Benefits of ERP:
(a) Business integration: The first and the most important advantage lie in the promotion of integration. The reason ERP packages are called integrated is the automatic data up gradation between related business components, since conventional company information systems were aimed at the optimization of independent business functions in business units, almost all were weak in terms of the communication and integration of information that transcended the different business functions in the case of large companies in particular, the timing of system structure and directives differs from each product and department / functions and sometimes they are disconnected.
For this reason, it has become an obstacle in the shift to new product and business classification. In the case of ERP packages the data of related business functions is also automatically updated at the time a transaction occurs. For this reason, one is able to grasp business details in real time, and carry out various types of management decisions in a timely manner based o that information.
(b) Flexibility: The second advantage of ERP packages is their flexibility. Diverse multi functional environments such as language, currency, accounting standards and so on are covered in one system and functions that comprehensively managed multiple locations that span a company are packaged and can be implemented automatically. To cope with company globalization and system unification, this flexibility is essential, and one could say that it has major advantages, not simply for development and maintenance, but also in terms of management.
(c) Better analysis and planning capabilities: Yet another advantage is the boosting of planning type functions. By enabling the comprehensive and unified management of related business and its data, it becomes possible to fully utilize many types of decision support systems and stimulation systems. Furthermore, since it becomes possible to carry out flexibility and in real time the feeling and analysis of data from a variety of dimensions, one is able to give decision makers the information they want, thus enabling them to make better and informed decisions.
(d) Use of latest technology: The fourth advantage is the utilization of latest developments in information technology (IT). The ERP vendors were very quick to realize that in order to grow and to sustain that growth: they have to embrace the latest developments in the field of information technology. So they quickly adopted their systems to take advantages of the latest technologies like open systems, client server technology, internet/ intranet, computer aided acquisition and logistics support, electronic commerce etc. It is this quick adaptation to the latest changes in information technology that makes the flexible adaptation to changes to future business environments possible. It is this flexibility that makes the incorporation of the latest technology possible during the system customization, maintenance and expansion phases.
(e) Reduced inventory and inventory carrying cost: The manufacturing nature of many ERP users makes the issue of process and material costs savings paramount. The main factor behind these savings is that implementation of the ERP system allows customers to obtain information on cost, revenues and margins, which allow it to better, manage its overall material cost structure. This ability to manage costs is best seen in savings that organizations can obtain in their inventory systems. Customers can perform a more complete inventory planning and status checking with the ERP system.
These checks and plans reveal existing surpluses or shortages in supplies. Improved planning and scheduling practices typically lead to inventory reductions to the order of 20 per cent or better. This provides not only a one time reduction in assets (cost of the material stocked), but also provides ongoing savings of the inventory carrying costs. The cost of carrying inventory includes not only interest but also the costs of warehousing, handling, obsolescence, insurance, taxes, damage and shrinkage.
(f) Reduced manpower cost: Improved manufacturing practices lead to fever shortages and interruptions and to less rework and overtime. Typical labor savings from a successful ERP system are a 10 per cent reduction in direct and indirect labor costs. By minimizing rush jobs and parts shortages, less time is needed for expediting, material handling, extra setups, disruptions and tracking splits lots odd jobs that have been set aside. Production supervisors have better visibility of required work and can adjust capacity or loads to meet schedules. Supervisors have more time for managing, directing and training people. Production personnel have more time to develop better methods and improve quality.
Reduced material costs: Improves procurement practices lead to better vendor negotiations for prices, typically resulting in cost reductions of 5 per cent or better. Valid schedules permit purchasing people to focus on vendor negotiations and quality improvements rather than spending their time on shortages and getting material at premium prices. ERP systems provide negotiation information, such as projected material requirements by commodity group and vendor performance statistics. Giving suppliers better visibility of future requirements help them achieve efficiencies that can be passed on as lower material costs.
(h) Improves sales and customer service: Improved coordination of sales and production leads to better customer service and increased sales. Improvements in managing customer contacts, making and meeting delivery promises, and shorter order to ship lead times, lead to higher customer satisfaction, goodwill and repeat orders. Sales people can focus on selling instead of verifying or apologizing for late deliveries. In custom product environment, configurations can be quickly identified and prices, often by sales personnel or even the customer rather than the technical staff.
Taken together, these improvements in customer service can lead to fewer lost sales and actual increase in sales, typically 10 per cent or more. ERP systems also provide the ability to react to changes in demand and to diagnose delivery problems. Corrective actions can be taken early such as determining shipment priorities, notifying customers of changes to promise delivery dates, or altering production schedules to satisfy demand.
(i) Efficient financial management: Improves collection procedures can reduce the number of days of outstanding receivables, thereby providing additional available cash. Underlying these improvements is fast, accurate invoice creation directly from shipment transactions, timely customer statements and follows through on delinquent accounts. Credit checking during order entry and improved handling of customer inquires further reduces the number of problem accounts. Improved credit management and receivable practices typically reduce the days of outstanding receivables by 18 per cent or better. Trade credit can also be maximized by taking advantage by supplier discounts and cash planning, and paying only those invoices with matching recipients. This can lead to lower requirements for cash-on-hand.
(j) The benefits from ERP come in three different forms i.e. in the short-term, medium-term and long-term. When initially implemented, in a year of the organization going live with ERP, it helps in streamlining the operational areas such as purchase, production, inventory control, finance and accounts, maintenance, quality control, sales and distribution, etc. This benefit is in form of ‘automating’ the transactions which promises accuracy, reliability, availability and consistency of data.
1. RISK IMPLEMENTATION:
Even in a single site, implementing ERP means "Early Retirement Probably." An ERP package is so complex and vast that it takes several years and millions of dollars to roll it out. It also requires many far-flung outposts of a company to follow exactly the same business processes. In fact, implementing any integrated ERP solution is not as much a technological exercise but an "organizational revolution." Extensive preparation before implementation is the key to success. Implementations carried out without patience and careful planning will turn out to be corporate root canals, not competitive advantage. Several issues must be addressed when dealing with a vast ERP system, and the following sections discuss each of them in detail.
Top Management Commitment
Implementing an ERP system is not a matter of changing softwaresystems, rather it is a matter of repositioning the company and transforming the business practices. Due to enormous impact on the competitive advantage of the company, top management must consider the strategic implications of implementing an ERP solution.
Management must ask several questions before embarking on the project. Does the ERP system strengthen the company's competitive position? How might it erode the company's competitive position? How does ERP affect the organizational structure and the culture? What is the scope of the ERP implementation -- only a few functional units or the entire organization? Are there any alternatives that meet the company's needs better than an ERP system? If it is a multinational corporation, the management should be concerned about whether it would be better to roll the system out globally or restrict it to certain regional units?
Management must be involved in every step of the ERP implementation. Some companies make the grave mistake of handing over the responsibility of ERP implementation to the technology department. This would risk the entire company's survival because of the ERP system's profound business implications.
It is often said that ERP implementation is about people, not processes or technology. An organization goes through a major transformation, and the management of this change must be carefully planned (from a strategic viewpoint) and meticulously implemented. Many parts of the business that used to work in silos now have to be tightly integrated for ERP to work effectively. Cutting corners in planning and implementation is detrimental to a company.
The top management must not only fund the project but also take an active role in leading the change. A review of successful ERP implementations has shown that the key to a smooth rollout is the effective changemanagement from top. Intervention from management is often necessary to resolve conflicts and bring everybody to the same thinking, and to build cooperation among the diverse groups in the organization, often times across the national borders.
Top management needs to constantly monitor the progress of the project and provide direction to the implementation teams.
The success of a major project like an ERP implementation completely hinges on the strong, sustained commitment of top management. This commitment when percolated down through the organizational levels results in an overall organizational commitment. An overall organizational commitment that is very visible, well defined, and felt is a sure way to ensure a successful implementation.
Implementing an ERP system involves reengineering the existing business processes to the best business process standard. ERP systems are built on best practices that are followed in the industry. One major benefit of ERP comes from reengineering the company's existing way of doing business. All the processes in a company must conform to the ERP model. The cost and benefits of aligning with an ERP model could be very high. This is especially true if the company plans to roll out the system worldwide. It is not very easy to get everyone to agree to the same process. Sometimes business processes are so unique that they need to be preserved, and appropriate steps need to be taken to customize those business processes.
An organization has to change its processes to conform to the ERP package, customize the software to suit its needs, or not be concerned about meeting the balance 30 percent. If the package cannot adapt to the organization, then organization has to adapt to the package and change its procedures. When an organization customizes the software to suit its needs, the total cost of implementation rises. The more the customization, the greater the implementation costs. Companies should keep their systems "as is" as much as possible to reduce the costs of customization and future maintenance and upgrade expenses.
There is a strong trend toward a single ERP solution for an entire company. Most companies feel that having a single vendor means a "common view" necessary to serve their customers efficiently and the ease of maintaining the system in future. Unfortunately, no single application can do everything a company needs.
Companies may have to use other specialized software products that best meet their unique needs. These products have to be integrated along with all the homegrown systems with the ERP suite. In this case, ERP serves as a backbone, and all the different software are bolted on to the ERP software. There are thirdparty software, called middleware, which can be used to integrate software applications from several vendors to the ERP backbone.
Unfortunately, middleware is not available for all the different software products that are available in the market. Middleware vendors concentrate only on the most popular packaged applications and tend to focus on the technical aspects of application interoperability rather than linking business processes.
Many times, organizations have to develop their own interfaces for commercial software applications and the homegrown applications. Integration software also poses other kinds of problems when it comes to maintenance. It is a nightmare for IS personnel to manage this software whenever there are changes and upgrades to either ERP software or other software that is integrated with the ERP system. For every change, the IT department will be concerned about which link is going to fail this time.
Integration problems would be severe if the middleware links the ERP package of a company to its vendor companies in the supply chain. Maintaining the integration patchwork requires an inordinate and ongoing expenditure of resources. Organizations spend up to 50 percent of their IT budgets on application integration? It is also estimated that the integration market (products and services) equals the size of the entire ERP market.When companies choose bolt-on systems, it is advisable to contact the ERP vendor for a list of certified third-party vendors. Each year, all the major ERP vendors publish a list of certified third-party vendors. There are several advantages to choosing this option, including continuous maintenance and upgrade support.
One of the major benefits of ERP solutions is the integration they bring into an organization. Organizations need to understand the nature of integration and how it affects the entire business. Before integration, the functional departments used work in silos and were slow to experience the consequences of the mistakes other departments committed. The information flow was rather slow, and the departments that made the mistakes had ample time to correct them before the errors started affecting the other departments. However, with tight integration the ripple effect of mistakes made in one part of the business unit pass onto the other departments in real time. Also, the original mistakes get magnified as they flow through the value chain of the company.
For example, the errors that the production department of a company made in its bill of materials could affect not only the operations in the production department but also the inventory department, accounting department, and others. The impact of these errors could be detrimental to a company. For example, price errors on purchase orders could mislead financial analysts by giving a distorted view of how much the company is spending on materials.
Companies must be aware of the potential risks of the errors and take proper steps, such as monitoring the transactions and taking immediate steps to rectify the problems should they occur. They must also have a formal plan of action describing the steps to be taken if an error is detected. A proper means to communicate to all the parties who are victims of the errors as soon as the errors are detected is extremely important. Consider the recent example of a manufacturing company that implemented an ERP package. It suddenly started experiencing a shortage of manufacturing materials. Production workers noticed that it was due to incorrect bills of materials, and they made necessary adjustments because they knew the correct number of parts needed to manufacturer.
However, the company did not have any procedures to notify others in case any errors were found in the data. The domino effect of the errors started affecting other areas of business. Inventory managers thought the company had more material than what was on the shelves, and material shortages occurred. Now the company has mandatory training classes to educate employees about how transactions flow through the system and how errors affect the activities in a value chain. It took almost eight weeks to clean up the incorrect bills of materials in the database.
Companies implementing electronic supply chains face different kinds of problems with integration of information across the supply chain companies. The major challenge is the impact automation has on the business process. Automation changes the way companies deal with one another, from planning to purchase to paying. Sharing and control of information seem to be major concerns. Companies are concerned about how much information they need to share with their customers and suppliers and how to control the information. Suppliers do not want their competitors to see their prices or order volumes.
The general fear is that sharing too much information hurts their business. Regarding controlling information, companies are aware that it is difficult to control what they own let alone control what they do not own. Companies need to trust their partners and must coordinate with each other in the chain. The whole chain suffers if one link is slow to provide information or access. The management also must be concerned about the stress an automated supply chain brings within each organization. For instance, a sales department may be unhappy that electronic ordering has cut it out of the loop, while manufacturing may have to adjust to getting one week's notice to order changes and accommodate those changes into its production orders.
Because the ERP market has grown so big so fast, there has been a shortage of competent consultants. The skill shortage is so deep that it cannot be filled immediately. Finding the right people and keeping them through the implementation is a major challenge. ERP implementation demands multiple skills -- functional, technical, and interpersonal skills. Again, consultants with specific industry knowledge are fewer in number. There are not many consultants with all the required skills.
One might find a consultant with a stellar reputation in some areas, but he may lack expertise in the specific area a company is looking for. Hiring a consultant is just the tip of the iceberg. Managing a consulting firm and its employees is even more challenging. The success or failure of the project depends on how well you meet this challenge.
ERP systems come in modular fashion and do not have to be implemented entirely at once. Several companies follow a phase-in approach in which one module is implemented at a time.
For example, SAP R/3 is composed of several "complete" modules that could be chosen and implemented, depending on an organization's needs. Some of the most commonly installed modules are sales and distribution (SD), materials management (MM), production and planning, (PP), and finance and controlling (FI) modules.
The average length of time for a "typical" implementation is about 14 months and can take as much as 150 consultants. Corning, Inc. plans to roll out ERP in ten of its diversified manufacturing divisions, and it expects the rollout to last five to eight years. The length of implementation is affected to a great extent by the number of modules being implemented, the scope of the implementation (different functional units or across multiple units spread out globally), the extent of customization, and the number of interfaces with other applications.
The more the number of units, the longer implementation. Also, as the scope of implementation grows from a single business unit to multiple units spread out globally, the duration of implementation increases. A global implementation team has to be formed to prepare common requirements that do not violate the individual unit's specific requirements. This involves extensive travel and increases the length of implementation.