ERP: Strength and Weakness

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In this presentation, we will analyze the strength and weakness of ERP systems. Implementation cost, investment required, hidden costs and benefits of implementing ERP will also be covered in this presentation. We will discuss advantages and disadvantages of ERP and analyse the reason behind the failure of ERP in some specific projects.
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ERP: Strength and Weakness

  1. 1. ERP & WEB BASED SUPPLYChain Management Chapter 2 ERP Strengths & Weaknesses
  2. 2. ERP Strengths & Weaknesses ERP InvestmentERP has become the buzz word all over the word.Is ERP really justified considering prohibitive highcost?This chapter analyses the Strengths & Weaknesses.Of the ERP.ERP software costs in Crores,besides there is cost ofImplementation of ERP.An organization has to paythe consultancy fees to outside consultant.besidesthere is cost of training the manpower.These costsare trice the cost of software.
  3. 3. ERP Strengths & Weaknesses ERP InvestmentThere aren’t any good numbers to predict ERP costs becausethe software installation has so many variables, such as: thenumber of divisions it will serve, the number of modulesinstalled, the amount of integration that will be required withexisting systems, the readiness of the company to change andthe ambition of the project—if the project is truly meant to bea battering ram for reengineering how the company does itsmost important work, the project will cost much more andtake much longer than one in which ERP is simply replacingan old transaction system. There is a sketchy rule of thumbthat experts have used for years to predict ERP installationcosts, which is that the installation will cost about six timesas much as the software license.
  4. 4. Hidden costs of ERPThere are some costs which are underestimated or overlookedWhen ERP is implemented.The following areas merit our attention.1. Training—Training is the near-unanimous choice of experienced ERP implementers as the most underestimated budget item. Training expenses are high because workers almost invariably have to learn a new set of processes, not just a new software interface. Worse, outside training companies may not be able to help you. They are focused on telling people how to use software, not on educating people about the particular ways you do business.
  5. 5. Hidden costs of ERPPrepare to develop a curriculum yourself that identifiesand explains the different business processes that will beaffected by the ERP system. One enterprising CIO hiredstaff from a local business school to help him develop andteach the ERP business-training course to employees.Remember that with ERP, finance people will be usingthe same software as warehouse people and they will bothbe entering information that affects the other. To do thisaccurately, they have to have a much broaderunderstanding of how others in the company do their jobsthan they did before ERP came along. Ultimately, it willbe up to your IT and businesspeople to provide thattraining.
  6. 6. Hidden costs of ERP2. Integration and testing—Testing the links betweenERP packages and other corporate software links thathave to be built on a case-by-case basis is anotheroften-underestimated cost. A typical manufacturingcompany may have add-on applications from themajor—e-commerce and supply chain—to the minor—sales tax computation and bar coding. All requireintegration links to ERP. You’re better off if you can buyadd-on s from the ERP vendors that are pre-integrated.If you need to build the links yourself, expect things toget ugly. As with training, testing ERP integration has tobe done from a process-oriented perspective.
  7. 7. Hidden costs of ERP 3.Customization—Add-on s are only the beginning ofthe integration costs of ERP. Much more costly, andsomething to be avoided if at all possible, is actualcustomization of the core ERP software itself. Thishappens when the ERP software can’t handle one ofyour business processes and you decide to mess withthe software to make it do what you want. You’replaying with fire. The customizations can affect everymodule of the ERP system because they are all sotightly linked together. Upgrading the ERP package—no walk in the park under the best of circumstances—becomes a nightmare because you’ll have to do thecustomization all over again in the new version.
  8. 8. Hidden costs of ERP 4.Data conversion—It costs money to move corporateinformation, such as customer and supplier records,product design data and the like, from old systems tonew ERP homes. Although few CIOs will admit it, mostdata in most legacy systems is of little use. Companiesoften deny their data is dirty until they actually have tomove it to the new client/server setups that popularERP packages require. Consequently, thosecompanies are more likely to underestimate the cost ofthe move. But even clean data may demand someoverhaul to match process modificationsnecessitated—or inspired—by the ERP implementation.
  9. 9. Hidden costs of ERP5 Data analysis—Often, the data from the ERP systemmust be combined with data from external systems foranalysis purposes. Users with heavy analysis needsshould include the cost of a data warehouse in the ERPbudget—and they should expect to do quite a bit ofwork to make it run smoothly6 Consultants ad infinitum—When users fail to planfor disengagement, consulting fees run wild. To avoidthis, companies should identify objectives for which itsconsulting partners must aim when training internalstaff. Include metrics in the consultants’ contract.
  10. 10. Hidden costs of ERP7 Replacing your best and brightest—It is acceptedwisdom that ERP success depends on staffing theproject with the best and brightest from the businessand IS divisions. The software is too complex and thebusiness changes too dramatic to trust the project tojust anyone. The bad news is a company must beprepared to replace many of those people when theproject is over.8 Implementation teams can never stop—Mostcompanies intend to treat their ERP implementation asthey would any other software project. Once thesoftware is installed, they figure the team will bescuttled, and everyone will go back to his or her day
  11. 11. Hidden costs of ERPBut after ERP, you can’t go home again. The implementers are too valuable. Because the implementers have worked so closely with ERP, they know more about the sales process than the salespeople and more about the manufacturing process than the manufacturing people.9 Waiting for ROI—One of the most misleading legacies of traditional software project management is that the company expects to gain value from the application as soon as it is installed, while the project team expects a break and maybe a pat on the back. Neither expectation applies to ERP.
  12. 12. Hidden costs of ERPMost of the systems don’t reveal their value until after companies have had them running for some time and can concentrate on making improvements in the business processes that are affected by the system. And the project team is not going to be rewarded until their efforts pay off.10 Post-ERP depression—The most common reason for the performance problems is that everything looks and works differently from the way it did before. When people can’t do their jobs in the familiar way and haven’t yet mastered the new way, they panic, and the business goes into spasms.
  13. 13. Benefits of ERP 1) Reduction in inventory 2) Redeployment of personnel 3)Productivity improvement 4) Order management cycle improvement 5) Financial close/cycle reduction 6) IT cost reduction 7)Procurement cost reduction 8) Cash management Improvement 9) Transportation cost reduction 10)Hardware maintenance reduction 11) Software maintenance reduction 12) On line delivery improvement
  14. 14. Advantages design engineering (how best to make the product) order tracking from acceptance through fulfillment the revenue cycle from invoice through cash receipt managing interdependencies of complex Bill of Materials tracking the 3-way match between Purchase orders (what was ordered), Inventory receipts (what arrived), and Costing (what the vendor invoiced) the Accounting for all of these tasks, tracking the Revenue, Cost and Profit on a granular level.
  15. 15. Five Major Reasons for understanding ERP1 Integrate financial information—;As the CEO tries to understand the company’s overall performance, he may find many different versions of the truth. Finance has its own set of revenue numbers, sales has another version, and the different business units may each have their own version of how much they contributed to revenue. ERP creates a single version of the truth that cannot be questioned because everyone is using the same system.
  16. 16. Five Major Reasons for understanding ERP2 Integrate customer order information—ERP systems can become the place where thecustomer order lives from the time a customerservice representative receives it until the loadingdock ships the merchandise and finance sends aninvoice. By having this information in onesoftware system, rather than scattered among manydifferent systems that can’t communicate with oneanother, companies can keep track of orders moreeasily, and coordinate manufacturing, inventoryand shipping among many different locationssimultaneously.
  17. 17. Five Major Reasons for understanding ERP3 Standardize and speed up manufacturingprocesses—Manufacturing companies—especiallythose with an appetite for mergers andacquisitions—often find that multiple businessunits across the company make the same widgetusing different methods and computer systems.ERP systems come with standard methods forautomating some of the steps of a manufacturingprocess. Standardizing those processes and using asingle, integrated computer system can save time,increase productivity and reduce headcount.
  18. 18. Five Major Reasons for understanding ERP4 Reduce inventory—ERP helps the manufacturing process flow more smoothly, and it improves visibility of the order fulfillment process inside the company. That can lead to reduced inventories of the materials used to make products (work-in-progress inventory), and it can help users better plan deliveries to customers, reducing the finished good inventory at the warehouses and shipping docks. To really improve the flow of your supply chain, you need supply chain software, but ERP helps too.
  19. 19. Five Major Reasons for understanding ERP5 Standardize HR information— Especially in companies with multiple business units, HR may not have a unified, simple method for tracking employees’ time and communicating with them about benefits and services. ERP can fix that.
  20. 20. Five Major Reasons for understanding ERPIn the race to fix these problems, companies often lose sight of the fact that ERP packages are nothing more than generic representations of the ways a typical company does business. While most packages are exhaustively comprehensive, each industry has quirks that make it unique. Most ERP systems were designed to be used by discrete manufacturing companies (that make physical things that can be counted), which immediately left all the process manufacturers (oil, chemical and utility companies that measure their products by flow rather than individual units) out in the cold. Each of these industries has struggled with the different ERP vendors to modify core ERP programs to their needs.
  21. 21. DisadvantagesSuccess depends on the skill and experience of the workforce, including training about how to make the system work correctly. Many companies cut costs by cutting training budgets. Privately owned small enterprises are often undercapitalized, meaning their ERP system is often operated by personnel with inadequate education in ERP in general, such as APICS foundations, and in the particular ERP vendor package being used.Personnel turnover; companies can employ new managers lacking education in the companys ERP system, proposing changes in business practices that are out of synchronization with the best utilization of the companys selected ERP.
  22. 22. DisadvantagesCustomization of the ERP software is limited. Some customization may involve changing of the ERP software structure which is usually not allowed. Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage. ERP systems can be very expensive to install.ERP vendors can charge sums of money for annual license renewal that is unrelated to the size of the company using the ERP or its profitability.
  23. 23. DisadvantagesTechnical support personnel often give replies to callers that are inappropriate for the callers corporate structure. Computer security concerns arise, for example when telling a non- programmer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards.ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companies—this is cited as one of the main causes of their failure
  24. 24. DisadvantagesSystems can be difficult to use. The system can suffer from the "weakest link" problem— an inefficiency in one department or at one of the partners may affect other participants. Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications. Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level). The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale.
  25. 25. Why do ERP projects fail so often?At its simplest level, ERP is a set of best practices for performing the various duties in the departments of your company, including in finance, manufacturing and the warehouse. To get the most from the software, you have to get people inside your company to adopt the work methods outlined in the software. If the people in the different departments that will use ERP don’t agree that the work methods embedded in the software are better than the ones they currently use, they will resist using the software or will want IT to change the software to match the ways they currently do things. This is where ERP projects break down.
  26. 26. Why do ERP projects fail so often?Political fights erupt over how—or even whether—the software will be installed. IT gets bogged down in long, expensive customization efforts to modify the ERP software to fit with powerful business barons’ wishes. Customizations make the software more unstable and harder to maintain when it finally does come to life. The horror stories you hear in the press about ERP can usually be traced to the changes the company made in the core ERP software to fit its own work methods. Because ERP covers so much of what a business does, a failure in the software can bring a company to a halt, literally.
  27. 27. Why do ERP projects fail so often?But IT can fix the bugs pretty quickly in most cases, and besides, few big companies can avoid customizing ERP in some fashion—every business is different and is bound to have unique work methods that a vendor cannot account for when developing its software. The mistake companies make is assuming that changing people’s habits will be easier than customizing the software. It’s not. Getting people inside your company to use the software to improve the ways they do their jobs is by far the harder challenge. If your company is resistant to change, then your ERP project is more likely to fail.
  28. 28. Common Causes of DisasterThere are several common causes of disaster while implementing the ERP system.1. Change management & training2. Poor planning3. Underestimating IT skills4. Poor Project management5. Technology trials6. Low involvements of top executives7. Underestimating resources8. Insufficient software evaluation
  29. 29. ERP :Lifeline of modern OrganizationAn ERP is a multi modular computer application,which is designed to support all the key activities ofan enterprise in integrated fashion.It is a waste of time to reenter data over againIt is very likely to be entered incorrectly.Data that results from very different disconnectedapplications is inconsistent, so attempts to analyze ityields the proverbial "apples and oranges"—adecision-support fruit salad.
  30. 30. ERP :Lifeline of modern OrganizationWith an integrated ERP suite, there is a "singleversion of the truth" that only needs to be enteredonce to be propagated to all parts of the businessthat need it. All business processes, all employeeswho touch the application, and all the executiveswho make decisions for the company see the sameversion of reality, in real time, all the timeYour business is more than internal operations: tobe successful, you need to efficiently manage yourown purchases of goods, services, and rawmaterials;
  31. 31. ERP :Lifeline of modern Organizationfoster and control your relationships with yoursuppliers and your business partners; and create,manage, and retain your customer base. All theserelationships are more efficiently and economicallymanaged with business-wide applications. Look atthat "order-to-cash" example; there are many stepsthat involve the customer, external deliveryservices, and the bank—all external to yourorganization.
  32. 32. ERP Strengths & Weaknesses End of Chapter 2
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