Does ERP and SCM Actually Save Money?

Enterprise Resource Planning (in short, ERP) is an organization management system that uses software application to corporate different aspects of the organization, automate and utilize the information between different departments of the organization to make it perform better. These departments include finance, customer support, supply chain management, distribution, accounting, inventory management…

In our supply chain management, we mostly focus on 3 macro processes of the supply chain framework: Customer Relationship (CRM), Internal Supply Chain (ISCM) and Supplier Relationship (SRM). These 3 supply chain frameworks help the organization to manage its customer, its own process in supply chain (inventory, tagging and accounting…) and its supplier relationship. These macro processes run on a basic framework called Transaction Management Foundation, which include basic components for finance, accounting and human resources… Figure 1 depicts how these 4 frameworks work together.

Figure 1: Frameworks for Supply Chain management

Requirements of a good SCM system

In today competitive world, a good ERP and SCM system has to support the organization with high quality information to quickly make good decisions. To achieve this goal, the information and the system must satisfy multiple requirements:

Information must be accurate: it is not necessary for information to be 100% correct but the general picture must be represented truly.

Information should not be out of date in a specific period: when managers need information the most, they should have the up-to-date information that can help them make decisions.

Information should be in the right format that managers can use it to quickly make the decisions. For example, information might need to be aggregated to help managers know the general state of the supply chain system.

Information should be shared between involved managers that help them to understand the same picture.

The information system should be updated whenever the business requirement changes, that helps the organization to have the correct and necessary information.

The system should be easy to use and requires little training for the staff to work with the system.

The system should run with few bugs, always available when the staff or managers need them.

These requirements do not look too hard for an organization to have its own SCM system. In practice, 75% of ERP implementations were considered a failure. This gives us a big question about why an organization could not achieve its goal in designing and implementing an ERP system.

Reasons for failures of ERP system

It is hard to measure a real success of an ERP system. The question is if the benefits the new ERP system brings is much higher than the cost and the risk that the organization has to invest in. There are multiple problems, the lack of the communication between business and IT manager, poor planning to deal with hidden cost, the lack of understanding about the risk and complexity of an IT system.

Risk and Complexity

Business managers usually underestimate the risk and the complexity of a SCM system. A current version of a simple ERP system now consists of millions of lines of code. This is too complex for any small team of people to understand the whole system.

Complexity goes along with a big number of bugs. These bugs cause a risk that managers could not see and estimate it clearly. If the system is down for a couple of hours, it is already millions lost for the company. As in Foxmeyer, 1996, the SAP’s SCM deployment did not expect to handle this level of volume of orders. "We ran some simulations but not with the level of data we have in the operating environment", one company executive said. Foxmeyer tried to solve this problem by sending hundreds of workers to work around the issues but the underlying software kept failing in middle of the process. Totally, this bug costed Foxmeyer tens of millions of dollars.

Hidden Cost

There are many hidden costs in designing and implementing a new ERP system for the organization that managers usually do not plan for. This makes up the total cost for the implementation to be much higher than the benefits gained from the implementation. According to Jarn, M.2002, there are 5 main costs that managers usually overlook:

Training Cost: people usually underestimate this cost. It usually takes a while for staff to adapt from the old system to the new system, for the changing of the old process to the new process.

Variety forms of data: data in SCM system is usually not in a standard format. The data come from multiple suppliers and the order requests come from multiple retailers and distribution centers. This makes it very difficult for any firm to standardize this data and match same items from different suppliers. The same iPhone case can be given different descriptions, specifications when it comes from different suppliers from different countries.

High Consulting Cost: this usually be overlooked by the consultant and the companies. The consultant may not have enough experience to plan for the project and the project may require longer time to finish or more payment to the consultant.

Integration and Implementation: Consultants want to test with the real dry-run to see how it affects the system, but usually the firms don’t want people to touch in their valuable data. This makes the integration, implementation and test process much harder than it is planned.

Managers fail to keep the project deadline. Because it is too difficult for consultants to give a correct estimation, most of the SCM projects fail to meet their deadline.

Slow to adapt to new business requirement

Although the companies spend millions dollar on the ERP projects, they also complain that it is too difficult to modify these systems to match their new business requirements. The risks and the complexities of the systems prevent developers and consultants to move quickly with any new business changes

References

· Lawson & Saini, 2009, A Service-Oriented Approach to Cost Cutting on Customizing SAP, Enterprise Acquisition, viewed on February, 28, 2012

· Brennan, J. 2012, Lean and Mean…There is a way of doing more with less…, Awards BA, viewed on February 26, 2012,

· Tarn, Yen and Beaumont 2002, Exploring the rationales for ERP and SCM integration, Industrial Management & Data Systems, viewed on February 26, 2012

· Wolf, T. 2011, What is ERP Software?, TMCNet, viewed on February 27, 2012

· Supply Chain Digest, The 11 Greatest Supply Chain Disasters, Supply Chain Digest, viewed on February 28, 2012

· Rettig, C.2007, The Trouble with Enterprise Software, MITSloan Management Review.

· Information Technology in a Supply Chain, Chapter 16, Part IV