How to Evaluate Costs/ROI

What would be a reasonable price?

Companies should analyze the capabilities of state-of-the-art MES to estimate what an MES deployment should cost. Historically, MES setups were “big bang” implementations, where functionality needed to be delivered immediately. These created large projects and long time lines that frequently failed to deliver an adequate business return and often were not aligned to the current business problems upon project completion.

SAP’s introduction of xApp Manufacturing Integration and Intelligence (SAP xMII), which it bills as the world’s first manufacturing intelligence portal, is another example of technology advances offering better support for MES deployment. Like ERP systems, MES solutions have historically had two basic pricing models: user-based and usage- or module-based. The former entails one license fee per user, which includes access to all modules of the system. The latter means functionality is purchased on an a la carte basis, plus an additional per-user fee.²¹

According to Simon Jacobson, a research director at AMR, a new MES can cost anywhere from $150,000 to $300,000 for the software license, plus one-and-a-half to three times that amount for services, depending on the complexity and number of sites installed. ²²

Hosted and software-as-a-service (SaaS) deployments are also emerging as means to minimize capital requirements. CFOs can balk at a large capital outlay for enterprise software if it doesn’t translate into immediate ROI, but some SaaS vendors, such as Plex Systems, are helping clients overcome this challenge by offering MES functionality as a subscription service over the Web.. ²³

SaaS pricing models are in flux, though. At Forrester Research’s recent IT forum, a roundtable was undertaken with several leading software and services firms around the topic of SaaS pricing trends. Key takeaways:

1. SaaS pricing is evolving toward true usage-based models. Most early SaaS pricing was on a fairly simplistic, per-user-per-month basis, sometimes with add-on costs for “extras” such as mobile, storage, or advanced modules; today, many buyers are seeking pricing options that more closely map to value, such as usage-based or transaction-based models.
2. Many SaaS vendors are providing transparency into pricing and contract terms. These vendors have typically had transparent pricing, often listed on their Websites or shared by user communities. One challenge for buyers who are stuck in a traditional, on-premises purchasing mindset is that SaaS vendors typically have limited transparency into breakdown of pricing (i.e., splitting out software, hosting, and support).
3. “Freemium” remains common, but approaches vary widely. Many SaaS vendors continue to offer various types of free trials or free low-end editions to allow potential customers to try the product before buying, and to capitalize on the word-of-mouth that is quite common among SaaS users. ²⁴

Typical project payback for MES investments comes in six to 24 months. Most MES projects are justified on cost-reduction measures, such as:

• lower work in progress (WIP) and finished goods inventory (FGI)
• reduced waste, scrap, and materials
• reduced cost of regulatory compliance
• reduced rework
• lower maintenance costs
• reduced indirect labor costs
• shorter cycle times
• improved quality
• reduced process and product variability

Process improvements also accrue to the ROI for MES investments such as:

• faster new product introduction (NPI) cycle
• shorter time to innovation
• improved adherence to customer audit requirements (traceability and genealogy)
• promotion of flow manufacturing

Finally, overarching market improvements are supported by MES: better collaboration, improved supply chain visibility, and a platform for continuous improvement.²⁵

FOOTNOTES