ERP & TOC Collaboration

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Perspective read supporting the view that with TOC, the benefits of ERP materialize better and the collaboration of the ERP and TOC (ERP –TOC) becomes more powerful tool for improving profits and performance.

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ERP & TOC Collaboration

  1. 1. Research PapersERP & TOCCollaborationThe Whole Is GreaterThan The Sum Of The Parts! by Kuldeep Singh Malik
  2. 2. ERP & TOC CollaborationERP is vital to manage an enterprise and, is being implemented world over with a reasonablesuccess. Though, it provides a total, integrated solution for the organizations information-processing requirements, yet it fails to respond to changes in the rules, procedures, measurements,and even in the belief systems. Additionally, it involves high costs, time and energy, and afterdragging on for years, yields very little performance improvement. A new ERP system benefitscompanies, in cleaning up data and tightening procedures. But, unless a companys businessprocesses are re-engineered, its performance will not be substantially improved. However, if theTOC is coupled with ERP, then the Business Process improvements begin to show results. This papersupports the view that with TOC, the benefits of ERP materialize better and the collaboration of theERP and TOC (ERP –TOC) becomes more powerful tool for improving profits and performance.Enterprise Resource Planning (ERP):ERP is “a packaged business software system that enables a company to manage the efficient andeffective use of resources by providing a total, integrated solution for the organizationsinformation-processing needs” [Sumner Mary (2000)]. This software facilitates the integration ofall the functional information flows across the organization into a single package with a commondatabase. Therefore, it allows easy and immediate access to information regarding inventory,product or customer data, and prior history information [Shehab, E., Sharp, M., Subramanian, L.and Spedding, T. (2004.)]. ERP initially covered all routine transactions within an organization only.However, it was later expanded to cover external customers and suppliers [Turban, E., Leidner, D.,Mclean, E. and Wetherbe, J. (2006)]. Most ERP systems now have the functionality and thecapability to facilitate the flow of information across all business processes internally andexternally. Furthermore, ERP systems have the capability to “reach beyond their own corporatewalls to better connect with suppliers, distributors and customers to engage in e-business” [Nah, F.and Lau, J. (2001)].Today, many public and private organizations worldwide are implementing ERPsystems in place of the functional legacy systems that are not anymore well-compatible withmodern business environment. However, the process of moving from functional applications to anERP system is difficult and challenging [Kroenke, D. (2008)].The switch to ERP system is expensiveand it requires development of new procedures, training and converting data [Zhang, Z (2005)].1. A Literature Review on ERP:More than 60 percent of Fortune 500 companies had adopted of ERP system [G. Stewart, M. Milford, T.Jewels, T. Hunter, and B. Hunter (August 2000)]. The relation between ERP and competitive advantage aswell as different managerial and organizational process enhancing the competitive position has not beenwell covered by the ERP literature. And, ERP system can yield at most a temporary competitive advantage asothers are also installing these enterprise-wide systems [Steven J. Balderstone and Victoria J. Mabinsearch(1999)].Nearly all literature on ERP is focused on ERP project and ERP implementation. Little attention hadbeen paid on the post implementation phase of ERP projects. IT cannot by itself influence the productivityof a company.. The main efficiency factor lies in the way people use these technologies. ERP is one of themajor motives of firms attaining a competitive advantage [Sumner Mary (2000)]. Those organizations thatcan customize their ERP systems with the new ideas to match specific strategic and decision-making needswill be more difficult to imitate. ERP systems may support the extended value chain of the organization,allowing them to link and share data with its suppliers and customers to improve business operationsthrough business process innovations [Zhang, Z., Lee, M., Huang, P., Zhang L. and Huang, X. (2005)].It is alsosuggested to better adapt business process to human factors by explicitly taking into account concepts likethe role, competence and knowledge of human resources [Millman, G.J. (2004)].Vector Consulting Group www.vectorconsulting.in
  3. 3. ERP & TOC Collaboration2. Universal issues in ERP systems:ERP systems have been advancing efficiency in organizations throughout the world, but also have thereputation in industry of being notoriously over-sold and under-delivered [Mabert, V.M., Soni, A. andVenkataramanan, M.A. (2000)], while ERP has been credited with providing competitive advantage in someenvironments, the ERP market is maturing . ERP systems have drawback of being large, complicated, andexpensive [Shehab, E., Sharp, M., Subramanian, L. and Spedding, T. (2004.)].ERP implementation requires anenormous time commitment from an organizations information technology department or outsideprofessionals. ERP systems tended to create changes in many business processes, and as noted by [Shang, S.and Seddon, P. (2002)] putting ERP in place requires new procedures, employee training, and bothmanagerial and technical support. According to [Smith, D. (2000)], Many ERP implementations have failedas a result of lacking clear plans. It is noted that for successful ERP implementation, one of the most criticalsuccess factors is Re-engineering the business process, called as BPR. It is noted by [Sumner Mary (2000)]that BPR should continue with new ideas and updates to take full advantage of the ERP system when thesystem is in use. Organizations should be willing to change their businesses to fit the software in order toreduce the degree of customization [Murray, M., & Coffin, G. (2001)]. Many organizations have madeunnecessary, complex customization to ERP software because the people making the changes do not fullyunderstand the organizations business practices [Sumner Mary (2000)]. According to [Somers T.M. andNelson K.G. (2004)], the Critical success factors in ERP implementation is BPR that drives technology choiceis an enabling factor that can give to ERP success.3. The Theory of Constraints:The Theory of Constraints (TOC) developed by Eliyahu M. Goldratt, is a techniques of organisationalimprovements. It claims that each system has at least one constraint, challenging current state of businesspractices. Thus, if the organization is viewed as a chain, then the place to focus our improvement effortsmust be at the point of greatest weakness – the weakest link, limiting factor or constraint. It is this aspectthat lies at the heart of TOC approach which is called the Five Focussing Steps, first described by [Goldratt,E.M. (2000),].These five focussing steps are namely, Identify the constraint(s),Exploit the constraint(s),Subordinate to the constraint:, Elevate the constraint: and Prevent inertia – go back to step one4. ERP & TOC Collaboration: The Whole is Greater Than the Sum of the Parts:It is argued by [Goldratt, E.M. (2000),] that the key dimension of any technology is that it should diminish alimitation within the operational aspects of any organization. The new technology has to be implementedinto an existing system of policies, behavior, measurements and other assorted rules and regulations.Combination of ERP with TOC (ERP-TOC) provides fast, direct and whole-companywide performanceimprovements, wherein the notion of the constraint is linked to the focus and leverage offered bythroughout accounting [Somers T.M. and Nelson K.G.( 2004)]. It is suggested by [Dr Ted Hutchin (2001)] thatthe notion that the organization should be viewed as a chain and the importance of the constraint alsoneed to be recognized. There are typically three key areas of focus of ERP-TOC, namely, manufacturing,project management and distribution. Firstly, in the manufacturing area, the application of approaches suchas Drum – Buffer – Rope, have been well researched and the results clearly achieved. The whole of therevenue chain from supply to customer is made possible with ERP. There is a conflict between controllingcosts and protecting sales [Turban, E., Leidner, D., Mclean, E. and Wetherbe, J. (2006)].Secondly, in theproject management focus area of ERP-TOC, its capability of data integration presents robust system. DuringERP project life cycle, in the pre-implementation stage, TOC helps in the right selection of an ERP system.During the project implementation stage of an ERP system, TOC helps in management, makes theimplementation smooth and fast. During middle of an implementation, it provides a set of policies,procedures and measurements that give new focus, direction and momentum to the process; it can changeemployees behavior towards resistance to the change by showing the value of ERP via TOC.Vector Consulting Group www.vectorconsulting.in
  4. 4. ERP & TOC Collaboration5. ERP & TOC – How do both workERP- TOC determines and monitors the bottleneck resource, set and manage the buffers, time the releaseof work to maintain a smooth flow to the bottleneck and maximum throughput for the plant, and analyzeresources and buffers for performance improvement. It is about attitude, approach, and process than aboutsoftware .It helps reinforce new procedures, disciplines, and measurements that are taking the place of theold ways of doing things. Once the drum is identified and the “rope” put in place to time the launching ofwork into the plant, the most critical on-going concern is to keep the right amount of buffer in front of theCCR to ensure maximum throughput and a smooth flow of work. ERP-TOC helps in scheduling work incounterintuitive environment. Typical scheduling logic and practice, including priority calculations, work ona no-later-than date basis, tied to due date for completion of the entire production process. Scheduling forall other work centres is tied directly to scheduling for the CCR and is not aimed at increasing utilization onthese subordinate resources.. The concept of “buffer penetration” is unique to ERP-TOC and is a keymanagement tool. Management reports display appropriate priorities and highlight potential problems tokeep operations moving according to TOC principles.6. Results of ERP-TOC based on some cases:After ERP-TOC implementation, the service days taken by the US Navy helicopter service division to service54 helicopters in a year, reduced to 133 days from previous average of 190-200 days ,this means a 1000hours/direct labor reduction and a dip in overtime from between 15 – 18% to 5%..It is noted from this casethat ERP-TOC is a successful technique. Focused on improving planning cycle time, simultaneously. Inanother case, ITT Night Vision, a manufacturer of night vision devices (NVDs) for the United States.,Developed an enabling SAP APO model based on the Theory of Constraints, the following results wereobtained:˜ Improved planning cycle times from 10 days to 2 or 3 days˜ Improved capacity utilization by 20%˜ Reduced finished goods inventory by 19%˜ Improved product-mix planning through better understanding of co product sales.˜ Implemented a flexible model that allows additional constraints to be implemented in one week or less˜ Positioned the company to take advantage of future e-business developments including collaborative planning7. ConclusionsERP systems have been instrumental in advancing efficiency in organizations throughout the world by givingaccess to inventory, product and customer data towards attaining a competitive advantage. However,putting ERP in place requires new procedures, training and converting data, adapt business process tohuman factors in the context of the role, competence and knowledge of human resources. It renders ERPsystem being complicated, and expensive. One of the most critical success factors is Re-engineeringbusiness process, which should continue with new ideas and updates. Here, ERP systems criticalshortcoming is its failure to respond to changes in the rules, procedures, measurements, and even in thebelief systems. If ERP is used in combination with TOC, the three key areas are focused, namelymanufacturing, project management and distribution. TOC helps an ERP system throughout the project lifecycle in effective implementation. On the basis of results of ERP-TOC, it can be concluded that TOC can helpERP to succeedVector Consulting Group www.vectorconsulting.in
  5. 5. ERP & TOC CollaborationReferences:Akkermans, H., Bogert, P., Yucesan, E., and Wassenhove, L. (2003) The impact of ERP on supply chain management: Exploratoryfindings from a European Delphi study, European Journal of Operational Research, Vol. 146, No. 2, pp.284–301.Sumner Mary (2000). “Risk factors in enterprise-wide/ERP projects”, Journal of Information Technology, 15, pp 317-327.Dr Ted Hutchin (2001), “Enterprise Resource Planning – Creating Real Bottom-Line Impact”,G. Stewart, M. Milford, T. Jewels, T. Hunter, and B. Hunter (August 2000), “Organizational readiness for ERP implementation,”Proceeding of the Americas Conference on Information Systems, pp.966-971Goldratt, E.M. (2000), “Necessary But Not Sufficient”, North River Press Great Barrington MAKroenke, D. (2008), “Experiencing MIS”, Prentice Hall.Mabert, V.M., Soni, A. and Venkataramanan, M.A. (2000) Enterprise resource planning survey of manufacturing firms, Productionand Inventory Management Journal, Vol. 41, No. 20, pp.52–58.Millman, G.J. (2004) What did you get from ERP and what can you get? Financial Executive, May, pp.38–42.Murray, M., & Coffin, G. (2001). A case study analysis of factors for success in ERP system implementations. Proceedings of theSeventh Americas Conference on Information Systems, Boston, 1012–1018.Nah, F. and Lau, J. 2001. Critical factors for successful implementation of enterprise systems. Business Process ManagementJournal, 7 (3): 285-296.Olson, D.L., Chae, B. and Sheu, C. (2005) Issues in multinational ERP implementation, Int. J. Services and Operations Management,Vol. 1, No. 1, pp.7–21.Shang, S. and Seddon, P. (2002) Assessing and Managing the Benefits of Enterprise Systems: the Business Managers Perspective,Information Systems Journal, 20(12): pp. 271-299.Shehab, E., Sharp, M., Subramanian, L. and Spedding, T. (2004.) Enterprise resource planning: An integrative review. BusinessProcess Management Journal, 10 (4): 359-386.Smith, D. (2000), “The Measurement Nightmare”; St Lucie Press Boca Raton USASomers T.M. and Nelson K.G.( 2004). “Taxonomy of players and activities across the ERP project life cycle, Information andManagement, 41(3):257–278.Steven J. Balderstone and Victoria J. Mabinsearch (1999), “The World of the Theory of Constraints: A Review of the InternationalLiterature” (The CRC Press Series on Constraints Management), CRC Press; 1 edition.Turban, E., Leidner, D., Mclean, E. and Wetherbe, J. (2006). Information Technology for Management: transforming organizationsin the digital age5th edition, John Willy & Sons.Zhang, Z., Lee, M., Huang, P., Zhang L. and Huang, X. 2005. A framework of ERP systems implementation success in China: Anempirical study. International Journal of Production Economics Kuldeep Singh Malik is Head of Research at Vector Consulting Group. Vector Consulting Group (www.vectorconsulting.in) is the leader of ‘Theory of Constraints’ consulting in India. Vector has been working closely with some of the well known retail chains, FMCG, fashion products, custom manufacturing industry and auto after market companies to improve their overall profitability through supply chain effectiveness. Kuldeep Singh Malik can be reached at kuldeep@vectorconsulting.inVector Consulting Group www.vectorconsulting.in

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