ERP Implementation for Midsize companies Necessary Expense or Strategic Investment?
Date: Monday , January 03, 2011
Enterprise Resource Planning (ERP) has become quite an established term over last couple of decades. For most of us it means a tool that helps an organization run various functions of its day to day operations and also help drive strategic decisions. ERP Systems have the potential to cover a wide arena from functions as Human Resources, Supply Chain Management, Customer Relations Management, Financials, Manufacturing functions and Warehouse Management functions.
Evolution of ERP followed the general evolutionary trend of Information Technology (IT). Long ago organizations worldwide started realizing how adoption of an ERP system makes some of them distinctly competitive and others an exact opposite. On the other hand ERP product development over last three decades has ensured that ERP products are not just a competitive differentiator for large companies, but a critical enabler for midsize companies as well. For every midsize company, not enabling itself with a good ERP system today is like trying to conduct business without using basic technological tools like emails.
To clarify for the uninitiated, Enterprise Resource Planning (ERP) is an integrated system which facilitates the required collaborative effort for various departments of an organization such as marketing, sales, production, quality management, materials management, logistics, financial accounting and financial control. At the very basic level, integration of such a system helps in ensuring accuracy of information, productivity, efficiency, scalability and above all reliability. This system unleashes possibility of implementing management practices that make one organization fundamentally different from another.
The main problem faced by SMEs when it comes to ERP is that their requirement is limited while the product offered exceeds their specifications in all ways (including the costs).The gap between these two needs to be analyzed by the companies and SMEs. It is not possible for the vendor to bring down their standards for the sake of the company neither is it feasible for the later to upgrade for the sake of the former. So, for a proper management their should be a balance between the two. The company should discuss with the vendor to analyze the pros and cons of every possibility to match their requirements.
Basics of guaranteeing on the investment
Not every collection of features is an ERP product: ERP is a software product. ERP product market has evolved over last two decades to have clear market leaders and a host of other products. Choosing the right product is very basic to ensuring that one gets highest return from the investment. Implementing an ERP system and fine tuning it to be a business enabler over a well defined roadmap requires that the product chosen by you does not exhaust itself as you go beyond operational execution and look to enable your strategic insight, competitive edges and USPs. Just as it is well understood today that developing a software system from scratch as your own ERP is a big waste of energy, choosing a product that covers 75 percent of your operational execution is similarly imprudent.
Explosive growth and high returns come from your ERP system when you are able to take beyond operational execution and use for one of following:
*Strategic Decision Making
It’s important for the product that you choose as your ERP system to be able to enable all of the above over a period of time. Most immature ERP products exhaust themselves at the level of Operational Execution itself, and leave no scope for growing to subsequent steps of evolution.
Implementing the Product well is as important as the product itself: Implementation is a crucial exercise in ensuring the success of an ERP initiative. Implementation process does not mean just setting up the transactional parameters and master data for a product so that it can function for a specific company. It’s a purely business driven exercise of bringing about a change and taking the organization along with it. It’s too elaborate a topic to address in a few paragraphs but just as a word of caution, like any other change initiative all the following are critical success factors –
1. Selection of a worthy partner who can bring definitiveness to your project in terms of time lines and ability to give you the best solution for your business
2. A clear solution strategy and implementation plan
3. Buy-in and support from company leadership
4. Buy-in on the solution features from all function leaders
5. Communication strategy for every section of ERP user
6. Commitment of right resources to the project
7. Single minded pursuit to finish the project on original schedule
8. A project control procedure that leaves no room for lack of accountability and has the ability to incentivize everyone involved
Where do you get the return on investment from?
*Lower Cost of Operation – Higher productivity and efficiency leads to lower cost of operation across the organization.
*Higher Serviceability to Customers – A company that operated at 85 percent serviceability ratio to its customers can operate at 95 percent of serviceability as a result of collaborative efficiency between sales, production, quality check and logistics. This translates to 10 percent more revenue collection and proportionate profits year after year.
*Higher Throughput – Getting more out of your installed capacity could mean crores of saved capital investment. With a good ERP product and a well implemented solution one can optimize its production capacities and coordinate with sales to achieve higher throughput.
*Faster Inventory Turns – Most manufacturing companies have 70 percent of their cost in the raw material. Faster inventory turns means significantly lower amount of working capital and its cost.
*Lower Cost of Compliance – Accurate and demonstrable operational execution means higher statutory compliance. This translates into saving significant amount of money on ensuring compliance and management time.
*Control on intended inefficiency – As the organization grows, visibility and transparency is sacrificed. Trust based system leads to scope of mismanagement. A good ERP system brings a huge deterrent of audit trail and traceability into the system. This leads to crores of money saved over a period in material handling itself.
Dr. Mahesh Taneja, AVP- Finance and Information Technology at Munjal Showa and a doctorate in Inventory Optimization says – “For a company that is past `50 crores turnover, cost of the best ERP solution can be recovered from the material handling efficiency itself”.
Apart from tangible benefits there are plenty of intangible benefits. Can we really think of implementing vendor evaluation or distributor management if we can’t measure a few key result areas accurately in real time. Can we possibly incentivize our dealer network if our marketing department’s vision of a rebate system cannot be automated through our ERP system. Is it going to be possible to sell to an OEM in Europe if our ERP system does not help us in tracing the component supplier in case our client had to unfortunately recall its product. What if my USP is fastest order-to-delivery, if I cannot make it happen through my ERP system. Can I ever ignore the fact that a core of well defined processes that is embedded into my ERP system can free my management to drive the company to a growth target in four years time that was otherwise to be achieved in five years time.
The list of ROI elements goes on. On one hand ERP is as necessary to a business as an email system. On the other hand a good ERP system can be source of sustainable competitive advantage, higher profits and scalability. For an Indian manufacturer growing beyond about `50 crores turnover, having a good ERP solution is a must. The great news is that it is actually a wealth creator.
The author is CEO, Vital Wires Consulting