Introduction to ERP (Part 2)

Benefits of implementing ERP systems

Obviously, implementing ERP systems bring to business organizations the following benefits:

  • Inventory reduction
  • Improve cash management
  • Increase revenue and profits
  • Reduce transportation & logistics costs
  • Reduce IT costs

Albeit intangible, organizations can gain these benefits including: unanticipated cost reductions, improve responsiveness to customers, more flexibility and effective management of the supply chain.

Pros and Cons

As an old saying “Every garden has its weeds”, so does ERP has its own pros and cons. Thanks to the integration of business processes, it can be seen that ERP systems enable to offer these advantages:

  • Save time and expenses
  • Data and reporting tools allow faster decision-making for management levels
  • Single data source and easily share data among all units/ departments
  • Help to track every transaction from starting till end
  • Supply real-time information whenever required
  • Provide synchronized information transferred between different functional areas such as sales, marketing, finance, manufacturing, human resource, logistics, etc.

While these advantages usually outweigh disadvantages for most of enterprises implementing ERP systems, there are some of the most common drawbacks suffered:

  • Customization in many situations is limited and must be avoided due to high costs or time consumption
  • In many cases, organizations need to re-engineer their own business processes to align them with ERP solutions
  • Extremely costly and time intensive
  • Need significant resources to conduct training, maintain and support the new system
  • Employees need to change their daily operations
  • Need outside consultant

Absolutely many obstacles can be prevented if adequate investment and training are involved; and the most critical element determining the success of ERP implementation is experience and skills of end-users to quickly adapt to the new system.

ERP Implementation

It is experienced that scope of ERP brings significant changes to staff working processes and practices. Usually implementation time highly depends on these several factors including  business size, number of modules, customization, scope of process changes, and readiness of the customer to take ownership for the project. Some researches indicate that a typical project of a large enterprise requires around 150 consultants and takes about 14 months for implementation, while small projects may need few months and of course multinational and other large implementations can takes years.

  • Process Preparation

ERP implementation definitely leads to changes in existing business processes; therefore, enterprises should well understand of needed process changes prior to starting the implementation. While the poor understanding could be the main reason of project failure, project difficulties could be related to the system, business processes, infrastructure, training and even lack of motivation. Therefore, it is so crucial that organizations should spend time and effort to throughly analyze business processes before implementing ERP software, which is helpful to identify opportunities for process modernization and ensure the alignment of current processes with those provided by new ERP system. Based on previous studies, risk of business process mismatch could be decreased or even prevented by:

+ Linking current processes to the organization’s strategy

+ Analyzing the effectiveness of each process

+ Understanding existing automated solutions

Furthermore, it is considerably difficult to implement ERP system in decentralized organizations due to their different processes, business rules, data semantics, authorization hierarchies and decision centers. It can be explained that these businesses may require migrating some business units before others, postponing implementation to complete essential changes for each unit, possibly reducing integration (that should be considered as the beauty of ERP system) and dramatically customizing the system to meet some specific needs.

In the nutshell, adopting “standard” process could lead to a potential disadvantage – loss of competitive advantage which is however often offset by gains in other areas; hence, the overall performance and competitive advantage can be then improved.

  • Configuration

Due to features of each industry and organization, standard ERP system is not the best practice to be applied for all. So configuration allows to balance the way organizations want the ERP system to work with the way it was designed to work. Thereby, ERP systems typically provide many settings that help to modify system operations. For instance, an organization is able to switch between 2 types of inventory accounting (FIFO and LIFO), which depends on its selection and then corresponding configuration needs conducted.

  • Two tier enterprise resource planning

It is not uncommon for companies to operate the equivalent of two ERP systems at once: one at the corporate level and one at the division or subsidiary level. A popular example is manufacturing company using an ERP system to manage across the organization; and its customers are served by independent global or regional distribution, production or sales centers, and service providers which have have their own business models, business processes and workflows. Thus, two tier ERP allows those independent centers or subsidiaries to continue operating under their own characters separating from the main company, which consequently helps the company to locally respond to business requirements in multiple locations.

There are some key factors influencing the success of enterprise’s adoption of two tier ERP systems:

+ Manufacturing globalization, the economics of sourcing in emerging economies

+ Quick and less costly ERP implementations at independent centers or subsidiaries by selecting software more suited to smaller organizations

+ Extra effort is required to transfer data between two ERP systems

  • Customization

Theoretically, ERP systems are built on industry best practices that are intended to be deployed as is. However, one size cannot fit all, so ERP vendors often offer configuration options as mentioned above. Yet the feature gaps still remain even after completion of configuration. There are several choices to reconcile the feature gaps and each option has its own pros and cons. Technical solutions consist of rewriting part of the delivered software, writing a homegrown module to work within the ERP system and interfacing to an external system. These three technical options constitute  varying degrees of system customization and in which the first choice is the most invasive and costly to maintain. Alternatively, there are also non-technical solutions like changing business practices or organizational policies in order to better match the delivered ERP solution.

Advantages of customization

+ Improve user acceptance

+ Opportunity to keep competitive advantage vis-à-vis using only standard package

Disadvantages of customization

+ Increase time and resources required to test, implement and maintain

+ Prevent seamless communication with partners using the same ERP system that is not customized

+ Create over reliance on customization that undermines the principles of ERP as a standardizing software platform

Difference between configuration and customization

+ While customization is always optional, the software must always be configured before using

+ The software is designed to handle various configurations and must predictably perform in any allowed configuration

+ The system behavior and performance that is predictable when configuration is conducted belongs to the ERP vendor’s obligation. While the effect of customization is less predictable and it is the customer’s responsibility

+ Configuration changes certainly survive upgrades to new versions, so do some customizations but they require retesting; even other customizations are overwritten during upgrading and must be re-implemented

  • Extensions

ERP systems can be extended with 3rd party software. Accessing to data and features are provided by published interfaces. Some common extensions:

+ Reporting and republishing

+ Capturing transactional data such as by using scanners, RFID, etc.

+ Advanced planning and scheduling (APS)

+ Access to specialized data and capabilities, such as syndicated marketing data and associated trend analytics

+ Managing facilities and transmission in real-time

  • Data migration

This refers as a process of moving, coping and restricting data from the existing system to the ERP system. This stage is really essential to implementation success and requires dramatically planning. Unfortunately, migration is one of final activities before production phase so it is often receives insufficient attention. Migration planning can be structured as the below steps:

+ Identify data to migrate

+ Determine migration timing

+ Generate data templates

+ Freeze the toolset

+ Decide on migration-related setups

+ Define data archiving policies and procedures

Infographics

Data was collected from a survey amongst corporations conducted by ittoolbox in 2004.

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The End

 

Reference

http://projectmanagement.ittoolbox.com/documents/research/

http://www.tutorialspoint.com/sap/sap_introduction.htm

ERP (Enterprise Resource Planning), Tech-faq.com, March 5, 2014

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