ERP - Where is the Snow Ball Rolling?

 

by: Eli Schragenheim & Moshe Yerushalmy

ERP systems are the last word in the management of large organizations. The use of systems which combine all the data banks of the organization, was started in the industry and is quickly spreading to different organizations, large or medium sized.

ERP, Enterprise Resource Planning, is a super-system which is based on a central data bank. The ERP does away with a situation which needs different systems - for the management of the production floor, finances, marketing, distribution and purchasing - and where it is necessary to create interfaces which will make them relate to each other. Many organizations are interested in technically improving their information systems, thus chasing after ERP. Instead of correcting the old fashioned information systems, many organizations see the proper solution to the problems such as bug 2000, in introducing the novel ERP systems, while achieving a higher technical ability. The benefit to the organization is explained by the ability to support many users, and enable them to achieve any datum, at the proper level of classification, relatively easily.

The benefit is found at the technical level of the data systems. Maintenance of different data bases means that the same datum may appear in different places, and may even be of different values. This situation may occur when the datum is fed into different software and under other circumstances. The different values may result from mistakes or different interpretations of the same datum. The duration of an action, for example, may be defined in one place as about 10.14 seconds, and in another place it will be rounded off to 10 seconds. The calculations of the averages may be different in different software, according to different definitions of the data and extent of weight which result from the calculations. The unification of the data bases enables a quicker and more reliable updating. The system also forces the organization to decide who will be in charge of introducing the data and the parameters of all software.

ERP systems are relatively new, hence more efficient than other older systems. The intensified technical capability also enables them to manage a larger quantity of data and to perform more sophisticated data processing. In view of the rapid development of the markets and the increase in the number of the products and the various raw material, the new system promises durability when facing a significant increase in the level of the activity in the company. The primary advantage of the transition to ERP system lies, then, in the comfort, velocity, in the capability to deal with enormous quantities of data, and, of course, in the credibility of the modern as compared to the old .

However ERP systems enable us to get much more than technical improvement, as important as it may be. In investing a lot of thought, it is possible to get a substantial benefit in the way the organization is managed. The ERP is a comprehensive system, hence presenting opportunities to check and change the central processes of the organization. Being an integrated system, ERP also presents every manager with information about interfaces among the different functions, which might be influenced by his decisions. This way it is possible to reach better business deals.

There is, of course a connection between those two advantages. There can be only one true advantage for the organization: the extended improvement of the organization's business results. The change of the system with the purpose of bringing technical improvement in the information system, may prevent future problems, but does not open a gate for new opportunities. Those appear only at the level of the functioning of management ability, improvement of procedures, etc. In order to apply these, there is sometimes a need for a technical improvement of the information systems.

 

Which Achievements Can Be Reached Through an Intelligent Application of ERP?

One of the obstacles along the way to the success of any organization in reaching its aims is the lack of a systemic view of most of the middle management, sometimes even that of senior managers. All the modern management approaches have noticed the large number of problems in the interfaces among the organizational functions. The fact that each organizational function focuses only on its role, brings the whole organization to a situation in which it does not realize its potential. One of the most problematic interfaces in the industrial organizations is between marketing , sales and production. Marketing often complains about the slowness of production's response to the market's demands, while production criticizes the lack of credibility of marketing forecasts, the unreal supply demands, and the lack of planning ability in order to exploit the resources of production for a length of time.

Integrated knowledge can help to achieve a better general functioning of the organization as one system, on condition that the manager has the knowledge and the understanding of the new information. A sales manager with a good understanding of the testing of the load level of the production floor and its priorities, will be able, for example, to reach a sound decision about the timing of the sales campaigns. Moreover: connections with the financial system of the organization, can translate the sales forecast into a cash-flow forecast, thus adding a layer to the decision of the sales campaign's timing. When we add the needed purchase of raw materials to the equation, we will get an additional feedback about possible failures in the decision of sales campaigns.

Marketing decisions which have a long term significance are also related to other systems in the organization. The decision about the positioning of certain product is related to and depends on the designing capability of the product, and on the capability of its production to stand up to the quantities and to the level of quality and finish according to the marketing decisions. The financial meaning of the decision involves both the marketing forecasts, and the magnitude of the resources needed. The information needed for this kind of decision, is to be partly found in the information system of the organization, but is also scattered among different systems. There is, of course, also important and necessary information which does not exist in the computerized systems, but only in the heads of some people in the organization. This kind of information can be expressed in systemic decisions, only when there is wide understanding about the functioning of the organizational system as a whole.

In the computers' world there is usually a separation between support of the regular activities of an organization, (transactions), and between the support needed for managerial decisions. One of the basic key processes which always executed in every organization, and enable it to function is the process which ensures the supply of the product to the customers is one of the key processes in any organization. In broader terms it is called the supply chain. True, the name also relates to the suppliers of the organization and to the suppliers of the suppliers, but for our purposes we will concentrate on a section of the process which exists in the specific organization.

In order to describe the process we will start with the action of selling to the customer. The action of selling must be documented, meaning the information about this specific client who committed himself to the purchase of a number of items for a certain sum of money must be documented. Generally the plant commits itself to providing the items on a due date. If the plant works according to a process of production for stock, or by forecast, then the information about the sale must arrive at the warehouse for completed products, with the purpose of sending the client the merchandise he had asked for. When the delivery is performed, a report about the decrease in the stock or data for a revaluation of the sales forecast will be sent. Those transactions of information will feed additional processes, such as the decisions of production of items and decisions about the purchase of raw material.
Many plants work under a policy of production by order, which implies an organized chain of information - transactions of information which feed actions in the different functions of the organization. One process produces the financial transactions, which start with the sales action, which feeds the production of an invoice, the follow up of the payment, etc. Assuming that the sales action originated from a purchase action, it feeds an additional transaction of information, among the organization and its customers, and between the organization, its suppliers and its workers, at whose end, payment will take place. Those key processes cross the whole organization, and they are based on the passing of information among the different organizational functions. When the information systems are different, it creates a problem of interfaces which results in extreme slowness, mistakes, and even lack of knowledge.
ERP systems claim to comprise all the key processes of the organization under one information roof, meaning, a commitment for a perfect updating of the information through the length and breadth of the organization. On the surface, the value of the ERP system seems clear. If in the present situations there are delays and stammering in the key processes of the organization, in the future the information will be clear at any place and stage of the organization.

The Irony is that the value of the integrative information system can be less than this, and sometimes more, too.

 

Everything is Known but Nothing Understood

In a non-intelligent application of the ERP system, everything is known but nothing understood. The order from the client has been received, but nobody takes responsibility for the supply on time. Production is aware of the order, but the order has been put in a tray with other orders, and they are all waiting together for certain raw material or for a specific machine to become free of its other duties. Briefly, the information exists, but the basic fault in the supply process hasn't been corrected. The fact that the information is available, as we see, does not always mean the working process will become smarter or more efficient.

An ERP system with a management with a high level of understanding can give the organization much more than the strengthening of the existing process through a better availability of information and higher credibility. When faced by the availability of the information, the process can be redesigned. In the past the organization has been producing according to an assumed forecast, since the exact needs of the customers couldn't be guessed. In the new process they can produce directly to order, and still honor the supply dates, as long as the production floor has sufficient capacity to respond swiftly. In certain cases, when it looks as if there could be a capacity problem, another decision could be made, one based on profound knowledge, combined with the relevant information, and producing a controlled quantity for the stock, in order to survive the load height of the pressure. The purchasing processes will demand that the operating process be more efficient, hence availability of information.

With intelligent application we can achieve far reaching business results. But the organization is required to do more than change the information system, the processes must also change, especially the thinking of the managers, and even of the workers of the organization.

 

What is the Value of the Information?

The value of the information depends on the level of knowledge of the consumers of the information, and on their cultural norms regarding its possible use. It sounds obvious, but the basic assumption behind most of ERP applications, is that as available information, it has intelligent applications. We think this assumption is wrong.
Let us assume, for example, that the sales department is negotiating with a marketing chain about a month of the product x, in which the items will be sold at a large discount, a fact which will double sales of x during this particular month. The availability of the productional information theoretically enables the manager of the sales department to check the availability of the raw materials for the production of x, and the levels of load on the machines. In a similar way the production manager can have information about dealings with the marketing chain about item x. Will this manager bother to check the projections that his decisions will have on the system? Is the sales manager aware of the possibility that the campaign of product x will cause shortage in product y in the same period? Will the production manager make an effort to check the negotiations periodically in order to raise the alarm on time about possible problems?

 

Does the Production Manager See it as Part of his Duty?

Let us again assume that fulfilling the campaign requires activating a special night shift, at an exceptionally high cost. Does the availability of the information cause the company's accountant to realize on time that the sales department is working on a campaign that may cause financial loss to the entire company?
Two different problems stand before the actual use of the availability of the information. The first one is that the sales manager does not possess enough knowledge to understand the industrial information to which he is being exposed. The second - there is no clear interest to do so - as such an inspection isn't viewed in the organization as part of the definition of his job. The emphasis here is on the word perception of the job definition, and not the formal definition which may embody such a requirement. If in reality the sales manager is not seen as responsible for a demand that does not suit the needs of production or purchasing, it is difficult to expect him to do it out of his own initiative. Under these conditions, the availability of the information is worthless.

 

How to Deal with both Problems?

The solution for the first problem is, of course, instruction about both the significance that information from another department may hold, and about the creation of an infrastructure for systemic structured thinking. This solution is actually a partial answer to the second problem, which deals with the organizational culture, too . In reality, we are talking , here, about a move which is meant to re-design, or at least re-think central processes in the organization, the company's policy regarding every organizational function, rules of decision making which influence the whole organization and the information which will support those procedures and decisions. This kind of process of managerial change, needs the support of suitable managerial knowledge in order to help in the change in the managerial culture. The aim of promoting the organization's purpose through rethinking the processes and the decision making, so that they take into account the system's functioning, is in close contact with the application of integrative information systems which support the change itself. Actually, these are two processes bound together. Through one process we try to introduce, into the organization, knowledge and a culture of comprehensive systemic thinking, while adjusting the central processes of the organization to the era of the integrative coordinated activity. This process necessitates managerial thinking and instruction at the various levels of management. In the second process, we apply an integrative information system, that will be able to support the new integrative key processes, as well as the decision making processes at the different levels within the organization.

 

The Managerial Aspect

Many applications of the ERP do not take into account the managerial aspect. Without managerial thinking the project will grow over and above the true needs of the organization. Because of the novelty of the new systems, there is always the temptation to increase the application and to add data and options which are hardly related, if related at all, to the future activity of the organization. This way the system keeps growing until it is out of control. The greatest disadvantage of the ERP is the multiple options it presents to the confused customer. Today's managerial understanding claims that superfluous options in the information system actually are a curse for the future. Univercities studies found out that superfluous information is like superfluous stock and causes similar damages. New managerial approaches did manage to increase a high awareness of the damages that excess stock may cause. However, the damage that superfluous options and unnecessary data in the system can cause, have still not penetrated the consciousness of many managers.

Although, it looks as if those two processes may be separated. When faced by the pressure to change the existing systems with novel ERP systems, it seems as if it is possible to apply the information system first, and only later prepare managerial functions for the new era. Such an attitude may cause more damage than an unfocused project, which goes on beyond the original planning and ends with a huge, frightening system. ERP systems have a characteristic which endangers the separation of processes. Theoretically, ERP system enable great flexibility in the direction of the organizational processes and methods of data processing. Most of the novel systems enable "customizing" the information systems according to the managerial needs of the specific organization. This enormous flexibility creates the hope that after application, the system can be regulated again. Wrong. The moment the ERP system starts working, it is almost impossible to make real alterations . In other words, the decisions about the functioning of the ERP system, will remain valid up to its being replaced by another, more novel, system . The enormous flexibility is just a bluff. It exists only at the beginning of the way, and there is no turning back.

 

Three Stages for the Application of ERP

One of the most popular models for the application of ERP includes three main stages. The first one, the planning and designing of the future system, and the description of the way the organization will function with the system. The second stage is the application, and the third one comprises the tests and the first runs, up until a steady, working system.

In view of the fact that it is difficult to make changes in the ERP system, it is obvious that the stages of general planning and designing must be carefully monitored by the management. At this stage we must take into account the capabilities of the new information technologies, and design the functioning of the organization in the future. Another subject that should be discussed during the first stage is the way the managers behave, including the areas of their responsibility and the information they will need for their decision making.

The result in this case will be a project plan which centers on the needs of the organization, combined with the vision of its managers. The outcome is a better application planning, which will completely focus its aims on the application of the project, and mainly, a better understanding of the managers and workers of the company about their future and about the importance of their cooperation in the effort to lead the organization towards a better future.

Many managers are afraid that the planning stage will be too long, and will postpone the application of the information system, which is much needed because of the hardships the existing system finds in withstanding the load. We must remember that when we focus the project according to the managerial vision the whole process may drastically be shortened. The same goes for the process of instructing management: not only will it not lengthen and complicate the process, but it will make it shorter, thanks to the understanding the managers acquire. It will also bring close cooperation between the application team, and the managers at the intermediate level in the organization.

If at the stage of general planning there is still comprehensive and integrative thinking, it disappears at the stage of application, when it is divided into small sections which are dealt with separately. Without suitable instruction and focusing, there is danger of losing integrative thinking, which is the advantage of the ERP systems. Without management stress on seeing the organization as a whole and the information truly needed as a consequence, every local application will raise new demands from the system and will cause the stage to be too prolonged. With managerial thinking and inspection there is a clear connection between any task and the final goal, which is a better functioning of the organization, which uses the availability of the information for the business development of the company.

The third stage combines the different parts into one system. Can the organization work with it? Will the organization be able to reach the managerial aims which are the basis of the need for an integrative system?

At this stage it is imperative to continue with the instruction to management in order to reach the main purpose of the organization - the intelligent use of the information system in order to achieve improved business results.

The rush after the ERP poses an alternative the organization faces. The application of a process of change is problematic from any point of view. It is difficult to choose between a change that looks reduced, because it deals only with the technical aspects, and between a strategic change, where the application of the integrative information system is only one step. Understanding the hazards of the application might help in the choice. This danger was spotted by experienced people among the experts of the Gartner Group, the oracles of the information systems, who state that many of the failures in the application of the ERP happened because of a lack of managerial focusing on getting business results. If the purpose of the organization is to improve its business results, all they have to understand is that they have a project in hand which is supposed to combine an information system with a systemic managerial approach.

 

Cost Versus Benefit

The ERP software market is estimated in billions of dollars. The cost for the organizations which apply it, is much higher than the cost of the software. It is estimated that the cost of the software stands around 20% of the general cost of the application of the system in the organization. Were the transition to an ERP system relatively easy, the improvement of the capabilities of the information systems would give certain benefits equal to the investment in the transition itself. However, the investment in the transition to ERP systems is enormous. Actually we are speaking of a change which influences the whole organization. Experts in organizational behavior are aware of the huge amount of energy invested in organizational changes with a much smaller appeal than the transition to ERP. That is the reason why the return of the investment should be carefully inspected. Nobody expects an accurate and exact quantification of the cost against the future benefit, but to take into account, at least, in a qualitative fashion , the many and different components which are influenced by the decision. If on the side of the investment an analysis of the immediate expenses can locate software, hardware, outside counseling, and the allotment of the intern team, dedicated solely to the application project, people often forget to take into account the management efforts to promote the project. It is also possible that the transition stage will create operational problems which will harm the organization's customers. Damage to the customers has a real cost, although it is difficult to calculate. When the organization gets to the point of evaluating the benefit from the application of the system, people usually use general, non-committal expressions. Usually a date is set for the beginning of the work with the new system, and this is the only measurement of success. The business benefits for the organization are not formulated, hence are not part of the aim to achieve.

A management that does not try to establish the organization's vision in the era of the ERP, and to see how the organization will be able - in the future - to have financial gains from the move, will not only miss the real benefits, but will leave a bad taste in the organization of much ado about nothing. One of the dangers of focusing on the technical benefits of the novel systems, is that what will remain engraved in the memory of the organization is only the period of the exaggerated hassle If the same managers use exactly the same items of information in the future that they are using today, the marginal benefit of the convenience will decrease with time.