Page 1

Financial Prospects on Implementation of ERP

Financial Prospects on Implementation of ERP

CONTENTS ACKNOWLEDGEMENT....................................................................5 1 INTRODUCTION..............................................................................7 1.1 Introduction....................................................................................................7 1.2 Purpose of Study...........................................................................................8 1.3 Research Objectives.....................................................................................8 1.4 Research Methodology.................................................................................8

2 LITERATURE REVIEW.................................................................10 2.1 Literature Review........................................................................................10

3 ENTERPRISE RESOURCE PLAINING.........................................12 3.1 Definition.....................................................................................................12 3.2 ERP Benefits and Advantages....................................................................13 3.3 The Open Source Definition........................................................................15 Introduction: Open source doesn't just mean access to the source code. The distribution terms of open-source software must comply with the following criteria:...............................................................................................................16 Free Redistribution: The license shall not restrict any party from selling or giving away the software as a component of an aggregate software distribution containing programs from several different sources. The license shall not require a royalty or other fee for such sale.......................................................16 Source Code: The program must include source code, and must allow distribution in source code as well as compiled form. Where some form of a product is not distributed with source code, there must be a well-publicized means of obtaining the source code for no more than a reasonable reproduction cost preferably, downloading via the Internet without charge. The source code must be the preferred form in which a programmer would modify Page 2

Financial Prospects on Implementation of ERP

the program. Deliberately obfuscated source code is not allowed. Intermediate forms such as the output of a preprocessor or translator are not allowed.......16 Derived Works: The license must allow modifications and derived works, and must allow them to be distributed under the same terms as the license of the original software................................................................................................16 Integrity of the Author's Source Code: The license may restrict source-code from being distributed in modified form only if the license allows the distribution of "patch files" with the source code for the purpose of modifying the program at build time. The license must explicitly permit distribution of software built from modified source code. The license may require derived works to carry a different name or version number from the original software...........................16 No Discrimination Against Persons or Groups: The license must not discriminate against any person or group of persons.......................................17 No Discrimination Against Fields of Endeavor: The license must not restrict anyone from making use of the program in a specific field of endeavor. For example, it may not restrict the program from being used in a business, or from being used for genetic research........................................................................17 Distribution of License: The rights attached to the program must apply to all to whom the program is redistributed without the need for execution of an additional license by those parties....................................................................17 License Must Not Be Specific to a Product: The rights attached to the program must not depend on the program's being part of a particular software distribution. If the program is extracted from that distribution and used or distributed within the terms of the program's license, all parties to whom the program is redistributed should have the same rights as those that are granted in conjunction with the original software distribution.........................................17 License Must Not Restrict Other Software: The license must not place restrictions on other software that is distributed along with the licensed software. For example, the license must not insist that all other programs distributed on the same medium must be open-source software.....................17

Page 3

Financial Prospects on Implementation of ERP

License Must Be Technology-Neutral: No provision of the license may be predicated on any individual technology or style of interface...........................17 3.4 Choosing An Erp System: ..........................................................................17 3.5 Implementation Strategy.............................................................................20

4 MODULES OF ERP.......................................................................30 4.1 General Ledger...........................................................................................30 4.2 How ERP Improves General Ledger Capacity:..........................................31 4.3 Benefits for Control: ...................................................................................32 4.4 Financial Processing:..................................................................................33 4.5 Application Features...................................................................................33 4.6 Cost/Benefit Analysis..................................................................................34 4.7 What Can ERP Do for the Supply Chain?..................................................38 4.8 Chain ERP management supply.................................................................41 4.9 Four Key Benefits of Supply Chain Management Software.......................46 4.10 ERP Purchasing Module:..........................................................................47 4.11 Features of purchasing module:...............................................................48 4.12 Major benefits............................................................................................49 4.13 Cost and Benefits Analysis:......................................................................49

5 CONCLUSION AND RECOMMENDATIONS................................57 5.1 Conclusion...................................................................................................57 5.2 Recommendations......................................................................................58

Page 4

Financial Prospects on Implementation of ERP

ACKNOWLEDGEMENT First of all I would thank Almighty GOD who has guided me the way for a bright future. I would like to acknowledgement the help provided by my teacher to make this project a success. My teacher Dr.XYZ provided guidance and learning at every step of the project which helped me, a lot in the questioning, data collection and preparation of this report. He always gave full energy and showed willingness in my project. I am also thankful to my parents who accommodated me during those long hours of work in writing Final Project Report and all the friends and colleagues who equally encouraged me. I would also like to appreciate the co-operation I got from my classmates at the institute, which boosted my morale and encouraged me to strive for better results.



Page 5

Financial Prospects on Implementation of ERP

Abstract Debate exists regarding the contribution of information technology to firm performance reflecting predictions of a positive, negative, or nonexistent relationship. Prior research has examined technology and firm performance in the aggregate, however, this study focuses on a specific technology —Enterprise Resource Planning (ERP) and its impact on firm performance. Economic and industrial organization theories provide the basis for the examination of how ERP systems affect firm coordination and transaction costs. ERP systems are expected to: (1) reduce costs by improving efficiencies through computerization; and (2) enhance decision-making by providing accurate and timely enterprisewide information. These effects should be associated with improved firm performance. This research finds, after accounting for within-firm variances, no significant improvement associated with residual income or the ratio of selling, general, and administrative expenses in each of the 3 years following the implementation of the ERP system. However, a significant improvement in firm performance resulting from a decrease in the ration of cost of goods sold to revenues was found 3 years after the ERP system implementation (but not in the first or second year after implementation). Further, there was a significant reduction in the ratio of employees to revenues for each of the 3 years examined following the ERP implementation.

Page 6

Financial Prospects on Implementation of ERP

1 INTRODUCTION 1.1 Introduction ERP stands for Enterprise Resource Planning. ERP is a way to integrate the data and processes of an organization into one single system. Usually ERP systems will have many components including hardware and software, in order to achieve integration, most ERP systems use a unified database to store data for various functions found throughout the organization. Enterprise resource planning (ERP) is a company-wide computer software system used to manage and coordinate all the resources, information, and functions of a business from shared data stores. An ERP system has a service-oriented architecture with modular hardware and software units or "services" that communicate on a local area network. The modular design allows a business to add or reconfigure modules (perhaps from different vendors) while preserving data integrity in one shared database that may be centralized or distributed. The term ERP originally referred to how a large organization planned to use organizational wide resources. In the past, ERP systems were used in larger more industrial types of companies. However, the use of ERP has changed and is extremely comprehensive, today the term can refer to any type of company, no matter what industry it falls in. In fact, ERP systems are used in almost any type of organization - large or small. In order for a software system to be considered ERP, it must provide an organization with functionality for two or more systems. While some ERP packages exist that only cover two functions for an organization (QuickBooks: Payroll & Accounting), most ERP systems cover several functions. Today's ERP systems can cover a wide range of functions and integrate them into one unified database. For instance, functions such as Human Resources, Supply Chain Management, Customer Relations Management, Financials, Manufacturing functions and Warehouse Management functions were all once stand alone software applications, usually housed with their own database and network, today, they can all fit under one umbrella - the ERP system.

Page 7

Financial Prospects on Implementation of ERP

1.2 Purpose of Study The purpose of this study is to examine how two organizational members, i.e. business and information technology (IT) managers evaluate the success measures of acquired enterprise resource planning (ERP) systems. The study is to highlight the importance of ERP, especially for growth, production, financial evaluation and business stability. Furthermore it also talks about the importance of implementation in non-government organisations (NGOs), educational and medical centres to develop the affective and authenticated centralize system environment culture in the corporate sectors, medical and financial institution of the country.

1.3 Research Objectives The objectives of the research were as follows: •

To gather the current trends in the ERP implementation

To gather statistically valid information of the extent of FOSS implementation

To develop comparison of the national and global trend in corporate sectors, manufacturers, large and small Enterprises.

To gather a comprehensive information regarding ERP Implementation through questionnaire as survey tool to focus on loopholes and critical errors.

To develop the research methodology

1.4 Research Methodology Both quantitative and qualitative model will be included to for this research model. The literature review as conducted by the researcher for the global adoption and the culture of ERP modules and technologies which includes current trends and future prospects of ERP implementation. This review included contribution of the ERP in the global economy, role of government, educational institutes and non-government organizations in the growth and promotion of ERP implementation. The researcher then established connection to the online userPage 8

Financial Prospects on Implementation of ERP

groups and forums to gather information related to the different modules of ERP. He used online research websites to gather information about comparison of market share of ERP Pre-designed module vs. Customised software. While gathering the information about ERP in Pakistani Software industry, a survey tool was used to gather solicit feedback from IT professionals working in various Software Development Centres of Pakistan. Researcher found lack of responsiveness while gathering the related data. It was noted that main reason for lack of responsiveness or non-cooperation is the unavailability of the professional trainers, technical staff and very expensive cost of training as well as lack of exact and professional guideline.

Page 9

Financial Prospects on Implementation of ERP

2 LITERATURE REVIEW 2.1 Literature Review In the "digital nervous system" 1a book center, Bill Gates (1999) stressed the 90's the theme of business Reengineering and de two thousand years after the key is speed, this statement reveals the important nature of business India is changing. Jeff Brown (1998) in the " Market Leadership in the Information Age "a book center, but also pointed out that" information "as the key to competitive corporate world, who can effectively palm Grip information, delivery services, controlling the speed, who will be able to win new business arena above, which is a cut depends on Ability of the business in-house planning and establishment of a complete digital workflow. History of the development in the information industry, above, this is the first time No longer dominated by hardware innovations to lead the entire industry. Many famous domestic and overseas software suppliers, such as Oracle, SAP, Baan, PeolpeSoft, JDEdwards, and ASDC (DSC), etc. company, a response to this trend and gradually develop a full-featured and complex enterprise resource integration system, The Enterprise Resource Integration System, whether in performance or build method above, all the others are becoming more and more mature, but in systems integration Process reengineering with the above, but it also makes the most of the enterprises in the import process encountered many obstacles and India. Therefore, enterprises put L system, the effectiveness of information technology, strengthen the competitiveness of enterprises, we must effectively integrate business processes, making Application of information technology to achieve optimization. Today's century is the era of a speeding of information we need is like the Enterprise Resource Integration System (Corporate Resource Integration System, CRIS) an effective tool for tackling key problems, CRIS can be integrated functional levels of the elements, resulting in cross-functional information flow. In the modern business environment, the Indian, Between 1

Page 10

Financial Prospects on Implementation of ERP

enterprises is becoming increasingly fierce competitive environment, in order to be able to quickly respond to customer needs, and can be compared with the other competitors have a competitive advantage, allowing companies are increasingly dependent on information technology; also to competitors in a market in order to survive, and due to stress Intense competitive conditions and therefore would like to help in the information technology of the following can be integrated within the enterprise information and Limited resources in order to achieve a competitive advantage and thus to achieve business goals, enterprise resource planning (Enterprise Resource Planning, ERP) system, which came into being. Because ERP is based on industry best-practice benchmark for the Indian Business Process designed a set of computer software packages, can be integrated throughout the enterprise arising from the information, so that Business operations and circulation of information through timely operations, providing an authorized user as a decision-making. ERP system all current CRIS system integration is the center of the mainstream products, which is the ERP era is all about.

Page 11

Financial Prospects on Implementation of ERP




Enterprise resource planning (ERP) is the industry term used to describe a

broad set of activities supported by multi-module application software that helps a manufacturer or other business manage the important parts of its business. These parts can include product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders. ERP can also include application modules for the finance and human resources aspects of a business.



Page 12

Financial Prospects on Implementation of ERP

Some of the bigger players in the ERP outsourcing market are SAP, Peoplesoft, and J. D. Edwards. New comers include Oracle, IBM, and Microsoft.

3.2 4ERP Benefits and Advantages According to Anthony, R. A, organizational processes fall into three levels - strategic planning, management control and operational control. Even though much of ERP success has been in facilitating operational coordination across functional departments, successful implementation of ERP systems benefit strategic planning and management control one way or other. 5

ERP is an information software system that incorporates all the

applications of a business’s operations and all its departmental functions into one single system that can be used by all the departments of the business. Businesses need ERP (enterprise resource planning) software systems in order to run more efficiently and economically. Every department of a business generates its own data. When this data remains segregated by department, the result is disorganization and a splintering of information. This means it can take days for one department to get data from another. Compartmentalized data means built in delays in getting information to where it is needed. Businesses using software packages that do not communicate with each other make the company less competent and result in a loss of profits. A business operating without ERP uses many kinds of software and is, therefore, not able to optimize organizational business activities, nor to follow a client’s patterns and choices. ERP was designed to integrate a business’ data under one common platform. When this data is organized and coordinated to form a complete picture, the business saves costs and increases profit. ERP also cuts down on labor intensive and time consuming processes. Basically, ERP is the answer to many of the problems plaguing de-centralized businesses. ERP combines all business applications into one database so that all departments can share their 4 and


Page 13

Financial Prospects on Implementation of ERP

information and communicate with each other more quickly. Another advantage of ERP is that it does away with porting. Porting data from one system to another introduces the probability that errors might creep into the data. By its very structure, ERP automates business processes. A process involving ERP can be set. In that way, tasks will be repeated in the same way each time, thus increasing efficiency and reducing errors. Best practices can be built into ERP allowing employees to increase productivity. In the end, the integrated systems resulting from ERP will benefit a business’ marketing, accounting, and management. ERP also benefits a business’ order tracking procedures. The ability to track orders properly permits a business to acquire detailed information on where an order stands, to find patterns in a customer’s behavior, and to decide which marketing strategies work best. The ability to know when and how the manufacturing of a product should be altered is another advantage of ERP. Security is another area where ERP proves to be an advantage. The databases provided by ERP are capable of safely storing a business’ confidential data. One of the greatest advantages of ERP software comes from its accounting applications which can integrate the cost, profit, and revenue data from each and every sale. Help reduce operating costs: ERP software attempts to amalgamate commerce processes across departments onto a single enterprise-wide information system. The major benefits of ERP are enhanced harmonization across functional departments and increased efficiencies of doing business. The instant benefit from implementing ERP systems we can imagine is abridged operating costs, such as inferior inventory control price, inferior production costs, inferior marketing costs and inferior help desk support costs. Facilitate Day-to-Day Management: The other benefits from implementing ERP systems is facilitation of day-to-day Page 14

Financial Prospects on Implementation of ERP

management. The implementations of ERP systems care for the organization of backbone data warehouses. ERP systems offer better convenience to data so that management can have up-to-the-minute access to information for decision making and managerial control. ERP software helps track actual costs of activities and perform activity based costing. Support Strategic Planning: Strategic Planning is "a deliberate set of steps that assess needs and resources; define a target audience and a set of goals and objectives; plan and design coordinated strategies with evidence of success; logically connect these strategies to needs, assets, and desired outcomes; and measure and evaluate the process and outcomes." Part of ERP software systems is intended to support resource planning section of strategic planning. In reality, resource planning has been the weakest link in ERP practice due to the difficulty of strategic planning and lack of sufficient integration with Decision Support Systems (DSS). 6

And speaking of the advantages of ERP, here are just a few to give you

an idea of what’s in store. •

Customer relationship management - for sales effectiveness and performance

management with customer plug-ins for feedback •

Analytics, real-time data, easy to use screen interface for completing tasks

A single repository which contains the full business database or, sub-sectors

thereof •

Sales configuration, pricing management, incentive compensation

Mobility - worldwide access to the database

3.3 7The Open Source Definition



Page 15

Financial Prospects on Implementation of ERP

Introduction: Open source doesn't just mean access to the source code. The distribution terms of open-source software must comply with the following criteria: Free Redistribution: The license shall not restrict any party from selling or giving away the software as a component of an aggregate software distribution containing programs from several different sources. The license shall not require a royalty or other fee for such sale. Source Code: The program must include source code, and must allow distribution in source code as well as compiled form. Where some form of a product is not distributed with source code, there must be a well-publicized means of obtaining the source code for no more than a reasonable reproduction cost preferably, downloading via the Internet without charge. The source code must be the preferred form in which a programmer would modify the program. Deliberately obfuscated source code is not allowed. Intermediate forms such as the output of a preprocessor or translator are not allowed. Derived Works: The license must allow modifications and derived works, and must allow them to be distributed under the same terms as the license of the original software. Integrity of the Author's Source Code: The license may restrict sourcecode from being distributed in modified form only if the license allows the distribution of "patch files" with the source code for the purpose of modifying the program at build time. The license must explicitly permit distribution of software built from modified source code. The license may require derived works to carry a different name or version number from the original software.

Page 16

Financial Prospects on Implementation of ERP

No Discrimination Against Persons or Groups: The license must not discriminate against any person or group of persons. No Discrimination Against Fields of Endeavor: The license must not restrict anyone from making use of the program in a specific field of endeavor. For example, it may not restrict the program from being used in a business, or from being used for genetic research. Distribution of License: The rights attached to the program must apply to all to whom the program is redistributed without the need for execution of an additional license by those parties. License Must Not Be Specific to a Product: The rights attached to the program must not depend on the program's being part of a particular software distribution. If the program is extracted from that distribution and used or distributed within the terms of the program's license, all parties to whom the program is redistributed should have the same rights as those that are granted in conjunction with the original software distribution. License Must Not Restrict Other Software: The license must not place restrictions on other software that is distributed along with the licensed software. For example, the license must not insist that all other programs distributed on the same medium must be open-source software. License Must Be Technology-Neutral: No provision of the license may be predicated on any individual technology or style of interface.

3.4 8Choosing An Erp System: Technology is the engine that drives corporate productivity. Sound business process to implement that technology is the transmission. Effective, well-thoughtout strategy is the gear shift. Well-connected and synchronized, they make a 8

By Steve Hammett, Account Executive, BroadPoint Technologies

Page 17

Financial Prospects on Implementation of ERP

smooth running machine. Without all three, a car can only roll downhill. Similarly, technology implementations without intelligent strategy and sound business process will just go downhill. Price-driven, fire-aim-ready technology deployments are proven to fail. Company decision makers unable or unwilling to commit to do the job right are asking for trouble-and that’s what they typically get, along with very costly fixes. Reasons abound, but most often it boils down to the basics: budgetary mandate to go as cheap as possible and to implement in an impossibly-short time period. While cost and time efficiency certainly factor into the final equation, they should be guidelines, not primary decision-making drivers. Before making determinations about either, commit to researching what’s needed in scope, time, and money. Then, and only then, establish a timeline and budget for the process. Instead, what often happens is a dramatic call for sweeping improvement. Technology is thrown at the problem as a quick-fix. Companies substitute the technology itself for sound business process. Quick-fix thinking isn’t anything new. From the time the innovative General Hannibal implemented new technology (elephants) to enhance his ability to wage war, management theorists have recommended wave after wave of performance improvement and technology strategies to gain the competitive edge. Noble intentions drive these efforts, and each may address a part of the problem. If the goal is to symbolize to employees, customers, and shareholders that management recognizes the challenge and is doing something about it, then any of these campaigns will do the job. However, piecemeal approaches purported to be the answers to technology issues can be as dangerous as no response at all, as they can absorb resources and detract from the true needs. This is confusing; so what does a person need to think about to get started? A few years ago Deloitte and Touch surveyed hundreds of companies who had recently purchased a new ERP system; what was unique about this survey is that D&T separated out the respondents’ criteria into first time and second time purchasers to determine if experience changed purchasing criteria. Top Ten Criteria for Selecting

2nd Time

1st Time Page 18

Financial Prospects on Implementation of ERP

Software Level of support from the solution provider 1 8 Vendor’s track record of performance 2 10 Software’s ability to fit the business 3 4 Growth potential of software 4 7 Price of the software 5 1 Quality of documentation 6 9 Functionality of the software 7 5 Ease of use 8 3 Ease of implementation of the new system 9 2 Software works with existing hardware 10 6 If you look at the second time column, (experienced purchasers), solution provider support and vendor’s track record were the top criteria while the first time purchasers had these at the bottom. This clearly demonstrates that experienced decision makers value the partners expertise above all else while the inexperienced decision makers don’t understand how critical the partner is to the implementation. Additionally, inexperienced purchasers put price as their top criteria yet experienced purchasers put price out of the top three criteria. So, look for partners that have experience, understand business process and have a large stable of clients who see them as trusted advisors. I would add software viability to this mix; make certain that the software you choose is backed by a financially sound company with a proven track record. This last criterion is the reason BroadPoint is a Microsoft Dynamics partner. For mid-sized businesses, you want to be certain that you have a firm foundation in which to grow your business, and Microsoft provides this foundation. As your business evolves and grows, we partner with you to tune the engine that drives corporate productivity. BroadPoint and you, with a Dynamics foundation, make a smooth running machine. So when beginning a search for a new ERP system, look for a partner who understands your business, uses sound software and has clients who see the partner as a trusted advisor.

Page 19

Financial Prospects on Implementation of ERP

3.5 9Implementation Strategy In choosing new enterprise resource planning (ERP) software, implementation is every bit as important as finding the right program. You should be thinking about it proactively when evaluating systems, you should raise the topic with propsective vendors and even ask for examples of their customers' strategies. {C} There are hundreds of articles on "best practices" for implementing ERP software, but understanding each strategy and choosing the best option is difficult. So, we set out to consolidate the information in a single guide. Our aim is to give you enough information – and the most important pieces – to choose the best implementation process for your organization. We'll cover the three most widely discussed ERP implementation strategies: Big bang - Implementation happens in a single instance. All users move to the new system on a given date. Phased rollout - Changeover occurs in phases over an extended period of time. Users move onto new system in a series of steps. Parallel adoption - Both the legacy and new ERP system run at the same time. Users learn the new system while working on the old. Survey





We recently hosted a survey to find out which ERP implementation strategies are the most popular and most successful. With the help of Twitter and our favorite industry bloggers, we received 45 responses from organizations that have been involved in an implementation. Our survey was brief and informal with just four simple questions: Which implementation strategy did your organization choose? Big bang, phased rollout, parallel adoption, combo of big bang and phased rollout, or other. If you selected other, please describe the strategy you chose. Was the implementation a success? If you selected no, please explain why. 9








Mar 11, 2010

Page 20

Financial Prospects on Implementation of ERP

When it comes to ERP implementations, these questions skim the surface. We understand a myriad of questions and answers would be required to learn when it's appropriate to choose a certain strategy. Additionally, we realize reporting the "most successful strategy" would be erroneous. While one strategy may work for a majority of companies, it may not be the best strategy for your organization. As Jonathan Gross from Pemeco pointed out, "The circumstances dictate the appropriateness of the implementation strategy. In some cases, a phased deployment might be more appropriate than a parallel deployment. In other cases, it might be the opposite." Nevertheless, our survey did uncover some interesting data. Here are the results:

Eighty-nine percent of respondents followed "big bang," "phased rollout" or a combination





The number of phased rollout users compared to big bang was split nearly evenly; parallel adoption trailed far behind with only four users; "other" came in last. The "other" respondent left us the following explanation for his strategy:

Page 21

Financial Prospects on Implementation of ERP

"Component implementation; pilot projects; alpha testing; refinements and iteration before opening it to entire unit. If successful in a unit, expand it







Eighty-eight percent of implementations – or 40 out of 45 – were successful. Of those that answered "No," we received the following comments: Logistics problem (visa issue delay, user delay for data collection, delay in top management support). – Phased Rollout We are still under the progress of phased manner, only “Materials and Finance” is under parallel run and they’re facing some bugs/modifications. - Parallel Adoption Still running both systems in parallel, 3 years later!" – Parallel Adoption 1 year late, although all other success parameters achieved. - Big Bang concentrating on tools not architecture. - Big Bang Just as the name implies, a big bang ERP implementation happens in a single, major event. All modules are installed across the entire organization all at once, more or less. Of course the changeover from the legacy system doesn't happen without proper planning. There are many pre-implementation activities that need to be carried out prior to Page 22

Financial Prospects on Implementation of ERP

the big bang. After the planning activities have been successfully executed, the old system will be turned off, and the new system will be launched. At this point there is no turning back. However, there should be fall-back scenarios prepared just in case the initial changeover is a failure. The big bang implementation strategy has supporters on both sides of the fence. The most common criticism is the risk factor; there are a number of things that could go wrong in an instant changeover. However, the implementation is quick and less costly than a long, drawn-out phased approach. Here is a list of other benefits and drawbacks of big bang implementation: Advantages

Implementation time is shorter Implementation difficulties and "pains" are


Difficulties are more pronounced Details may be overlooked in the

condensed rush to change Costs are much lower than a long, drawn-out Employees have less time to learn implementation Employees only need to be trained on the new system, not for the changeover period Implementation happens on a single date and everyone knows the date

the new system Full end-to-end system testing is tough






implementation Fall-back scenarios are more difficult than originally perceived A failure in one part of the system could affect others There is a catch-up period (see Illustration below)

Another downside of big bang implementations is Ken Eason's "Initial Dip Phenomenon." Eason, author of "Information Technology and Organisational Change" and one of the original authorities on implementation strategies, describes an "initial dip phenomenon" which happens shortly after an implementation. This catch-up period happens because users are struggling with the new system and organizational performance temporarily declines as a Page 23

Financial Prospects on Implementation of ERP


Phased Rollout

In keeping with the theme of cosmological evolution, phased rollout would be analogous to the Steady State theory: instead of an implementation happening in a single instance, small changes occur over time. An organization moves off the legacy system and onto the new ERP system in a series of predetermined steps. This can be achieved in several different ways. Here are three well-known techniques: •

Phased rollout by module -

This is the most common phased rollout

strategy. ERP modules are implemented one at a time. Typically you begin with core business functions – those necessary for daily operations – then add in more modules and functionality with each phase. However, some experts suggest starting with easy modules like general ledger, or beginning with the less mission-critical modules. For a good explanation, read Insight Consulting Partner's write-up. •

Phased rollout by business unit -

Under this approach implementation is

carried out in one or more business units or departments at a time. For example, you begin with implementing the new ERP system in human resources, then move to accounting. Some organizations may put Page 24

Financial Prospects on Implementation of ERP

together an implementation project team that travels between each department during implementation phases. As the team gains more experience with each implementation, subsequent phases become more efficient. •

Phased rollout by geography -

For organizations with multiple locations, a

phased rollout by geography is a frequent approach. The new ERP system is introduced at one or more company locations at a time. This is also referred to as the "pilot adoption method." It's common for large organizations that have multiple locations or independent departments. Of course there are hundreds of options, including many variations and combinations of these three. Just like big bang, a phased rollout strategy has advantages and disadvantages. This table includes several common viewpoints: Advantages

Companies experience

gain during

knowledge the


and initial

Not as focused and urgent

implementation phase that can be as big bang applied to subsequent phases

Possible to introduce modules while programming future modules



change over an extended period of time Each modules relies on

With conversion occurring in parts, time information from other modules, is available for adjustments






information missing There is no catch-up period, employees learn as they go

Several adjustments are needed Page 25

Financial Prospects on Implementation of ERP



More time for users to adapt to the new system

Duration of the project is much longer than big bang

Technical staff can focus on one part of






the system or a select group of users at system becomes more difficult one time

with each phase

Project members may develop unique

Temporary bridges must

implementation skills that they can be be positioned for in later rollouts




system and new system



The third generic – though less talked about – ERP implementation plan is the "parallel adoption" approach. This has also been referred to as "parallel conversion," "parallel running," or "parallel cutover." Parallel adoption is thought to be the least risky implementation process. It includes running both the old and new ERP system at the same time. This way users can learn the new system while performing regular work activities on the old system. After requirements for the new system are met, then the legacy system is decommissioned.

Page 26

Financial Prospects on Implementation of ERP

Page 27

Financial Prospects on Implementation of ERP



illustration from Ken Eason,




presented "middle


the road"

between big bang Eason Strategy Matrix and phased adoption. For example, the pace of the changeover is slower than big bang, but faster than phased adoption. Similarly, user adaptation is easier than big bang, but more difficult than phased adoption. The major trade-off – not illustrated in Eason's matrix – is cost. Parallel adoption is the most expensive implementation method. Additionally, having employees enter data in both systems is not efficient. However, if the extra costs are less than costs incurred after a backfired big bang adoption, then it's a reasonable plan. Still, organizations cannot predict cost overruns of big bang, so parallel adoption has become decreasingly popular because of perceived high costs. 10

Which ERP Implementation Strategy is Best for Your Business?

There certainly is no one-size-fits-all when it comes to implementing an ERP system. Every company has unique goals, and an implementation requires careful planning and analysis. Some companies may choose a combination of strategies, like a mini big bang mixed with phased rollouts (i.e. "big bang" the important modules, then add in the peripheral modules later). Others may choose to implement a mid-market ERP system (e.g. Microsoft Dynamics, Epicor) at the plant-level, while keeping



major ERP system






Page 28

Financial Prospects on Implementation of ERP

headquarters). And at times, the best implementation strategy will be obvious (as illustrated in this case study). At a minimum, we hope this guide gets your organization off on the right foot. By choosing one of the above or developing an entirely custom strategy, you should be well on your way to success.

Page 29

Financial Prospects on Implementation of ERP



General Ledger

The General Ledger module is the heart of any accounting system. The Chart of Accounts and a company's income statement and balance sheet are maintained in the General Ledger. Since OpenPro's General Ledger module is flexible and customizable, it is useful for any sized business. Because all OpenPro systems are fully web-based, data is available everywhere, which provides mobility and flexibility for your business. OpenPro web-based Financials helps you save time, reduce administrative costs and gain better control over your business by automating a wide range of accounting related tasks. It is a highly reliable and integrated series of business applications that delivers a flexible, scalable and full featured total management solution. The Financial software is compliant with US-FASB, IASB, IFRS, and SOX standards, and meets GASB requirements. It can handle government and nonprofit accounting standards. OpenPro Financials has a variety of features and options built into it. The Financials module is a fully integrated system with OpenPro Distribution, CRM, Manufacturing, and E-commerce; it also works well as a stand-alone module. OpenPro is ideal for companies standardizing on web-based technologies; OpenPro is a cost-effective, easy to implement business software solution that delivers internet-ready accounting and business management capabilities to your business.


Page 30

Financial Prospects on Implementation of ERP

Financials is a full service module, flexible enough to handle multiple companies in various ways. In addition to providing maximum flexibility, the financial system gives you fast and easy access to the information you need for day-to-day tasks and period-end processing. OpenPro Financials module includes Job Cost, Executive Desktop, General Ledger, Budgets, Fixed Assets, Accounts Receivable, Check Reconciliation, Accounts Payable, and Payroll/Human Resources.

4.2 How ERP Improves General Ledger Capacity: Flexibility, quickness, and efficiency are the pillars and needs of the modern organization. In order to ful fill all the requirements that the market imposes, ERP has become an useful utility. The general ledger tasks are nowadays one of the most important activities on the daily basis reports, and this system is the most effective in helping to provide a solid structure where the cost of sales, profit centre accounting and general ledger are unified. Many enterprises find it difficult to combine the reporting applications, and some companies spend considerable amounts of money to ensure the effectiveness of their external and internal reporting. The records could be disorganized due to their slow execution. In this instance, ERP becomes the best tool to reorganize this function by increasing the data quality, combining the fields included in the different databases of one program. In regards to specific regulations and requirements related to the financial reporting, ERP is able to provide an updated solution to maintain your activities in order, because it has the ability to represent the parallel financial reporting in several ledgers. With the implementation of the system, compliance and transparency are guaranteed, and it also makes it easier to gather and report the valuation bases

Page 31

Financial Prospects on Implementation of ERP

needed to settle more than one account. Through this unified reporting program the accounting is a simpler task to complete faster.

4.3 Benefits for Control: The general ledger capabilities are benefited by the use of ERP in many ways. An important challenge that modern companies face are the slow processes of closing. When the system interferes in this activity, the data is all concentrated in one single source, and it is easier to assign transparency for auditing. By this way, the closing can be made faster and save time for other relevant issues. Another advantage that the program offers is the ease of use. Although training would be needed, any expert in integrated systems would be capable of using it. The accounting and financial departments together with the controller will be unified. The reports will also be integrated with the ability to create reports in compliance with several requirements that include the different regulations for each country or industry. Of course the main attractive of ERP for the direction board is related to the profits. Through the general ledger it is possible to reduce all the costs of ownership. The system supports a great variety of functions, with recurrent entries, reversion entries, statistical entries, different currencies, staff and assignation entries. All the data registered is validated online during the process of entry. All the combinations of accounts, income and outcome totals are verified immediately. The online validation allows the users to quickly correct the information without executing the process separately. This benefit increases the productivity and efficiency of the staff members since it avoids the repeated cycles of correction of common data to the system that validates the data during the lot processing.

Page 32

Financial Prospects on Implementation of ERP

4.4 Financial Processing: The processing options are a great tool for capturing transactions with efficiency and control. All the entries of journals are automated and it is possible to group journals to run in parallel or in a special order when some journal depends on the results of another. Likewise, the organization could be improved since the system provides the users with the ability to schedule the journals to be generated or posted based on your needs automatically. Since the companies are worried about producing additional value with less resources, this system helps to satisfy this need by running processes across multiple ledgers easily. Unlimited ledgers could be settled and at the same time run openings, closings, balances and reports.



Application Features

General Ledger is the heart of the accounting system. The Chart of Accounts and a company's statements are maintained in the General Ledger. Because of the flexibility of the OpenPro General Ledger application, it can be used by any business. Run reports for all prior years, complete drill down to data entry screens with security and know who processed the transaction. Accounts Payable/Receivable: Manage your vendors and customers. Flexible enough to meet any business' needs, while still being able to streamline, saving time and cutting costs. Check Reconciliation: Keep track of all your deposits and payments with an easy to use balancing system. Fixed Assets: Record company assets and automatically calculate depreciation expenses. Supports several methods of depreciation and 12

Page 33

Financial Prospects on Implementation of ERP

automatically posts expenses. Payroll/HR: Maintain your employee's records electronically. With 128 bit encryption, the system is secure enough to keep your most sensitive documents safe. Payroll supports a variety of special functions ranging from calculating payroll checks with individual deductions to maintaining information required for state and federal reports. Job Cost/Project Management: Provides management information you need to quickly identify project costs that are out of line with budget estimates and requirements. Budgets: Keep track of what you are spending; compare your budget with actual amounts. Executive Desktop: Create graphic reports of the company status, from budget charts to manufacturing work orders. Executive Desktop allows you to create specific graphs for each user type.



Cost/Benefit Analysis

Following on my previous post about Cost/Benefit Analysis General Ledger, here is the more chocolate. The example! To illustrate the process, let’s create a hypothetical company with the following characteristics:

Annual sales: $500 million Employees: 1000


Page 34

Financial Prospects on Implementation of ERP

Number of plants: 2 Distribution centers: 3 Manufacturing process: Fabrication and assembly Product: A complex assembled make-to-order product, with many options Pre-tax net profit: 10 percent of sales Annual direct labor cost: $25 million Annual purchase volume (production materials): $150 million Annual cost of goods sold: $300 million Current inventories: $50 million Now, let’s take a look at its projected costs and benefits both for a combined ERP/ES implementation and then for an ERP only project. Costs are divided into one time (acquisition) costs and recurring (annual operating) costs . . . and are in our three categories: C = Computer, B = Data, A = People.

Page 35

Financial Prospects on Implementation of ERP

Page 36

Financial Prospects on Implementation of ERP

Page 37

Financial Prospects on Implementation of ERP





What Can ERP Do for the Supply Chain?

--Rakesh Kumar, Global Industry Product Director Manufacturing Industry, Microsoft Business Solutions

Page 38

Financial Prospects on Implementation of ERP


The goal for any manufacturing operation - whether it is a discrete or a process manufacturing business - is to produce quality products at the lowest possible cost while striving to exceed customer expectations. Achieving this consistently and cost-effectively depends on gaining deep insight into the supply chain, especially when it comes to managing the complexities of formulating and producing products to custom specifications. Maintaining market share in today's ever more competitive landscape requires that manufacturing industries process orders faster-increasing execution and delivery reliability rates-while giving customers better information on order status and simultaneously managing compliance with legal and regulatory requirements. All of this requires tremendous agility and a truly dynamic operating environment that's capable of assimilating real-time information flows across supply-chain touch points with ease. But when it comes to joining the supply-chain management "dots," manufacturers face serious technical challenges in terms of process and data flows - especially when it comes to integrating the "spaghetti soup" of systems controlling individual customer, supplier and production functions.


O’Brien, James. Introduction to Information Systems, 12e, 2005

Page 39

Financial Prospects on Implementation of ERP

To resolve this integration challenge, manufacturers are taking a fresh look at enterprise resource planning (ERP) as a means of gaining that all important "single version of the truth" and equally crucial seamless connectivity to customers and suppliers. In the past, ERP has received a mixed reception. When the first commercial ERP software packages exploded onto the market in the 1990spromising to integrate all data and related organizational processes into a unified single information system-ERP acquired a reputation as an unwieldy monolith that was unsuited to supply-chain management, being inflexible, costly to implement and complex to operate. But manufacturers-regardless of their size or the industry in which they operate --have been missing out on a critical IT opportunity, because ERP has changed. Previously software vendors tried to fit a single ERP solution around the needs of diverse industry verticals, such as semiconductors, chemicals or food/beverages, resulting in shortfalls in the levels of support needed for industry terminologies and industry-specific complexities in the manufacturing operations. Today's next-generation out-of-the-box, supply-chain-management-specific ERP solutions, such as Microsoft Dynamics AX, have evolved, becoming impressively scalable end-to-end offerings that effectively streamline and automate business processes across the supply chain. Alongside delivering that all important data unity within the enterprise, today's ERP solutions use customisable Web services to make it simple and quick to connect with suppliers, logistics providers and customers and enable seamless real-time data exchange and process sharing. Easy to deploy and featuring easy-to-use intuitive tools that can be accessed across the manufacturing operation-from the shop floor to the top floortoday's ERP solutions make "joined up" streamlined supply-chain management an achievable reality. It's this unique ability to integrate external business processes and support application-to-application connectivity across multiple systems in a cost-effective Page 40

Financial Prospects on Implementation of ERP

manner that now makes it possible for manufacturers to respond quickly to changing customer and supplier demands. Supply-chain optimization also is possible now. Powerful inventory management tools help to improve forecasting and planning, so supply and inventory levels can be fine-tuned to customer demand. While access to realtime data gives users faster access to the tasks and critical business intelligence information-like key performance indicators-needed to optimize the supply chain. Finally, ERP makes it easy to simplify government and corporate compliance commitments by defining custom business rules and workflows based on risk scenarios. Today's ERP solutions provide the vital backbone on which effective, costefficient and dynamic supply-chain collaboration can take place. Besides unleashing demand-driven production, organizations of any size in any sector can respond faster to change, incorporate new customers and suppliers with ease, and adapt their operation on the fly as business needs change.



Chain ERP management supply

Effective and integrated supply chains are of strategic importance to companies who want to gain competitive advantage. Customers are demanding greater flexibility, superior services, and rapid response. ERP is the capability to provide timely cross organizational information. W. Edwards Deming stated that approximately 95% of the problems within an organization can be directly linked to the process only 6% are people problem. To stay in the game, suppliers must achieve shorter lead times, greater assets utilization, and increased productivity, all at lower costs. The real opportunity for competitive advantage best lies with Effective Integrated Supply Chains. We have worked extensively across different industries and have come up with series of tailored Supply Chain Management modules in to assist companies to streamline their operations, reduce logistics costs and enhance customer service-all in real time. We offer specialist advice on every aspect of your supply 17

Page 41

Financial Prospects on Implementation of ERP

chain design, implementation, and execution, including I Whether you're implementing, upgrading, or expanding your Enterprise resource planning system - or looking to optimize your supply chain - the highly skilled consultants at HP Services have the methodologies and know-how to meet your needs on-time and on-budget. HP implementation teams draw on our first-hand experience with SAP deployments throughout our own organization, in addition to our work with Enterprises around the world as a SAP Global Services Provider, to bring you solutions based on proven best practices and methodologies. We offer world-class supply chain process consulting, application implementation and IT infrastructure services. Our offerings encompass conventional SAP implementations, design and deployment of solutions in the rapidly evolving Advanced Planning and Scheduling (APS) arena, SAP Enterprise portals, and supply chain management and optimization solutions. All of our services and solutions are designed to help you increase profitability, reduce lead times and costs, focus on your core competencies, and enhance your ability to collaborate with partners and customers. ERP & Supply Chain consulting with a difference Take advantage of HP's special strengths in ERP and supply chain optimization: One-stop shopping for end-to-end solutions that integrate high-performance platforms, HP and partner infrastructure and application software, consulting and integration services, and support

A strategic and collaborative relationship as an SAP Global Services Partner A track record of working with clients in diverse industries: more than half of all SAP







First-hand experience with SAP R/3 consolidation and APO within HP Page 42

Financial Prospects on Implementation of ERP

Annual recipient of SAP's Award of Excellence since its inception in 1995 A proven, best practices-based "rapid" methodology to analyze, build, integrate, and evolve solutions Global reach with offices in 160 countries A uniquely collaborative approach that fosters efficient knowledge transfer between our people Your enterprise is part of a supply chain, or maybe a demand chain, and there are companies, or maybe enterprises, ready to sell you an enterprise resource planning system that will help you label everything your organization does with spiffy new buzzwords. If you're involved in your organization's information technology systems, you've heard about Enterprise Resource Planning (ERP) systems. These are huge, all-in-one systems that promise to handle disparate processes that at one time required their own computer systems: sales ordering, general ledger, accounts payable and receivable, cost management,







purchasing, material planning, shop floor data collection and management, and production. ERP is one of the hottest software products in the large business market today. Independent studies put the overall market in 1998 at about US $16.7 billion, up an








AMR Research of Boston, a leading industry expert firm, predicts that the total opportunity for ERP, including the software, installation and services required to make













The ERP field today is led by some of the world's biggest software companies: Oracle (the world's second-largest software firm after Microsoft), SAP, Baan, JD Edwards, PeopleSoft and SSA might sound familiar to most readers. ERP promises not only to automate all your back office business procedures, it also offers electronic commerce. If you want to sell over the Internet, ERP vendors





And with the Y2K problem just around the corner, you might be looking to upgrade What


system. can


is ERP


worth do





Integrating sales, order desk, inventory control, finance, and management Page 43

Financial Prospects on Implementation of ERP

reporting has significant benefits, not the least of which is from the information technology manager's perspective. There's now only one computer system to maintain and to upgrade periodically, which saves a lot of time and money. Implementing an ERP system often replaces several older computer systems, which can also boost computer productivity. With only one system, you can also reduce



If your current computer system isn't ready for the year 2000, ERP can nicely sidestep that issue as most ERP vendors made sure their products were ready for







A more significant benefit for most companies is the improved use of their information technology. ERP systems present better information in a more timely manner to the people who need it. Sales reps can check inventory levels and prices before committing to deadlines; managers can check margins before offering



Having a single source of data for everything that happens in an enterprise also makes the whole organization more flexible; companies can ramp up production more quickly, or can shift what they're making or where they're making it more readily. ERP systems can also make employees, whether in customer service or production, more productive. ERP systems can reduce turnaround or order fulfillment time and increase accuracy in fulfilling customer orders. For cash savings, ERP systems can help reduce inventory costs through improved stock tracking. Case




Last year, Walbar, a manufacturer of turbine blades and other parts for airplane engines, replaced its business application system with an ERP system from JD Edwards. Walbar is a division of Coltec Industries, Inc., and has three locations in the United States and one in Mississauga, Canada. The company took more than 18 months to select a system, install it and train its employees. The system has been "live" since May, 1999. Since Walbar chose to phase in the implementation, Page 44

Financial Prospects on Implementation of ERP

as of our press time the company had not yet started using all the modules, but started with the core: inventory control, financials, product data management, bills of materials, routing, work centre, shop floor management and workflow. The total cost for the implementation at the Mississauga plant, including the IBM AS/400 computer, servers, new IBM workstations, software, installation and training






"It's early to say what the benefits are, but I have definite expectations about reducing inventory, which will free up a significant amount of cash," says Peter Mammone, director of finance at the Mississauga location. "Another real benefit will be the ability to better plan for the severe cyclical nature of the airplane engine


Beyond that, Mammone sees real improvements in improved customer service; quicker and more accurate delivery of customer orders through better materials planning and order tracking. In Mammone's industry, mistakes are very costly, as there are only about a dozen manufacturers of airplane engines in the world. He says









One key benefit of ERP systems is the way it integrates a company's flow of information. Using an ERP system, the sales, purchasing, production, inventory control and accounting departments all use the same information. One set of data is used throughout the company to make sure customers get what they want when they want it, and that the whole thing is profitable for the company. Centralizing this information and presenting it consistently can also improve planning




To illustrate the value of ERP in action, take a look at Xerox Corp., which installed an Oracle ERP system in three distribution locations across the United States. Each centre produces digital cpiers and printers, and ships them to customers. When an order comes in, Oracle's Release 10.7 ERP system picks the appropriate stock from the inventory, which is all identified with bar codes. Barcode readers from Intermec track products and communicate with the ERP Page 45

Financial Prospects on Implementation of ERP

system via wireless transmission; middleware from Connectware translates the barcode









Four Key Benefits of Supply Chain Management Software

Supply chain software can offer tremendous value to any company that relies on the smooth planning and execution of related operations to achieve long-term profitability and maintain a solid competitive edge. That’s why more and more organizations are purchasing and implementing supply chain applications. In fact, the market for supply chain and related softwares is expected to reach $7.4 billion in 2008, according to a report by ARC Advisory Group. Improve Your Supply Chain Network: Supply chain softwares provide complete, 360 degree visibility across the entire supply chain network – something that cannot be easily achieved with disjointed manual processes. With supply chain, users can monitor the status of all activities across all suppliers, production plants, storage facilities, and distribution centers. This enables more effective tracking and management of all related processes, from the ordering and acquisition of raw materials, through manufacturing and shipping of finished goods to customers or retail outlets. So the status of missioncritical activities can be tracked at all times, and potential inefficiencies or problems can be identified and corrected immediately, before they become unmanageable. Minimized Delays: Many supply chains – particularly those that haven’t been enhanced with a supply chain application – are plagued by delays that can result in poor relationships and lost business. Late shipments from vendors, slow downs on production lines, and logistical errors in distribution channels are all common issues that can negatively impact a company’s ability to satisfy customer demand for its products.


Page 46

Financial Prospects on Implementation of ERP

With supply chain software, all activities can be seamlessly coordinated and executed from start to finish, ensuring much higher levels of on-time delivery across the board. Enhanced Collaboration: Imagine having the ability to know exactly what your suppliers and distributors are doing at all times – and vice versa. Supply chain softwares make that possible, bridging the gap between disparate business softwares at remote locations to dramatically improve collaboration among supply chain partners. With supply chain softwares, all participants can dynamically share vital information – such as demand trend reports, forecasts, inventory levels, order statuses, and transportation plans – in real-time. This type of instantaneous, unhindered communication and data-sharing will help keep all key stakeholders informed, so supply chain processes can run as flawlessly as possible. Reduced Costs: A supply chain software can help reduce overhead expenses in a variety of ways. For example, it can: Improve inventory management, facilitating the successful implementation of just-in-time stock models, and eliminating the strain on real estate and financial resources caused by the need to store excess components and finished goods Enable more effective demand planning, so production output levels can be set to most effectively address customer requirements – without the shortages that result in lost sales, or the waste that drains budgets Improve relationships with vendors and distributors, so purchasing and logistics professionals can identify cost-cutting opportunities such as volume discounts.

4.10 19ERP Purchasing Module: ERP Purchasing module streamline procurement of required raw materials. It automates the processes of identifying potential suppliers, 19

Page 47

Financial Prospects on Implementation of ERP

negotiating price, awarding purchase order to the supplier, and billing processes. Purchase module is tightly integrated with the inventory control and production planning modules. Purchasing module is often integrated with supply chain management software.

4.11 Features of purchasing module: •

Streamlines purchase and process cycles

Detailed Supplier/Subcontractor/Service Provider database

Capturing materials requirement

Automatic firing of purchase requisitions based on MRS

Quotations from various suppliers

Recording Payment terms in PO

Excise consideration in Purchase and Process Orders

PO authorization

PO amendments with complete amendment history

Order cancellation and order closing

Multiple delivery schedules

Quality inspection of goods

Quotation validity

MIS for vendor evaluation based on quality, price & delivery time

Subcontracting – generation of process orders

Multiple indents for multiple items in a single PO

Purchase order processing

Purchase order entry with item details and other details like taxes, discounts, extra charges like freight, P&F, octroi etc.

Flexibility to generate Purchase Order in domestic and foreign currency

Advance adjustments

Purchase bill with updating of GL and purchase book

Service contracts, Service Bills, Service indents and PO

Value based approval of indents

Bill of Entry Page 48

Financial Prospects on Implementation of ERP

Complete import functionality with handling of custom details - Purchase Bill for import, Excise consideration in imports

Reports for Order tracking for complete control on the procurement cycle ERP Purchasing module aims at making available the required materials

of the right quality, in the right quantity, at the right time and at the right price, for the smooth functioning of the organization. All purchasing and subcontracting activities such as inviting quotations, supplier evaluation, placing purchase order, order scheduling and billing are covered in this module. Import of goods is also handled by the system.

4.12 Major benefits •

Vendor performance analysis for effective vendor management.

Smart List to generate the Purchase Orders.

Purchase Receipt Generation Process.

Option to generate Quote-Request to Vendors.

Analysis Reports equipped with graphical charts.

Instant access to critical PO data.

PO generation time/cost savings.

4.13 20Cost and Benefits Analysis: One of the main focuses of a Business Excellence project is customer service. We find that our "make to stock" Business Excellence companies achieve high levels of stock availability, typically over 99%. Any make for stock company in a competitive situation should be able to estimate the possible extra sales they could capture if they always had their products on the shelf. For other types of business, assemble to order, make to order or engineer to order, the benefits from a Business Excellence project typically come in the form of reduced lead time, a 50% reduction in 12 months is common, and on-time delivery close 20

Page 49

Financial Prospects on Implementation of ERP

to 100%. The potential for increasing sales if lead time could be reduced by half and on time delivery improved should be estimated. It would not be realistic to believe that all the potential increase in sales could be realised, so the potential benefit from increased sales should be calculated as the gross margin on a proportion of the potential increase. For the example shown in Figure 1 we have taken half of the potential benefit. Some companies will get increased sales from both the off the shelf and lead time improvements but for most it will be an either/or situation. The most basic improvement that Business Excellence companies achieve is a stable, managed master schedule out to the cumulative lead time. When a manufacturing department has stable, reliable schedules so that supervision can spend their time managing and improving their processes instead of chasing material and shuffling priorities, there will be a saving in both direct and indirect costs. Idle time or waiting time, if recorded, is typically only the tip of the iceberg. An estimate of the potential direct saving alone should be made and again we will use just 50% added into the project benefits for our example. Direct material is frequently a large proportion of the cost of sales. There are many potential savings in this area that arise from improvements in master scheduling. If you give your vendors stable schedules they can achieve the same manufacturing cost savings as you. The greater visibility will enable your suppliers to invest in better equipment and to take on value engineering work with you. Single reliable sources of material, rather than multiple but unchecked sources, opens up the possibility of point of use delivery which saves inventory and administration time. We find that purchasing department can typically achieve a 20% reduction in material costs with as little as 3 months forward visibility of requirements. We will again be as realistic as possible and use only half of this estimate of potential savings on purchased material for our example.

Page 50

Financial Prospects on Implementation of ERP

Inventory is the last main category of quantifiable savings.


replacing a seat of the pants planning system with a faster, computerised system will often result in inventory rising, as the temptation is to react to the messages to purchase material but not always get around to actioning the other messages. The ignored messages will include re-scheduling out works orders and therefore, purchases. If there are overdue items on the schedules, all the other material which depends on the overdue items will be scheduled. Eliminating all overdue items on the schedules alone will significantly reduce raw material and work in progress. When a managed master production schedule is driven by a sales and operations plan, agreed by the senior team, finished unit inventory will be much better controlled so that slow moving stock will be gradually eliminated.

All amounts in ÂŁ000's Sales

Benefit 40,000

Possible % increase if product always available (make to stock items)


Possible % increase with shorter lead times (make to order items) Gross margin%


Annual benefit for 50% of above


Annual direct labour cost


Possible % labour cost saving with stable schedules & no material shortages Annual benefit from 50% of above Annual purchase material cost

5% 125 15,000

Possible % purchase cost saving with better material requirement information Annual benefit for 50% of above Estimated inventory holding cost (% of inventory value) Current raw material inventory value Possible % reduction in raw material

10% 750 16% 2,000 25% Page 51

Financial Prospects on Implementation of ERP

Current work in progress and intermediate storage value


Possible % work in progress and intermediate stock 50%

reduction Current finished stock inventory value possible % finished stock inventory saving Annual inventory saving benefit from 50% of above Total annual benefit

5,000 25% 180 2,055

Total one time capital saving (25% of inventory reductions)


Figure 1 : Benefits With inventory there are two types of savings. The cost of holding inventory, including the cost of the storage space and its overheads, inventory management etc., is an annual cost saving. In addition there is a one time capital saving which will offset the one time capital cost of the project. It is reasonable to take half the potential annual saving in inventory holding cost. For the capital saving, a quarter of the capital is a more realistic figure as there may be equipment purchases necessary to realise some of the capital savings described in the chapter on continuous improvement. The benefits analysis table in Figure 1 (the figures are in 000’s) show some typical figures for a company with a £40m p.a. turnover. Unfortunately there is a cost associated with this benefit so it is now necessary to estimate the cost of the project. First there will be hardware and software costs. At this stage the choice of system may not have been made. It would do no harm to put in a fairly high estimate obtained by talking to any of the software companies. There will be a one time capital cost of the software which will vary enormously depending on the complexity of the software and size of the company (see ERP software tiers table), typically from about £7,000 to as much as £40,000 (US$10,000 to US$60,000) per seat / user licence depending on the software and the database licence fee. Page 52

Financial Prospects on Implementation of ERP

Whilst every effort should be made to resist the temptation to customise the package, there may have to be some changes which should be allowed for and some packages (e.g. SAP R/3 and JDE's EnterpriseOne) may be cheaper for the software but much more expensive to configure. SAP R/3, for instance, may only cost £3,000 for the software per user licence but £15,000 per user licence for consultants to configure. There will also be an ongoing maintenance cost to install the upgrades along with further customising (typically 15% to 20% per annum of the software cost). The programming cost will depend on the size of the company but there could be two man years in the customising and one person on a continuous basis after that. The Project Cost table in Figure 2 gives some typical figures.

All amounts in £000's

Hardware Software Customising / configuring



ne time






10 0 20 0 60

20 40 30

Data control Inventory records

15 0

Bills of material





Education Page 53

Financial Prospects on Implementation of ERP







Direct labour


Full time project leader

35 11

Full time project team (4)


Outside consultancy

75 12

Miscellaneous Total




5 18





Figure 2 : Project Costs Many companies do not go any further than these costs to arrive at the cost of the project. It would, indeed, be possible to change the current planning system for the new planning system without any additional costs. Unfortunately, such implementations fail to achieve any of the benefits itemised above. All of the benefits come from the second half of the investment. You have to allow for costs associated with getting the bill of material and inventory record accuracy above the 98% that is vital to get meaningful data from the system. For inventory records, the cost of cycle counting will be on-going but bills of material will generally remain accurate, once the process for maintaining the bills of material has been established, without any significant on-going cost. The same applies to routings. An allowance should be made for external education and training in the initial phase. As well as the initial cost of education and training, there will be an on-going cost of training new recruits and for adjusting the process as the business changes. An allowance of 25% per annum of the start up training and education cost is a good estimate.

Page 54

Financial Prospects on Implementation of ERP

Many companies start out with the intention of not having a full time project leader let alone a full time project team. At this stage it is not necessary to decide whether you will have these full time people but the justification should include them. As a rule of thumb, a project team of three people is necessary for companies with up to 300 employees. One more project team member is needed for every 200 employees. Deciding who the team will be can be delayed until later. Finally there should be a "miscellaneous" allowance of about 10% of the cost so far. This is one cost that is almost always overspent!

all amounts are ÂŁ000's Sales opportunity


Direct labour efficiency


Cost of material Inventory holding cost reduction Total annual saving On-going costs

1,500 360 2,225 143

Net annual benefit


One time cost


One time cost saving Net capital cost Pay back period (years)

Cost of 1 month delay

562 468 0.25


Figure 3 : Cost and Benefits Summary The last stage of the analysis is to bring together the costs of implementing and compare it with the net annual benefits (see Figure 3). The pay back period can then be calculated and compared with the company norm. It is Page 55

Financial Prospects on Implementation of ERP

very unusual if the pay back is not one of the best the company has seen for a while. The final figure to calculate is to divide the net annual benefit by 12. This gives the cost of one month delay. This is a powerful motivator to get on with the project, get the best people possible onto the task forces and avoid delays. The cost of delay of ÂŁ175,000 per month in this example puts the costs into perspective. The cost of the full time project team, for instance, becomes less of a decision. A full time project team will considerably speed up the project invariably and pay for their cost many times over. The use of outside consulting help is a significant and cost effective way to speed up the project. One of the most common causes of delay is the decision on which software package to use. The fact is that success or lack of it has almost nothing to do with software. There are some basic functionality requirements that are described in the Software Selection Guide most of the better known packages have this functionality now, after that it is down to support and training.

Page 56

Financial Prospects on Implementation of ERP

5 CONCLUSION AND RECOMMENDATIONS 5.1 Conclusion From the beginning, a successful ERP implementation must be mapped to the client’s growth strategy. Taking this approach, along with superior project management, documentation, communication and training will ensure the success of the implementation and maximize adoption of the software. The technology should align with organizational processes and structures so that it supports the company goals, not the other way around. An ERP solution will become an integral part of your business, and OmniVue wants to make sure it lives up to your expectations. All the information should be accurate, timely and consistent. More importantly, an organization needs a typical and total integrated network to combine and hoop the data. Lack of such total integrated network might start really bad for organizations in the long run. In summary, ERP is the foundation of present and future success of Electronic Commerce Business to Business. It is probable that the term ERP (never very explicit) will disappear, that the editors too will disappear if they cannot reinvent themselves . But the transformation toward new business paradigms will be achieved by the combination of a rethinking of processes, a performing ERP solution, and the Internet technologies. These elements taken separately do not explain the transformation we are witnessing today. It is the synergy of a combined effort process, ERP and technology which leads to this transformation. It is in fact the first time that the company has the requisites to really situate the customer as sovereign. As far as critical success factors, the Needs Requirement had to be formal, detailed and lead naturally to an ERP solution choice. It also set a framework for scripts, tests, in later implementation phases. But there needed to be a certain humility and flexibility so that the benefits of the ERP solution be optimized. The Customer had to say I want this, this and Page 57

Financial Prospects on Implementation of ERP

this, but also listen carefully when the Editor said I can deliver this, this and that. Unless there was an overriding business, legal or fiscal reason, the economic path was one of compromise. A ‘failure’ factor could be either not sufficiently expressing objectives, needs, constraints clearly; or having done so, sticking to them so rigidly that the ERP solution was customized or interfaced to death. The success factors to this point in time, i.e. at the outset of the project implementation, often dictated whether the project would ultimately be in line with budget costs, delays and expectations. To use the concrete metaphor already cited, the errors made at this stage would be difficult to correct (remold) later on.

5.2 Recommendations It is recommended that: •

ERP must be given importance in the national IT e-governance policy, which will pave the way for ERP implementation in the country.

Role of educational institutes cannot be undermined in promoting ERP. Educated professional trained and equipped with the ERP tools and technologies can bring major contribution in revolutionise the open source culture in the country.

Non government organisations must be encouraged to help government in helping Pakistan economy by adopting and promoting ERP culture.

Government should extend the educational and training activities to influence the inclusion of ERP in syllabus and train the teachers on ERP technologies.

Page 58

Financial Prospects on Implementation of ERP


Page 59

Financial Prospects on Implementation of ERP  

Financial Prospects on Implementation of ERP ACKNOWLEDGEMENT .................................................................... 5 2 LITERA...