Enterprise Resource Planning



Enterprise Resource Planning



by David Barth, 2001

DEFINITION OF ERP


Enterprise Resource Planning (ERP) is a set of best practices for running a company. Because it is intended to apply to all departments across a company's organizational chart, it consists of software and a database containing detailed company information that can be shared by other departments. The term "planning" in the ERP title is false because ERP is not designed to plan. It is designed to integrate all departments and functions across a company onto a single computer software application, using a single database or data warehouse that serves finance, manufacturing, inventory control, human resources, etc. Each department can share information with other departments. Initially, many companies install an ERP system for one or two key departments.

Basically, ERP software represents a generic picture of the way a typical company does business, and provides one data repository that can be used by every department within the company. Most ERP applications were originally designed for manufacturing companies that make discrete, individual products, but process manufacturers (oil, chemical, and utility companies that measure their products by flow rather than individual units) now have ERP offerings available to them.


ERP CAN IMPROVE COMPANY PERFORMANCE


ERP's greatest successes have been in the area of the order fulfillment process, the "back-office" application. It allows all departments to find out and update the status of an order. Its aim is to replace the traditional, simple "basket-to-basket" order system when paperwork wends it way though the company. To make ERP work, the system needs to be continuously up-to-date. For example, inventory levels must be accurate.


THE ERP CHALLENGE


Installation of a new ERP system requires workers to change the way they do their jobs, perhaps the biggest roadblock in trying to implement a new system. However, it can improve the way the company does business, making it more responsive and efficient. The keys to a successful ERP is training personnel to use it, teaching them the value of the application, and getting them to accept ownership of it.


TIME REQUIRED TO IMPLEMENT ERP


Implementation can range from six months to three years, depending on what modules are chosen to be installed, the size and complexity of company operations, etc.


FIVE REASONS COMPANIES CHOOSE TO IMPLEMENT ERP


  1. Integrate financial information
    An ERP system has one set of numbers, replacing the information maintained by each separate department. The sales department might have reported sales differently from the way the finance or shipping. ERP uses one data repository used by everyone.


  2. Integrate customer order information
    ERP allows a company to keep track of information more easily because instead of data moving from one department system to another department system, one system is used by all.


  3. Standardize and speed up manufacturing processes
    ERP systems come with standard methods for automating manufacturing process which can save time, increase productivity, and reduce head count.


  4. Reduce inventory
    ERP helps the manufacturing process flow more smoothly. The order status and fulfillment process is visible by all, which can result in reduced work-in-progress (WIP) inventory, can help users plan deliveries to customers, and reduce finished good (FG) inventory. Supply Chain software can be beneficial in this respect, but ERP vendors have embedded basic supply chain information into their products.


  5. Standardize HR information
    The HR module in ERP can standardize time tracking for employees across the enterprise and provide consistent benefits information throughout the company.


ERP FAILURES


The most common reason that companies cancel ERP projects is that they discover the software does not support one or more of their critical business processes. One option is to change the business process to accommodate the software, which means changing established ways of doing business (that often provide competitive advantage). This approach forces employees to change the way the company runs. The other option is to modify the software to fit the process, but this move can slow the project, increase direct and indirect project costs, introduce dangerous bugs into the system, and make future ERP vendor upgrades difficult or impossible.


THE COST OF AN ERP SYSTEM


Meta Group studied 63 small, medium and large companies in a variety of industries. The average Total Cost of Ownership (TCO) of ERP, including hardware, software, professional services and internal staff costs, including software installation and two years of follow-on support, was $15 million. The highest TCO was $300 million and the lowest was $400,000.


ERP PAYBACK


The Meta Group study of the 63 companies found that the average ERP installation time was 23 months, and it was another eight months before a company experienced positive results. The median annual savings afforded by the new ERP were $1.6 million.


ERP HIDDEN COSTS


  1. Training
    Training is the most underestimated budget item. Most employees have to learn a different way of using the system, and all departments will have to begin using the same system.


  2. Integration and testing
    Integrating existing company software to the ERP, and testing it, can involve considerable time and expense.


  3. Customization
    Beware of customizing an ERP system. Doing so can carry a high cost and make future ERP software upgrades difficult or prohibitive.


  4. Data conversion
    Converting the data in disparate department databases to a single ERP repository can be time-consuming and expensive. As the data is moved, it should be verified for accuracy. In some cases, the ERP system may require one or more fields to be modified or converted.


  5. Data analysis
    Analysis of the existing data to determine how to place it into the ERP can be expensive.


  6. Consultant costs
    Companies need to plan for consultant disengagement to control costs.


  7. Replacing the ERP implementers
    Retaining the employees who implemented the ERP is critical. With their new knowledge and experience, other companies may try to lure them away. The result is that the company will have to replace them with more expensive new-hires. One way to slow the stampede away from the company is to develop a retention bonus program.


IMPLEMENTATION TEAMS CAN NEVER STOP


Implementers need to be retained by the company because they have so much ERP knowledge. Not only can they answer questions from the various departments, but they can generate ad hoc reports.


ERP ROI


Unlike traditional system implementations, ERP usually requires several months before a return on investment (ROI) is realized.


POST-ERP DEPRESSION


In a Deloitte Consulting survey of 64 Fortune 500 companies, one in four companies reported that they suffered a drop in performance when their ERP system went live because employees had to change the way they operated. The actual percentage is probably higher.


WHY DO ERP PROJECTS FAIL SO OFTEN?


Even though ERP is intended to be a set of best practices for running the company, if employees don't accept these practices, the installation will fail. If employees are resistant to change, ERP is likely to fail. A major challenge is to convince the employees to change the way they run the system.


CONFIGURING AN ERP


ERP packages consist of thousands of tables and logic switches. For simplicity, most ERP software is configured with generic switch settings. Learning what options are available and how to set them can help an installation achieve success.


ORGANIZATION OF AN ERP PROJECT


  1. Big Bang
    In the Big Bank approach, an ERP system is installed across the entire company and the legacy systems are turned off. Although this method was used during the late 1990s, it is rarely used due to the trauma of rapid change.


  2. Franchise
    The franchaise method, most commonly employed, is used by companies that have departments that do not share common processes, allowing independent ERP packages to be installed for each entity. Each ERP is linked to share information and provide corporate information. This solution allows each department to find a ERP software that most closely reflects its way of doing business.


  3. Slam Dunk
    The slam dunk approach is employed by smaller companies willing to use ERP for only a few key processes. This saves money, but the benefits of a complete ERP are not felt.


ERP AND E-COMMERCE


E-commerce has added the capability of web-based access. This can allow customers to view information applicable to themselves - business to customer (B to C), and suppliers and other businesses can access the information - business to business (B to B).