Since the early 1990’s, businesses have invested large sums of money (somewhere between two and five trillion dollars) in buying and implementing enterprise software, not to speak of the substantial time and energies that have gone into such implementations. While some investments such as design automation software have paid off as expected, most have not. Prime examples are ERP, CRM and SCM.

How does one explain this apparent paradox? The power of enterprise software is in moving, processing and storing large amounts of data quickly and efficiently. Once you recognize that this power has been used to either repetitive work or automate management information, the answer becomes clear. For when you automate repetitive work, you benefit. Work can be done cheaper, faster and with fewer errors.

But, when software has been used to automate management information, all attempts to-date have failed because:
The potential benefit of computers to managers is enterprise-wide visibility, so that they can make decisions based on what is good for the organization rather than what is good for their department. Let’s be clear here. We are talking about simple day-to-day decisions, not necessarily strategic decisions. For example, should an engineer work on Project A or Project B? If the department manager knows that Project A cannot be accommodated by the downstream testing department for another two weeks, he can instruct the engineer to work on Project B.

Unfortunately, existing management rules compensate for lack of global visibility by optimizing locally. Managers hope that if everyone is locally efficient, the organization as a whole will also be efficient in the long run. As we know from our intuition, this is not true. For example, Sales can be very efficient by selling more of Product A so salespeople book many large orders for it. But Manufacturing is most efficient in producing Product B. If both Sales and Manufacturing continue to improve their local efficiencies, the company simply ends up with too much inventory and too many unhappy customers. Worse yet, the situation will never improve—even when you provide visibility of Sales to Manufacturing. You have to change the rules!

Therefore, when you implement ERP, you can reduce the number of people needed in Purchasing and Accounts, but your inventory levels, lead times and production efficiencies remain exactly the same. Remember how CISCO would close its books in 24 hours because of its real-time systems, yet, at the same time, write-off billions in inventory? The issue was not visibility. After all, CISCO wrote off many months of inventory – even faxes and telephones can transmit information faster than that. Such write-offs highlight the local optimization rules that exist in their supply chain.