How much does Supply Chain automation cost?
Supply Chain automation costs can vary depending on many factors: licence type implementation, testing and support costs all add up to the total business automation costs. In this post, we go through the different pricing of Supply Chain automation software
DIFFERENT PRICING MODELS
Typically, automation software costs go from less than £10/ month per user to about £80/ month for integrated ERP with enhanced automation features.
Most automation software is sold on a SaaS model: SaaS stands for Software As A Service, it means you buy the software on a subscription basis and pay a monthly fee usually calculated as a combination of features and number of users.
NOTE: the prices mentioned in this article refer to quotes received between Aug and Sep 2020.
With SaaS, companies lease the software with many benefits:
No upfront investments: You pay only if the software is in use.
Costs are accounted for as running expenses: the entire cost of the licence is tax-deductible as opposed to purchasing a licence upfront that can be accounted for as an asset.
One payment includes all: no install or hardware costs are due with SaaS; it is all cloud-based and the monthly fee includes everything you need to operate the software.
SaaS can also come with some cons though:
Security: The software vendor is responsible for the security of your data. It is important to note that the vast majority of BPA or RPA software vendors do have advanced security in place with dedicated teams and a large portion of their budget allocated to cyber-security. It is essential to go through the security details with your vendor of choice during the tender process. Differences between licence, implementation, and support costs.
Ownership: With SaaS, you own your data, but the software vendor owns the software where your data is stored. This means that, if your vendor goes busted and there is no recovery plan, you might lose your applications and your data. Although extremely rare, the possibility of disruption due to a software vendor going out of business is real. Companies that invest in automation software must agree with the vendor backup plans and recovery tools that mitigate the risks of disruptions.
INDIVIDUAL USER LICENCE
With prices starting from less than £10/ month this model is the most used. With an individual user licence, you can get the automation apps only to some users in your organization. This is a useful model for companies that want to start with automation and prefer having just a few team members in charge of designing and testing before rolling out the software across the company
Benefits of individual user licences
You can start with one licence for one user only: With this option, companies can save in the initial phase where users are most likely to spend time designing and learning about their new tools.
Some Supply Chain automation software allows you to have different licences types, therefore, different costs depending on whether the user is designing the automation workflows – higher cost - or just viewing the results – lower costs.
Increase or decrease licences as the teams change: with individual user licence, you can simply purchase more or cancel unused licences as the teams change. This is useful for SMEs in the growth phase where headcount can grow fast
Another popular pricing model is based on packages that include a max number of users. Prices start from about £300/ month for a package of 30 users. With these pricing model, companies buy a package that includes a maximum number of users – typically starting from 20 to 30 – and get charged regardless of the actual number of users with full access to the software. The only real benefit we see is with a large organization with tech-savvy users. Here companies can save money on licence costs when purchasing bulk licences
THE PROBLEM WITH BULK LICENCES
Waste if not used: Buying a package of 30 licences and ending up using only 10 is a waste of money. Companies who purchase in bulk are often tempted by the savings when all the licences are in use, but it is unlikely that new automation software will be used by the entire team from day one. The adoption of a new technology looks more like a slow-raising curve than a straight line, therefore bulk licences are usually more expensive
Companies are tied to upgrade in bulk: software vendors with these pricing models also require bulk purchases when adding more licences as the number of users grows. Similarly to what discussed above, prices will raise if, because of the need of one more licence you must buy a package 30.
A less popular pricing model for automation software is a one-off cost that companies pay upfront to purchase the software. This method is getting momentum as a key differentiator by vendors who aim to get new customers by selling software as a product rather than a service.
WHY ONE-OFF PURCHASE MIGHT NOT WORK IN THE LONG TERM
Companies considering this type of pricing model must pay attention to some details:
Risk of obsolescence: One-off purchases are typical of software as a product as opposed to as a service. This means the product might be sold as a specific version and when a new one is released this must be purchased separately as opposed to a SaaS model when companies are enrolled on a plan including constant upgrades and updates
Can the vendor sustain the pricing? One-off software purchases are typical of proof of concepts where vendors are trying to launch a new product in the market and can offer early adopters a quick low-commitment approach that can be very convenient. In the long term though, software vendors using this model can hardly sustain a business that is only generating revenues from new customers. Such vendors focus more on new customer acquisition than R&D and customer service
The second most important cost to consider is training.
In most cases, training is provided in the form of online material published by the software vendor. Vendors like Microsoft have their training material published and can be accessed regardless of whether you have purchased a licence or not. This approach can be a big differentiator as companies can require users to get the training and even get certifications. You can check the Microsoft learning paths here
Other companies offer training material or tutors as part of the initial phase at no additional costs. But this does not mean that training is free. The time spent by the team on training is a cost for the company, to better assess the training costs of Supply Chain automation software you can calculate the hourly wage of the Supply Chain team and multiply by the hours of training required to master the automation software.
Is summary, training costs are low when the software is intuitive, user-friendly and can be mastered even by teams with low IT skills.
SHORT-TERM VS LONG-TERM COSTS
Automation software, unlike most IT investments, begins to deliver benefits shortly after is implemented if the automation fits within a framework of streamlined workflows as I discuss in this previous article here.
It is important to remember that automation cannot fix inefficient processes. It can indeed reduce inefficiency by eliminating risks due to manual input, but the main benefits of Supply Chain automation are providing faster and better insights, reduce costs and boost productivity as I discuss in this article here
In this framework, it becomes clear that, while short-term costs are related to training and project management, long-term costs are associated with licences, adoption curve – usage over time – and the effectiveness of the automation tools in the end-to-end processes.
Let us take as an example a demand planning automation tool I helped implementing for a food company.
All the company’s SKUs have shelf-life constraints that must be factored in the planning calculations. Before implementing the automation tools, the company was planning weekly using spreadsheets and users knew weekly planning was enough to minimise the risk of buying too much inventory. When designing the automation then, because the replenishment calculation did not consider the shelf-life, the tests returned planning suggestions that were unrealistic and could have resulted in the company losing stock that would pass the best-before date before it could be sold.
The first reaction to the test data was questioning the application capability to plan effectively, but the real problem was in the planning process. The issue was in not factoring the remaining shelf life on receipt of the goods in the planning model. Once this was assessed for all SKUs and the calculation updated, the application began suggesting the optimal replenishment schedule and quantities.
THE COST OF CHANGE: HOW MUCH IT COSTS TO CHANGE AUTOMATION SOFTWARE
Thinking of changing your automation software for a different one? No problem, the switchover is usually fast and without any additional costs. These are the two typical scenarios that companies face when moving from an automation tool to another:
Automation is bespoke and/ or embedded in a core system: If this is the case change might require some time and internal costs will include project management and data backup plus some kind of external consulting/ IT costs to change the core system setting. Companies using enterprise software like SAP or Oracle might expect higher costs here while suites like Microsoft Dynamics or tier-f2 ERP can be more convenient to update.
Automation is standalone and integrated with the core system: in most cases, this setup requires almost no costs and the apps can be switched over fast with limited costs of project management and data backup
HOW MUCH SHOULD A COMPANY SPEND ON AUTOMATION?
There isn’t a general rule of thumb on how much companies should spend on automation.
According to this Deloitte article, companies in consumer goods average spend on IT is 2.04% of turnover. But rather than focusing on IT spend over turnover ratio, which can or cannot be relevant to SMEs, companies should calculate the spend as an ROI based on the benefits that automation will bring when in use. If you want to learn more, I have an article on how to build a business case for supply chain automation here.
In essence, the ROI on automation is calculated as a percentage of the gains minus the spent divided by the spent. Here is an example:
Company A spends on Supply Chain wages an average of £15 per hour and manual data entry accounts for 2 hours a day of 5 team members. By introducing automation software with initial training and project management costs of £25K and licence cost of £120 per month, the company can eliminate manual data. Here are the calculation steps:
The total cost of manual data entry = [(£15 × 2 hours) ×5 team members] × 250 working days a year = £37,500 per year
Total cost of automation = £25K PM and training + (£120 per month licence × 12 months) = £26,440
Even considering a lower net saving on the first year due to high costs of training and implementation, automation can bring savings from year two onwards thanks to the SaaS model and costs per licence model.
Supply Chain automation software is inexpensive if bought with a SaaS plan and licences are purchase for individual users, SMEs can harvest greater benefits from the automation if this is rolled out with standalone solutions that are integrated with a company’s core system as opposed to building the automation within enterprise software suites which is a preferred solution for larger companies.
When evaluating the spend of automation companies should consider the ROI rather than the investment on turnover ratio and be aware that most automation projects can deliver benefits almost immediately although, it is after the first year where companies should expect to see the best return on their investment.
If you want to learn how we help small businesses reduce costs through automation check the video case study here