What is it worth to your business (and your bottom line) to lead a workforce that functions as a team, working together to meet and exceed customer expectations on product, delivery, price, and service?
The answer may appear obvious: the business will achieve peak financial performance and it will have enhanced value— both intrinsically, and to potential acquirers. Achieving such a goal, however, can prove elusive.
ERP: Working Together
A business enterprise is a collection of procedures, formal and informal, automated and manual, that combine to form a system for satisfying customer needs. Organizations that seek to streamline this complex system, removing waste and formalizing processes into a collection of articulated best practices achieve the highest possible results.
Software is an important ingredient in this recipe for success but it is important to keep its role in perspective: software provides only the foundation upon which and through which exceptional performance can be achieved.
The textbook definition of Enterprise Resources Planning (ERP) states that it as an expanded effort to standardize recordkeeping that will permit information sharing among different areas of an organization in order to manage the business more effectively and efficiently. More importantly, a successful implementation of ERP formalizes and integrates business processes across the organization, achieving this through a single, integrated information system platform.
ERP: The Value of Vision
To maximize long term returns from ERP, its justification must be incorporated into your vision for the firm. The short term returns on an ERP investment often get the most attention because they are for the most part tangible. We’ll discuss them in more detail shortly, but, in general, they center around better capital and operational efficiencies, improved customer service, and enhanced decision making capabilities. The intangible benefits, however, reward owners by enabling them to continuously transform their business in ways that turn their vision for it into a reality. In the long term this translates into enhanced enterprise value.
To fully realize this enhanced enterprise value, management must integrate the benefits of ERP into their strategic vision. At a high level these include:
- Integrated business processes
- Formalized business processes
- Automated business processes
- Real-time information available within business functions
- Real-time information available across business functions
- Optimized inventory management
- Optimized deployment of human capital
- Accurate and detailed insights into costs
- Insightful access to customer and supplier history
- Rapid response to changing customer requirements
- Flexible and adaptable information systems architecture
ERP: Continuous Implementation
The investment in ERP is ongoing and so are the returns. Remember, the initial investment in the software provides the information system platform upon which the organization’s business processes will be implemented, after they are evaluated and reengineered. Initial and ongoing investments in training, consulting and management’s time integrate technologies with processes to reap the maximize return. It is important not to lose sight of the fact that the software itself, while a critical component, is only the backbone that supports the body of operational processes that achieve your business objectives.
ERP capabilities are normally implemented in a phased approach. Usually core business processes are addressed first. But remember, there are always opportunities for process improvements. These improvements are in response to both the changing business environment in which the firm operates and a management approach that strives to always seek improvements in operational capabilities and performance.
Critical to ERP’s long term success is a clear articulation by senior management that the implementation is ongoing and that it is as much about improving and integrating processes as it is about deploying a single software platform on which the business will function. Defining how this is a part of a larger strategic vision and then communicating this throughout the organization is vital to maximizing ERP’s return on investment.
ERP: Operational Benefits
Let’s consider a few of the operational benefits that can be derived from the implementation of an ERP system.
Inventory Accuracy and Traceability
How important is the accurate and timely fulfillment of customer orders? What are the costs of ensuring this manually and the costs of a mistake?
Combine this with a need to avoid tying up cash in inventory and regulatory or customer requirements to provide traceability capabilities and the challenge is quite daunting. ERP enables firms to quickly and accurately take, process, and fulfill orders of all kinds — not just sales orders — through integrated processes that span multiple functions. Further, it provides the foundation for the deployment of other techniques such as barcoding, lot tracking, and serialization. The resulting inventory accuracy reduces the scope of cycle counting dramatically. It is no longer a means to re-establish quantities on hand, but rather a spot check that validates its accuracy, uncovering processes that may require management’s attention when there is a discrepancy.
How do you know what to purchase, or produce, when, and in what quantities?
The Master Production Scheduling (MPS) and Material Requirements Planning (MRP) modules in an ERP system address these complex questions. Forecasts can drive long term purchasing and production plans for items with long lead times while still taking into account demand that has already been booked and netting against time phased supply. The result is an organization in which all departments are working together to address a common sales, purchasing, and production plan that satisfies customer requirements while reducing the investment in inventory required to do so.
Appropriate Product Pricing
If a price changes on a purchased component do you know immediately how that will impact the cost of all saleable products for which it is a component? These are fundamental questions addressed by an ERP system.
Bills Of Operation (BOOs) that define production costs and Bills Of Material (BOMs) that define the purchased and subassembly components from which it is produced, roll up to define a product’s cost. A change in either of these or a purchased component’s cost can have a ripple effect across a product line. The ability to immediately see this impact is fundamental to management’s ability to determine a products margin and their ability to make informed pricing decisions.
Access to Market Intelligence
The past informs the future. ERP makes available real time access to sales bookings and history that is critical to sound marketing decisions. Comprehensive and flexible analysis tools and reports that paint an complete picture of sales performance enables management to wisely invest marketing dollars, define product mix, and develop accurate forecasts that will drive the production and purchasing plans.
Streamlined Process Flows
How can an organization respond faster to customers and reduce cycle times?
One way is visibility across departments when an action in one impacts others. This is only possible when there is an operational platform that is common to all. ERP is that common operational platform. For example, the booking of an order in the sales department can result immediately in the creation of a work order in manufacturing through a business event. Likewise, shipping also sees this event. Both can incorporate it into their work plan. Questions can be addressed immediately before a situation arises that might have a negative impact on customer service. The result is an increase in the speed at which an organization can fulfill customer requirements.
ERP: Demonstrated Value
Companies that implement ERP do so for a variety of reasons. Many share overlapping results but in almost every case there are both short term and long term justifications and benefits.
Brenda Jameson of Richart Distributors, a manufacturer of the Flomore line of pumps and accessories for the oil industry, explains it this way:
We realized immediate benefits in individual areas such as an improvement in our ability to manage accounts receivable and to be proactive in planning for purchasing and manufacturing. But, our implementation also positioned us for the long term and the tremendous growth we are now experiencing.
Mark Lindberg, Operations Manager for Admotec, Inc., manufacturer of advanced technology motion and positioning sensors, echoes these ideas in his approach to ERP and its benefits.
The biggest short term benefit for a small firm is discipline.
Like Richart, Admotec’s outstanding customer service and unique product capabilities have combined to fuel rapid growth. Mark’s long term view has also guided his approach:
Implementing ERP in a small company forces you to do things in ways that will eventually be required as the firm grows and workflows must be integrated across departments. Growth means that individuals can no longer wear so many hats. Having a system in place that accommodates this makes the transition much easier.
Both firms have demonstrated a proactive approach to implementing business systems that provide immediate and tangible benefits while positioning them well for the future. ERP is the cornerstone to that approach.
ERP: Tying it All Together
When evaluating ERP and the value it represents, whether your perspective is that of a firm that is already implemented and planning to roll out additional capabilities, or, it is that of a firm that is embarking on an initial implementation, it is important to keep in mind that the benefits accrue both tangibly in the short term and through enhanced enterprise value realized over the long term.
For the latter, put yourself in the position of an outsider, perhaps a customer or potential acquirer, who is visiting your firm on a site visit several years from now. Will they be impressed by the tight procedures you have in place to handle day-to-day operations in a fast and accurate manner? Will they see tight integration and information sharing within and between departments? Will they note that you have a solid information systems platform that enables process and functional integration and through which you can embrace future growth opportunities?
If the vision you articulate includes a successful ERP implementation — that will enable you to shine during this future site visit, then you are on your way to increasing the underlying value of your firm.