and need to do in the company itself - but this will ensure the success of your ERP introduction.