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.
Reengineering
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.
Integration
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.
ERP Consultants
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.
Implementation Time
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.
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