A Smarter Path to ERP Selection


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The path forward is one that requires business transformation -transformation into an integrated enterprise. An integrated enterprise is an organizational structure that recognizes that a business operates best as a coordinated unit, and not as a mere collection of individual departments. Efficiency is achieved because focus is placed on processing transactions and information throughout the the enterprise. An ERP system is a prerequisite to the achievement of enterprise integration.

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A Smarter Path to ERP Selection

  1. 1. A Smarter Path to ERP Selection
  2. 2. Title Contents Introduction.............................................................................................................................................3 The Business Problem: Functional Business Silos in Manufacturing and Distribution Companies........3 The Only Solution: Evolution to an Integrated Enterprise.......................................................................5 ERP Software: An Indispensable Tool to an Integrated Enterprise.........................................................6 The Scary Truth about ERP Projects: Failure Risks...............................................................................8 Driving ERP Success: An Integrated Approach for an Integrated Enterprise.........................................9 The Interconnected Phases of ERP Projects.........................................................................................9 Conclusion............................................................................................................................................11 A Smarter Path to ERP Selection | Compare Business Products ©2012 2
  3. 3. Title Introduction The ingenuity of manufacturers and distributors continues to astound. When faced with obstacles, these companies generally have the capability to use whatever means are at their disposal to overcome those obstacles. For example, it’s not uncommon to see small and mid-sized businesses rely on software systems they’ve built internally to handle processes that have become too cumbersome for manual processing. It’s even more common to see businesses relying on models built in Microsoft Excel and forms built in Microsoft Word to transact business. What happens, however, is that the stop-gap processes that once served their businesses so well ultimately impede productivity. What’s more, these processes and systems create unintended consequences that are both counterproductive and difficult to undo. The Business Problem: Functional Business Silos in Manufacturing and Distribution Companies In many cases, companies develop processes and systems on ad hoc bases to support particular departmental process requirements. For example, a manufacturer suddenly facing an influx of sales orders might implement a production scheduling tool to help its shop floor prioritize production orders and schedule resources. Although these solutions are intended to satisfy immediate needs, they generally have an unintended consequence of reinforcing an organizational structure made up of a collection of departmental silos1. Commonly, in these types of scenarios, a company’s departments will entrench their own sets of processes and systems, largely disconnected from the rest of the enterprise. In business terms, a “silo” refers to a function or department that operates with minimal reciprocity with other functions or departments. A silo represents a scenario where transactions and information are processed internally within that vertical function or department, but not across other functions or departments. Two notable consequences of silos include: 1) information that is hoarded within functions and not shared across the organization, 2) process inefficiencies at the departmental interface level, i.e. in the bridge 1 A Smarter Path to ERP Selection | Compare Business Products ©2012 3
  4. 4. Title A disconnected organizational structure will ultimately limit growth and the achievement of scale. In this type of environment, inefficiency prevails. Data is first entered into one siloed system. Then, to move a transaction through the enterprise, it must oftentimes be manually extracted and re-transcribed into another siloed system. In many cases, this pattern repeats until an order-to-cash or procure-to-pay transaction is fully processed. In general, a business knows that it has outgrown its legacy systems when it suffers performance pains because of any of the following: 1. Business process inefficiency 2. Inaccurate and incomplete data 3. Untimely and insufficient reporting Business Process Inefficiency When a company has siloed business functions, it’s likely to encounter process inefficiencies both within departmental functions as well as in the handoffs (or interfaces) between departments. Oftentimes, these inefficiencies are caused by the manual entry, re-entry, and reconciliation of data. As transaction volumes increase beyond a certain inflection point, organizations become exposed to higher rates of recording and reporting errors, particularly as human interactions with paper-based and manual entry systems increase. There’s also a human capital fatigue issue. People might become burnt out and seek other opportunities as they become increasingly enveloped in mundane and repetitive tasks. Finally, process inefficiencies might cause a company to lose key customers, particularly if there is a noticeable drop in product quality or an increase in shipment delays. Inaccurate and Incomplete Data In many cases, issues with data integrity and completeness can be attributable to limitations with existing systems. As discussed above, human error is a significant source of data inaccuracy. Thus, higher incidences of manual entry, re-entry, and reconciliation are generally followed by higher rates A Smarter Path to ERP Selection | Compare Business Products ©2012 4
  5. 5. Title of error. These errors ultimately become manifest in financial reports, payment collections, payables, product quality, and order fulfillment. Untimely and Insufficient Reporting Limitations with legacy data capture systems create problems with the quality of the reports generated from captured data. When data is stored in a collection of Word, Excel, and PDF documents, it might take an employee days, weeks, or months to analyze the content. Many companies forgo this type of time-consuming analysis because any resulting insights are likely to have become irrelevant by the time a report is produced. These days, businesses want access to relevant, accurate, and timely reports that allow them to make critical business decisions. They want to be in a position identify and address bottlenecks in their operations before customer orders are compromised or before excessive inventories choke off their cash flow. Businesses want to know which suppliers aren’t performing, so they can minimize their own exposure to any resulting quality and timeliness issues. The bad news for many manufacturers and distributors is that their legacy processes, data capture, and data reporting systems no longer support their need for efficient transactional processing and reporting. The good news is that by identifying these types of challenges, businesses are generally ready to embark on a journey that will transform their organization. The Only Solution: Evolution to an Integrated Enterprise For any business that struggles because of disjointed systems and processes, the journey to a brighter future starts with acceptance of change. Leadership has to accept that their business’ organizational structure, processes, and systems will have to change. Departmental managers have to accept that their responsibilities and accountability are going to have to change. No longer will they reign supreme over their respective isolated departmental fiefdoms. No longer will their departments be largely disconnected and isolated from the rest of the organization. Employees are going to have to change. They’re going to have to learn new tasks and unlearn job routines that they’ve committed to habit over A Smarter Path to ERP Selection | Compare Business Products ©2012 5
  6. 6. Title the course of years, perhaps decades. This change is perhaps more accurately described as an organization’s evolution into a dynamic, interconnected, and agile enterprise. In other words, a business that wants to evolve from its growthinhibiting, value-capped current state is going to have to transform itself into an integrated enterprise. It will have to break down functional siloes and eliminate information hoarding. It will have to replace these with cross-functional teams and information sharing. It will also have to implement enterprise software systems that centralize data storage, automate transactional processing, and facilitate real time (or near real time) reporting. In summary, an integrated enterprise is one that is empowered to: □□ □□ □□ □□ □□ □□ □□ □□ □□ Free its people from the mundane to allow them to perform high-value work Lean itself out by eliminating process inefficiency Tightly control cash depleting inventory by ensuring that materials arrive and are processed just-in-time Make achievable order promise dates based on real-time analyses of capacity and resource requirements Establish physical and human resource capacity based on assessed supply and demand needs Proactively respond to unforeseen changes in customer orders or supply sources Focus on its marketing mix, and eliminate its least-profitable product lines and customers Procure only from those suppliers that offer the optimal mix of price, timeliness, reliability, and quality Comply with regulatory reporting obligations in efficient and cost-effective manners, with, for example, easy access to audit trails and traceability reports ERP Software: An Indispensable Tool to an Integrated Enterprise Enterprise resource planning (ERP) software is a prerequisite for any organization seeking to become an integrated enterprise. In many respects, ERP provides the structural and architectural foundation upon which an integrated enterprise is built. In a nutshell, ERP is a tool that enables a company to achieve cross-functional integration, transactional 2 Material requirements planning and distribution requirements planning, respectively. A Smarter Path to ERP Selection | Compare Business Products ©2012 6
  7. 7. Title efficiency, and timely and accurate reporting. For example, when a customer accepts a quotation for a product, sales has an ability to convert that quote into a sales order with a click of a mouse. If the terms of an order require pre-payment, the ERP system can be configured to electronically trigger the activation of accounts receivable invoicing functions. From an operational perspective, the order can become visible to an MRP or DRP2 engine that issues make and/or buy recommendations. And, those recommendations can be converted into a work order or purchase order at the click of a mouse. These are but a few examples of the myriad of opportunities offered by ERP - opportunities to process transactions quickly, efficiently, and with reduced scope for error. Gone are the days of needing armies of business analysts to export data. The above scenarios largely focus on processes that can be automated with ERP. Obviously, an organization still needs people to receive and store product, manage the shop floor, and make business decisions. However, it will need far fewer people (and associated payroll expenses) to perform mundane and time consuming data entry and reconciliation tasks. The system can perform those tasks, with greater efficiency, accuracy, and reliability. An ERP system can accomplish these tasks with precision because it draws upon a single version of data residing in a common database. For example, in an ERP environment, a company isn’t likely to find itself with a sales order that conflicts with an invoice packet. Both document sets will pull common data from the same source, with minimal need for human intervention. With data stored in a common database, a company can also position itself to achieve timely and accurate BI (business intelligence) reporting. Gone are the days of needing armies of business analysts to export data from various Excel spreadsheets and Word documents into other spreadsheets. Also gone are the days where analysts spend weeks analyzing data only to make recommendations based on data that has since become stale. With the volatility of markets and the pace of change, today’s businesses don’t have the luxury of A Smarter Path to ERP Selection | Compare Business Products ©2012 7
  8. 8. Title time. Decision-making has to be based on analysis of the most current data. Fortunately, business intelligence tools provide powerful reporting algorithms that can efficiently slice and dice data. Today’s business analysts are no longer mere data miners and aggregators. They can provide value-add in the form of data analysis, data interpretation, and recommendations thereupon. The Scary Truth about ERP Projects: Failure Risks In summary, ERP provides businesses with an opportunity to hit their growth potential and deliver on their strategic targets. It gives them a chance to become leaner and meaner than ever before. As with any upside, however, there’s a risk of commensurate downside (in some cases, of greater downside). Depending on the source (and what they’re trying to sell), you’re likely to read citations of ERP project failure rates ranging between 40% and 70%. In general, failure is attributable to one or more the following: significant cost overruns, significant schedule overruns, failure to achieve projected benefits, and disruptions to operations. Although failure can generally be traced to a myriad of causes, any particular instance falls into one or more of the following buckets: 4. Unpreparedness to undertake an ERP project 5. Selecting a solution that fails to meet key business requirements 6. Improperly managing an ERP implementation project Although failure rates appear to be alarmingly high, failure is neither arbitrary nor random. It’s a product of poor decision-making and substandard execution. The good news, in other words, is that a company’s ability to avoid ERP failure is largely in its own hands. A Smarter Path to ERP Selection | Compare Business Products ©2012 8
  9. 9. Title Driving ERP Success: An Integrated Approach for an Integrated Enterprise The first half of this report highlighted some of the reasons why an integrated enterprise is a critical driver of business success. This section discusses why an integrated project is a critical driver of ERP success. By way of brief background, many businesses believe that ERP is comprised of two discrete and unintegrated projects: selection and implementation. The first project involves picking a system, and the second involves installing it. Businesses that approach ERP as a collection of siloed projects are, in many respects, making the same mistakes as a businesses that allow their departments to operate as siloed fiefdoms. The Interconnected Phases of ERP Projects A key to ERP success, therefore, is to treat the underlying projects as a collection of interrelated phases, namely: business requirements assessment, selection, implementation, and post-implementation optimization. This paper covers only the first three of these phases. Phase 1: Business Requirements Assessment A business requirements assessment should be the starting point for any ERP project. The purposes of this phase include the following: • Assessing project feasibility • Developing a requirements set for enterprise integration (both operational and systems) • Developing a business case, budget, and schedule for the project(s) Assuming that a project passes the feasibility threshold, a company should then define its operational, systems, and change management requirements. From an operational perspective, this would include 3 Evaluate whether the vendor intends to develop the software in a manner consistent with the business’ projected growth. A Smarter Path to ERP Selection | Compare Business Products ©2012 9
  10. 10. Title a definition of the business process reengineering efforts needed to integrate the enterprise. From a systems perspective, this would include a definition of the key business processes that any selected system should be capable of supporting. From a change management perspective, this would include the various organizational structure, operational, capital asset, and human capital elements that will need to evolve for the project to succeed. Business process mapping is an effective technique to uncover many of these requirements. Among other things, maps provide a visual representation of key requirements that any system will need to support as well as the gaps and issues with existing operations. Phase 2: ERP Vendor Selection With its Phase 1 requirements assessment, a company has positioned itself to anchor its ERP vendor evaluations in its actual business requirements – both existing and future (the latter defined by suggested resolutions to existing operational gaps). The scope of ERP selection should be dictated by whatever due diligence is necessary to support effective ERP selection decision-making. In the ERP world, “functionality is king”, and businesses should assess functionality from multiple perspectives, including: questionnaires, demonstrations, and reference checks. They should expand their due diligence to include some or all of the following elements: software reliability, maintenance and support, implementation services, software development path3, and vendor solvency (among other things). To the extent possible, they should use the business requirements they defined in Phase 1 to establish evaluation parameters and criteria. Phase 3: ERP Implementation Management If done properly, an organization will commence ERP implementation with the right-fitting system and a set of requirements that can be leveraged throughout the project. Although an oversimplification, here are five critical success factors to ERP implementation: □□ Effective Project Planning: ERP is a complex initiative involving multiple sets of stakeholders, A Smarter Path to ERP Selection | Compare Business Products ©2012 10
  11. 11. Title □□ □□ □□ □□ business process re-engineering, training, data migration, and system testing. Each facet of the project should be rigorously planned to task, resource, deliverable, milestone, and cost levels. The project scope should be tightly defined, with a formal mechanism to control change. Project teams should be developed, and communications channels should be formalized. Companies should also consider developing actionable plans for resource management, change management and training, and IT infrastructure requirements. Train-the-Trainer Training: An ERP system will only be effective to the extent that a company’s people use the system in the way that’s intended. Businesses should consider employing a train-the-trainer technique where the key users are trained as ERP super users. These super users will, in turn, administer training to the end-users. Developing super-users ensures that business puts itself in a position to carry on operations once the consultants have moved on to the next project. Effective Organizational Change Management: Project success requires unwavering support from senior leadership as well as buy-in from users. Businesses should seek out project champions at all levels of the company to ensure continued organizational commitment to the initiative. Further, businesses should implement techniques to both identify and manage inevitable resistance to change. Data Migration: The migration of corrupt, inaccurate, or incomplete data can thwart even the best intentioned of projects. Businesses should adopt formal strategies to locate data, cleanse data, and properly time migration efforts. Systems Testing: Inadequately tested systems can lead to operational paralysis. Businesses should employ a series of incremental testing phases designed to test each and every departmental business scenario as well as the interfaces among departments. Conclusion In summary, businesses that carry on operations with unintegrated departments and systems will eventually hit a wall in their development. Manually entering and reentering data in multiple locations is time consuming, error prone, and inefficient. The path forward is one that requires business transformation – transformation into an integrated enterprise. An integrated enterprise is an organizational structure that recognizes that a business operates best as a coordinated unit, and not as a mere collection of individual departments. Efficiency is A Smarter Path to ERP Selection | Compare Business Products ©2012 11
  12. 12. Title achieved because focus is placed on processing transactions and information throughout the enterprise. In other words, an integrated enterprise focuses processing transactions within and between functions. An ERP system is a prerequisite to the achievement of enterprise integration. The combination of process automation and common data storage provides business with opportunities to significantly reduce incidences associated with manual data entry and reconciliation. It also provides an opportunity to perform meaningful business intelligence in real time or near real time. However, the path to ERP success can be risky if not well managed. Businesses would be well-advised to take an integrated approach to their ERP projects – an approach that accounts for the interrelation among requirements assessment, selection, and implementation phases. Those that do are far more likely to experience ERP success, and the ultimate benefits of enterprise integration. A Smarter Path to ERP Selection | Compare Business Products ©2012 12
  13. 13. Title About the Expert: Jonathan Gross, LL.B., M.B.A. Vice President and General Counsel, Pemeco Consulting www.pemeco.com Pemeco is a leading vendor agnostic consulting firm that specializes in business requirements assessments, ERP selection, ERP implementation, and ERP optimization. Jonathan helps manufacturing and distribution clients leverage enterprise software technologies to optimize their business operations. Jonathan is also a part-time MBA professor of systems analysis and design at the Schulich School of Business at York University, Canada’s #1 ranked MBA program according to The Economist Magazine. A Smarter Path to ERP Selection | Compare Business Products ©2012 13