ERP Systems – are they a Cost or Benefit?

ERP Systems – are they a Cost or Benefit?

Author: | Published: 06 Oct 2015

I’m in ERP sales, so I’m an easy target for those who think that ERP salespeople make over-exaggerated claims. Some do, but I’m not one of them. You don’t need to exaggerate to justify an ERP system, and if you do the job properly it can often result in a negative cost (i.e. it saves more per year than it costs).

I’d like to suggest that part of the reason that many ERP implementations fail to deliver the cost benefits claimed or expected during the sales and buying process is that not enough attention is paid to policy definition. I will use one of the most common ERP justification reasons – inventory reduction – as an example.

An ERP system, by itself, will not reduce inventory. It is a tool that has to be used by people to support the goal of inventory reduction. But inventory reduction as an isolated goal is not a great idea if you ignore service levels. A more intelligent approach is to set the goal to be an improvement in customer service levels whilst simultaneously reducing or optimizing inventory across the organization. In fact, inventory optimization is a better goal than inventory reduction.

This is much harder to achieve than it sounds, and you can quickly reach the point where the client doesn’t actually know how to do this. If you then combine the client’s position (lack of knowledge or expertise) with the fact that most ERP systems lack certain tools that are fundamental if you want to balance service and inventory levels, you can understand why ERP sales and implementation teams duck the problem. It could also be argued that many ERP sales teams do not understand the full implication of balanced inventories and, therefore, do not realize that part of the ‘solution’ components are missing from their product offering.

What typically happens is that, quite rightly, the client uses the new ERP system as a reason to streamline business processes. Simply streamlining processes often creates the same end result, but more efficiently, which is a hidden trap.

That’s where policy should, but rarely does, affect or influence the new processes. Setting a policy that combines service levels with inventory levels requires a complete rethink of processes and practices, and it is this that drives out cost and delivers operational benefits.

Policy definition needs to precede requirements definition. It’s no good producing a requirements spec, buying a system that fits the spec, and then deciding what your company policies are. By this stage you’ve probably bought the wrong system.

The same comments/approach can be applied to the other throw-away ERP system justifications such as WIP reduction, improved customer satisfaction, etc.

To answer the question posed in my blog title, if policy is clearly and intelligently defined – with measures – and if the selection and implementation process is focused on policy goals, then ERP can, and probably will, deliver cost reductions. This presupposes that cost reduction is a policy goal. It might not be.


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Comments (2)

  • Gerald Poe Reply

    David, Well said. Companies want to think and believe, they have ERP therefore they are doing ERP. Thus they disarm the need for speed and relax; knowing “it is just a button push away.” Ownership begs the question what else/next do we need to do?

    October 6, 2015 at 12:21 pm
  • David Waller Reply

    I completely agree with you Gerry. Buying ERP gets you ERP. But ERP doesn’t, in itself, resolve your problems. You have to make changes before there can be any benefits. It’s the precise definition of what these changes need to be, and why, that are often overlooked. ERP can be deemed to underperform if these required changes are not picked up and resolved during implementation. The fact is that ERP does what you ask, and if you don’t ask you may not get.

    October 13, 2015 at 7:22 am

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