This article originally appeared on the 3AG blog.
A quick intro
ERP. No other three letters can strike such fear into the heart of a CFO. But why is this the case? And what can leaders do to solve this problem?
First a quick primer. The term Enterprise Resource Planning, or ERP, was first coined by Gartner in the 1990s. It describes software that evolved out of maintenance resource planning and manufacturing resource planning tools developed in the 1960s. By integrating new features like finance and accounting into these tools, companies were able to get a much more integrated view or their operations.
Who uses ERPs?
The primary users of ERP are accounting, finance, logistics and production, but it’s hard to find anyone not affected by ERP implementations.
What are the benefits?
It’s important to understand that there are things that ERPs can do quite well, and that there are things that ERPs struggle with. ERPs have were traditionally designed to record activities against a work order, i.e. to process business transactions efficiently. Consequently, the benefits of ERP include:
– Providing a central repository for most of your company’s data and business processes
– Reduction of manual paperwork
– Inventory management & expiration tracking
– Automatic creation of accounts payable and accounts receivable
– Quality management
– Standardization of information and processes
All sounds great so far, doesn’t it? Now for the bad news:
– ERP failures are common. According to Gartner most ERP implementations fail
– ERP implementations are expensive
– ERPs take a long time to implement, generally measured on the scale of years
– New ERPs may require business process changes
– Organizational changes that occur mid-implementation could affect business processes
While cloud-based ERPs remove the IT burden of managing infrastructure, they still suffer from ERP integration issues. Furthermore, cloud-based ERP systems lack the customizability of their on-site predecessors.
ERPs are great at collecting data, not so good at interpreting
Despite the cost and long implementation time, ERPs are critical in helping organizations record data and business processes. They force departments to follow process and ensure that everything is properly tracked. And they are powerful tools for managing customer orders, purchase orders, manufacturing orders, field service requests, shipments and returns.
Where companies tend to face ERP disappointment is when they try to access this data (outside of a standard work order). Business reporting, analytics, predictive modeling – these are all very important use cases that are not easily handled by an ERP.
Perhaps it’s an issue of perspective. ERPs are good at outlining and policing business process. These work flows get coded into the ERP at implementation, becoming a static snapshot of the company’s process. Just like physical equipment however, over time these processes wear down and become inefficient. In contrast, businesses are dynamic, complex systems that change over time due to changing conditions.
How can you tell when your ERP is not working for you?
There are a few signs that your ERP implementation is getting a bit stale:
– A proliferation of spreadsheets and manual workarounds are required to make things work
– Significant effort is required to close financials, build forecasts and develop basic reporting
– You’ve experienced a lot of employee churn since the original ERP implementation or most recent upgrade
– You and your team have a sneaky suspicion that the data you’re looking at isn’t accurate
Do you need an ERP upgrade?
Not necessarily. Many companies choose to manage reporting and analytics separately by extracting data from the ERP into a separate data repository (known as a data warehouse or data lake). The advantage to this approach is that companies can now take advantage of other modern reporting, dashboarding and analytics tools without the need for expensive changes to the ERP. Furthermore, data from other systems can be stored in a data warehouse, opening the possibility for even richer analysis.
Closing the loop and optimizing your business
Accurate reporting is critical for an organization, allowing employees to make informed decisions and avoid shooting from the gut. But reporting alone is not enough, as it generally involves an underlying assumption that business processes are static.
A more sophisticated approach is to combine reporting with activities targeted at identifying and removing inefficiencies within the organization. Over time a company’s environment changes because of changes in customer needs, competitive actions, aging processes, and organizational restructuring. These changes wear away at a company’s business processes, resulting in inefficiencies. Since these changes are gradual, companies often wait until their net effect is visibly noticeable, with a scattershot approach to identifying and fixing problems.
What if, in combination with your ERP, you could close the loop and continuously optimize business processes, inventory, throughput, and so on? By properly modeling different components of your business and continuously feeding these models with data from your ERP you can not only identify where inefficiencies exist – you can even get recommendations on how to fix these inefficiencies.
Such a system is not science fiction, but it does require accurate modelling of business processes. By building models that extract data from your ERP, identify optimal operating conditions, and then close the loop by feeding this data back into your ERP, your company will not only improve operations, but it will perhaps change ERP from being such a spiteful 3-letter acronym.