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ERP Guide : Benefits from ERP

Tutorial by:      Date: 2016-04-11 03:47:45

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The two main characteristics of ERP, data integration and support for best practice processes, can
potentially lead to several advantages for business management and operations. Below an overview is
presented of answers that managers give when they are asked for the reasons for their ERP implementation.
he overview is based on research by Bagranof & Brewer (2003), Duplaga & Astani (2003), Lee (1998),
Markus & Tanis (2000), and Shang & Seddon (2002). hese authors carried out interviews and case
studies in organisations that planned to implemented ERP, but had not yet started their implementation.

Firstly, the managers give reasons that result from the data integration characteristic of ERP. With ERP, one
standardised source of information is created. he eiciency of data gathering can be improved: obsolete
administrations and registrations can be abolished, and it becomes simpler to guarantee the timeliness
and completeness of the data. he efectiveness of decision making can also be improved: because of
a higher quality of the underlying data, a better understanding of the organisation’s management and
operations is created, and therefore a better foundation for decision making. Another important reason
for the start of an ERP implementation is improved cohesion in the internal processes: when departments
start using each others’ data, they get a better awareness of the importance of their work for other parts
of the organisation, which creates higher synergies between departments. Moreover, data integration
is oten seen as an important requirement for so-called supply chain integration, a form of far-reaching
cooperation in the supply chain which aims to create synergies not only within an organisation, but also
between organisations. ERP ofers the capability to create data integration with customers, suppliers and
other parties, and can therefore be the basis for supply chain integration.
Secondly, organisations select ERP systems because of their support for best practices. Many organisations
use their ERP implementation as a starting point for a redesign of their business processes. his business
process redesign (or: BPR) can lead to improvement of existing processes, or to completely new ways
of working.
As an example: companies expect ERP to speed up processes and reduce processing times. Reduced
processing times result in a number of clear advantages for business management and operations. Service
to customers improves when customer orders can be shipped faster; this provides an opportunity for
increased customer satisfaction. Moreover, faster processing of production orders improves the usages
of manufacturing capacity; this improves productivity. Reduced processing times also ofer inancial
beneits: when inished products or work in process inventory stays shorter within the organisation,
less working capital is required. Less working capital means that cash can be used for other purposes or
that less interest needs to be paid.
In addition to faster processes, companies want to create better processes or realise process innovation by
an ERP implementation. ERP systems oten ofer several options for the design of a process. As an example:
for a production planning process, most ERP systems ofer several alternatives. he simplest option is
manual order planning. A bit more complex is planning with the well-known Material Requirements
Planning (or: MRP) technique: the planner enters the orders that need to be produced, and the ERP
system calculates the required raw materials. Some ERP systems can plan automatically on the basis
of preferred delivery dates of customers, or calculate production plans that optimise machine capacity
usage. An organisation that implements ERP can select those best practices that best it its business
management and operations.

Other reasons that managers mention as the background for their decision to implement ERP are oten
more related to shortcomings of existing computer systems than to the two main ERP characteristics. ERP
has been a solution for Millennium problems for many organisation in the late 1990s; this is no longer
a valid reason today, but in many cases they still use ERP. Another reason for an ERP implementation
can be reaping the beneits of a modern IT architecture; here, ERP can of course be helpful, but it is
certainly not the only solution.

he research described above paints a positive picture of ERP. An ERP implementation requires a
substantial investment, will take several years and may exceed its budget. However, once the
implementation barrier has been taken, companies are positive about their ERP implementation and
experience the implementation as a success. From a inancial point of view, the implementation starts
to pay out ater three years: the company’s productivity increases, as well as its proitability compared
to similar companies hat have not adopted ERP.

ERP horror stories

Theoretically, the ERP characteristics data integration and support for best practices can be beneicial
for organisations that implement ERP, and indings of academic empirical research on ERP support the
theoretical beneits. However, there are also ERP horror stories, examples of ERP implementations that
cost more than ever expected and even endangered the continuity of the organisation that attempted
to implement ERP.

A well-known horror story concerns the large multinational pharmaceutical company Fox Meyer Drugs.
With an annual revenue of around ive billion US$ this was one of the ive largest companies in its industry
in the US. In 1993, Fox Meyer Drugs decided to implement an ERP system, as the company experienced
rapid growth and the existing systems could not handle the increasing numbers of transactions.

The project was carried out under high time pressure with the support of the company’s top management.
he shop loor, however, did not support the project, for fear of the loss of jobs that might be a result of
standardised and more eicient processes. When the ERP system went live under high pressure, it could
only handle ten thousand of the required forty-two thousand transactions per day. he failure to handle
transactions eventually led to the bankruptcy of Fox Meyer Drugs in 1996 [Scott 1999].

The ERP implementation at Dell in the mid 1990s also did not progress according to plan. Ater two years
of adaptations to the standard ERP system, CIO Jerry Gregoire decided to terminate the implementation
project. In these years, Dell had introduced a revolutionary business model of direct distribution to
customers via the Internet, without the dealer network that was customary in the industry at that time.
ERP is based on the use of best practice processes, while Dell developed company-speciic innovative
processes. For Dell, ERP was therefore not the right strategic choice. In the words of the CIO:

“I pray that our competitors are successful in their large ERP implementations – then we will drive them crazy with
customer innovations using our own technology. Our competitors will ind themselves vendor dependent for
these innovations”.

ERP horror stories also occur in Europe. Hagemeyer was a Dutch listed trading company that was
founded in 1900 by the Hagemeijer brothers [Sluyterman, 2001]. At the company’s centennial in 2000
the company changed direction: the company wanted to focus on business-to-business markets and
supported the new strategic direction by a world-wide ERP implementation [Hagemeyer, 2001]. Ater
initial successful go-lives in various countries, the implementation in the largest market, the UK, did not
work out. Insight into inventory positions was lacking because the information in the integrated ERP
system was unreliable, which for a trading company of course is an untenable situation. he company’s
revenue shrank with 34 percent in four years [Hagemeyer, 2005], and the company had to write of at
least one hundred million Euro of its ERP investment. In 2004 bankruptcy could only just be avoided.
A new CEO was appointed, the company deviated from the new strategy, but it was only in 2006 that it
became proitable again. his was too late to guarantee the independent future of the company: in 2007
Hagemeyer was acquired by its long-time competitor, the French company Rexel [Sneller & Bots, 2009].

Hagemeyer is not unique in he Netherlands. A few examples of companies that also had to write of
tens of millions of their ERP investments are Wessanen [Wessanen, 2003], KLM [FD, 1999] and Vopak
[Vopak, 2002]. Oice furniture manufacturer Samas had to issue extra shares in 2007 when its ERP
implementation failed; on the day that the public ofering of the new shares was announced, the Samas
share lost twelve percent of its value [FD, 2007]. In other countries ERP is not always successful either:
in 2004 the Belgian company D’Ieteren had to accept a write-of of forty-ive million Euro of the ERP
investment of its subsidiary Avis [Tijd, 2004].

SPEER – ERP project at the Dutch Ministry of Defence. Source: Parliamentary Documentation

Horror stories do not exclusively take place in the private sector. he ERP implementation at the Dutch
Ministry of Defence has sadly become a famous case. he implementation of ERP started in 2004,
and initially, the project was estimated to require an investment of 188 million Euro [Tweede Kamer,
2004]. In 2006, the minister had to announce a revision of the ERP project. As the revision showed
that a considerable extra investment of sixty million Euro was required, and that the completion of the
implementation project had to be postponed with three years, the Dutch parliament demanded progress
reports twice a year for the project [Tweede Kamer, 2006]. In below picture key numbers from these progress
reports have been summarised.

On the horizontal axis ofbelow picture the years are given in which the total investment requirement and the
planned completion of the project are projected. On the vertical axis, the projected year of completion is
given. he circles indicate the size of the required investment. he igure shows that in 2004 a required
investment of 188 million Euro was estimated, with a planned project completion year of 2010. he
most recent estimate in 2013 projects a considerably higher investment of 495 million Euro, as well as
a considerably later completion year of 2014 [Tweede Kamer, 2013].

The above horror stories have news value and therefore attract attention of the press. Probably, there
have been overwhelmingly more smooth ERP implementations than horror stories; these, however,
are less interesting from a journalist’s point of view. Nevertheless, the horror stories show that an ERP
implementation should not be started lightly. ERP implementations are complex, and they involve
inancial, operational and reputation risks. No organisation wants to be the next ERP horror story.

 

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