In search of "Common Sense"

Jun 23, 2011

Are you making the most from your ERP?


When it comes to technology there are three ways of adopting it.

The first one is to naively believe in a magical technological solution for leading your business to increased productivity. You will be quickly placed on an IT company's sucker list that's labeled, "They'll buy anything."

The second is to be genuinely interested in doing the right thing. But, beware of being unwittingly surrounding yourselves with IT hotshots who are interested in having the opportunity to play with the latest technology and brag to their friends about how IT-cool they are. These brilliant nerds would willingly bankrupt your company in order to have the latest, greatest, best and most cutting-edge technology.

Finally, there is more sober way to be prepared to embrace and invest in technology as a tool when you understand exactly how you'll be rewarded by significant improvement in your company’s competitive advantage, nothing less. A Rupee invested in IT should be expected to return not less that 1000% ROI if not more.

Take the case how one of the companies understood the power of RFID scanning system for one of its huge distribution centers, fifteen football fields in size. They realized they'd be able to receive a pallet from a manufacturer, scan it and move it onto one of their dispatch trucks in as little as eight minutes, They were ready to move ahead. The scanning system they finally decided on increased productivity more than 15 percent and paid for itself within two years.

Is the above example a good enough case to decide the connection between IT investment and productivity improvement? Should the company stop looking for possible changes/improvements beyond the immediate vicinity where the technology is installed?

We would say that the company has left a huge value addition on table that is possible after introducing such a powerful technology in their arsenal. The company needs to analyze if the technology is necessary then what else it needs to do to make it sufficient to get extraordinary returns from the adoption of technology. We call it Necessary and Sufficient Thinking inspired by Dr. Eliyahu Goldratt’s novel – Necessary but not Sufficient.

THE REALITY:
Many problems are experienced with the implementation and use of new technology. These problems create great losses in time and money and can cause that the benefits expected from the new technology is never fully realized.

A well-known example is the implementation of the complex technology of ERP.

Many studies have been conducted around the experiences of various companies who have attempted to implement ERP. Some of the studies have asked the questions: “What are the factors causing small and medium enterprises (SMEs) to hesitate in adopting technology that is widely recognized as critical to any organizations’ profitability?  Is making the change considered too difficult, too costly or too risky at the present time?” The answer to these all the questions is all of the above. The experience of SMEs world over with implementing ERP has been patchy at the best and downright waste of money and time for majority of them.

A study published in International Journal of Computer Applications list critical success factor for successful ERP implementation in SMEs. These include: Top management support, highly competent project team, right implementation scope, management program change, data accuracy, education & training.

This, in other words, means impossible for any SME.

Necessary & Sufficient Solution:

Necessary & Sufficient solutions claims to provide a process to ensure new technology implementations will have real bottom line benefits.  But what is the Necessary & Sufficient Solution?

Dr. Eliyahu Goldratt, famous author of the book -The Goal, approaches the aspect of implementing and using new technology in his book Necessary but not Sufficient.  He makes use of simple statements to distinguish between the concepts of necessity and sufficiency of a new technology.

The first statement is:

Technology can bring benefit if and only if it diminishes a limitation

When considering a new technology, this statement implies the following: A new technology should only be considered if it would diminish a limitation. Because if the new technology does not diminish a limitation it will not bring any benefit. And if the new technology does not bring any benefit, then it is not necessary.

The second statement:

Technology is a necessary condition but it is not sufficient.

The concept of sufficiency creates awareness of the additional activities /aspects  that are necessary to ensure the successful implementation of technology. (Goldratt focuses on this activity of changing the rules that recognize the existence of the limitation).

Let’s return to the basic question: Are the benefits expected from the new technology guaranteed by the mere installation of it?

Goldratt states that the existence of the limitation is recognized and accommodated by customs, habits, measurements, policies, behaviors and measures (collectively referred to as rules).

If, as part of the implementation, it is neglected to address these modes of behavior (rules) it means that the new technology is used in an environment that still assumes the existence of the limitation. 

Therefore, the rules will impose a limitation and if the rules are not changed the full benefits will not be realized.

To practically implicate the concepts of necessity and sufficiency, Goldratt formulated four simple questions that should be answered in order to help achieve the successful implementation of new technology.

The four questions are:
1.         What is the main power of the technology?
2.         What limitation does this technology diminish?
3.         What rules helped us to accommodate the limitations?
4.         What rules should we use now?

Goldratt has applied the principles of the “Law of Necessity and Sufficiency” to the ERP environment.  He has answered the four questions for ERP and has even gone so far as suggesting a strategy that ERP providers and integrators should follow to ensure that the complex technology is successfully implemented to ensure fast and significant bottom line improvements for the customers.

ERP IMPLEMENTATION METHODOLGY

Enterprise resource planning (ERP) is an integrated computer-based system used to manage internal and external resources including tangible assets, financial resources, materials, and human resources. It is a software architecture whose purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders. Built on a centralized database and normally utilizing a common computing platform, ERP systems consolidate all business operations into a uniform and enterprise wide system environment.

The above-mentioned 4 questions are answered for the ERP implementation environment:

1.         What is the power of the technology?

The power of ERP is its ability to handle data. This means storing, transfer data between silos and retrieve data. This is many orders of magnitude better than technology previously employed – the paper technology.

2.         What limitation does it diminish?

The limitation with which organizations had to live with before ERP is: the necessity of any manager (at any level, in any function, in any organization) to make decisions without having all the relevant data.
The technology that diminishes such a huge limitation should bring enormous benefits.

3.         What rules helped to accommodate the limitation?

The rules developed to by-pass this limitation helped to make decisions based on the existing data generated and accessible in local vicinity. These are the “local optima rules”. Since the limitation existed for every manager, it is no wonder that we find these “local optima rules” in every corner of the organization. Some of these “local optima rules” are:

a.         Economic Batch Quantity for Production

b.         Min-Max and reorder level for Purchase

c.         Evaluation of production worker and machines based on efficiency and utilization.

d.         Product Cost for calculating product margin of Sales

e.         Artificial P&L accounts for SBUs, Divisions, Functions etc which share significant common services

f.          Activity Based Costing to attempt reducing the distortions created by Cost Accounting based allocation of overheads.

These are very sensible rules and have given very good results as compared to arbitrary or random decisions. By implications, if even after implementing ERP, these rules remain, then the company would be operating as if the enormous power of technology is not at all harnessed and the company operates within the limitation that existed before implementation of ERP.

4.         What the rules that should be used now?

Local optima rules help to decide what is good for the ‘local’ in the fond hope that what is good for the 
‘local’ is also good for the ‘global’ or ‘total system’. The reality is that that good for different ‘parts’ are in conflict with each other. For example “Economic Batch Quantity” results in increase in inventory and lead time which conflicts with global goal of increasing profits and reducing response time.
The new rule need not be very complex. As every manager in any function, department, level has access to all the relevant information, the decision criteria would be common to everyone and simple to understand.

This decision criterion relates to what is good for the Global or “Total System”. The priority that needs to be followed by every decision maker for all types of decisions – operational, tactical or strategic is as follows:

a)         Priority One: How to increase Throughput (T) of the system?

b)         Priority Two: How to reduce Inventory or Investment (I) in the system?

c)         Priority Three: How to reduce Operational Expense (OE) of the system?

The new rules as described above are converted into practical method by Goldratt in the shape of Drum-Buffer-Rope and Critical Chain Project Management. For supply chain operations new metrics like Throughput Dollar Days and Inventory Dollar Days are suggested to increase reliability and effectiveness of the complete system.

Any organization which has adopted the above approach to plan and implement ERP has reaped returns which are far superior to the current approach of using ERP to adopt or make minor modifications to existing ways of working and just automate what the organization has been doing for ages.

Works Cited

Upadhyay, Parijat, et al. "A Comparative Study of Issues Affecting ERP Implementation in Large Scale and Small Medium Scale Enterprises in India: A Pareto Approach." International Journal of Computer Applications (0975 – 8887) (Volume 8– No.3, October 2010).

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