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ERP System for Small and Medium Enterprise

How Small and Medium Enterprise Can Plan For
ERP?
In the frst article, we discussed how a dash of well-structured evaluation system
can help small and medium enterprises (SMEs) to mitiate enterprise resource
plannin (ERP) ris! "#$ the failure of the implementation of the ac%uisition phase of
the system&
In this article, we descri'e some SMEs can ta!e steps to mitiate the ris! of failure
of the implementation of ERP in the ne(t phase of implementation) the plannin
phase&
In short, the plannin stae is the stae durin which the orani*ation is preparin
to +ERP-i*e+ its activities& ,n ERP pro-ect re%uires much more than simply installin
a system of computer software& It re%uires orani*ational restructurin&
In eneral, SMEs need to restructure their operations to meet the parameters of the
.ow of 'usiness as defned 'y the ERP software& /hese days, most ERP pac!aes
are pre-adapted to areas 'ased on some of the 'est industry practices&
/he e(tent of orani*ational restructurin that is needed depends on the structure
of e(istin 'usiness processes, and the technical and functional re%uirements of the
ERP software&
,s with any comple( pro-ect restructurin, the implementation of ERP is
accompanied 'y certain ris!s of pro-ect failure& 0or e(ample, failure can result from
implementation runaway that causes the pro-ect 'ecomes profta'le& It can also
result in the re-ection of the restructured orani*ation where such re-ection hinders
the achievement of e1ciencies pro-ected environment&
In the followin sections, we will focus on these specifc ris!s of the failure of the
implementation and e2ectiveness of the implementation plannin can mitiate
these ris!s&
3efault Ris! #) Implementation of runnin outdoors
If an SME is plannin to implement ERP, the main reason for doin so is li!ely to
achieve cost savins& ,ccordin to 4556 research 'y the ,'erdeen 7roup, the need
to reduce operatin costs and administration continues to 'e the main driver of the
ac%uisition of ERP in the SME sement& "4$
0or fnancial reasons drive the decision to implement ERP, it is essential that the
implementation will 'e completed in the 'udet& , failure to deliver implementation
will 'e economic failure of the pro-ect&
Since this section deals with fnances ERP-related, it is important to 'rie.y discuss
some of the underlyin principles&
8n the cost side of an ERP 'udet is 'ased on a total cost of ERP ownership (/98)
calculation& /98 is the total present system costs, maintenance and service values&
/he costs and maintenance of the system are larely f(ed and determina'le in
advance&
:owever, maintenance costs are enerally very varia'le and di1cult to predict
accurately& In addition, the service costs are proportionately lare& In 455;, the
costs of services accounted for <=> of total cost of ownership for SMEs& In other
words, for every ? #55 spent on small 'usiness ERP software, it spent an additional
? @# of service& "A$ ,s you pro'a'ly uessed, the service costs primarily re.ect the
costs of implementation&
Poor plannin, allocation of resources, incorrect, pro-ect delays and scope creep (i&e&
une(pected increase in the scope of the pro-ect) are the usual culprits for the costs
of implementin the run& /he frst three are enerally well understood& 3rift
deserves a little more attention&
3urin the implementation, there is a temptation holy rail for +ERP-i*e+ some
'usiness processes that have not 'een included in the oriinal pro-ect plan& /he
-ustifcation for additional reach that the additional e1ciency will 'e achieved 'y
+ERP-i*in+ the additional tas!s& /he implementation seems the perfect time to
'roaden the scope of application) the pro-ect is underwayB the consultants are on
site and are dedicated teams&
/hese temptations must 'e resisted& /he implementation is rarely a ood time to
'roaden the scope (e(cept for une(pected e(penses that must 'e addressed)&
/he reason the temptation must 'e fouht 'ecause the arument chanes
une(pected perimeter is only part of the 'enefts of the fnancial e%uation&
,dditional costs are also to 'e ta!en into account& /hese costs include direct costs
of services and the opportunity costs of delay& Reardin the latter, every day
unplanned that the SME is not a'le to operate under the new system is a day of lost
e1ciency&
It is fair to assume that the scope of the ERP pro-ect is desined to ma(imi*e the
net 'enefts of ERP (net proft C cost savins - costs)& /his means that all the pro-ect
components that ive a positive net 'eneft payments& /his also means that all the
elements which ive a neative net 'eneft (includin the additional costs e(ceed
the additional e1ciency ains) are re-ected& /he scope unforeseen increases are
usually components that produce neative net profts, i&e& they would not 'e
profta'le& Since they reduce the return on investment ERP, these components must
'e re-ected&
/he followin chart (omitted) shows the relationship 'etween the cost of a raw
pro-ect, the ross costs and net profts (net income C ross costs - ross costs)& ,s
shown 'y the line of net 'enefts, in terms of pro-ect is ideal in ,& ,t this point, all
cost components are accepted and all unprofta'le components are re-ected& ,ny
pro-ect plan that is to the left of point , means that the plan could 'e e(panded to
proft& ,ny pro-ect plan to the riht of point , means unprofta'le components are
accepted& Scope increases are enerally components that are to the riht of point ,&
/he profta'ility analysis a'ove e(plains why chanes additional perimeter is 'oth
unnecessary and un'enefcial to the pro-ect& ,s time passes, these incremental
chanes will 'e either inored or implemented as part of a cost optimi*ation plan&
In summary, a well-structured plan can mitiate the fnancial ris!s associated with
too 'road a defnition of the scope and e(tent of creep& /his plan will help !eep the
ERP pro-ect within 'udet and on time&
:owever, while fnancial ris!s are mitiated, other types of failure ris!s still threaten
the success of the pro-ect& Such a ris! is that some !ey people will re-ect the new
ERP system and D or 'usiness processes restructured&