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INSTITUTE OF BUSINESS AND
TECHNOLOGY
Financial Prospects on Implementation of ERP
Final Project/Thesis
Course Code : MKT-606
MBA (Banking and Finance)
FACULTY OF
MANAGEMENT AND SOCIAL SCIENCES
SPRING - 2011
Financial Prospects on Implementation of ERP
CONTENTS
ACKNOWLEDGEMENT .................................................................... 4
1 INTRODUCTION........................................................................... 7
1.1 Introduction ................................................................................................ 7
1.2 Purpose of Study ....................................................................................... 8
1.3 Research Objectives .................................................................................. 8
1.4 Research Methodology .............................................................................. 8
2 LITERATURE REVIEW .............................................................. 10
2.1 Literature Review ..................................................................................... 10
3 ENTERPRISE RESOURCE PLAINING ...................................... 12
3.1 Definition .................................................................................................. 12
3.2 ERP Benefits and Advantages................................................................. 13
3.3 The Open Source Definition..................................................................... 16
3.4 Choosing an ERP System ....................................................................... 17
3.5 Implementation Strategy .......................................................................... 20
4 MODULES OF ERP .................................................................... 29
4.1 General Ledger ........................................................................................ 29
4.2 How ERP Improves General Ledger Capacity: ........................................ 30
4.3 Benefits for Control: ................................................................................. 31
4.4 Financial Processing: ............................................................................... 32
4.5 Application Features ................................................................................ 32
4.6 Cost/Benefit Analysis ............................................................................... 33
4.7 What Can ERP Do for the Supply Chain?................................................ 38
4.8 Chain ERP management supply .............................................................. 40
4.9 Four Key Benefits of Supply Chain Management Software ..................... 45
4.10 ERP Purchasing Module: ......................................................................... 47
4.11 Features of purchasing module: .............................................................. 47
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4.12 Major benefits .......................................................................................... 48
4.13 Cost and Benefits Analysis: ..................................................................... 49
5 CONCLUSION AND RECOMMENDATIONS ............................. 57
5.1 Conclusion ............................................................................................... 57
5.2 Recommendations ................................................................................... 58
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ACKNOWLEDGEMENT
First of all I would thank Almighty ALLAH who has guided me the way for a bright
future. I would like to acknowledgement the help provided by my teacher to make
this project a success.
My teacher Dr. Noor Ahmed Memon provided guidance and learning at every
step of the project which helped me, a lot in the questioning, data collection and
preparation of this report. He always gave full energy and showed willingness in
my project.
I am also thankful to my parents who accommodated me during those long hours
of work in writing Final Project Report and all the friends and colleagues who
equally encouraged me.
I would also like to appreciate the co-operation I got from my classmates at the
institute, which boosted my morale and encouraged me to strive for better
results.
Aamir Shafique Muhammad Amir Khan
(BEM-25066) (BEM-25060)
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Financial Prospects on Implementation of ERP
INSTITUTE OF BUSINESS AND
TECHNOLOGY
ABSTRACT SUBMITTED BY: Aamir Shafique
(BEM-25066)
Muhammad Amir Khan
(BEM-25060)
DISCIPLINE: MBA (Executive)
TITLE OF PROJECT REPORT: Financial Prospects on Implementation
of ERP
MONTH OF SUBMISSION: April, 2011
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon
Abstract
Debate exists regarding the contribution of information technology to firm
performance reflecting predictions of a positive, negative, or nonexistent
relationship. Prior research has examined technology and firm performance in
the aggregate, however, this study focuses on a specific technology —Enterprise
Resource Planning (ERP) and its impact on firm performance. Economic and
industrial organization theories provide the basis for the examination of how ERP
systems affect firm coordination and transaction costs. ERP systems are
expected to: (1) reduce costs by improving efficiencies through computerization;
and (2) enhance decision-making by providing accurate and timely enterprise-
wide information. These effects should be associated with improved firm
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Financial Prospects on Implementation of ERP
performance. This research finds, after accounting for within-firm variances, no
significant improvement associated with residual income or the ratio of selling,
general, and administrative expenses in each of the 3 years following the
implementation of the ERP system. However, a significant improvement in firm
performance resulting from a decrease in the ration of cost of goods sold to
revenues was found 3 years after the ERP system implementation (but not in the
first or second year after implementation). Further, there was a significant
reduction in the ratio of employees to revenues for each of the 3 years examined
following the ERP implementation.
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1 INTRODUCTION
1.1 Introduction
ERP stands for Enterprise Resource Planning. ERP is a way to integrate
the data and processes of an organization into one single system. Usually ERP
systems will have many components including hardware and software, in order to
achieve integration, most ERP systems use a unified database to store data for
various functions found throughout the organization. Enterprise resource
planning (ERP) is a company-wide computer software system used to manage
and coordinate all the resources, information, and functions of a business from
shared data stores. An ERP system has a service-oriented architecture with
modular hardware and software units or "services" that communicate on a local
area network. The modular design allows a business to add or reconfigure
modules (perhaps from different vendors) while preserving data integrity in one
shared database that may be centralized or distributed. The term ERP originally
referred to how a large organization planned to use organizational wide
resources. In the past, ERP systems were used in larger more industrial types of
companies. However, the use of ERP has changed and is extremely
comprehensive, today the term can refer to any type of company, no matter what
industry it falls in. In fact, ERP systems are used in almost any type of
organization - large or small. In order for a software system to be considered
ERP, it must provide an organization with functionality for two or more systems.
While some ERP packages exist that only cover two functions for an organization
(QuickBooks: Payroll & Accounting), most ERP systems cover several functions.
Today's ERP systems can cover a wide range of functions and integrate them
into one unified database. For instance, functions such as Human Resources,
Supply Chain Management, Customer Relations Management, Financials,
Manufacturing functions and Warehouse Management functions were all once
stand alone software applications, usually housed with their own database and
network, today, they can all fit under one umbrella - the ERP system.
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1.2 Purpose of Study
The purpose of this study is to examine how two organizational members,
i.e. business and information technology (IT) managers evaluate the success
measures of acquired enterprise resource planning (ERP) systems. The study is
to highlight the importance of ERP, especially for growth, production, financial
evaluation and business stability. Furthermore it also talks about the importance
of implementation in non-government organisations (NGOs), educational and
medical centres to develop the affective and authenticated centralize system
environment culture in the corporate sectors, medical and financial institution of
the country.
1.3 Research Objectives
The objectives of the research were as follows:
To gather the current trends in the ERP implementation
To gather statistically valid information of the extent of FOSS
implementation
To develop comparison of the national and global trend in corporate
sectors, manufacturers, large and small Enterprises.
To gather a comprehensive information regarding ERP Implementation
through questionnaire as survey tool to focus on loopholes and critical
errors.
To develop the research methodology
1.4 Research Methodology
Both quantitative and qualitative model will be included to for this research
model. The literature review as conducted by the researcher for the global
adoption and the culture of ERP modules and technologies which includes
current trends and future prospects of ERP implementation. This review included
contribution of the ERP in the global economy, role of government, educational
institutes and non-government organizations in the growth and promotion of ERP
implementation. The researcher then established connection to the online user-
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groups and forums to gather information related to the different modules of ERP.
He used online research websites to gather information about comparison of
market share of ERP Pre-designed module vs. Customised software.
While gathering the information about ERP in Pakistani Software industry,
a survey tool was used to gather solicit feedback from IT professionals working in
various Software Development Centres of Pakistan. Researcher found lack of
responsiveness while gathering the related data. It was noted that main reason
for lack of responsiveness or non-cooperation is the unavailability of the
professional trainers, technical staff and very expensive cost of training as well
as lack of exact and professional guideline.
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2 LITERATURE REVIEW
2.1 Literature Review
In the "digital nervous system" 1a book center, Bill Gates (1999) stressed
the 90's the theme of business Reengineering and de two thousand years after
the key is speed, this statement reveals the important nature of business India is
changing. Jeff Brown (1998) in the "Enterprise.com: Market Leadership in the
Information Age "a book center, but also pointed out that" information "as the key
to competitive corporate world, who can effectively palm Grip information,
delivery services, controlling the speed, who will be able to win new business
arena above, which is a cut depends on Ability of the business in-house planning
and establishment of a complete digital workflow. History of the development in
the information industry, above, this is the first time No longer dominated by
hardware innovations to lead the entire industry. Many famous domestic and
overseas software suppliers, such as Oracle, SAP, Baan, PeolpeSoft,
JDEdwards, and ASDC (DSC), etc. company, a response to this trend and
gradually develop a full-featured and complex enterprise resource integration
system, The Enterprise Resource Integration System, whether in performance or
build method above, all the others are becoming more and more mature, but in
systems integration Process reengineering with the above, but it also makes the
most of the enterprises in the import process encountered many obstacles and
India. Therefore, enterprises put L system, the effectiveness of information
technology, strengthen the competitiveness of enterprises, we must effectively
integrate business processes, making Application of information technology to
achieve optimization.
Today's century is the era of a speeding of information we need is like the
Enterprise Resource Integration System (Corporate Resource Integration
System, CRIS) an effective tool for tackling key problems, CRIS can be
integrated functional levels of the elements, resulting in cross-functional
1
http://www.abouterp.com/erp-oracle/ERP-literature-review-chapter.html
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information flow. In the modern business environment, the Indian, Between
enterprises is becoming increasingly fierce competitive environment, in order to
be able to quickly respond to customer needs, and can be compared with the
other competitors have a competitive advantage, allowing companies are
increasingly dependent on information technology; also to competitors in a
market in order to survive, and due to stress Intense competitive conditions and
therefore would like to help in the information technology of the following can be
integrated within the enterprise information and Limited resources in order to
achieve a competitive advantage and thus to achieve business goals, enterprise
resource planning (Enterprise Resource Planning, ERP) system, which came into
being. Because ERP is based on industry best-practice benchmark for the Indian
Business Process designed a set of computer software packages, can be
integrated throughout the enterprise arising from the information, so that
Business operations and circulation of information through timely operations,
providing an authorized user as a decision-making. ERP system all current CRIS
system integration is the center of the mainstream products, which is the ERP
era is all about.
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3 ENTERPRISE RESOURCE PLAINING
3.1 Definition
2
3
Enterprise resource planning (ERP) is the industry term used to describe a
broad set of activities supported by multi-module application software that helps
a manufacturer or other business manage the important parts of its business.
These parts can include product planning, parts purchasing, maintaining
inventories, interacting with suppliers, providing customer service, and tracking
orders. ERP can also include application modules for the finance and human
resources aspects of a business.
2
www.hostyourspace.co.uk/tag/erp-benifits/
3
http://www.mariosalexandrou.com/definition/erp.asp
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Some of the bigger players in the ERP outsourcing market are SAP, Peoplesoft,
and J. D. Edwards. New comers include Oracle, IBM, and Microsoft.
4
3.2 ERP Benefits and Advantages
According to Anthony, R. A, organizational processes fall into three levels
- strategic planning, management control and operational control. Even though
much of ERP success has been in facilitating operational coordination across
functional departments, successful implementation of ERP systems benefit
strategic planning and management control one way or other.
5
ERP is an information software system that incorporates all the
applications of a business‘s operations and all its departmental functions into one
single system that can be used by all the departments of the business.
Businesses need ERP (enterprise resource planning) software systems in
order to run more efficiently and economically. Every department of a business
generates its own data. When this data remains segregated by department, the
result is disorganization and a splintering of information. This means it can take
days for one department to get data from another. Compartmentalized data
means built in delays in getting information to where it is needed. Businesses
using software packages that do not communicate with each other make the
company less competent and result in a loss of profits. A business operating
without ERP uses many kinds of software and is, therefore, not able to optimize
organizational business activities, nor to follow a client‘s patterns and choices.
ERP was designed to integrate a business‘ data under one common
platform. When this data is organized and coordinated to form a complete
picture, the business saves costs and increases profit. ERP also cuts down on
labor intensive and time consuming processes. Basically, ERP is the answer to
many of the problems plaguing de-centralized businesses. ERP combines all
4
www.sysoptima.com and www.absoft.co.uk
5
http://www.erp.com/section-layout/337-erp-software/8204-advantages-of-erp-software.html
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business applications into one database so that all departments can share their
information and communicate with each other more quickly. Another advantage
of ERP is that it does away with porting. Porting data from one system to another
introduces the probability that errors might creep into the data.
By its very structure, ERP automates business processes. A process
involving ERP can be set. In that way, tasks will be repeated in the same way
each time, thus increasing efficiency and reducing errors. Best practices can be
built into ERP allowing employees to increase productivity. In the end, the
integrated systems resulting from ERP will benefit a business‘ marketing,
accounting, and management.
ERP also benefits a business‘ order tracking procedures. The ability to
track orders properly permits a business to acquire detailed information on where
an order stands, to find patterns in a customer‘s behavior, and to decide which
marketing strategies work best. The ability to know when and how the
manufacturing of a product should be altered is another advantage of ERP.
Security is another area where ERP proves to be an advantage. The databases
provided by ERP are capable of safely storing a business‘ confidential data.
One of the greatest advantages of ERP software comes from its accounting
applications which can integrate the cost, profit, and revenue data from each and
every sale.
Help reduce operating costs:
ERP software attempts to amalgamate commerce processes across departments
onto a single enterprise-wide information system. The major benefits of ERP are
enhanced harmonization across functional departments and increased
efficiencies of doing business. The instant benefit from implementing ERP
systems we can imagine is abridged operating costs, such as inferior inventory
control price, inferior production costs, inferior marketing costs and inferior help
desk support costs.
Facilitate Day-to-Day Management:
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The other benefits from implementing ERP systems is facilitation of day-to-day
management. The implementations of ERP systems care for the organization of
backbone data warehouses. ERP systems offer better convenience to data so
that management can have up-to-the-minute access to information for decision
making and managerial control. ERP software helps track actual costs of
activities and perform activity based costing.
Support Strategic Planning:
Strategic Planning is "a deliberate set of steps that assess needs and resources;
define a target audience and a set of goals and objectives; plan and design
coordinated strategies with evidence of success; logically connect these
strategies to needs, assets, and desired outcomes; and measure and evaluate
the process and outcomes."
Part of ERP software systems is intended to support resource planning section of
strategic planning. In reality, resource planning has been the weakest link in ERP
practice due to the difficulty of strategic planning and lack of sufficient integration
with Decision Support Systems (DSS).
6
And speaking of the advantages of ERP, here are just a few to give you
an idea of what‘s in store.
• Customer relationship management - for sales effectiveness and performance
management with customer plug-ins for feedback
• Analytics, real-time data, easy to use screen interface for completing tasks
• A single repository which contains the full business database or, sub-sectors
thereof
• Sales configuration, pricing management, incentive compensation
• Mobility - worldwide access to the database
6
http://www.erp.com/section-layout/337-erp-software/6824-some-advantages-of-erp.html
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7
3.3 The Open Source Definition
Introduction: Open source doesn't just mean access to the source code. The
distribution terms of open-source software must comply with the following
criteria:
Free Redistribution: The license shall not restrict any party from selling or
giving away the software as a component of an aggregate software
distribution containing programs from several different sources. The license
shall not require a royalty or other fee for such sale.
Source Code: The program must include source code, and must allow
distribution in source code as well as compiled form. Where some form of a
product is not distributed with source code, there must be a well-publicized
means of obtaining the source code for no more than a reasonable
reproduction cost preferably, downloading via the Internet without charge.
The source code must be the preferred form in which a programmer would
modify the program. Deliberately obfuscated source code is not allowed.
Intermediate forms such as the output of a preprocessor or translator are
not allowed.
Derived Works: The license must allow modifications and derived works, and
must allow them to be distributed under the same terms as the license of
the original software.
Integrity of the Author's Source Code: The license may restrict source-code
from being distributed in modified form only if the license allows the
distribution of "patch files" with the source code for the purpose of modifying
the program at build time. The license must explicitly permit distribution of
software built from modified source code. The license may require derived
7
http://www.opensource.org/docs/osd
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works to carry a different name or version number from the original
software.
No Discrimination Against Persons or Groups: The license must not
discriminate against any person or group of persons.
No Discrimination Against Fields of Endeavor: The license must not restrict
anyone from making use of the program in a specific field of endeavor. For
example, it may not restrict the program from being used in a business, or
from being used for genetic research.
Distribution of License: The rights attached to the program must apply to all to
whom the program is redistributed without the need for execution of an
additional license by those parties.
License Must Not Be Specific to a Product: The rights attached to the
program must not depend on the program's being part of a particular
software distribution. If the program is extracted from that distribution and
used or distributed within the terms of the program's license, all parties to
whom the program is redistributed should have the same rights as those
that are granted in conjunction with the original software distribution.
License Must Not Restrict Other Software: The license must not place
restrictions on other software that is distributed along with the licensed
software. For example, the license must not insist that all other programs
distributed on the same medium must be open-source software.
License Must Be Technology-Neutral: No provision of the license may be
predicated on any individual technology or style of interface.
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8
3.4 Choosing An Erp System:
Technology is the engine that drives corporate productivity. Sound business
process to implement that technology is the transmission. Effective, well-thought-
out strategy is the gear shift. Well-connected and synchronized, they make a
smooth running machine. Without all three, a car can only roll downhill. Similarly,
technology implementations without intelligent strategy and sound business
process will just go downhill.
Price-driven, fire-aim-ready technology deployments are proven to fail. Company
decision makers unable or unwilling to commit to do the job right are asking for
trouble-and that‘s what they typically get, along with very costly fixes. Reasons
abound, but most often it boils down to the basics: budgetary mandate to go as
cheap as possible and to implement in an impossibly-short time period. While
cost and time efficiency certainly factor into the final equation, they should be
guidelines, not primary decision-making drivers.
Before making determinations about either, commit to researching what‘s needed
in scope, time, and money. Then, and only then, establish a timeline and budget
for the process. Instead, what often happens is a dramatic call for sweeping
improvement. Technology is thrown at the problem as a quick-fix. Companies
substitute the technology itself for sound business process.
Quick-fix thinking isn‘t anything new. From the time the innovative General
Hannibal implemented new technology (elephants) to enhance his ability to wage
war, management theorists have recommended wave after wave of performance
improvement and technology strategies to gain the competitive edge. Noble
intentions drive these efforts, and each may address a part of the problem. If the
goal is to symbolize to employees, customers, and shareholders that
management recognizes the challenge and is doing something about it, then any
of these campaigns will do the job. However, piecemeal approaches purported to
be the answers to technology issues can be as dangerous as no response at all,
as they can absorb resources and detract from the true needs.
8
By Steve Hammett, Account Executive, BroadPoint Technologies
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This is confusing; so what does a person need to think about to get started? A
few years ago Deloitte and Touch surveyed hundreds of companies who had
recently purchased a new ERP system; what was unique about this survey is that
D&T separated out the respondents‘ criteria into first time and second time
purchasers to determine if experience changed purchasing criteria.
Top Ten Criteria for Selecting
2nd Time 1st Time
Software
Level of support from the solution provider 1 8
Vendor’s track record of performance 2 10
Software’s ability to fit the business 3 4
Growth potential of software 4 7
Price of the software 5 1
Quality of documentation 6 9
Functionality of the software 7 5
Ease of use 8 3
Ease of implementation of the new system 9 2
Software works with existing hardware 10 6
If you look at the second time column, (experienced purchasers), solution
provider support and vendor‘s track record were the top criteria while the first
time purchasers had these at the bottom. This clearly demonstrates that
experienced decision makers value the partners expertise above all else while
the inexperienced decision makers don‘t understand how critical the partner is to
the implementation. Additionally, inexperienced purchasers put price as their top
criteria yet experienced purchasers put price out of the top three criteria. So,
look for partners that have experience, understand business process and have a
large stable of clients who see them as trusted advisors. I would add software
viability to this mix; make certain that the software you choose is backed by a
financially sound company with a proven track record. This last criterion is the
reason BroadPoint is a Microsoft Dynamics partner. For mid-sized businesses,
you want to be certain that you have a firm foundation in which to grow your
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business, and Microsoft provides this foundation. As your business evolves and
grows, we partner with you to tune the engine that drives corporate productivity.
BroadPoint and you, with a Dynamics foundation, make a smooth running
machine. So when beginning a search for a new ERP system, look for a partner
who understands your business, uses sound software and has clients who see
the partner as a trusted advisor.
9
3.5 Implementation Strategy
In choosing new enterprise resource planning (ERP) software, implementation is
every bit as important as finding the right program. You should be thinking about
it proactively when evaluating systems, you should raise the topic with
propsective vendors and even ask for examples of their customers' strategies.
{C} There are hundreds of articles on "best practices" for implementing ERP
software, but understanding each strategy and choosing the best option is
difficult. So, we set out to consolidate the information in a single guide. Our aim is
to give you enough information – and the most important pieces – to choose the
best implementation process for your organization. We'll cover the three most
widely discussed ERP implementation strategies:
Big bang - Implementation happens in a single instance. All users move to the
new system on a given date.
Phased rollout - Changeover occurs in phases over an extended period of time.
Users move onto new system in a series of steps.
Parallel adoption - Both the legacy and new ERP system run at the same time.
Users learn the new system while working on the old.
Survey Results – Updated April 1st
We recently hosted a survey to find out which ERP implementation strategies are
the most popular and most successful. With the help of Twitter and our favorite
9 Houston Neal Director of Marketing, Software Advice
Mar 11, 2010
http://www.softwareadvice.com/articles/manufacturing/erp-implementation-strategies-1031101/#ixzz1MJwevZgb
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industry bloggers, we received 45 responses from organizations that have been
involved in an implementation. Our survey was brief and informal with just four
simple questions:
Which implementation strategy did your organization choose? Big bang, phased
rollout, parallel adoption, combo of big bang and phased rollout, or other.
If you selected other, please describe the strategy you chose.
Was the implementation a success?
If you selected no, please explain why.
When it comes to ERP implementations, these questions skim the surface. We
understand a myriad of questions and answers would be required to learn when
it's appropriate to choose a certain strategy. Additionally, we realize reporting the
"most successful strategy" would be erroneous. While one strategy may work for
a majority of companies, it may not be the best strategy for your organization. As
Jonathan Gross from Pemeco pointed out, "The circumstances dictate the
appropriateness of the implementation strategy. In some cases, a phased
deployment might be more appropriate than a parallel deployment. In other
cases, it might be the opposite."
Nevertheless, our survey did uncover some interesting data. Here are the results:
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Eighty-nine percent of respondents followed "big bang," "phased rollout" or a
combination of the two strategies.
The number of phased rollout users compared to big bang was split nearly
evenly; parallel adoption trailed far behind with only four users; "other" came in
last. The "other" respondent left us the following explanation for his strategy:
"Component implementation; pilot projects; alpha testing; refinements and
iteration before opening it to entire unit. If successful in a unit, expand it
universally until all units have adopted."
Eighty-eight percent of implementations – or 40 out of 45 – were successful.
Of those that answered "No," we received the following comments:
Logistics problem (visa issue delay, user delay for data collection, delay in top
management support). – Phased Rollout
We are still under the progress of phased manner, only ―Materials and Finance‖
is under parallel run and they‘re facing some bugs/modifications. - Parallel
Adoption Still running both systems in parallel, 3 years later!" – Parallel Adoption
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1 year late, although all other success parameters achieved. - Big Bang
concentrating on tools not architecture. - Big Bang Just as the name implies, a
big bang ERP implementation happens in a single, major event. All modules are
installed across the entire organization all at once, more or less. Of course the
changeover from the legacy system doesn't happen without proper planning.
There are many pre-implementation activities that need to be carried out prior to
the big bang. After the planning activities have been successfully executed, the
old system will be turned off, and the new system will be launched. At this point
there is no turning back. However, there should be fall-back scenarios prepared
just in case the initial changeover is a failure. The big bang implementation
strategy has supporters on both sides of the fence. The most common criticism is
the risk factor; there are a number of things that could go wrong in an instant
changeover. However, the implementation is quick and less costly than a long,
drawn-out phased approach. Here is a list of other benefits and drawbacks of big
bang implementation:
Advantages Disadvantages
Implementation time is shorter Difficulties are more pronounced
Implementation difficulties and "pains" are Details may be overlooked in the
condensed rush to change
Costs are much lower than a long, drawn-out Employees have less time to learn
implementation the new system
Full end-to-end system testing is
Employees only need to be trained on the
tough to carry our prior to
new system, not for the changeover period
implementation
Implementation happens on a single Fall-back scenarios are more
date and everyone knows the date difficult than originally perceived
A failure in one part of the
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Advantages Disadvantages
system could affect others
There is a catch-up period
(see Illustration below)
Another downside of big bang implementations is Ken Eason's "Initial Dip
Phenomenon." Eason, author of "Information Technology and Organisational
Change" and one of the original authorities on implementation strategies,
describes an "initial dip phenomenon" which happens shortly after an
implementation. This catch-up period happens because users are struggling
with the new system and organizational performance temporarily declines as a
result.
Phased Rollout
In keeping with the theme of cosmological evolution, phased rollout
would be analogous to the Steady State theory: instead of an
implementation happening in a single instance, small changes occur
over time. An organization moves off the legacy system and onto the
new ERP system in a series of predetermined steps. This can be
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achieved in several different ways. Here are three well-known
techniques:
Phased rollout by module - This is the most common phased rollout
strategy. ERP modules are implemented one at a time. Typically you
begin with core business functions – those necessary for daily operations
– then add in more modules and functionality with each phase. However,
some experts suggest starting with easy modules like general ledger, or
beginning with the less mission-critical modules. For a good explanation,
read Insight Consulting Partner's write-up.
Phased rollout by business unit - Under this approach implementation is
carried out in one or more business units or departments at a time. For
example, you begin with implementing the new ERP system in human
resources, then move to accounting. Some organizations may put
together an implementation project team that travels between each
department during implementation phases. As the team gains more
experience with each implementation, subsequent phases become more
efficient.
Phased rollout by geography - For organizations with multiple locations, a
phased rollout by geography is a frequent approach. The new ERP
system is introduced at one or more company locations at a time. This is
also referred to as the "pilot adoption method." It's common for large
organizations that have multiple locations or independent departments.
Of course there are hundreds of options, including many variations and
combinations of these three. Just like big bang, a phased rollout strategy
has advantages and disadvantages. This table includes several common
viewpoints:
Advantages Disadvantages
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Advantages Disadvantages
Companies gain knowledge and
experience during the initial Not as focused and urgent
implementation phase that can be as big bang
applied to subsequent phases
Involves continuous
Possible to introduce modules while
change over an extended period
programming future modules
of time
Each modules relies on
With conversion occurring in parts, time information from other modules,
is available for adjustments so there could be critical
information missing
There is no catch-up period, Several adjustments are
employees learn as they go needed
More time for users to adapt to the new Duration of the project is
system much longer than big bang
Technical staff can focus on one part of A fall-back to the old
the system or a select group of users at system becomes more difficult
one time with each phase
Project members may develop unique Temporary bridges must
implementation skills that they can be be created between legacy
positioned for in later rollouts system and new system
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Parallel Adoption
The third generic – though less talked about – ERP implementation plan
is the "parallel adoption" approach. This has also been referred to as
"parallel conversion," "parallel running," or "parallel cutover."
Parallel adoption is thought to be the least risky implementation
process. It includes running both the old and new ERP system at the
same time. This way users can learn the new system while performing
regular work activities on the old system. After requirements for the new
system are met, then the legacy system is decommissioned.
Borrowing another illustration
from Ken Eason, parallel
adoption is presented as the
"middle road" between big
bang and phased adoption.
For example, the pace of the
changeover is slower than
big bang, but faster than
Eason Strategy Matrix
phased adoption. Similarly,
user adaptation is easier than big bang, but more difficult than phased
adoption.
The major trade-off – not illustrated in Eason's matrix – is cost. Parallel
adoption is the most expensive implementation method. Additionally,
having employees enter data in both systems is not efficient. However, if
the extra costs are less than costs incurred after a backfired big bang
adoption, then it's a reasonable plan. Still, organizations cannot predict
cost overruns of big bang, so parallel adoption has become decreasingly
popular because of perceived high costs.
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10
Which ERP Implementation Strategy is Best for Your Business?
There certainly is no one-size-fits-all when it comes to implementing an
ERP system. Every company has unique goals, and an implementation
requires careful planning and analysis. Some companies may choose a
combination of strategies, like a mini big bang mixed with phased
rollouts (i.e. "big bang" the important modules, then add in the peripheral
modules later). Others may choose to implement a mid-market ERP
system (e.g. Microsoft Dynamics, Epicor) at the plant-level, while
keeping a major ERP system (e.g. SAP, Oracle running at
headquarters). And at times, the best implementation strategy will be
obvious (as illustrated in this case study).
At a minimum, we hope this guide gets your organization off on the right
foot. By choosing one of the above or developing an entirely custom
strategy, you should be well on your way to success.
10
http://www.softwareadvice.com/articles/manufacturing/erp-implementation-strategies-1031101/#ixzz1MJugBBtm
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4 MODULES OF ERP
11
4.1 General Ledger
The General Ledger module is the heart of any accounting system. The Chart of
Accounts and a company's income statement and balance sheet are maintained
in the General Ledger. Since OpenPro's General Ledger module is flexible and
customizable, it is useful for any sized business.
Because all OpenPro systems are fully web-based, data is available everywhere,
which provides mobility and flexibility for your business.
OpenPro web-based Financials helps you save time, reduce administrative costs
and gain better control over your business by automating a wide range of
accounting related tasks. It is a highly reliable and integrated series of business
applications that delivers a flexible, scalable and full featured total management
solution.
The Financial software is compliant with US-FASB, IASB, IFRS, and SOX
standards, and meets GASB requirements. It can handle government and non-
profit accounting standards.
OpenPro Financials has a variety of features and options built into it. The
Financials module is a fully integrated system with OpenPro Distribution, CRM,
Manufacturing, and E-commerce; it also works well as a stand-alone module.
OpenPro is ideal for companies standardizing on web-based technologies;
OpenPro is a cost-effective, easy to implement business software solution that
delivers internet-ready accounting and business management capabilities to your
business.
11
http://www.openpro.com/products_financials_gl.html
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Financials is a full service module, flexible enough to handle multiple companies
in various ways. In addition to providing maximum flexibility, the financial system
gives you fast and easy access to the information you need for day-to-day tasks
and period-end processing.
OpenPro Financials module includes Job Cost, Executive Desktop, General
Ledger, Budgets, Fixed Assets, Accounts Receivable, Check Reconciliation,
Accounts Payable, and Payroll/Human Resources.
4.2 How ERP Improves General Ledger Capacity:
Flexibility, quickness, and efficiency are the pillars and needs of the
modern organization. In order to ful fill all the requirements that the market
imposes, ERP has become an useful utility. The general ledger tasks are
nowadays one of the most important activities on the daily basis reports, and this
system is the most effective in helping to provide a solid structure where the cost
of sales, profit centre accounting and general ledger are unified.
Many enterprises find it difficult to combine the reporting applications, and some
companies spend considerable amounts of money to ensure the effectiveness of
their external and internal reporting. The records could be disorganized due to
their slow execution. In this instance, ERP becomes the best tool to reorganize
this function by increasing the data quality, combining the fields included in the
different databases of one program.
In regards to specific regulations and requirements related to the financial
reporting, ERP is able to provide an updated solution to maintain your activities in
order, because it has the ability to represent the parallel financial reporting in
several ledgers.
With the implementation of the system, compliance and transparency are
guaranteed, and it also makes it easier to gather and report the valuation bases
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needed to settle more than one account. Through this unified reporting program
the accounting is a simpler task to complete faster.
4.3 Benefits for Control:
The general ledger capabilities are benefited by the use of ERP in many ways.
An important challenge that modern companies face are the slow processes of
closing. When the system interferes in this activity, the data is all concentrated in
one single source, and it is easier to assign transparency for auditing. By this
way, the closing can be made faster and save time for other relevant issues.
Another advantage that the program offers is the ease of use. Although training
would be needed, any expert in integrated systems would be capable of using it.
The accounting and financial departments together with the controller will be
unified.
The reports will also be integrated with the ability to create reports in compliance
with several requirements that include the different regulations for each country
or industry. Of course the main attractive of ERP for the direction board is related
to the profits. Through the general ledger it is possible to reduce all the costs of
ownership.
The system supports a great variety of functions, with recurrent entries, reversion
entries, statistical entries, different currencies, staff and assignation entries. All
the data registered is validated online during the process of entry. All the
combinations of accounts, income and outcome totals are verified immediately.
The online validation allows the users to quickly correct the information without
executing the process separately. This benefit increases the productivity and
efficiency of the staff members since it avoids the repeated cycles of correction of
common data to the system that validates the data during the lot processing.
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4.4 Financial Processing:
The processing options are a great tool for capturing transactions with efficiency
and control. All the entries of journals are automated and it is possible to group
journals to run in parallel or in a special order when some journal depends on the
results of another. Likewise, the organization could be improved since the system
provides the users with the ability to schedule the journals to be generated or
posted based on your needs automatically.
Since the companies are worried about producing additional value with less
resources, this system helps to satisfy this need by running processes across
multiple ledgers easily. Unlimited ledgers could be settled and at the same time
run openings, closings, balances and reports.
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4.5 Application Features
General Ledger is the heart of the accounting system. The Chart of
Accounts and a company's statements are maintained in the General
Ledger. Because of the flexibility of the OpenPro General Ledger
application, it can be used by any business.
Run reports for all prior years, complete drill down to data entry screens
with security and know who processed the transaction.
Accounts Payable/Receivable: Manage your vendors and customers.
Flexible enough to meet any business' needs, while still being able to
streamline, saving time and cutting costs.
Check Reconciliation: Keep track of all your deposits and payments with an
easy to use balancing system.
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Fixed Assets: Record company assets and automatically calculate
depreciation expenses. Supports several methods of depreciation and
automatically posts expenses.
Payroll/HR: Maintain your employee's records electronically. With 128 bit
encryption, the system is secure enough to keep your most sensitive
documents safe. Payroll supports a variety of special functions ranging
from calculating payroll checks with individual deductions to maintaining
information required for state and federal reports.
Job Cost/Project Management: Provides management information you
need to quickly identify project costs that are out of line with budget
estimates and requirements.
Budgets: Keep track of what you are spending; compare your budget with
actual amounts.
Executive Desktop: Create graphic reports of the company status, from
budget charts to manufacturing work orders. Executive Desktop allows you
to create specific graphs for each user type.
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4.6 Cost/Benefit Analysis
Following on my previous post about Cost/Benefit Analysis General
Ledger, here is the more chocolate. The example! To illustrate the process, let‘s
create a hypothetical company with the following characteristics:
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Annual sales: $500 million
Employees: 1000
Number of plants: 2
Distribution centers: 3
Manufacturing process: Fabrication and assembly
Product: A complex assembled make-to-order product, with many options
Pre-tax net profit: 10 percent of sales
Annual direct labor cost: $25 million
Annual purchase volume (production materials): $150 million
Annual cost of goods sold: $300 million
Current inventories: $50 million
Now, let‘s take a look at its projected costs and benefits both for a
combined ERP/ES implementation and then for an ERP only project.
Costs are divided into one time (acquisition) costs and recurring
(annual operating) costs . . . and are in our three categories: C = Computer,
B = Data, A = People.
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1415
4.7 What Can ERP Do for the Supply Chain?
16
The goal for any manufacturing operation - whether it is a discrete or a
process manufacturing business - is to produce quality products at the lowest
possible cost while striving to exceed customer expectations. Achieving this
consistently and cost-effectively depends on gaining deep insight into the supply
chain, especially when it comes to managing the complexities of formulating and
producing products to custom specifications.
Maintaining market share in today's ever more competitive landscape
requires that manufacturing industries process orders faster-increasing execution
and delivery reliability rates-while giving customers better information on order
status and simultaneously managing compliance with legal and regulatory
requirements. All of this requires tremendous agility and a truly dynamic
operating environment that's capable of assimilating real-time information flows
across supply-chain touch points with ease.
14
--Rakesh Kumar, Global Industry Product Director Manufacturing Industry, Microsoft Business Solutions
15
http://blogs.technet.com/b/vertical_industries/archive/2011/04/04/what-can-erp-do-for-the-supply-chain.aspx
16
O‘Brien, James. Introduction to Information Systems, 12e, 2005
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But when it comes to joining the supply-chain management "dots,"
manufacturers face serious technical challenges in terms of process and data
flows - especially when it comes to integrating the "spaghetti soup" of systems
controlling individual customer, supplier and production functions.
To resolve this integration challenge, manufacturers are taking a fresh
look at enterprise resource planning (ERP) as a means of gaining that all
important "single version of the truth" and equally crucial seamless connectivity
to customers and suppliers.
In the past, ERP has received a mixed reception. When the first
commercial ERP software packages exploded onto the market in the 1990s-
promising to integrate all data and related organizational processes into a unified
single information system-ERP acquired a reputation as an unwieldy monolith
that was unsuited to supply-chain management, being inflexible, costly to
implement and complex to operate.
But manufacturers-regardless of their size or the industry in which they
operate --have been missing out on a critical IT opportunity, because ERP has
changed.
Previously software vendors tried to fit a single ERP solution around the
needs of diverse industry verticals, such as semiconductors, chemicals or
food/beverages, resulting in shortfalls in the levels of support needed for industry
terminologies and industry-specific complexities in the manufacturing operations.
Today's next-generation out-of-the-box, supply-chain-management-specific ERP
solutions, such as Microsoft Dynamics AX, have evolved, becoming impressively
scalable end-to-end offerings that effectively streamline and automate business
processes across the supply chain.
Alongside delivering that all important data unity within the enterprise,
today's ERP solutions use customisable Web services to make it simple and
quick to connect with suppliers, logistics providers and customers and enable
seamless real-time data exchange and process sharing.
Easy to deploy and featuring easy-to-use intuitive tools that can be
accessed across the manufacturing operation-from the shop floor to the top floor-
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today's ERP solutions make "joined up" streamlined supply-chain management
an achievable reality.
It's this unique ability to integrate external business processes and support
application-to-application connectivity across multiple systems in a cost-effective
manner that now makes it possible for manufacturers to respond quickly to
changing customer and supplier demands.
Supply-chain optimization also is possible now. Powerful inventory
management tools help to improve forecasting and planning, so supply and
inventory levels can be fine-tuned to customer demand. While access to real-
time data gives users faster access to the tasks and critical business intelligence
information-like key performance indicators-needed to optimize the supply chain.
Finally, ERP makes it easy to simplify government and corporate compliance
commitments by defining custom business rules and workflows based on risk
scenarios.
Today's ERP solutions provide the vital backbone on which effective, cost-
efficient and dynamic supply-chain collaboration can take place. Besides
unleashing demand-driven production, organizations of any size in any sector
can respond faster to change, incorporate new customers and suppliers with
ease, and adapt their operation on the fly as business needs change.
17
4.8 Chain ERP management supply
Effective and integrated supply chains are of strategic importance to
companies who want to gain competitive advantage. Customers are demanding
greater flexibility, superior services, and rapid response.
ERP is the capability to provide timely cross organizational information. W.
Edwards Deming stated that approximately 95% of the problems within an
organization can be directly linked to the process only 6% are people problem.
To stay in the game, suppliers must achieve shorter lead times, greater assets
utilization, and increased productivity, all at lower costs. The real opportunity for
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competitive advantage best lies with Effective Integrated Supply Chains. We
have worked extensively across different industries and have come up with
series of tailored Supply Chain Management modules in to assist companies to
streamline their operations, reduce logistics costs and enhance customer
service-all in real time. We offer specialist advice on every aspect of your supply
chain design, implementation, and execution, including
I Whether you're implementing, upgrading, or expanding your Enterprise
resource planning system - or looking to optimize your supply chain - the highly
skilled consultants at HP Services have the methodologies and know-how to
meet your needs on-time and on-budget.
HP implementation teams draw on our first-hand experience with SAP
deployments throughout our own organization, in addition to our work with
Enterprises around the world as a SAP Global Services Provider, to bring you
solutions based on proven best practices and methodologies.
We offer world-class supply chain process consulting, application implementation
and IT infrastructure services. Our offerings encompass conventional SAP
implementations, design and deployment of solutions in the rapidly evolving
Advanced Planning and Scheduling (APS) arena, SAP Enterprise portals, and
supply chain management and optimization solutions. All of our services and
solutions are designed to help you increase profitability, reduce lead times and
costs, focus on your core competencies, and enhance your ability to collaborate
with partners and customers.
ERP & Supply Chain consulting with a difference
Take advantage of HP's special strengths in ERP and supply chain optimization:
One-stop shopping for end-to-end solutions that integrate high-performance
platforms, HP and partner infrastructure and application software, consulting and
integration services, and support
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A strategic and collaborative relationship as an SAP Global Services Partner
A track record of working with clients in diverse industries: more than half of all
SAP installations worldwide are on HP systems\
First-hand experience with SAP R/3 consolidation and APO within HP
Annual recipient of SAP's Award of Excellence since its inception in 1995
A proven, best practices-based "rapid" methodology to analyze, build, integrate,
and evolve solutions Global reach with offices in 160 countries A uniquely
collaborative approach that fosters efficient knowledge transfer between our
people Your enterprise is part of a supply chain, or maybe a demand chain, and
there are companies, or maybe enterprises, ready to sell you an enterprise
resource planning system that will help you label everything your organization
does with spiffy new buzzwords. If you're involved in your organization's
information technology systems, you've heard about Enterprise Resource
Planning (ERP) systems. These are huge, all-in-one systems that promise to
handle disparate processes that at one time required their own computer
systems: sales ordering, general ledger, accounts payable and receivable, cost
management, payroll (human resources planning), inventory, logistics,
purchasing, material planning, shop floor data collection and management, and
production.
ERP is one of the hottest software products in the large business market today.
Independent studies put the overall market in 1998 at about US $16.7 billion, up
an impressive 39 percent from a year earlier.
AMR Research of Boston, a leading industry expert firm, predicts that the total
opportunity for ERP, including the software, installation and services required to
make it work, could be as high as US $66.6 billion by 2003.
The ERP field today is led by some of the world's biggest software companies:
Oracle (the world's second-largest software firm after Microsoft), SAP, Baan, JD
Edwards, PeopleSoft and SSA might sound familiar to most readers.
ERP promises not only to automate all your back office business procedures, it
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also offers electronic commerce. If you want to sell over the Internet, ERP
vendors are ready for you.
And with the Y2K problem just around the corner, you might be looking to
upgrade your system. ERP is definitely worth close consideration.
What can ERP do for you?
Integrating sales, order desk, inventory control, finance, and management
reporting has significant benefits, not the least of which is from the information
technology manager's perspective. There's now only one computer system to
maintain and to upgrade periodically, which saves a lot of time and money.
Implementing an ERP system often replaces several older computer systems,
which can also boost computer productivity. With only one system, you can also
reduce training costs.
If your current computer system isn't ready for the year 2000, ERP can nicely
sidestep that issue as most ERP vendors made sure their products were ready
for the millennium about two years ago.
A more significant benefit for most companies is the improved use of their
information technology. ERP systems present better information in a more timely
manner to the people who need it. Sales reps can check inventory levels and
prices before committing to deadlines; managers can check margins before
offering special deals.
Having a single source of data for everything that happens in an enterprise also
makes the whole organization more flexible; companies can ramp up production
more quickly, or can shift what they're making or where they're making it more
readily.
ERP systems can also make employees, whether in customer service or
production, more productive. ERP systems can reduce turnaround or order
fulfillment time and increase accuracy in fulfilling customer orders. For cash
savings, ERP systems can help reduce inventory costs through improved stock
tracking.
Case in point: Walbar
Last year, Walbar, a manufacturer of turbine blades and other parts for airplane
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engines, replaced its business application system with an ERP system from JD
Edwards.
Walbar is a division of Coltec Industries, Inc., and has three locations in the
United States and one in Mississauga, Canada. The company took more than 18
months to select a system, install it and train its employees. The system has
been "live" since May, 1999. Since Walbar chose to phase in the implementation,
as of our press time the company had not yet started using all the modules, but
started with the core: inventory control, financials, product data management,
bills of materials, routing, work centre, shop floor management and workflow.
The total cost for the implementation at the Mississauga plant, including the IBM
AS/400 computer, servers, new IBM workstations, software, installation and
training was about US $1 million.
"It's early to say what the benefits are, but I have definite expectations about
reducing inventory, which will free up a significant amount of cash," says Peter
Mammone, director of finance at the Mississauga location. "Another real benefit
will be the ability to better plan for the severe cyclical nature of the airplane
engine business."
Beyond that, Mammone sees real improvements in improved customer service;
quicker and more accurate delivery of customer orders through better materials
planning and order tracking. In Mammone's industry, mistakes are very costly, as
there are only about a dozen manufacturers of airplane engines in the world. He
says you can't afford to annoy any of them.
One key benefit of ERP systems is the way it integrates a company's flow of
information. Using an ERP system, the sales, purchasing, production, inventory
control and accounting departments all use the same information. One set of
data is used throughout the company to make sure customers get what they
want when they want it, and that the whole thing is profitable for the company.
Centralizing this information and presenting it consistently can also improve
planning and decision making.
To illustrate the value of ERP in action, take a look at Xerox Corp., which
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installed an Oracle ERP system in three distribution locations across the United
States. Each centre produces digital cpiers and printers, and ships them to
customers.
When an order comes in, Oracle's Release 10.7 ERP system picks the
appropriate stock from the inventory, which is all identified with bar codes.
Barcode readers from Intermec track products and communicate with the ERP
system via wireless transmission; middleware from Connectware translates the
barcode data from Intermec into Oracle's language.
18
4.9 Four Key Benefits of Supply Chain Management Software
Supply chain software can offer tremendous value to any company that relies on
the smooth planning and execution of related operations to achieve long-term
profitability and maintain a solid competitive edge. That‘s why more and more
organizations are purchasing and implementing supply chain applications. In fact,
the market for supply chain and related softwares is expected to reach $7.4
billion in 2008, according to a report by ARC Advisory Group.
Improve Your Supply Chain Network: Supply chain softwares provide
complete, 360 degree visibility across the entire supply chain network –
something that cannot be easily achieved with disjointed manual processes.
With supply chain, users can monitor the status of all activities across all
suppliers, production plants, storage facilities, and distribution centers. This
enables more effective tracking and management of all related processes, from
the ordering and acquisition of raw materials, through manufacturing and
shipping of finished goods to customers or retail outlets. So the status of mission-
critical activities can be tracked at all times, and potential inefficiencies or
problems can be identified and corrected immediately, before they become
unmanageable.
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Minimized Delays: Many supply chains – particularly those that haven‘t been
enhanced with a supply chain application – are plagued by delays that can result
in poor relationships and lost business. Late shipments from vendors, slow
downs on production lines, and logistical errors in distribution channels are all
common issues that can negatively impact a company‘s ability to satisfy
customer demand for its products.
With supply chain software, all activities can be seamlessly coordinated and
executed from start to finish, ensuring much higher levels of on-time delivery
across the board.
Enhanced Collaboration: Imagine having the ability to know exactly what your
suppliers and distributors are doing at all times – and vice versa.
Supply chain softwares make that possible, bridging the gap between disparate
business softwares at remote locations to dramatically improve collaboration
among supply chain partners. With supply chain softwares, all participants can
dynamically share vital information – such as demand trend reports, forecasts,
inventory levels, order statuses, and transportation plans – in real-time. This type
of instantaneous, unhindered communication and data-sharing will help keep all
key stakeholders informed, so supply chain processes can run as flawlessly as
possible.
Reduced Costs: A supply chain software can help reduce overhead expenses in
a variety of ways. For example, it can: Improve inventory management,
facilitating the successful implementation of just-in-time stock models, and
eliminating the strain on real estate and financial resources caused by the need
to store excess components and finished goods Enable more effective demand
planning, so production output levels can be set to most effectively address
customer requirements – without the shortages that result in lost sales, or the
waste that drains budgets Improve relationships with vendors and distributors, so
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purchasing and logistics professionals can identify cost-cutting opportunities such
as volume discounts.
4.10 19ERP Purchasing Module:
ERP Purchasing module streamline procurement of required raw
materials. It automates the processes of identifying potential suppliers,
negotiating price, awarding purchase order to the supplier, and billing processes.
Purchase module is tightly integrated with the inventory control and production
planning modules. Purchasing module is often integrated with supply chain
management software.
4.11 Features of purchasing module:
Streamlines purchase and process cycles
Detailed Supplier/Subcontractor/Service Provider database
Capturing materials requirement
Automatic firing of purchase requisitions based on MRS
Quotations from various suppliers
Recording Payment terms in PO
Excise consideration in Purchase and Process Orders
PO authorization
PO amendments with complete amendment history
Order cancellation and order closing
Multiple delivery schedules
Quality inspection of goods
Quotation validity
MIS for vendor evaluation based on quality, price & delivery time
Subcontracting – generation of process orders
Multiple indents for multiple items in a single PO
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Purchase order processing
Purchase order entry with item details and other details like taxes,
discounts, extra charges like freight, P&F, octroi etc.
Flexibility to generate Purchase Order in domestic and foreign currency
Advance adjustments
Purchase bill with updating of GL and purchase book
Service contracts, Service Bills, Service indents and PO
Value based approval of indents
Bill of Entry
Complete import functionality with handling of custom details - Purchase
Bill for import, Excise consideration in imports
Reports for Order tracking for complete control on the procurement cycle
ERP Purchasing module aims at making available the required materials
of the right quality, in the right quantity, at the right time and at the right price, for
the smooth functioning of the organization. All purchasing and subcontracting
activities such as inviting quotations, supplier evaluation, placing purchase order,
order scheduling and billing are covered in this module. Import of goods is also
handled by the system.
4.12 Major benefits
Vendor performance analysis for effective vendor management.
Smart List to generate the Purchase Orders.
Purchase Receipt Generation Process.
Option to generate Quote-Request to Vendors.
Analysis Reports equipped with graphical charts.
Instant access to critical PO data.
PO generation time/cost savings.
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4.13 20Cost and Benefits Analysis:
One of the main focuses of a Business Excellence project is customer
service. We find that our "make to stock" Business Excellence companies
achieve high levels of stock availability, typically over 99%. Any make for stock
company in a competitive situation should be able to estimate the possible extra
sales they could capture if they always had their products on the shelf. For other
types of business, assemble to order, make to order or engineer to order, the
benefits from a Business Excellence project typically come in the form of reduced
lead time, a 50% reduction in 12 months is common, and on-time delivery close
to 100%. The potential for increasing sales if lead time could be reduced by half
and on time delivery improved should be estimated. It would not be realistic to
believe that all the potential increase in sales could be realised, so the potential
benefit from increased sales should be calculated as the gross margin on a
proportion of the potential increase. For the example shown in Figure 1 we have
taken half of the potential benefit. Some companies will get increased sales from
both the off the shelf and lead time improvements but for most it will be an
either/or situation.
The most basic improvement that Business Excellence companies
achieve is a stable, managed master schedule out to the cumulative lead time.
When a manufacturing department has stable, reliable schedules so that
supervision can spend their time managing and improving their processes
instead of chasing material and shuffling priorities, there will be a saving in both
direct and indirect costs. Idle time or waiting time, if recorded, is typically only the
tip of the iceberg. An estimate of the potential direct saving alone should be
made and again we will use just 50% added into the project benefits for our
example.
20
http://www.bpic.co.uk/cstandbe.htm
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Financial Prospects on Implementation of ERP
Direct material is frequently a large proportion of the cost of sales. There
are many potential savings in this area that arise from improvements in master
scheduling. If you give your vendors stable schedules they can achieve the same
manufacturing cost savings as you. The greater visibility will enable your
suppliers to invest in better equipment and to take on value engineering work
with you. Single reliable sources of material, rather than multiple but unchecked
sources, opens up the possibility of point of use delivery which saves inventory
and administration time. We find that purchasing department can typically
achieve a 20% reduction in material costs with as little as 3 months forward
visibility of requirements. We will again be as realistic as possible and use only
half of this estimate of potential savings on purchased material for our example.
Inventory is the last main category of quantifiable savings. Merely
replacing a seat of the pants planning system with a faster, computerised system
will often result in inventory rising, as the temptation is to react to the messages
to purchase material but not always get around to actioning the other messages.
The ignored messages will include re-scheduling out works orders and therefore,
purchases. If there are overdue items on the schedules, all the other material
which depends on the overdue items will be scheduled. Eliminating all overdue
items on the schedules alone will significantly reduce raw material and work in
progress. When a managed master production schedule is driven by a sales and
operations plan, agreed by the senior team, finished unit inventory will be much
better controlled so that slow moving stock will be gradually eliminated.
All amounts in £000's Benefit
Sales 40,000
Possible % increase if product always available (make to
5%
stock items)
Possible % increase with shorter lead times (make to order
items)
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Financial Prospects on Implementation of ERP
Gross margin% 50
Annual benefit for 50% of above 1,000
Annual direct labour cost 5,000
Possible % labour cost saving with stable schedules & no
5%
material shortages
Annual benefit from 50% of above 125
Annual purchase material cost 15,000
Possible % purchase cost saving with better material
10%
requirement information
Annual benefit for 50% of above 750
Estimated inventory holding cost (% of inventory value) 16%
Current raw material inventory value 2,000
Possible % reduction in raw material 25%
Current work in progress and intermediate storage value 1,000
Possible % work in progress and intermediate stock
50%
reduction
Current finished stock inventory value 5,000
possible % finished stock inventory saving 25%
Annual inventory saving benefit from 50% of above 180
Total annual benefit 2,055
Total one time capital saving (25% of inventory
562
reductions)
Figure 1 : Benefits
With inventory there are two types of savings. The cost of holding
inventory, including the cost of the storage space and its overheads, inventory
management etc., is an annual cost saving. In addition there is a one time capital
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Financial Prospects on Implementation of ERP
saving which will offset the one time capital cost of the project. It is reasonable to
take half the potential annual saving in inventory holding cost. For the capital
saving, a quarter of the capital is a more realistic figure as there may be
equipment purchases necessary to realise some of the capital savings described
in the chapter on continuous improvement. The benefits analysis table in Figure
1 (the figures are in 000‘s) show some typical figures for a company with a £40m
p.a. turnover.
Unfortunately there is a cost associated with this benefit so it is now
necessary to estimate the cost of the project. First there will be hardware and
software costs. At this stage the choice of system may not have been made. It
would do no harm to put in a fairly high estimate obtained by talking to any of the
software companies. There will be a one time capital cost of the software which
will vary enormously depending on the complexity of the software and size of the
company (see ERP software tiers table), typically from about £7,000 to as much
as £40,000 (US$10,000 to US$60,000) per seat / user licence depending on the
software and the database licence fee.
Whilst every effort should be made to resist the temptation to customise
the package, there may have to be some changes which should be allowed for
and some packages (e.g. SAP R/3 and JDE's EnterpriseOne) may be cheaper
for the software but much more expensive to configure. SAP R/3, for instance,
may only cost £3,000 for the software per user licence but £15,000 per user
licence for consultants to configure. There will also be an ongoing maintenance
cost to install the upgrades along with further customising (typically 15% to 20%
per annum of the software cost). The programming cost will depend on the size
of the company but there could be two man years in the customising and one
person on a continuous basis after that. The Project Cost table in Figure 2 gives
some typical figures.
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Financial Prospects on Implementation of ERP
O O
All amounts in £000's
ne time n going
£ £
000's 000's
1 2
Hardware
00 0
2 4
Software
00 0
Customising / 6 3
configuring 0 0
Data control
1 1
Inventory records
50 0
3
Bills of material
0
3
Routings
0
Education
9 1
External
0 4
2
Internal 3
0
Direct labour 3
Full time project leader 3
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Financial Prospects on Implementation of ERP
5
Full time project team 1
(4) 15
7
Outside consultancy 5
5
1 1
Miscellaneous
25 8
Total Implementation 1, 1
cost 030 43
Figure 2 : Project Costs
Many companies do not go any further than these costs to arrive at the
cost of the project. It would, indeed, be possible to change the current planning
system for the new planning system without any additional costs. Unfortunately,
such implementations fail to achieve any of the benefits itemised above. All of the
benefits come from the second half of the investment.
You have to allow for costs associated with getting the bill of material and
inventory record accuracy above the 98% that is vital to get meaningful data from
the system. For inventory records, the cost of cycle counting will be on-going but
bills of material will generally remain accurate, once the process for maintaining
the bills of material has been established, without any significant on-going cost.
The same applies to routings.
An allowance should be made for external education and training in the
initial phase. As well as the initial cost of education and training, there will be an
on-going cost of training new recruits and for adjusting the process as the
business changes. An allowance of 25% per annum of the start up training and
education cost is a good estimate.
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Financial Prospects on Implementation of ERP
Many companies start out with the intention of not having a full time
project leader let alone a full time project team. At this stage it is not necessary to
decide whether you will have these full time people but the justification should
include them. As a rule of thumb, a project team of three people is necessary for
companies with up to 300 employees. One more project team member is needed
for every 200 employees. Deciding who the team will be can be delayed until
later. Finally there should be a "miscellaneous" allowance of about 10% of the
cost so far. This is one cost that is almost always overspent!
all amounts are £000's
Sales opportunity 240
Direct labour efficiency 125
Cost of material 1,500
Inventory holding cost reduction 360
Total annual saving 2,225
On-going costs 143
Net annual benefit 2,080
One time cost 1,030
One time cost saving 562
Net capital cost 468
Pay back period (years) 0.25
Cost of 1 month delay 175
Figure 3 : Cost and Benefits Summary
The last stage of the analysis is to bring together the costs of
implementing and compare it with the net annual benefits (see Figure 3). The pay
back period can then be calculated and compared with the company norm. It is
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Financial Prospects on Implementation of ERP
very unusual if the pay back is not one of the best the company has seen for a
while.
The final figure to calculate is to divide the net annual benefit by 12. This
gives the cost of one month delay. This is a powerful motivator to get on with the
project, get the best people possible onto the task forces and avoid delays. The
cost of delay of £175,000 per month in this example puts the costs into
perspective. The cost of the full time project team, for instance, becomes less of
a decision. A full time project team will considerably speed up the project
invariably and pay for their cost many times over. The use of outside consulting
help is a significant and cost effective way to speed up the project.
One of the most common causes of delay is the decision on which
software package to use. The fact is that success or lack of it has almost nothing
to do with software. There are some basic functionality requirements that are
described in the Software Selection Guide most of the better known packages
have this functionality now, after that it is down to support and training.
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5 CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion
From the beginning, a successful ERP implementation must be mapped to
the client‘s growth strategy. Taking this approach, along with superior project
management, documentation, communication and training will ensure the
success of the implementation and maximize adoption of the software. The
technology should align with organizational processes and structures so that it
supports the company goals, not the other way around. An ERP solution will
become an integral part of your business, and OmniVue wants to make sure it
lives up to your expectations.
All the information should be accurate, timely and consistent. More
importantly, an organization needs a typical and total integrated network to
combine and hoop the data. Lack of such total integrated network might start
really bad for organizations in the long run.
In summary, ERP is the foundation of present and future success of
Electronic Commerce Business to Business. It is probable that the term ERP
(never very explicit) will disappear, that the editors too will disappear if they
cannot reinvent themselves . But the transformation toward new business
paradigms will be achieved by the combination of a rethinking of processes, a
performing ERP solution, and the Internet technologies. These elements taken
separately do not explain the transformation we are witnessing today. It is the
synergy of a combined effort process, ERP and technology which leads to this
transformation.
It is in fact the first time that the company has the requisites to really
situate the customer as sovereign.
As far as critical success factors, the Needs Requirement had to be
formal, detailed and lead naturally to an ERP solution choice. It also set a
framework for scripts, tests, in later implementation phases.
But there needed to be a certain humility and flexibility so that the benefits
of the ERP solution be optimized. The Customer had to say I want this, this and
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Financial Prospects on Implementation of ERP
this, but also listen carefully when the Editor said I can deliver this, this and that.
Unless there was an overriding business, legal or fiscal reason, the economic
path was one of compromise. A ‗failure‘ factor could be either not sufficiently
expressing objectives, needs, constraints clearly; or having done so, sticking to
them so rigidly that the ERP solution was customized or interfaced to death.
The success factors to this point in time, i.e. at the outset of the project
implementation, often dictated whether the project would ultimately be in line with
budget costs, delays and expectations. To use the concrete metaphor already
cited, the errors made at this stage would be difficult to correct (remold) later on.
5.2 Recommendations
It is recommended that:
ERP must be given importance in the national IT e-governance policy,
which will pave the way for ERP implementation in the country.
Role of educational institutes cannot be undermined in promoting ERP.
Educated professional trained and equipped with the ERP tools and
technologies can bring major contribution in revolutionise the open source
culture in the country.
Non government organisations must be encouraged to help government in
helping Pakistan economy by adopting and promoting ERP culture.
Government should extend the educational and training activities to
influence the inclusion of ERP in syllabus and train the teachers on ERP
technologies.
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REFERENCES
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