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ERP System for Small and Medium Enterprise

How Small and Medium Enterprise Can Plan For
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
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
: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
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&