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  1. 1. HOW SMALL AND MEDIUM- relate to the need to manage geographically SIZED BUSINESSES CAN disparate value chains as well as different regulatory requirements. The operational NAVIGATE THE ERP MAZE pressures include the constant drive for cost Jonathan Gross, Pemeco Inc. reductions and revenue opportunities. August, 2009 Many SMEs are quickly learning that it is The following article is the first in a series simply too expensive and too inefficient to of four articles aimed at Small and Medium- manage these pressures using a patchwork sized Enterprises seeking a rapid of Excel spreadsheets and incompatible deployment of Enterprise Resource Planning software applications. To succeed in this systems and at the consultancies that may be global economy, SMEs need well-structured providing those firms with assistance. The operations and real-time access to articles are based on Pemeco’s proprietary meaningful, integrated, and accurate data. and systematic “Milestone Deliverables” Fortunately, enterprise resource planning and “Milestone Deliverables: Rapid (ERP) applications can help SMEs alleviate Implementation” ERP methodologies. This these various pressures and satisfy their first article describes the System Acquisition related business needs. Phase with a particular focus on how to In its most basic form, an ERP application is mitigate two of the key risks inherent in intended to electronically integrate an purchasing a pre-customized sector-specific organization’s processes and systems. A system. The next articles address the company installs ERP to enhance Planning/Chartering Phase, the operational efficiencies. When making an Implementation & Training Phase and the ERP decision, an SME has to understand Optimization Phase. that enhancing operational efficiencies is not Introduction: How ERP Can Help the same thing as creating efficient SMEs Streamline Global Operations operations. Using a football analogy, ERP Unlike prior generation Small to Medium- is an SME’s tactical system and its sized Enterprises (SMEs) that primarily operations are the players. Consider a operated in local economies, today’s SMEs situation where a team’s defensive corps compete on a global basis. Globalization made up of weak players is defending offers SMEs significant growth against another team’s skilled offensive opportunities, but it also exposes them to corps. The defence takes note of the game significant competitive, administrative and situation and the offensive team’s set-up. It operational pressures. The competitive astutely infers the likely offensive play-call pressures can include increasing demands and makes the correct tactical decision to made by buyers and suppliers, as well as play a nickel defence. Notwithstanding all market share pressures placed by foreign of these correct steps, the offense scores an competitors. The administrative pressures easy touchdown. The defence got smoked
  2. 2. even though it read the play and made the Benefits and Tradeoffs of Pre- correct tactical decision. What happened? Customized ERP Simply put, the defence had lousy players Until recently, the upside of ERP was who were unable to execute. For simply not worth the costs for SMEs. Now, organizations, ERP and operations work in ERP is becoming a commodity. As a result, the same way. A company needs to have many SMEs can make the business case for properly structured operations to maximize the investment by taking a vanilla approach the benefits of ERP. to ERP acquisition and implementation. Using a vanilla approach, an SME selects a When deciding whether to install ERP, an plug-and-play ERP package that is pre- SME has to understand that an ERP customized to its particular sector. Sector- implementation project requires much more specific packages are available for almost than the mere installation of a software every industry and sub-sector, including the package. It requires business process following: retail, industrial, manufacturing, reengineering and other forms of operational consumer packaged goods, real estate and restructuring. Such restructuring is critical financial (among many others). For to the success of any ERP project, where example, manufacturers can acquire SAP success is measured by the usefulness of the Business One, INFOR LN, or Oracle E- solution. Business Suite, all of which can include The usefulness of ERP is often gauged in procurement, CRM and/or scheduling terms of enhanced transparency of modules. operations. ERP enables departmental, In addition to the benefits of systems divisional and corporate-level integration and sector specificity, pre- representatives to gain access to real-time, customized solutions offer SMEs an ability process level information from across the to achieve a relatively quick return on ERP entire organization. For example, armed investment. As compared to fully with relevant procurement, manufacturing customizable ERP solutions, pre-customized and logistics information, the sales solutions are relatively more cost-effective department can improve customer and more easily implementable. However, satisfaction by providing its customers with an SME that is considering buying a pre- more accurate lead-time estimates. From a customized ERP package needs to be aware corporate level perspective, executives can of the inherent tradeoffs. better monitor operational performance and determine the likelihood that high-level Such trade-offs include limited system targets will be met. Discrepancies can be scalability and functionality, which drilled down and pin-pointed to the limitations necessarily flow from the fact applicable processes. Accurate, on-the-fly these types of systems are pre-customized, adjustments can be made. As a result, the i.e. they are built for some purposes and not business will become more nimble and more others. Also, they are built for general, responsive to supply and demand shifts. sector-specific consumption and are not 2
  3. 3. tailored to a specific firm’s individual needs. processes as defined by the ERP package. When choosing a pre-customized solution, Thus, before acquiring a pre-customized the SME has to be aware of a package’s ERP package, the SME should make sure particular limitations. It also has to be that the organizational structure aware of its own business, operational and requirements defined by the ERP package IT needs. If an SME does not have a firm are based on relevant, well-developed and grasp of these needs, it runs the risk of well-tested organizational principles. The acquiring a system that will fail to fill the SME also needs to understand its ability to important gaps. There is an unbelievable tolerate the required organizational changes. number of real-world examples (and academic case studies) involving SMEs that Acquisition of ERP: 4-Stage Analysis found out post-acquisition that the system to Mitigate Risks they had purchased lacked critical As discussed above, an SME faces certain functionality. In some of those cases, the risks when it decides to implement a pre- SMEs spent double the allotted budget to customized ERP solution. However, the acquire and implement modules to fill the SME (along with its advisers) can take steps gaps that should have been filled the first to mitigate its exposure to these risks before time. In other cases, the SMEs scrapped the it acquires the system. To do so, it needs to implementation entirely and considered the perform a critical analysis of its operational, system acquisition expense to be a sunk systems and restructuring needs (and cost. It is surprising that there are so many tolerances). It must then evaluate each horror stories of this nature. The risks proposed ERP package to determine which relating to system acquisition are easily package best suits its needs. Our firm mitigated – all that is required is some due performs this analysis in 4-stages, as diligence on the part of the SME! follows: Another trade-off of pre-customized ERP •“As Is” Mapping systems relates to the nature of the internal Stage 1 restructuring that accompanies a system implementation. As with the deployment of •Desired Future State & Issues Prioritization any ERP package, the implementing Stage 2 company must re-engineer some of its •(a) Development of ERP System Requirements business processes and organizational •(b) Model of Ideal Solution structure. However, unlike the Stage 3 •(c) Assessment and Ranking of ERP Systems implementation of a fully customizable solution, the implementation of a pre- •Acquisition of ERP System customized solution does not give the SME Stage 4 the flexibility to craft both the solution and the organization as it sees fit. Rather, the SME must restructure its own business and operations to accommodate the business 3
  4. 4. Stage 1: “As-Is” Mapping The SME (with the help of its advisers) Stage 3(b): undertakes a comprehensive operational process and information-flow mapping Based on 3(a), the SME models exercise. Through this exercise, the SME an ideal solution that addresses will uncover operational gaps, all of its requirements, administrative gaps and process including price and implementation requirements. inefficiencies. Stage 3(c): Stage 2: Desired Future State and Issues Prioritization The SME assesses and ranks the various ERP systems based The SME projects the desired future state of on a weighted analysis that its business and operations. Through this compares the actual solution to exercise, the SME articulates a vision of its the ideal solution. The SME future strategic, operational, functional and also assesses the proposed administrative requirements. The SME then system’s ability to satisfy the prioritizes the issues uncovered in Step 1 by individual requirements weighting each issue’s importance according defined in Stage 3(a). to the extent to which the resolution of that Stage 4: Acquisition of System issue will help the SME achieve its defined goals. After having completed the critical analysis, the SME is in Stage 3: Assessment and Ranking of ERP a position to acquire a pre- Packages customized ERP package that This stage is comprised of three sub-stages. best suits its needs. Stage 3(a): Example of a Scorecard Approach to ERP System Acquisition The SME develops technical As an example, consider the case of ACME, and functional ERP system an American manufacturer that has recently requirements based on the started sourcing its inputs from suppliers issues prioritization analysis located in China, the Philippines and undertaken in Stage 2. The Singapore. ACME’s procurement decisions SME then prioritizes these are based on quarterly sales forecasts requirements by weighting derived from market analyses and historical them relative to their ability to sales data. When inventory is received, it is address the issues defined in binned and intermingled with like inputs, Stage 2. and warehoused in the U.S. until ordered by its production department. Inventory accounting for financial reporting purposes 4
  5. 5. is determined by end-of-period manual high quality basis. From an operations counts. perspective, ACME prioritized the need to manage input costs, input quality, inventory After performing a Stage 1 “As Is” mapping costs, and foreign exchange hedging. of existing operations, ACME uncovered the following process gaps: In its Stage 3(a) analysis, ACME determined that its ERP system needed to have the  Variable inventory quality; following functionality:  Inaccurate sales forecasts leading to: an inability to  Currency assessment; satisfy unanticipated demand  Vendor rating; during busy periods and excess  Entry of inventory and non- inventory carrying costs during inventory items; slow periods;  Warehouse and shipping cost  Financial statement reports of assessment; and inventory do not reflect the true  Planning, purchasing and shop asset value; and interfaces.  Excessive foreign exchange currency losses. Figure 1 shows an excerpt of ACME’s order processing requirements from its ERP After assessing its process gaps, ACME Package Selection Scorecard. performed a Stage 2 analysis. On a strategic level, it decided to compete on a low cost, Figure 1: Excerpt from ERP Selection Scorecard 5
  6. 6. In Column 1, AMCE’s technical and Conclusion functional ERP needs are listed. In Column Implementing ERP is much more 2, ACME will prioritize the relative complicated than the mere installation of a importance of each need by assigning software package. Names like “pre- weights. In Columns 3 through 5, ACME customized” and “plug-and-play” may give will assess each of the ERP package’s SMEs the false impression that the selection abilities to satisfy its individual needs. In and implementation of ERP are relatively Columns 6 through 8, each ERP package is straight-forward. Nothing could be further given a weighted score for each from the truth. SMEs have to be aware that requirement. The weighted score is a ERP is a business decision and not just an IT function of each package’s ability to satisfy decision. It requires an organization-wide the need and the need’s priority. The commitment to making IT an integral part of bottom row shows an average weighted strategy and operations. A decision about score that allows ACME to compare each ERP should be made systematically and package’s ability to satisfy its overall needs. critically. Unfortunately, many SMEs do not have the resources, expertise or time to Figure 2 shows a graphical representation of undertake the type of critical analysis the individually weighted scores and total described above. Fortunately, specialty average weighted scores of each ERP advisory firms perform these types of Package. This representation clearly shows assessments in a time-effective and cost- that ERP Package C best meets ACME’s effective manner. individual and combined requirement needs. Figure 2: Graph of Weighted Scores 10 9 8 ERP Package A 7 ERP Package B 6 5 ERP Package C 4 3 2 1 0 6
  7. 7. Jonathan Gross, B.A. Hons, LL.B., M.B.A. is Vice-President of Business Development, Consultant with Pemeco, Inc. He provides the following services to both public sector and private sector manufacturers and distributors: operational needs assessments, alignment of operations and strategy, change management, process optimization, inter- and intra- organizational integration, and ERP systems acquisition and implementation.