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Considering the importance of master data for achieving operational excellence in finance, purchasing, sales, commerce, manufacturing and supply chain, we find the lack of initiative and investment to make Master Data Management efficient and effective surprising. In our experience the root cause for inaction is poor understanding of the costs and impact of suboptimal master data management.
This posts provides an overview of a practical approach for building a business case for improving Master Data Management (generally by implementing an effective Master Data Management solution). We recommend you to review our post “How Good and Useful is your Master Data” to assess the state of Master Data in your organization and its impact on operational excellence.
The business case for making Master Data Management efficient and effective primarily rests on the following
- The Savings an organization can realize by making Master Data Management efficient and effective
- The Investment it takes to make Master Data Management efficient and effective
Both of the above can make or break the business case for Master Data Management. Ideally Savings should be a factor higher than the investment as shown in the picture below.
Business Case for Master Data Management – Simplified Overview
Where to finding Savings
The savings opportunities for Master Data Management are primarily concentrated in 2 areas
Process Cost – Process cost is the most direct measure of the cost of Master Data Process, such as creating a new material, new customer, new supplier, extending materials, changes to master data, pricing changes, and many other processes.
Other Cost – Inefficient and ineffective master data processes can have adverse consequences on business operations and can result in costs that are not readily apparent but can be understood in terms of product launch issues, customer complaints, quality issues, supply chain delays, etc.. In addition, there is also value of having good master data readily available broadly since many people across the organization (sales, supply chain, finance) spend a lot of time looking for master data.
Master Data AS-IS Process Cost
Master Data Management comprises tens, if not hundreds, of business processes.
Master Data business processes are generally cross-functional and made up of activities that take time and cost to complete. Take the New Material process example below
In the example above, each new material master data creation can cost the company $250 dollars because of the actual work people have to do collect, evaluate ,and enter data into one or more systems. If an organization creates a thousand materials a year, the new material creation process alone can cost
$250X1,000 = $250,000 dollars / year
Add up process costs per year of all the master data processes as shown below to arrive at the total Master Data Process cost.
you can arrive at the total process cost of all Master Data processes.
Process Costs and Cycle Time with a Master Data Management solution
The goal of a Master Data Management solution is to make Master Data processes efficient and effective. The following shows the New Material Creation process with a Master Data Management solution like ZMDM. Many of the activities are now automated and completed by automated workflow activities. Cross-functional workflow driven coordination also minimized delays and the whole process can now be completed in 3.5 days (compared to 25+ days in original process). The process cost is also significantly lower at $50 dollars.
In the above master data process example, the savings for each new material creation process is $200. Multiplied over 1000 new material creation processes per year the number approaches $200,000 per year.
Savings due to Master Data Management solution
When Master Data solution is used for many master data processes, the savings add and can be substantial providing a foundation for a good business case for Master Data Management solution.
Investment to make Master Data Management Efficient and Effective
The other side of Savings for making the Business Case for Master Data Management is the Investment. Organizations have a couple of options
- Use lower cost resources to perform AS-IS Master Data Management process activities
- Use a Master Data Management solution like ZMDM to reduce the cost and improve effectiveness of Master Data processes
We will look at option 2 and investment side of adopting an effective Master Data Management solution. Since we are able to achieve yearly savings in Master Data process costs with the adoption of an effective Master Data Management solution let’s look at the initial and continued yearly investment.
In the example below, the investment in Master Data Management solution is justified only if the savings are substantially more than the investment (and the Return on Investment (ROI) clears the Rate of Return hurdle).