Is it Time to Replace Your ERP System? A Whitepaper Report
Dave Turbide, CFPIM, CIRM, CSCP, CMfgE Production Solutions April 2013
Overview Replacing an ERP system is a major business decision, and a major commitment of time and resources, so there has to be good reason to even consider it. On the other hand, an outdated or dysfunctional system can be a severe inhibitor to business success, so replacement can be an essential business move. At some point, perhaps many times, every company will find itself in the position of trying to decide whether to replace their existing system or continue with the system they already have. Once the decision has been made to pursue a replacement project, a cost justification – a return‐on‐investment (ROI) analysis – gives management a clearer picture of the costs and benefits. But that happens after the initial decision. The question at hand is what can or should trigger that initial move – the basic decision to stick with the current system or look at replacing it. Companies decide to undergo a system replacement project for many different reasons, some valid, other not so much. Usually, the reason can be boiled down to one or more of the following:
Visible problems with the current system Business needs that the system cannot support The company has outgrown the system’s capabilities An inability to get the information needed to support operations
We’ll explore some of the most common situations in the following four sections. The presence of any of these conditions is a definite indicator that your current system is inhibiting business success and growth, and positive and immediate action is required.
Dysfunctional Current System Sometimes it’s as plain as the nose on your face but often it is a lot more subtle. Users might be frustrated that the system simply doesn’t do what they need done. Slow response time adds to user dissatisfaction. Spreadsheets abound – a clear sign that the system is not being used effectively, probably because it just can’t do the job. Lots of “workarounds” are needed to overcome system limitations. A proliferation of add‐on third‐party programs is another indicator of limited functionality in the ERP system. Often, the system was adequate when first installed but the business has changed (and the world has changed) such that there are now missing or inadequate functions that are inhibiting your business. 1
Whether the system is performing needed functions adequately or not, it could be that either the hardware or the software is no longer supported or only supported with great inconvenience or high cost. This sometimes happens when the system developer is struggling to stay in business or has been acquired by a larger organization that is focused on other products and would rather that users of your system migrate to their flagship offerings. Some of these difficulties are obvious – you encounter them every day – while others may just be viewed as “the way things are” – and that’s the most dangerous kind. If you are not acutely aware of the problem, you might just ignore it while system limitations hamper the effective operation of your business or limit its growth. Even if things seem to be going well with your current system – perhaps especially if you are comfortable with the status quo – a periodic review of system function and adequacy would be a good business practice. You may find that things are, indeed, okay. But you may discover serious shortcomings that will have a financial impact on company operations in the near future. This is your opportunity to be proactive and address these shortcomings before business is severely impacted. Proceed to the next step and complete a system selection and ROI analysis.
Unmet Business Needs Do your competitors provide superior customer service? Are they able to deliver equivalent products and services at a lower price or achieve higher margins because their business is better managed? Or do you simply need to cut costs and improve margins for the health of the business? While your ERP system itself is probably not the cause of these problems, a new ERP system might be a big part of the solution. Companies that go through the ROI analysis process before implementing a new system will identify and quantify expected benefits that usually include the following:
Inventory reduction Improved on‐time completions with little or no expediting Higher productivity, lowered manufacturing costs Increased customer service and satisfaction leading to sales increases
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These benefits are real, achievable, and most often they are conservative estimates if what can be accomplished. Implementing a new system is often the trigger to improve processes, in part because the system provides the structure, visibility and measurements that support the management changes. State‐of‐the‐art systems incorporate the latest in proven management theories and techniques (also called industry best practices) that can help bring a company into parity with the best of their market segment… or better. If your company is lagging in any of the critical areas mentioned – inventory turns, customer satisfaction, time‐to‐market, productivity, cost‐of‐goods, on‐time schedule completion, and others – a new ERP system can be the mechanism for operational improvements to bring your company in line with the competition and beyond.
Growth Outpacing Control Growth may be a good problem to have, but it can be a problem nonetheless. Often, management controls have a hard time keeping up with the pace of change and systems can lag in needed capabilities as well. ERP systems are designed for a certain type of company – to meet the specific needs of certain industries and also to support a target size range. So‐called Tier One systems are capable of supporting an almost unlimited number of users in multiple locations and transacting a range of business activities in multiple markets. Less expensive and less complex “Tier Two” systems are designed for the mid‐sized manufacturer, a loosely defined range of company size that includes everything from a 20‐person job shop to a billion dollar (sales) consumer goods producer. Small company (Tier Three) systems offer limited capabilities and will only support a dozen or so users in the client company; no multi‐site or multinational capabilities. It’s not always easy to categorize a particular system into one of the “tiers”, and it’s not really important to do that. Just understand that systems designed for smaller companies will have limits in the number of active users that can be supported and also limited functionality. So a company that invests in a small system when they are small could well outgrow the system’s capabilities. Tier 2 or “mid‐range” systems are another story. Many of these systems contain broad and deep functionality on par with the more expensive and more complex “big ERP” products. They tend to be much more affordable in both actual cost and in implementation and support costs due to their decreased complexity. Many midrange ERP systems are capable of supporting many hundreds of users, multiple plants and 3
warehouses, multiple languages, and a wide range of business functions from collaboration and e‐commerce to cloud and mobile technologies, Business Intelligence, and advanced planning and scheduling capabilities. Aggressive developers continually add to their products’ capabilities as new technologies and new management techniques evolve. But companies can also outgrow their ERP system if the developer is not keeping the system updated with the latest technology, functionality, and management approaches. This can be particularly troublesome in the era of Internet connectivity and collaboration, analytics and social media integration, and e‐commerce. As these functions become more critical to competitive success, companies cannot afford to be hampered by lagging system functionality or outdated technology. If your system is slow, bulky, difficult to use, or is not expandable, you should replace it as soon as possible to minimize the damage to your business and its growth. If your system provider is not keeping up with business and technology developments, your business is being prevented from moving forward. Find a better provider and make the change to a system that will help your business move forward.
Information Access Executives can be hampered by lack of comprehensive, easy to access information about the business, sales and markets. That’s really what an ERP system is all about, after all. If the executive, manager, or knowledge worker is unable to access the information he needs, when he needs it, in a form that is meaningful, then everything else is of limited value. ERP systems have come a long way in the last few years. Today’s systems are built around a familiar and convenient graphical display format that empowers the user to take advantage of database technology, data management and analysis tools, and intuitive links to the office tools that we all rely on every day like Microsoft Word and Excel. Information is essential to the management of the business, complying with requirements from regulators, government agencies, consumer groups, and other stakeholders. Convenient and reliable access to that information is the key requirement for an ERP system. If you feel limited in accessing information in support of business requirements, that’s a big red flag. Move to a new system that unlocks information to support company operations. 4
None of the Above While the considerations listed above are the primary drivers for a system replacement decision, there can be other reasons why a company will decide to replace their existing ERP. Sometimes users or management lack confidence in the system: it’s not being used effectively and spreadsheets abound even though the information could be effectively managed by the system. In many cases, there’s nothing really wrong with the system and the problem is really a human one. Perhaps the implementation project was not carried out effectively, users were not trained adequately, original (trained) users have left the company and their replacements were not trained adequately, or the system was imposed on the organization from above or from a corporate parent and no one on site took ownership or responsibility. It’s also possible that company management or key users just don’t like it for whatever reason – maybe it just doesn’t look or work like what they had used in another company or an earlier system at this company. While these are not inherently system limitations, the net effect is the same as if they were – your company is not getting the benefits that you need from your ERP system. A re‐implementation of the existing system could theoretically solve the problem but “selling” the re‐implementation of a system that has not been accepted and is not generating benefits is very difficult to accomplish. The path of least resistance is to select a new system and get a fresh start, hopefully avoiding the errors that sank the current implementation. The important point is that an ineffective system, no matter the reason that it is ineffective, is a serious obstacle for company success and must be addressed. Replace the system and implement it correctly to move your company back into competitive position.
Benefits Today’s ERP can be impressively comprehensive, including integrated Business Intelligence, Customer Relationship Management, Supplier Relationship Management, Warehouse Management, Field Service Management, and more. But it is also flexible and tailor‐able so it can be configured to deliver the functionality you need today and
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grow as your business needs change. Today’s ERP is also familiar and easy to use because it looks like and works with the tools you use every day like Windows and Excel. A properly selected and implemented ERP system can help a company: • • • • •
Increase sales and improve customer service Improve cash management and reduced outstanding receivables Reduce purchasing and production costs; increase efficiency Improve inventory turnover Better utilize people, equipment and materials
Moving Forward Your first step is to recognize the need for a new system. If your existing system is not delivering the information you need to effectively run your business, get started by gathering a team of your best people to identify what you need and start gathering information about solutions and providers. After you have identified problems you want to solve, and benefits you plan to receive, determine if this is the correct time to start an ERP project implementation. Unfortunately, too many projects fail or fall short of their goals because the organization was not ready for the work required to implement a new system. Your company is ready to start your ERP replacement project if you have:
Gained agreement, across all affected areas of the company, on the project goals and benefits Established an accurate budget Completed the economic justification Identified the executive sponsor and assembled the project team
A knowledgeable professional can tell you about companies similar to yours and what their experience has been. 6
About the author: David A. Turbide, CFPIM, CIRM, CSCP, CMfgE Author of six books, hundreds of magazine articles, and numerous whitepapers, Dave is an independent consultant and freelance writer serving both the developers and the users of software and systems for manufacturers. For thirty years, Dave has helped manufacturers to select, implement, and get better results from their systems. He has worked with numerous companies, in all industries, and all sizes from the small machine shop to the large multi‐national. www.daveturbide.com
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