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BE, DCPA, MBA, MA(App. Psy.), PhD(Mgmt.) CE(I), FIE (I), MIMA, MISCA, LMCSI, LMIIMM
email@example.com http://ksskanhaiya.blogspot.com http://www.facebook.com/kss.kanhaiya Introduction
In today's business environment, greater interaction between the customers and manufacturers is essential. To deliver as per customer requirements and improve delivery performance, manufacturers need to decrease lead times within the enterprise and improve efficiency and effectiveness through efficient planning and control systems that enable synchronisation in all processes of the organisation. Enterprise Resource Planning is such a strategic tool, which equips the enterprise with the necessary capabilities to integrate and synchronise the isolated functions into streamlined business processes. ERP implementation in India is picking up very fast. Last few years have seen many companies taking initiatives to implement ERP. However, it is not a magic tool, which will transform everything overnight. Successful implementation is a long journey towards enterprise excellence. Many management issues need to be addressed to achieve expected results from ERP implementation. What is ERP? ERP is an industry term for integrated, multi-module application software packages that are designed to serve and support multiple business functions. It is an integrated business software system that encompasses all the operations an enterprise is engaged in, covering all aspects of business and enabling an organisation to effectively and efficiently mange its resources including material, people, plant & equipment across the entire enterprise based on an integrated database. An ERP software system allows a company to – • Automate & integrate majority of its business processes • Share common data and practices across entire enterprise • Produce and access information in a real time basis. • Take a process view of organisation. • Address entire need of organisation. • Achieve joint execution of business process among different modules ERP implies the use of packaged software modules to interface with an organization's own software with varying degrees of effort, and, depending on the software, ERP modules may be alterable via the vendor's proprietary tools as well as proprietary or standard programming languages. Brief History of ERP ERP has evolved as a strategic tool because of continuous improvement in the available techniques to manage business and the fast growth of information technology. Prior to 1960s, the business had to rely on the traditional ways of inventory management to ensure smooth functioning of organisation. The most popularly known amongst them is EOQ (Economic Order Quantity). In the 1970's the focus shifted to MRP (Material Requirement Planning) systems that translated the Master Production Schedule (MPS) for a specified end items into a detailed time-phased net requirements for the sub-assemblies, components and raw materials planning and procurement taking into account the inventory on hand. MRP proved effective in increasing efficiency by Reduction of inventory, Reduction in production and delivery lead By Dr. KSS Kanhaiya, First Published in 2006: Page 1 of 10
times and Making commitments more realistic; but it did not take into account other resources of an organisation. This gave birth to a modified MRP, known as Closed Loop MRP. In this technique, the capacity of the organisation to produce a particular product is also taken into account by incorporating a Capacity Requirements Planning (CRP) module where a feedback loop is provided from the CRP module to MPS if there is not enough capacity available to produce. In 1980s, the need was felt to integrate the other resources of organisation and the concept of Manufacturing Resources Planning (MRP-II) evolved which was an extension of MRP to shop floor and distribution management activities. Over the years, other tools had evolved to automate the manufacturing management process like Computer Aided Design, Computer Aided Manufacturing, Computer Integrated Manufacturing, Customer Oriented Manufacturing Management System, etc. In the early 1990's, the shortcomings of MRPII and the need to integrate new techniques, led to the development of a total integrated solution to cover areas like Engineering, Finance, Human Resources, Projects Management etc i.e. the complete gamut of activities within any business enterprise. Hence, the term ERP (Enterprise Resource Planning) was coined. ERP attempts to integrate the suppliers and customers with the manufacturing environment of the organisation.
Why is it Necessary?
By becoming the integrated information solution across the entire organization, ERP systems allow companies to standardize business processes and more easily enact best practices. By creating more efficient processes, companies can concentrate their efforts on serving their customers and maximizing profit. The essence of ERP is the premise that the whole is greater than the sum of its parts. The traditional application systems, which the organisations generally employ, treat each transaction separately. They are built around the strong boundaries of specific functions. In ERP, it stops treating these transactions separately as stand-alone activities and considers them to be the part of the inter-linked processes that make up the business. Almost all the typical application systems are nothing but the data manipulation tools. An ERP system also does the same, but in a different manner. There are hundreds of such data tables, which store data generated as a result of diverse transaction, but they are not confined to any departmental or functional boundaries, rather integrated for use by multiple users, for multiple purposes and at multiple places. Thus ERP can • Solve existing problem of island of heterogeneous info systems. • Facilitate flow of info among all processes. • Facilitate data sharing among different systems • Help organisations to o Improve operation, customer service & satisfaction o Adopt best global business practices o Reengineer business processes o Computerise the reengineered processes and build state of the art IT Infrastructure Following benefits are usually expected from ERP – • Improved decision making, resource productivity, material management lead times and customer relationships • Improved efficiency in deployment of capital goods, maintenance of plant equipment, human resource utilisation, accounting • Reduced inventory level and sales outstanding • Enhanced organisational capability to adapt new IT applications
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There are five major reasons why companies undertake ERP. 1. Integrate information: In traditional method, many different versions of the company’s overall performance exist with different functions like production, sales and finance. ERP creates a single version of the truth that cannot be questioned because everyone is using the same system. 2. Standardize and speed up manufacturing processes: ERP systems Standardize methods and using a single, integrated computer system can save time, increase productivity and reduce headcount. 3. 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 work-in-progress inventory, and it can improve delivery plan to reduce the finished good inventory. ERP helps to improve the flow of supply chain too. 4. Standardize HR information: ERP can fix the problems of HR not having a unified, simple method for tracking employees’ time and communicating with them about benefits and services. 5. Bring Value to Organization: ERP can be utilised for the purposes of Enterprise Integration and Standardizing Processes & Data, Business Process Transformation, Performance Measurement, Enabling Best Management Practices and Building an Intelligent Enterprise Here, it is important that the managements remain alert not to 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.
It is said that, ERP is the finest expression of the inseparability of business and information technology. The incremental improvement in the information technology and the drastic reduction in prices of computers have made it possible even for the small organisation to think about ERP systems. The new era of PC, client server technology and scalable RDBMS have contributed for the ease of deployment of ERP systems. Most of the ERP systems exploit the power of Three Tier Client Server Architecture. In a client server environment, the server stores the data, maintains its integrity and consistency and processes the requests of the user from the client desktops. The load of data processing and application logic is divided between the server and the client. The three-tier architecture adds a middle stratum, embodying all application logic and the business rules that are not part of the application, enforcing appropriate validation checks. Issues related to multi-locational operation and control can be addressed using online data transfer using the other important enabling technologies like Internet, Intranet, Workflow, Workgroup, GroupWare, Electronic Data Interchange (EDI), Data warehousing, etc. There are various ERP vendors available today. Few of them are SAP AG, Oracle Corporation, Peoplesoft Inc., JD Edwards & Company, BaaN Infosystems, Ramco Systems, System Software Associates, and QAD etc. The first five vendors account for 64 percent of total ERP market revenue. The vendors offer slightly differing features in their products; still the major modules are same in all of the products.
Implementing ERP projects
There are three commonly used ways of installing ERP. • Big bang: In this strategy, all relevant modules are implemented in one go across entire organisation. This is the most ambitious and difficult approach to ERP implementation. Company gives up its legacy systems at once and installs new system across the entire company.
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Locationwise: In this strategy, all relevant modules are implemented in one go at one location. The plan is that implementation at other locations will follow. This has become the common approach of ERP implementation and suits large diverse companies that do not share many common processes across units. Independent ERP systems are installed in each unit. Common processes, such as financial accounting may be linked across the enterprise. Each unit has its own instance of ERP -- that is, a separate system and database. The systems link together to share the information necessary for the big picture across all the business units viz. business unit revenue, or for processes that don’t vary much from unit to unit viz. HR. Module wise implementation: In this strategy, Individual modules are taken up for implementation one by one as per criticality. Key processes, like those contained in an ERP system’s financial module, are designed as per ERP system’s model.
Steps for ERP Project implementation
An organisation should follow the following route for implementation of ERP project. Care should be taken that over enthusiasm or Ash effects do not result into the management overlooking or undervaluing the first two steps i.e. Assessing ERP readiness of organisation and Selling of idea to prepare organisation for ERP. Similarly, the last step of training should also be given very high emphasis if benefits from ERP are actually to be realized. Assess Readiness of Organisation for ERP Prepare organisation for ERP (Selling of Idea) Detailed plan • ERP s/w selection • Implementation methodology Process modelling (As is vs As to be) Conduct feasibility study
Implementation • Development • Customisation • Quality assurance Data migration Going Live on Use
ERP implementation phase – Detailed Plan
A detailed plan for implementation phase of the above mentioned project route is suggested below. • Form proper implementation teams By Dr. KSS Kanhaiya, First Published in 2006: Page 4 of 10
o Select steering committee and Nominate Project champion o Select personnel and form areawise cross functional teams Prepare implementation plan o Orientation & training of the project team o Identification and documentation of existing business process o Creation of desired business process documentation o Mapping of business process on to ERP S/W o Gaps analysis and Customisation o Uploading of relevant data on the developed system and Conducting test runs o Parallel run with existing system o Cross over to ERP system Develop Future Plan depending on strategy used and business needs
Important Issues for Management Consideration
Selection of Implementation Strategy After the decision to go ERP way, one of our first major decisions concerns the approach: big bang or little bangs? If big bang is chosen, converting all of the branches and departments at once, everything would ride on one go-live event. This method dominated early ERP implementations because of the need to revamp old systems for Y2K. But now few companies attempt it anymore because it calls for the entire company to mobilize and change at once. Getting everyone’s cooperation and acceptance at once is a tremendous effort, largely because no one within the company has any experience using it, so no one is sure about its benefits. Many departments have computer systems that have been honed to match the ways they work. ERP does not offer the comfort of familiarity that a custom legacy system has been offering. Also, such implementation requires a direct mandate from the CEO. In location wise strategy, implementations begin with a pilot installation in a particularly patient unit. Once the project team gets the system up and running, it begins ‘selling’ ERP concept to other units using the first implementation as a kind of reference. This strategy takes a long time. Companies that initially installed ERP using this strategy are now trying to consolidate as many of those different instances of ERP as possible into one for the entire company. Module wise implementation strategy is used in smaller companies expecting to grow into ERP. The goal here is to get ERP up and running quickly. Companies that use this strategy need not expect much payback from the new system but use it as an infrastructure to support more diligent installation efforts to be taken up later. Deciding on the little bang approach reduces the size of the risks. There are downsides to the little bang strategy: The project cost goes up and the time to implement increases, and the longer you play, the higher the odds that something will go wrong. But it's not as risky as the big bang. Good, fast or cheap? There's a cliché in project management that says, "You can only have two out of Good, fast or cheap". ERP and cheap is an oxymoron. If we miss our completion date by a couple of months, we will lose the benefits of the software for that period only, but if we get a bad implementation fast, we prepone our long downhill journey. One should therefore concede early on to not having the project done fast or cheap, but concentrate on doing things right. Reengineering & ERP An ERP system simulates necessary functions of the business and provides seamlessly integrated information at all the required places and in an appropriate form. It helps the enterprise link its resources, utilize and allocate them in the best possible manner and control
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them on a real time basis. It enables the enterprise to achieve world class performance by streamlining its processes and optimizing the resources. Reengineering can be called as an essential precursor to ERP implementation. Since, ERP gets the best out of the available resources, it is very important to reengineer the business processes before going for an ERP implementation. If the business processes are not streamlined, the resource allocation will always be sub-optimal. Proceeding from the inside out It may be helpful not to convert any real-time customer-facing functions in the first phase. If something goes wrong, it should remain within the company and not affect the customer. Training Every ERP contract will include clauses about training. The questions of importance are: Who will be trained? What will be scope of training for different groups of users, maintainers and administrators of the system? How would you differentiate good and bad training? How do you measure post-training performance? A training clause without proper answers to these may turn up as pseudonym for post-commissioning picnic to be arranged by supplier for the selected teams. Successful software training is tricky. You have to train your trainers, who will train power users, who will in turn help train front-line associates. Each branch should need to be certified before go-live. An overall minimum post training score of 80% and a positive subjective assessment by trainers should be required before giving go-ahead to the go-live. Disaster recovery plan Organizations do have disaster recovery plan for recovering data after an outage. But recent exposures to security breaches and attacks highlight the need for not only to protect data but to also put in place plans to prevent business outages. An organization must have a strategy in place to help avoid outages and rapidly resume the flow of business processes when outages do occur in order to restore business operations. This strategy is called business continuity. Business continuity planning requires strong executive commitment. Executives need to ensure that their people understand their roles and responsibilities; that processes are articulated, understood and prioritized; and that measurement systems are put in place to ensure an orderly process flow. Many enterprises fail to adequately for plan business continuity. Some of the reasons for this oversight include: • Lack of management sponsorship to business continuity planning • Lack of budget for building complete business continuity plans • Unclear ownership of business continuity strategy (IT, policy makers, business unit executives etc.) • Lack of knowledge and expertise in areas that contribute to building a business continuity strategy (business process, systems/ storage/network failover/recovery, organizational behavior etc.) The success of a business continuity plan depends on management commitment, resource assignment, testing to ensure that the plan works both from equipment as well as people/ process perspective, and an ongoing commitment to adjusting the plan to changes in operations. To develop a business continuity strategy, enterprises should pay close attention to people, process and technology issues. Some special challenges Top management has also to pay attention to the following challenges for success in reaping benefits from ERP project. • Presence of top management commitment towards ERP • Readiness to invest in the high cost, high risk and high reward project. • Shifting from function view to process view By Dr. KSS Kanhaiya, First Published in 2006: Page 6 of 10
Change management system Communication infrastructure Faith in selected package software Readiness for business process modification to fit system Prudence in software customisation to fit business needs Clear focus on objectives Clarity between installation & implementation o Goal of installation is to move from one software product to other with minimum disruption o Goal of implementation is to enable organisation to achieve business goals as a result of transformation of business processes. Hidden costs of ERP Almost every corporate project contains different landmines in the budgeting process. In case of ERP implementation too there are certain costs that are commonly overlooked or underestimated. The following hidden costs should actually be taken care of so as to avoid budget overrun or surprises. • Training: Training is 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 educate people about the particular ways you do business. They are focused on telling people how to use software. The company has to develop a curriculum that identifies and explains the different business processes that will be affected by the ERP system. Remember that with ERP, finance people will be using the same software as warehouse people and they will both be entering information that affects the other. To do this accurately, they have to have a much broader understanding of how others in the company do their jobs than they did before ERP came along. So, the company has to spend on design and development of new course(s), training their own trainers and IT personnel and arranging training of the employees through these trained people. It is the best ERP investment a company would ever make. But, most companies overlook budgeting properly for ERP training. • Integration and testing: Testing the links between ERP packages and other corporate software links that have to be built on a case-by-case basis is another underestimated cost. A typical manufacturing company may have add-on applications like supply chain, sales tax computation and e-commerce. All require integration links to ERP. Testing ERP integration has to be done from a process-oriented perspective. Veterans recommend that instead of plugging in dummy data and moving it from one application to the next, you should run a real purchase order through the system, from order entry to shipping and receipt of payment, preferably with the participation of the employees who will eventually do those jobs. • Customization: Add-ons are only the beginning of the integration costs of ERP. Much more costly is the actual customization of the core ERP software itself. This happens when the ERP software can’t handle one of your business processes and you decide to make it do what you want. The customizations can affect every module of the ERP system because they are all so tightly linked together. You will have to use extra staffers to do the customization work, and to maintain it. • Data conversion: It costs money to move corporate information, such as customer and supplier records, from old systems to new ERP systems. Most data in legacy systems is of little use. Companies often fail to see their data as dirty until they • • • • • • • By Dr. KSS Kanhaiya, First Published in 2006: Page 7 of 10
actually have to move it to the new client/server setups required by ERP packages. Even clean data may demand some overhaul to match process modifications necessitated by the ERP implementation. ERP system may require entry of new data, which never existed on legacy system. As for example, consider the need for all the rules to be made available to the rules compliance engine so that HR subsystem may work fruitfully. Companies are likely to underestimate the cost of these. Consultants: Improper disengagement planning may allow consulting fees to run wild. To avoid this, companies need to identify objectives for which its consulting partners must aim when training internal staff. Company should include metrics in the consultants’ contract; for example, a specific number of the user company’s staff should be able to pass a test similar to what the consultants have to pass to lead an ERP engagement. ERP Team: ERP success depends on staffing the project with the brightest from the business and IT divisions because the software is too complex and the business changes too dramatic. Company must be prepared to replace many of those people when the project is over. Though the ERP market is not as hot as it once was; yet consultancies and other companies will be hounding yours with higher salaries and bonus offers than you can afford or your HR policies permit. Developing a suitable retention program for ERP veterans although may involve expenditure; that is worth that because if you let them go, you may have to hire someone like them as consultants. Tenure of implementation team: Most companies believe that once the ERP system is installed, the team will be scuttled, and everyone will go back to their earlier job. But this seldom happens. Just writing reports to pull information out of the new ERP system will keep the project team busy for a year at least. Having had worked so closely with ERP, the implementers know more about the sales process than the salespeople and more about the manufacturing process than the manufacturing people. Companies can’t afford to send them back into the business because their insight is so much important for deriving benefits from ERP. IT departments sometimes overlook planning for this post-ERP installation activity and including it into the ERP project. Waiting for ROI: The company expects to gain value from the application as soon as it is installed. This does not apply to ERP. Most 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. Post-ERP dip: ERP systems often cause havoc in the companies that install them. In a recent Deloitte Consulting survey of 64 Fortune 500 companies, one in four admitted that they suffered a drop in performance when their ERP system went live. 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.
What follows are some questions, the top management have to ponder and clarify to gain confidence in the decision to go ERP way and to have clarity of expectations from the same. Will ERP fit the ways of our business? Before the implementation begins, it’s critical for companies to figure out if their ways of doing business will fit within a standard ERP package. At that point there are two things they can do: They can change the business process to accommodate the software, which will mean deep changes in long-established ways of doing business and shake up important people’s roles and responsibilities. Or, they can modify the software to fit the process, which will slow By Dr. KSS Kanhaiya, First Published in 2006: Page 8 of 10
down the project and may also introduce bugs into the system. Such software modification can make upgrading the software to the ERP vendor’s next release difficult because the customizations will need to be rewritten to fit with the new version. How much will the payback from ERP be? Don’t expect ERP to revolutionize your business. Its contribution is optimizing the way things are done internally rather than with customers or suppliers. If ambition of ERP has the focus on to bring improvements to the ways of company’s doing business, it will bring more value than if the project is treated as a simple systems replacement. And since ERP affects mostly the existing back office processes such as order management rather than creating new revenue opportunities, the bottom-line value may not be much. Veterans say ERP is more a cost of doing business to make the company operate more efficiently than something that offers dramatic payback. Why do ERP projects fail? ERP is a set of best practices for performing the various duties in the company departments. To get the most from the software, you have to get people inside company to adopt the work methods outlined in the software. If the people in the different departments don’t agree that the work methods embedded in the software are better than the ones they currently use, they resist using the software or want IT to change the software to match the ways they currently do things. IT gets bogged down in long, expensive customization efforts to modify the ERP software to fit with existing business practices. Customizations make the software more unstable and harder to maintain. Because ERP covers so much of what a business does, failure in the software can prove costly. This is where ERP projects break down. But few big companies can avoid customizing ERP because 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. Getting people inside your company to use the software to improve the ways they do their jobs is by far the harder challenge. If people in your company are resistant to change and your HR intervention efforts to gain acceptance are suboptimal, then your ERP project is more likely to fail. How difficult is it to upgrade ERP software? It’s extremely difficult, unless you are one of the rare companies that did not tinker with the system while installing it. How does ERP fit with e-commerce? ERP vendors were not prepared for e-commerce. ERP assumes that the only people handling information will be your employees, who are highly trained and comfortable with the tech jargon embedded in the software. But now customers and suppliers are demanding access to the same information your employees get through the ERP system—things such as order status, inventory levels and invoice reconciliation—except they want to get all this information simply, without all the ERP software jargon, through your website. E-commerce means IT departments need to build two new channels of access into ERP systems; one for customers (known as b2c -- business-to-consumer) and one for suppliers and partners (b2b -- business-to-business). These two audiences want two different types of information from your ERP system. Can I use ERP to manage entire network of suppliers? ERP was designed at a time when process management was an internal affair. The systems have lagged behind the growth of globalization and offshore outsourcing of manufacturing. When most U.S. manufacturing was still mostly local, companies could link their ERP systems through expensive electronic data interchange (EDI) connections. But EDI links never penetrated much beyond a manufacturer’s top tier of suppliers, due to the cost of installing and managing the links at the supplier. In India still even an Internet connection is By Dr. KSS Kanhaiya, First Published in 2006: Page 9 of 10
often a luxury for low-end suppliers. The market for managing the core ERP information (orders, inventory, etc.) of the “extended supply chain” is only now beginning to emerge. Will ERP fix integration problems? ERP was designed to solve integration problems, but developers who believe they are modeling an entire business in software don’t spend much time thinking about how that system will connect with other systems. The vendors created proprietary methods of connecting their systems with others, which have improved over the years, but the architecture of these systems, in a broad sense, has been monolithic, highly integrated and difficult to change. The final blow to the original enterprise software architecture model came in 2004 when major enterprise software vendors announced that they were offering packages of integration middleware. It acknowledges the reality that integration happens best outside of specific software applications, not inside them. Conclusion The migration from legacy system to ERP is a very serious business and requires high level of involvement from top management. The shift should be taken as a strategic decision rather than cosmetic change. Risk, reward and costs involved are high and expectations from the shift should be rationally optimal rather than what the consultants say. Change management and training aspects need special attention and should be taken up before, during and after the project implementation. ***************
By Dr. KSS Kanhaiya, First Published in 2006: Page 10 of 10
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