Theory of Constraints ensures a successful ERP selection and Implementation

Theory of Constraints ensures a successful ERP selection and Implementation

Author: | Published: 20 May 2014

ERP selection and Implementatio

In the book Thinking About ERP, the authors suggest ERP is no longer a competitive advantage. It is now a competitive disadvantage not to have an ERP, or to select one that doesn’t operate efficiently and effectively.

To ensure the selection of an appropriate ERP, business decision-makers should answer the following questions:

  • What strategic business objective will be served with ERP?
  • What, how much and when will ERP contribute to this particular objective?
  • How do the answers to the last two questions influence what ERP system to select?
  • How to go about an ERP implementation, and how to operate the ERP system once it is live?

One of the best ways to answer these questions is through the application of Eli Goldratt’s Theory of Constraints (TOC), a change-management philosophy and methodology that companies can use to consistently achieve their goals. TOC helps to clarify the linkage from a business’s constraints to its performance – as measured on the bottom line. This can also ensure the ERP selection process is a business decision based on targeted objectives, and that the benefits will be verifiable.

According to the TOC approach, an organization can be evaluated and controlled by three measures:

  1. throughput (the rate at which it generates money through sales),
  2. inventory,
  3. operational expenses.

A business benefit is only real if it results in increased throughput, reduced inventory, or reduced operating expenses.

A good example of successfully applying TOC can be found in Basic Grain Products Inc, a private-label snack food manufacturer based in Burnaby, British Columbia. Prior to July 2012, Basic Grain Products ran its business on a mixture of legacy products.

Having identified the company’s constraints, Basic Grain Products went in search of an ERP that would provide an integrated, real-time view of its business processes. The company chose SYSPRO as the solution that best addressed their business objectives at a price they could afford.

“By connecting the inventory system with order entry,” says CFO Norman Shung, “and by continuously updating information on inventory quantity and availability as a function of doing business, our book inventory now gives us an exact image of our real inventory. That gives us a very high degree of control over our inventory, and over its associated costs. It also helps us keep track of our expired product, and makes it much easier to adhere to the FIFO (first in – first out) method, which wasn’t being properly managed before. We still have to gather more data, but at least, now, the visibility is there.”

TOC shouldn’t be abandoned once the selection process is over. Every ERP implementation potentially affects the enterprise on three basic levels:

  1. business processes,
  2. business systems,
  3. employees.

The ‘Thinking About ERP’ book calls these the ‘three degrees of freedom’, and their relative importance changes for every project.

Some businesses think they only need to change their business system. In reality, ERP always has a degree of process review, and usually involves realigning roles and responsibilities. An understanding of the constraints along each degree of freedom, and of the change management solutions required to mitigate those constraints, is an important aspect of ERP selection.

Basic Grain Products’ next big challenge, says Shung, came after the ERP implementation, and lay along the degree of freedom that symbolizes employee organization. “As is often the case, people are fearful of change, and with our new ERP came many changes to both our technology and our business processes.”

Change management is always an important factor in a successful ERP deployment, adoption and return on investment. Organizations that don’t realize the need for change management may not see their ERP project meet its business objectives.

Learn how to apply inventory optimization to your business

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Comments (2)

  • Gerald Poe Reply

    Oddly enough, our group has been reasoning the costs of not having ERP and they are numerous. Costly because without ERP a company is left stranded at the mercy of whims and competition they not only have no control over, but get pinned down in a game of survival of the fittest.

    February 19, 2014 at 5:23 pm
  • Odete Passingham Reply

    Yes Gerald; I’m sure you have a lot of stories from the trenches. Survival is simply not enough because the pace of change is so great. Today a business must be agile and responsive. To be nimble you need tools that allow for unified collaboration not only with your processes but across you supply chains.

    February 20, 2014 at 7:46 pm

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