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Demystifying ERPs'1) What is an ERP is and how SMEs’ can effectively utilize them?
Enterprise-wide Resource Planning, more commonly known as ERP is a planning philosophy which combines all the requirements of the company in to a single, integrated software program that runs off a single data base so that the various departments can more easily share information and communicate with each other.
An ERP typically performs the following tasks in a Manufacturing Operation.
The Material Planning triggers off the Purchase Order to the supplier and when Customers Orders come through, Production is Planned based on availability of material, machine and other resources. Customer Orders are then shipped off with all related documentation (Not just Invoices and Despatch notes, but even export documentation like CUSDEC, Boat Notes etc).
Thereafter the system will track Receivables, auto generate Cheques on due dates to Creditors and Print the Final set off Accounts.
In a Nutshell: No single document is produced manually not even the bank deposit slip. Most important all reports are generated by the system and are not Excel dependant.
Currently most SMEs’ operate their Business Process through Stand Alone systems. Sometimes we see partial integration like the Sales & Accounting modules working together.
However even today it is rare to see a Totally Integrated solution working where data is captured from the time material planning takes place through making suppliers orders and costing the shipment to preparing final accounts.
2) ERPs basic function is to automate the entire Business Process
A major driver of the ERP is that the entire business work flow is automated thus streamlining the Business Process and providing Information on time, which eliminates duplication and errors and reduces manpower requirements while providing a whole host of other benefits, the most important of which is:
“Top management can focus on Strategic Business Decision making rather than getting involved in day to day operational hiccups”
3) ERPs’ facilitate successful Supply Chain Management which is the key to any business success or survival.
Successful Supply Chain management is ensuring On Time Delivery (OTD). This means that the organization must have sufficient but not excess stocks to match customer orders on time. Simple as it may sound, it is a complex process that only an ERP can handle.
An ERPs main contribution in this area is: Forecasting Demand, Ordering and Monitoring the timely arrival of Raw materials, Production Planning and Scheduling, Quality Assurance through lab testing samples, Manufacture and delivery of goods.
4) ERPs bring about “Best Business Practice”
For an ERP to be termed World Class it must encompass the state of the art management and financial reporting standards. Example of which are: Activity Based Costing, Just in Time Inventory Management, KPI monitoring, Balance Score card etc. We even hear of systems that say “Environmentally Friendly” since they reduce the need of paper.
Nearly all organizations have their business process documented entirely or partially. It is referred to as the Procedure manual also called the “Black Book”.
For a business using manual processes to ensure every procedure is followed is a difficult task but if the system controls every process then the business procedure is standardized and cannot be deviated.
“Your focus is now on the Business not on its process”
5) Importance of Business Intelligence
When an ERP is implemented, the Top Management and Divisional Heads specify all reporting requirements they deem necessary at that time to the Software Vendor. However it is not possible to anticipate ad hoc reporting requirements that will occur over a period of time.
Thus very often management need to perform analysis on the database to get vital information on an ad-hoc basis.
Example of such information is the Top 10 Customers who purchased Product ABC during the special discount period. Or Top 10 Suppliers of Product group xyz for last three years with value wise annual breakdowns.
They are also used to implement Performance Management Systems.
The Business Intelligence (BI) tool can be used as a query tool to extract information by non IT personnel. The training required to handle the BI tool is similar in complexity to training required in handling Excel There are many BI tools available in the market and COGNOS is most widely used in Sri Lanka.
6) Justifying the ERP investment
The ERP can be cost justified from many aspects. The main area of saving that we have experienced is in direct savings on reduction of working capital requirements.
Example: Stock values are reduced through Just in Time stock management, Debtors exposure is at the acceptable level through constant monitoring, Reduction in staff even though business volume has increased.
When ERPs are purchased the vendor has to provide the client a return on investment analysis. This is both tangible and intangible benefits. The client when he signs on has clauses included in the contract that ties up payment terms to the ROI.
Activity Based Costing is the key driver for the success of ERPs’ but sadly I have yet to come across a single SME that uses this feature.
7) ERP cost over runs, missing deadlines and frustrated users:
Successful Implementation of an ERP is the part that requires all our skills. It covers from understanding user requirement, data conversion, user training at all levels, parallel runs, change management etc.
8) ERPs Create a Competitive Advantage
When you do business with “on time delivery” at a “lower price” and “reasonable quality” means you got your customer and beaten the competitor to it.
ERPs play the role of a catalyst in this regard.
In addition a successfully implemented ERP facilitates Increasing Profits and Improving Cash Flow.
ERP Implementation Pitfalls
Challenges to successful ERP implementation
- Inadequate Definition of Requirements
- Resistance to Change
- Inadequate Resources
- Inadequate Training
- Lack of Top Management Support
- Poor Communication and Co-operation
- Poor Project Design and Management
- Poor ERP Package Selection
- Customization Issues
- Inadequate Definition of Requirements
- The requirements definition should clearly specify the issues and problems that the ERP system is supposed to solve and the additional capabilities expected out of the system
- One of the most important tools in defining the system is to map out the data flow diagram and to define the Management Information system
1.2 Resistance to Change
- It is very important that users be won over before implementing the system. Forcing the system on unwilling people will only harden their resolve to revolt.
- One main reason for the resistance is ignorance
- People always have a lot of misconceptions about ERP – that it will increase the workload, lead to loss of jobs, loss of control, self importance and sometimes even fraud.
- ERP implementation is a very costly affair that requires a variety of resources – money, people, software, hardware etc.
- There are many items that will be missed during the preparation of the budget but will consume money during the implementation. The long implementation period (usually 8-20 months) will escalate many costs.
- Getting the right people with the necessary skill, aptitude and enthusiasm is one of the most difficult tasks faced by ERP implementation teams. These inadequacies in resources can create many a challenge to the ERP implementation.
- The roles of top management in IT implementations include developing and understanding of the capabilities and limitations of IT, establishing reasonable goals for IT systems, exhibiting strong commitment to the successful introduction of IT and communicating the cooperate IT strategy to all employees.
- Research on project failures show that project cancellation occur when senior management delegates progress monitoring and decisions at critical junctures of the project to technical experts.
- The importance of top management support was instrumental in the success of all ERP implementations. So going ahead without solid backing from top management is a sure recipe for disaster.
- Communication is essential within the project team, between the team and the rest of the organisation and with the client.
- A key factor for the successful implementation of ERP systems requires a corporate culture that emphasizes the value of sharing common goals over individual pursuits and the value of trust between partners, employees, managers and corporations.
- As ERP systems are cross functional and above departmental boundaries, co-operation and involvement of all involved is critical.
- ERP potential cannot be leveraged without strong coordination of effort and goals across business and IT personnel
- Project management activities span the life of the project from initiating it to closing it.
- Specifically, proper management of scope is critical to avoid schedule and cost overruns and necessitates having a plan and sticking to it.
- Customization increases the scope of an ERP project and adds time and cost to an implementation
- Choosing the right ERP packaged software that best matches the organisational information needs and processes is critical to ensure minimal modification and successful implementation and use.
- Selecting the wrong software may mean a commitment to investing in hardware and applications that do not fit the organisations strategic goal or business process.
- When it is discovered that the ERP differs from the system that it is replacing, the organisation is faced with the possibility of either customisation or tailoring the ERP.
- Modify the ERP to match the organisational process and / or data structure
- Modify the organisational process and / or data structures to match the ERP
- A combination of the above
- Most organisations approach the customisation / tailoring decision without the proper information required to reach a good decision.