Business Value of ERP

Dept. of Information Systems SVKM's NMIMS University 1

Facts About ERP projects65% of executives believed that ERP could be

harmful to their organizations.( Muscatello & Chen, 2008)

Robbins-Gioia,an Alexandria-based program management consulting firm, recently reported that :51 %of ERP projects are considered failuresa full 30 percent far exceed budget and missed their

completion dates by a wide margin 25% of organizations adopting ERP systems faced

significant resistance from staff 10% of the organizations also encountered

resistance from managers(Muscatello & Chen, 2008)

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The Firm Value Chain and the Industry Value ChainThe Firm Value Chain and the Industry Value Chain

Figure 3-11

Su

pp

liers

Human Resources

Finance and Accounting

DemandPlanning

Manufacturing Planning

LogisticsPlanning

DistributionPlanning

OrderEntry

Enterprise Resource Planning

Cu

sto

me

rs

Purchasing& Accounts

Payable

MRPInbound

InventoryPlant Mgmt.

Manufacturing& ProductionScheduling

InventoryControl &

Warehousing

Distribution& AccountsReceivable

Enterprise Resource PlanningThe Business Value of ERPThe Business Value of ERP

ERP ROIERP success rate low and positive ROI often

non existent More than 90% of the companies doesn’t have

a success the first time aroundERP need to be driven by right strategic and

tactical process improvements with documented assumptions and valid ROI expectations and Matrix

New processes and ERP must be implemented correctly and quickly

However these are barely approached in this manner the first time

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ERP ROIROI does not come from ERP. ROI comes

from what you do using ERPROI comes from process improvementsERP software alone brings little business

performance improvementERP and process flows are not mutually

exclusiveStrategic decisions and commitment of top

level exec’sBusiness process re-engineeringImplementation tuned with the overall

strategic objectives6

How ROIIdentify business processesDefine ROI metrics which should include

parameters like inventory levels, number of days for customer outstanding, the type of reports, the number of people in a particular function etc.“

Select the appropriate ERP package (select most appropriate modules)

SW application should be flexible and scalableMeasure the benchmarks post implementation Use the following methods: Payback, ROI,

CBA etc

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Business CaseCreate a base case of year-o-year savings from

cost cuts that could be made without ERPCreate an ERP case of y-o-y savings that could

be made with ERPSubtract Step 1 from Step 2 and calculate NPV

of the residual cash flowPositive NPV means you can probably proceed

with the deployment of ERPPerform sensitivity analysis (withstand

slippage and cost overruns)Back-allocate all ERP system deployment costs

to individual business units so that they can factor them in their planning

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ERP ROI ChallengesERP software was installed to mirror a set of

existing, inadequate business processes.Many ERP implementation failures were

caused by Y2K being the driving force behind the project rather than the defined business performance

With Y2K as the driver, ERP became a software replacement project.

ERP ROI are so well-hidden and cant be reasonably measured

Strategy and its implementation are not considered

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ERP ROI Challenges Implementations done by inexperienced

Consultants/system integration personnel with limited domain knowledge

Pre-implementation preparation activities were not understood and done.

Executive sponsorship and active, on-going involvement with the ERP implementation were lacking

IT personnel were all caught up in beauty contests of technical wizardry

Training to transition from the old legacy system technology to the new.

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Strategic Questions Will ERP help us to improve customer

satisfaction? How? How much and when?Will ERP contribute to increasing our market

share? How? How much and when?Will ERP decrease our operating expenses?

How? How much and when?Will ERP help to increase revenue? How?

How much and when? Will ERP decrease our inventory investment?

How? How much and when

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Strategic QuestionsWill ERP shorten our order-to-delivery cycle

time? How? How much and when?Will ERP help us keep pace with or surpass our

competitors? How? How much and when?Will ERP shorten our time-to-market? How? How

much and when?Will we be able to reduce our material costs

through improved supply base management? How? How much and when?

Have we appropriately defined responsibility and accountability for these business performance improvements?

What are the metrics for measuring performance improvement in both tactical and strategic areas?

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Critical Success FactorsProject Champion/SponsorProject Management Business Plan and VisionTop Management Support and Executive

CommitmentERP Team and CompositionProject Support and Effective CommunicationLegacy Systems and Informaion TechnologyBusiness ProcessesSystem IntegrationSystem Testing

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Critical Success FactorsA Vanilla ERP ApproachSoftware Selection and SupportStrategic InitiativesHuman ResourcesTrainingData QualityVendor ResourcesOrganizational CultureCompetitive Analysis of Enterprise

Integration StrategiesOrganizational Knowledge ManagementRisk ManagementReadiness

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ROI examples

Company: TEI Technologies Pvt. Ltd. ERP: iBaan Modules: Distribution, manufacturing, finance, QMS Time to implement: 70 days Investment: Rs 30 Lakh ROI period: Expected to be two years

Company: Pidilite Industries Ltd.ERP: Orion (ICICI Infotech)Modules: S&D, Finance, Purchase, Inventory, TaxTime to implement: 12 monthsInvestment: Rs 50 LakhROI period: 2 years

Company: Escorts Agri Machinery GroupERP: Oracle E-Business SuiteModules: Finance, discreet manufacturing, business intelligence Time to implement: One yearInvestment: Rs 4 croreROI period: Expected to be 3 years

Company: Godrej Industries Ltd.ERP: MFG/PROModules: Materials, manufacturing, costing, planning, distribution, financeTime to implement: 30 monthsInvestment: Rs 13 CroreROI: Expected in 4-5 years

Company: Emerson Network Power (India)ERP: MFG/PROModules: Manufacturing, sales, inventory, finance, service, distributionTime to implement: 6 monthsInvestment: Rs 1.5 CroreROI: 16 months

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Costs of Implementing a New ERP

Case studies

TCOPanorama case

study