Frequently Asked Questions
How can ERP improve a company's business performance?
ERP’s best hope for demonstrating value is as a sort of battering ram for improving the way your company takes a customer order and processes that into an invoice and revenue—otherwise known as the order fulfillment process. That is why ERP is often referred to as back-office software. It doesn’t handle the up-front selling process (although most ERP vendors have recently developed CRM software to do this); rather, ERP takes a customer order and provides a software road map for automating the different steps along the path to fulfilling the order.
When a customer service representative enters a customer order into an ERP system, he has all the information necessary to complete the order (the customer’s credit rating and order history from the finance module, the company’s inventory levels from the warehouse module and the shipping dock’s trucking schedule from the logistics module, for example).
People in these different departments all see the same information and can update it. When one department finishes with the order it is automatically routed via the ERP system to the next department. To find out where the order is at any point, you need only log in to the ERP system to track it down.
With luck, the order process moves like a bolt of lightning through the organization, and customers get their orders faster and with fewer errors than before. ERP can apply that same magic to the other major business processes, such as employee benefits or financial reporting.
People don’t like to change, and ERP asks them to change how they do their jobs. That is why the value of ERP is so hard to pin down. The software is less important than the changes companies make in the ways they do business. If you use ERP to improve the ways your people take orders and manufacture, ship and bill for goods, you will see value from the software.
If you simply install the software without trying to improve the ways people do their jobs, you may not see any value at all—indeed, the new software could slow you down by simply replacing the old software that everyone knew with new software that no one does.
How long will an ERP project take?
Companies that install ERP do not have an easy time of it. Don’t be fooled when ERP vendors tell you about a three- or six-month average implementation time. Those short (that’s right, six months is short) implementations all have a catch of one kind or another: The company was small, or the implementation was limited to a small area of the company, or the company used only the financial pieces of the ERP system (in which case the ERP system is nothing more than a very expensive accounting system).
To do ERP right, the ways you do business will need to change and the ways people do their jobs will need to change too. And that kind of change doesn’t come without pain. Unless, of course, your ways of doing business are working extremely well (orders all shipped on time, productivity higher than all your competitors, customers completely satisfied), in which case there is no reason to even consider ERP.
The important thing is not to focus on how long it will take—real transformational ERP efforts usually run between one and three years, on average—but rather to understand why you need it and how you will use it to improve your business.
Will ERP fit the ways I do business?
Before the checks are signed and the implementation begins, it’s critical for companies to figure out if their ways of doing business will fit within a standard ERP package. The most common reason that companies walk away from multimillion-dollar ERP projects is that they discover the software does not support one of their important business processes.
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 (that often provide competitive advantage) and shake up important people’s roles and responsibilities (something that few companies have the stomach for). Or they can modify the software to fit the process, which will slow down the project, introduce dangerous bugs into the system and make upgrading the software to the ERP vendor’s next release excruciatingly difficult because the customizations will need to be torn apart and rewritten to fit with the new version.
Needless to say, the move to ERP is a project of breathtaking scope, and the price tags on the front end are enough to make the most placid CFO a little twitchy. In addition to budgeting for software costs, financial executives should plan to write checks to cover consulting, process rework, integration testing and a long laundry list of other expenses before the benefits of ERP start to manifest themselves
Underestimating the price of teaching users their new job processes can lead to a rude shock down the line, and so can failure to consider data warehouse integration requirements and the cost of extra software to duplicate the old report formats. A few oversights in the budgeting and planning stage can send ERP costs spiraling out of control faster than oversights in planning almost any other information system undertaking.
What does ERP really cost?
There aren’t any good numbers to predict ERP costs because the software installation has so many variables, such as: the number of divisions it will serve, the number of modules installed, the amount of integration that will be required with existing systems, the readiness of the company to change and the ambition of the project—if the project is truly meant to be a battering ram for reengineering how the company does its most important work, the project will cost much more and take much longer than one in which ERP is simply replacing an old transaction system.
There is a sketchy rule of thumb that experts have used for years to predict ERP installation costs, which is that the installation will cost about six times as much as the software license. But this has become increasingly less relevant as the market for ERP has slowed over time and vendors have offered deep discounts on the software up front.
When will I get payback from ERP—and how much will it be?
Don’t expect to revolutionize your business with ERP. Its contribution is optimizing the way things are done internally rather than with customers, suppliers or partners. Again, value depends on ambition. If ERP is the focus of an effort to bring dramatic improvements to the way a company does business, it will bring more value than if the project is treated as a simple systems replacement. And even if ERP does bring dramatic change, because it affects mostly 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. And most veterans say it takes six months or more to get the new systems and processes running up to snuff. A Meta Group study of 63 companies a few years ago found that it took eight months after the new system was in (31 months total) to see any benefits. The median annual savings from the new ERP system were $1.6 million—pretty modest, considering that ERP projects at big companies can cost $50 million or more.
Why do ERP projects fail so often?
At its simplest level, ERP is a set of best practices for performing the various duties in the departments of your company, including in finance, manufacturing and the warehouse. To get the most from the software, you have to get people inside your company to adopt the work methods outlined in the software. If the people in the different departments that will use ERP don’t agree that the work methods embedded in the software are better than the ones they currently use, they will resist using the software or will want IT to change the software to match the ways they currently do things. This is where ERP projects break down.
Political fights erupt over how—or even whether—the software will be installed. IT gets bogged down in long, expensive customization efforts to modify the ERP software to fit with powerful business barons’ wishes. Customizations make the software more unstable and harder to maintain when it finally does come to life. The horror stories you hear in the press about ERP can usually be traced to the changes the company made in the core ERP software to fit its own work methods. Because ERP covers so much of what a business does, a failure in the software can bring a company to a halt, literally.
But IT can fix the bugs pretty quickly in most cases, and besides, few big companies can avoid customizing ERP in some fashion—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. It’s not. Getting people inside your company to use the software to improve the ways they do their jobs is by far the harder challenge. If your company is resistant to change, then your ERP project is more likely to fail.
How do I configure ERP software?
Even if a company installs ERP software for the so-called right reasons and everyone can agree on the optimal definition of a customer, the inherent difficulties of implementing something as complex as ERP is like, well, teaching an elephant to do the hootchy-kootchy. The packages are built from database tables, thousands of them, that IS programmers and end users must set to match their business processes; each table has a decision "switch" that leads the software down one decision path or another.
By presenting only one way for the company to do each task—say, run the payroll or close the books—a company’s individual operating units and far-flung divisions are integrated under one system. But figuring out precisely how to set all the switches in the tables requires a deep understanding of the existing processes being used to operate the business. As the table settings are decided, these business processes are reengineered, ERP’s way. Most ERP systems are preconfigured for most of the major processes, however, allowing just hundreds—rather than thousands—of procedural settings to be made by the customer.
Can I use ERP to manage a network of foreign suppliers?
ERP was designed at a time when process management was an internal affair. The systems have lagged behind the explosi 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 (and ERP systems themselves) never penetrated much beyond a manufacturer’s top tier (read biggest, richest) of suppliers, due to the cost of installing and managing the links at the supplier. In third-world manufacturing destinations, even an Internet connection is often a luxury. The market for managing the core ERP information (orders, inventory, etc.) of the “extended supply chain,” is only now beginning to emerge.
What is the hardware requirement for ERP?
Being a high end, mission critical application that should scale exceptionally well to address the needs of corporate giants (with even 100 Billion USD annual business), ERP software today are the most demanding software pieces in terms of hardware requirements. Typical RAM sizes would be at least 1GB and several GB of RAM would be needed for larger installations. The disk size requirements would be equally very large often running into several dozens of GB - typically about 100 GB of disk space is needed by ERP software. The mission-critical nature of the application demands several log files to be maintained forcing larger disk sizes. Once again the large disks must be high-speed & "highly available" by way of redundancy measures such as RAID.
Do we get best business practices through ERP?
The answer to this question is Yes and No. ERP software like SAP R/3 or RAMCO Marshal has the benefit of understanding the best practices followed in thousands of corporations worldwide, where the particular ERP software has been implemented. In a sense, ERP software embeds these best practices inside their software. This explains the Yes part of the answer. One reason why end users pay an exorbitant amount to buy ERP software is the fact that ERP is not just a piece of "shrink wrapped" software. The embedded business processes inside provide the real value to the ERP software. So, ERP can bring "best of the breed" practices to any organization. However, the onus of profiting through these best practices entirely lies on the end users. An organization suffering from " Not invented here" syndrome may do too much over customization and build into ERP implementation the archaic practices followed for decades in a specific company. This in turn may deprive the benefits of the best practices to that company. This explains the No part of the answer. {For core Business Processes it may be the best to follow the best business practices of the ERP vendor, but there is always a percentage of customization required for any ERP implementation. The ability of the ERP to extend easily is a critical factor to evaluate.}
What are the typical modules of ERP?
Typical Modules of ERP include sales (sales forecasting, customer prospecting, customer follow-up, support for telemarketing, database marketing), order processing (inquiry handling, order taking) shipping, transportation, invoicing, finance (G/L, AR, AP), asset management, cost accounting, financial accounting, manufacturing and materials management. Optionally quality project, warehouse, continuos production and other modules are also present in different ERP software. Industry specific modules to cater to hospitals, retail, banking, insurance, oil, shipping and transportation are also available from some vendors.
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