Do You Need a Materials Compliance Software Solution? Here Are Some Cost Considerations.

Manufacturers face unique challenges in meeting today’s materials compliance requirements. With multiple agencies demanding reporting for a variety of compliance requirements across industries, materials compliance can sometimes be overwhelming. This is especially true for companies with complex assemblies and multiple products.

Using manual data entry to meet reporting obligations for regulations and customer requirements can cost you time and money as well as introduce errors. Because of this, many companies have found it worthwhile to use third-party software to export data frrom their own internal databases to the required reporting formats.

But is a third-party materials compliance software solution right for you? Here are some factors to consider as you investigate the possibility of using a software application for material content reporting.

Third-Party Software Can Lower Long-Term Costs

Without an electronic interface to automate the dataflow, manual data entry into central data repositories such as the International Material Database System (IMDS) can require significant labor hours. Building a very simple component in IMDS can take between 10 to 20 minutes, depending on how many materials, substances and sub-components are in the part. A company with 1,000 simple components to enter into IMDS would likely need to budget for a full-time-equivalent of labor working on data entry for several months. For more complex assemblies, IMDS manual data entry can be a full-time job for multiple individuals.

Using a third-party application alongside IMDS can help you automatically collect data from suppliers and roll up components into assemblies, greatly reducing (although not fully eliminating) the manual data entry requirements. Redundancies are eliminated by indexing supplier submissions and rolling up the elements of the Bill of Materials outside of IMDS and then importing them into IMDS electronically.

Software Is a Long-Term Investment

Commercial materials compliance software is not free. Purchasing and implementing an application requires an up-front investment and ongoing maintenance costs.

As with any long-term investment, the general approach is to calculate the net present value of the purchase to inform the decision of whether or not the software will be beneficial. This means that you would need to weigh the costs and benefits of the manual data entry approach versus the costs and benefits of making the software investment. 

A simplified cost analysis of a three-year period can help you analyze this decision and decide if the long-term investment of materials compliance software will save your company time and money in the long-run.

Simplified Evaluation of Annual Manual Data Entry Costs

Consider a purely manual approach to data entry with no benefit from software automation. The most straightforward means of estimating the cost is to conduct a pilot reporting program with a few staff members, having them enter representative material content data and timing the per-component labor requirements. 

The average hourly labor cost for the data entry team (a) multiplied by the per-component time requirement (b), times the number of components annually required (c), represents your annual manual data entry costs, (d):

(a) (Avg. Hourly Labor Cost) * (b) (Hours/Component) * (c) (# of Annual Components)

= (d) Annual Manual Data Entry Cost

Simplified Evaluation of Software-Enabled Materials Data Entry Costs

Materials compliance software will typically require an up-front investment plus annual ongoing maintenance costs equal to approximately 20% of this up-front investment. Therefore, in Year One, software costs can be represented as an initial investment (e) and a further investment of 0.2 * (e). In subsequent years, the annual costs are approximately 0.2 * (e).

As mentioned above, materials compliance software does not completely eliminate the need for manual data entry. There will still be manual effort involved in manipulating the data. If this factor is represented as (f), then you can calculate the annual cost of software-facilitated materials compliance reporting:

Year 1:  (e) + 0.2 * (e) + (f)

Year 2:            0.2 * (e) + (f)

Year 3:            0.2 * (e) + (f)

Manual Data Entry vs. Software-Enabled Compliance Costs

Combining these factors, and ignoring the time-value of money and an enterprise’s required internal rate of return (which should certainly be considered for investments longer than a couple of years), we get two very simplified equations for a three-year period:

(1)                  3{(a)*(b)*(c)} = 3*(d)

(2)                 {(e) + 0.2 * (e) + (f)+ 0.2 * (e) + (f) + 0.2 * (e) + (f)} = 1.6*(e) + 3*(f)

Combining (1) and (2), we obtain a break-even point between the two approaches when:

3*(d) = 1.6* (e) + 3*(f)

(f)  = (d) – 0.53 * (e)

A hypothetical software solution that completely eliminates any manual data entry (f=0) could then be considered fairly priced when its purchase price (e) is approximately twice a company’s annual manual data entry costs. A company spending $100,000/year on manual data entry labor costs (without software), (d) may value such a solution at around a $200,000 price point. 

However, in reality (f) is never anywhere near zero, so the equation sets a hypothetical upper bound on the value proposition offered by materials compliance software. If the software is only 50% effective at dropping manual data entry costs, i.e. (f) = 0.5(d), then the upfront purchase price of the software may be cost-beneficial when it is roughly equal to the annual manual data entry costs.

How To Determine Software Efficiency (f)

The annual manual cost of data entry (d), can be determined from the pilot data entry reporting program mentioned earlier. The initial investment for a materials compliance software (e) is readily available from prospective software vendors.

Therefore, the only difficult factor to determine is (f), the annual manual data entry that remains after a software solution has been implemented. It may seem especially difficult to evaluate manual data entry requirements for a software solution without first buying the software to test its efficiency, which is a bit of a catch-22 dilemma.

One option to determine (f) is to ask the software vendors for an estimate. Keep in mind that they may tend to underestimate the time that software-assisted manual data entry will require. Another option is to ask the software vendor to put you in touch with companies who have already implemented the software solution and can provide you with an approximate idea of what manual data entry tasks will still remain with the software solution in place.

Moving Forward

If your company faces significant annual manual data entry costs for materials compliance, investigating a third-party software solution makes sense. To evaluate the software, you’ll need to know annual manual data entry costs as well as the upfront and annual costs of the software.

Determining how much manual data entry the software will save you can be tricky. If this factor is overlooked or underestimated, it can lead to poor decision making based on an incomplete understanding of the cost factors. However, by talking to software vendors or other companies who have implemented software solutions, you can obtain a reasonable estimate of this cost factor.

For assistance in evaluating software solutions for materials compliance, contact Tetra Tech’s compliance experts. We can help determine cost factors, understand your software needs and find a solution that will ultimately save you time and money in product compliance reporting.

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