ERP stands for Enterprise Resource Planning – software that handles the information management needs for the entire company and all its activities. Sounds good, doesn’t it? One software package fully automates and streamlines your business from quote to cash, from procurement to distribution, from HR to maintenance. With ERP, a company should be able to operate at peak efficiency and speed, satisfy customer requirements effortlessly, and generate an ever increasing profit for the owners and shareholders.
Of course, software by itself cannot accomplish any of these things. But properly selected and implemented, ERP can definitely enable all of the above and more. In today’s fast-paced and highly competitive business world, manufacturers must be in control of information—both internal and external—and ERP is the right toolset for the job.
There is an entire universe of intelligence around the selection, implementation and use of ERP systems. After 25 years in the ERP business, we’ve learned a few things. And, we’d love to share them with you.
What is an ERP?
ERP is a set of software applications, built around a single database (very important), that collects, manages and exploits information for the entire enterprise, enabling full business analysis. ERP gets its power from its broad reach and its integrated nature. All aspects of the business are included, so all activities can be coordinated to support company objectives and strategy. Bringing the information into a single database supporting integrated functionality allows each user in each functional role to have access to any and all information that can help them do their jobs more efficiently and more effectively. Part of The APICS definition of ERP notes that ERP allows an organization to use “internal knowledge to seek external advantage”[1].
ERP is customarily modular in structure with application sets that address the various business areas: planning and scheduling, production control, inventory management, customer service, procurement, finance and accounting, etc. Today’s ERP solutions often include as many as 20, 30, or more “modules,” or applications that can be installed and configured to build the software suite that addresses the company’s activities and needs.
ERP TCO and ROI
No company invests in tools and equipment without a clear indication that the investment will pay back in some way. With ERP, the major benefits include cost reduction, higher efficiency, better use of resources, reduced lead time, better customer service (often leading to increased sales), reduced overtime and expediting, higher quality, improved employee satisfaction, reduced turnover, and more.
When planning an ERP project, most companies will develop a cost-benefit study to delineate the expected costs and Return on Investment (ROI), often necessary to secure management support and funding for the project.
The cost side of the analysis includes capital expense for hardware, software and systems, plus costs for data conversion, implementation, user training, and any other expenses required to get the system “up and running.” Total cost of ownership (TCO) should be estimated for a reasonable useful life expectancy for this kind of investment – typically five to 10 years. Please note that a properly selected and implemented system may well have a useful life beyond 10 years (there are many ERP solutions in place today that are 20 or more years old)—as long as the system is regularly maintained and updated by the supplier and the user company. Note also that a cloud/SaaS ERP implementation will likely have very little in the way of capital expenses, but operating expenses will be somewhat higher month-to-month. Using a reasonable service life for your TCO cost estimate will level the playing field for these two approaches.
Choosing the right ERP solution (more on this in the next section) is an important factor in containing total costs. Extending or modifying a less-than-adequate ERP package can add considerable cost, implementation time-to-benefit, and long-term support costs to your project.
On the benefit side of the analysis, there are direct benefits like inventory reduction, less overtime and expediting, and less scrap/rework. There are also indirect benefits like higher quality, better customer service and on-time shipment (perhaps leading to increased sales), lead time reduction (a competitive advantage), and improved employee morale and retention. Most companies find enough direct benefits to more than justify the cost, and enjoy the indirect benefits (which can be even greater than direct benefits) as a bonus. And don’t forget that a system change might just be a “must,” if your current system does not provide the functionality you need to stay ahead of the competition and leverage emerging technologies.
Choosing an ERP Solution
There are many choices of ERP solutions from vendors large and small, including general-purpose systems; systems designed or adapted for specific industries or types of manufacturing; and on-premise or cloud-based systems—not to mention a range of designs about how the information is handled and presented. The most important consideration for system selection is functional appropriateness or “fit.” It is important for the system to address the specific needs of the organization and also fit the processes and duties of the users.
However, ERP buyers should also be highly mindful of any modifications, add-on software, or work-around procedures that may be required after implementing an ERP system. Work-arounds do not produce any benefit to the organization and leave that portion of the business detached from the ERP ecosystem. And integrations and modifications are often difficult to build and expensive to maintain over time.
A focus on fit and adaptability will quickly identify the ERP solutions that can meet your needs.
For example, many organizations today operate multiple facilities in different locations, requiring multi-currency and language capabilities that are not available in all ERP products. These companies are not looking for a simple multi-tenant SaaS ERP for small businesses or a generic English ERP. These companies need a short list of vendors that can support all of their operating locations.
After choosing a few enterprise-class ERP systems that fit their business size, industry and complexity, these companies must then assess the ability of each system to be further aligned to their unique business processes through configurations and customizations. And, the risk, effort and cost associated with those modifications. And please note that a company searching for cloud/SaaS ERP may not easily find the functional depth or system malleability that are typically characteristic of more mature ERP solutions.
System selection is a time-proven process. Do internet research, engage a selection service or ERP consultant to help identify candidate suppliers, or use an in-house team to identify a reasonable handful of prime candidates (six or fewer). Do more thorough investigation into the “short list,”schedule demonstrations, and talk to or visit current users of the system, preferably in companies similar to yours. Make your selection and plan the implementation.
One final word on selection: be sure to involve key departmental leaders (not necessarily managers – people who know the functions and needs of their department and are respected “doers” within their area of responsibility) from all major aspects of the business. The system will become a mainstay of operations in every part of the business and the primary communications and coordination facility that ties them together. Early and active involvement in the system selection process is the best way to enlist their participation in the implementation and, most importantly, creates a sense of ownership that is key to system acceptance and success.
ERP Implementation
Once you’ve chosen the right system, the next step is implementation – putting the system in place and making it a part of the company’s day-to-day operations. Your ERP system supplier and perhaps external ERP consultants can help you put together and carry out a detailed plan to get your new system up and running in minimal time. Undoubtedly, your ERP supplier will offer local assistance as part of their proposal. Some suppliers have direct employees in branch offices around the globe supporting their installations, while others use a network of affiliated representatives to sell and install their ERP solutions. With direct (employee) implementation assistance, you have a single chain-of-command up through the developers and owners of the software. With local affiliates, be sure to subject the affiliate to the same level of due diligence as you do with the developer to be sure that they will be able to provide the services and expertise you need to be successful.
Implementation can and should be managed with standard project management tools and techniques. Choose a strong and capable project leader. Plan the process in detail, identify people and resources needed, document the plan in a project management tool like Microsoft Project or similar software. And manage the process closely. And don’t select someone from IT as the project leader. ERP is an operations tool and must be fully integrated into the mainstream operations of the business. It is not an IT tool or project. The users must be in control of the selection and implementation (with the appropriate participation and assistance from IT, of course).
Be sure that the executive sponsor or champion is visibly involved so that he or she can provide impetus, keep the team focused on timely completion, and resolve any conflicts that may arise.
A final note on implementation: don’t stint on user education and training. Many companies unwisely cut the training budget when attempting to reduce overall cost to meet budget limitations. This is a critical mistake. This is a user-based system, and only works when the users incorporate the system’s functionality and information into their day-to-day activities. They will not enthusiastically accept and benefit from the new system unless they understand what it does and how it works.
Beginning Your ERP Project
An ERP selection and implementation project is an important initiative for a company and must be approached with a certain level of commitment, dedication and enthusiasm. There is no need for fear or trepidation. Literally thousands of companies have successfully implemented ERP and are enjoying the benefits of better information, tighter control, and enhanced overall performance.
There are many resources available to help you in the ERP selection and implementation process, including software selection services and web sites, software developers and local representatives, independent ERP consultants, and most importantly, your in-house team of future ERP users. Browse our blogs, downloads, and articles for more information on selecting and using ERP. You’ll find information on ERP and technology trends, project planning and management tools, ERP research, as well as advice and opinions from experienced ERP consultants, developers, and users (some associated with Jeeves and some independent).
One final thought: ERP is an enabler. If your current system is not supporting your operational and competitive goals, it’s time to start a project.
[1] APICS Dictionary, fourteenth edition, APICS Chicago IL, 2013
