In search of "Common Sense"

Feb 10, 2010

Necessary but not sufficient redux – Inability of ERP vendors to think logically

Redux is an adjective meaning "brought back, restored"

The headline SAP's CEO Resigns: Delays in Launching Online Business Software Cited as One Reason for Downfall
brings the prophetic nature of Eliyahu Goldratt's novel "
Necessary but not sufficient" into immediate relevance. Goldratt had written the novel to alert the ERP vendors, which were held as stock market darlings in the late nineties, against the bumpy road ahead. These companies were attracting a PE multiple of 100 mostly due to their growth track record rather than their profitability.

Goldratt had logically pointed out that ERP vendors had wrongly surmised that in order to make the customers happy they needed to keep on adding newer and newer features. This race for adding features to make the ERP application as comprehensive as possible was resulting a very complex software. In order to compete with each other, these vendors were releasing incomplete and bug-ridden application to the clients. This in turn was making it difficult to implement for the implementation partners and difficult to troubleshoot whenever bugs were reported by the clients and implementation partners, which was happening with more and more regularity. These facts had started appearing in reality and they pointed to the future where ERP vendors would stop growing at a scorching pace. Another factor that would be contributing to brakes on growth was that almost all of Fortune 1000 organizations had implemented one or the other ERP. These organizations had implemented ERP in their drive to replace the legacy software before the purported Y2K disaster. Moreover, the ERP application was in a position to provide visible bottom-line improvements by shrinking the time that information was travelling through the geographically diverse locations where such large organizations had presence. The sub-Fortune 1000 organizations, popularly known as SMEs (Small and Medium Enterprises), did not have legacy applications that needed to be replaced before Y2K and hence wanted to have a bottom-line orientation for their decisions.

ERP vendors did not have any story, other than jazzy features and catchy phrases like system optimization, or greater operations visibility, then. They still do not have a credible story of why any organization should implement ERP and go through a very painful change. The key benefits that ERP can bring to organizations - large, medium or small, but which ERP vendors and their implementation partners do not focus on are:

  1. Reduction in lead-time
  2. Increasing the reliability in delivery measured as On-time-in-full delivery %
  3. Reduction in inventory
  4. Increase in sales.
  5. Reduction in material costs,
  6. Reduction in the days of outstanding receivables

It seems the ERP vendors did not draw any lessons from that warning. They are still too dazzled by technical wizardry their techies can throw-up. The debate around on-premise and hosted (SAP V/s Netsuite) points towards this myopic vision.

Below is an extract from a flyer on SAP BusinessByDemand, a SAAS offering from SAP and why I find it so disappointing. The biggest disappointment is obsession with cost reduction rather than throughput (sales minus totally variable cost) increase.


My Comments

The SAP® Business ByDesign™ solution is an on-demand solution that comes with the extensive expertise and stability of SAP. This solution helps enhance growth, productivity, and collaboration and provides lower, more predictable IT costs. SAP experts fully manage, monitor, and maintain the solution in hosted data centers worldwide, freeing you to focus on growing your business.

Business Challenges

• Streamline business processes without incurring significant IT capital costs

  • Instead of highlighting the reduction in costs, it would be great to highlight how ERP can help "Exploit the Constraint" to squeeze out maximum throughput for the given investment in business.
  • The transparency is required for internal stakeholders more than the external stakeholders to prevent accumulation of inertia and unnecessary inventory in any part of the organization.
  • Rather than managing complexity, it should highlight how the whole thing can be simplified by ensuring WIN-WIN situation for all the components of Supply-Chain. This can be done by reporting the Throughput-Dollar-Days and Inventory-Dollar-Days for different players in the Supply-Chain.

• Meet increased requirements for transparency and reporting

• Preserve and expand customer base

• Manage logistical and supply chain complexity

• Improve employee productivity and collaboration

Key Features

• Financials and compliance – Generate trusted, up-to-date data that lets you perform financial reporting, make informed management decisions, and enable regulatory compliance • IT on demand – Reduce costs and increase control with a single, flexible business management solution

  • The most important feature should be managing operations using Simplified Drum-Buffer-Rope (S-DBR) for Production environment and Critical Chain Project Management (CCPM) for Project environment.
  • The focus again should be on increasing throughput, creating conflict free environment within and outside the organization rather than shaving some imaginary costs.

• Customer service and support – Use customer relationship management processes to improve service with a new understanding of costs and profitability

• Workforce management – Enhance HR operations and maximize employee potential

• Procurement – Strengthen relationships with suppliers and streamline purchasing processes

• Supply chain – Cut costs and improve effectiveness of supplier relationships and logistics

Business Benefits

• Get up and running quickly with streamlined business processes and a 360-degree view of your business

  • Reduction in lead-time
  • Increasing the reliability in delivery measured as On-time-in-full delivery %
  • Reduction in inventory
  • Increase in sales.
  • Reduction in material costs,
  • Reduction in the days of outstanding receivables

• Reduce IT costs with smooth, predictable deployment and operation as well as built-in service and support

• Enhance employee productivity and collaboration using a single solution interface, personalized business portals for each employee, and built-in user help

• Make better-informed decisions faster using analytics and dashboards

• Improve flexibility and reduce risk by adapting the business to changing