Jul/100
Clean Windshield Leads to Signifcant Horsepower Boost
We are all familiar with the standard tools for measuring the performance of our business; namely the balance sheet and the income statement. And if we are a halfway decent backyard mechanic at working on the business, then we also pay attention to our bank balances and free cash flow. And if we are a journeyman, we might be using any number of balance sheet ratios for analysis. However, all these tools are akin to the rear view mirror in our car. They tell us what is behind us, or in other words, what has already happened. Now don’t get me wrong, the rear view mirror is an indispensable tool, particularly when you put the transmission in reverse.
I am assuming however that all of you want to keep your business moving forward, and therefore have your transmission in drive, or perhaps even overdrive. That being said, the front windshield is a much more valuable tool for navigating the vehicle where you want it to go than is the rear view mirror. And the same can be said for our businesses. The windshield enables you to see where you are headed, judge when you might get there, and make any course corrections that might be necessary. We should be relying on the windshield to guide us at least 90+ percent of the time.
What’s the condition of your business windshield? Is it crystal clear and revealing? Or is it cracked, scratched, and caught in a torrential downpour with worn out wipers? If it’s the latter, then common sense says it’s time for immediate corrective measures.
What are some corrective measures that can be used to improve your windshield’s vision so that you can see where the business is headed? The first place to start might involve identifying the leading indicators for your specific industry and business. Following are a few examples.
What are the key processes and actions in your business that drive profitability and produce the results on the balance sheet and income statement? Perhaps it’s any number of these common activities.
Are there correlations, indexes, trends or statistical measures that impact your business directly or indirectly? If so, how much warning do they provide and what impact do they have? Can your industry associations provide insight to these leading indicators? If not, there are also organizations that specialize in analyzing and forecasting trends in a variety of industries. As an example, check out the Institute for Trend research at http://ecotrends.org/ .
Regardless of where you find your early indicators, identifying and measuring them can frequently enable you to not only take early corrective action if need be, but can also shed light on what the real critical drivers and contingencies are in your business.
The odds are that your ERP or business management system is currently producing some of these metrics. However, the reality is that many of the critical measures for your business are probably not being reported. The good news is that your ERP system is likely tracking many of the core data elements necessary to provide meaningful information. However, it might be necessary to create additional reports or KPIs (Key Performance Indicators) to extract the correct pieces of data and present them in a context that provides clear visibility as to where the business is headed. In order to maximize the power of this information, you will want to ensure that the various key roles in your organization have access to the critical indicators needed for their specific scope of responsibility.
Once you have identified your specific leading indicators for the key roles in your business, give us a call at 425-820-6120 and we can help you find and unlock the critical information in your ERP system to help guide your business down the freeway toward a stronger bottom line.
Nov/090
No Decision – May You Forever R.I.P (Part 3)
In our last issue we discussed the rationale and importance of developing a comprehensive business case for your ERP or IT project to ensure that it presses forward to completion and does not fall victim to the countless threats that swamp many projects. We also discussed the methods for determining why change, and in fact the project, is needed. In this issue, we will discuss how to determine the dollars and cents of the analysis.
3. Assess the Value. You should recognize that there are financial benefits and non-financial benefits, as well as tangible savings and intangible savings. Financial benefits and tangible savings are fairly easy to identify. While the Intangible savings will certainly require more digging to be able to quantify, don’t overlook them as they could be more significant than the tangible savings.
Possible benefit categories might include time savings, increased productivity, improved quality, employee quality of life, improved customer service, and reduced inventory. Each of these categories can be further analyzed for specific projections of financial savings. For example, reduced inventory is a tangible financial benefit that should also result in reduced carrying costs (reduced storage, less time handling inventory, reduced inventory obsolescence, reduced insurance expense), reduced freight expense, and improvement in working capital. There are very real financial benefits associated with each of these and you need to project those values.
Improved customer service would likely be considered an intangible financial benefit. However there are several sub elements, including increase in market share, decrease in customer complaints, decrease in returns or warranty claims, decrease in uncollectable AR and write-offs that could be projected to produce tangible savings.
4. Estimate the Costs. Identifying and quantifying the costs is more straight forward than tracking the benefits, but mistakes can still be made if you are not careful. First recognize that there are costs associated with the initial acquisition of the system (hardware and software), as well as installation costs. In addition, there are onetime costs and recurring costs.
An all too common mistake is to underestimate the costs, resulting in an over budget project. Why does this repeatedly happen? There can be a variety of reasons but the primary ones are indicated below.
- Costs are understated at the outset due to looking at projections through an overly optimistic scenario. Rarely do best case scenarios materialize. And when you consider the odds of best case becoming reality when it involves multiple people, processes, and deliverables from multiple organizations – well let’s just leave it at almost never and call it good.
- Costs are understated due to a lack of understanding of complete project requirements. The firm providing the ERP system may not fully understand the scope of requirements and therefore underestimates the costs. Or perhaps they low balled the estimate in order to win the business. Alternatively, the organization purchasing the ERP system may not have fully evaluated their requirements and capabilities, and thus has incorrectly identified the project scope.
- Costs are understated because the organization purchasing the ERP system is anxious to trim implementation costs and thereby takes on responsibility for self-performing much of the work, or simply eliminates what are deemed to be discretionary services such as training or report writing. It is a rare organization that is able to pull off a significant self-perform effort successfully. Consequently this will generally lead to a severely challenged project that is both late and short on deliverables, and ultimately over budget when the tasks are reassigned outside the organization.
- Costs are purposely underestimated in order to get a project approved with the thought that additional funding will be sought later once the project is off the ground. Thankfully we don’t see this approach often but it does surface in certain types of organizations.
- Costs are understated due to ignoring internal labor costs and diminished productivity during the implementation. Productivity suffers merely as a result of having to learn new systems. In addition, organizations will generally look at the wages for existing employees as sunk cost and not fully realize that every moment taken away from their primary duties results in incremental operating costs for the organization. This happens when normal productivity suffers due to spending significant time on non-core tasks, such as implementing an ERP system. The problem can be exacerbated by electing to reduce money spent on expert consultants (obvious incremental cost), and instead assign extra tasks to existing employees (less obvious incremental cost) that might be able to complete the task in a given period of time. Aside from the very real incremental cost of having the employee pick up the extra tasks, is the danger that the task won’t be completed on time or at satisfactory levels and now you may start incurring additional costs as other areas are impacted.
In the next issue, we will discuss the means for pulling all this hard work together into a credible and meaningful set of recommendations that demonstrates thorough analysis and provides the means to launch the project, and most importantly, complete the project.
Oct/094
What Is This Thing Called ERP Anyway?
I suspect that most, if not all of you, have heard the term ERP system. And some of you may even know that the acronym stands for Enterprise Resources Planning. That’s a mouthful that on the surface doesn’t seem to mean much. But since an entire industry has been developed around ERP systems, and since just about every legitimate business has one these days, there must be something to it. Let’s take a look and see if we can unravel the mystery.
Tracing ERP’s Ancestors
To understand where ERP got its birth roots, we need to go back to the 1960’s. That is when an approach called MRP (Material Requirements Planning) was born to handle specific processes for certain types of businesses. You will note that both ERP and MRP had the concept of planning in common. But aside from that, one seemed to focus on material requirements, while the other focused on enterprise resources.
Simply stated, the purpose of an MRP system was to assist manufacturers plan and manage inventory (material requirements) so as to meet demand for end finished goods. In order to do this, it was necessary to know current inventory levels of component parts and raw materials, replenishment schedules, and the total demand being placed on all these items.
While MRP was somewhat effective in meeting its stated objectives, it was also quite limited in reach. In fact, it was a closed loop that dealt with a very finite set of factors. When you consider that a typical manufacturing organization has many functional needs and departments apart from the manufacturing process itself, such as A/P, A/R, G/L, customer service, order entry, forecasting, purchasing etc., there were lots of planning and processing needs not being met by MRP. Consequently, the late 1970’s and early 1980’s saw the birth of Manufacturing Resource Planning (MRP II).
You can see with the transition to MRP II, we were no longer focusing on simply material requirements planning, but now had broadened the focus to include all of the manufacturing resources planning utilized in a manufacturing organization. MRP II systems did a reasonably good job of performing the necessary functions associated with buying materials, producing goods, selling the goods, and following the movement of money associated with all of those transactions.
ERP is Born
As time passed in the latter 1980’s and early 1990’s, it was discovered that MRP II was all fine and well if you were a manufacturer. But what if like the majority of businesses in North America today, you were not a manufacturer? In that case another approach was required, and thus ERP (Enterprise Resources Planning) was born. The ERP system set out to expand beyond just manufacturers and encompass the needs of all enterprises regardless of their industry, and the resources required to plan and operate those enterprises.
As ERP systems have evolved over the last couple decades, these systems have embraced and added functional areas such as those shown below.
| Financial Planning | Quality Management |
| Product Engineering | Human Resources |
| R & D | Manufacturing Execution Systems |
| Customer Relationship Management (CRM) | Field Service |
| Supply Chain Management | Logistics and Distribution |
| Marketing | Advanced Planning and Scheduling |
| Sales and Operations Planning | Lean and Full JIT Support |
As you can see from the table above, lots of potential complexity has been heaped upon the ERP system stack. In a highly functional ERP system deployment, the ERP system represents a set of sophisticated tools whose reach is deep and wide, yet tightly integrated across all departments and functions so that there is a single set of high integrity cohesive data available for all users.
The People
Unfortunately, all too often, ERP systems are viewed purely in the context of software functionality. But the real measure of success in terms of an ERP system is the user’s usage experience with the ERP system. Given that, the notion of people is the other very critical element required in the ERP system discussion. To what degree does an ERP system recognize and embrace the importance of people and their roles in an organization? To what degree does it adapt or facilitate varying roles? To what degree does the ERP system empower the people with the right information at the right time in the right place to make and support informed decisions affecting the organizations tactical and strategic needs? It’s only when we have successfully incorporated the all important people component of the equation with the software functionality, that a successful process is identified. The combination of many successful processes constitutes a real ERP system.
ERP Maturity Model
We have just covered the last forty years of ERP product evolution at hyper speed, and even though we have barely skimmed the surface, it is probably plenty deep enough for this discussion. There is one other important concept however that should be considered in an ERP system discussion and that is what is referred to in some circles as the ERP Maturity Model. The ERP Maturity Model is a means of identifying the various levels of sophistication of an ERP system along with the level of value that it brings to an organization. While the number of levels can vary from one model to the next, the typical scenario goes something like this.
| Level | Sophistication and Value |
| 1. Data Management System | Data is collected and organized, but may not be valuable enough to be classified as information. There may be many sets of data at play at any given time. |
| 2. Shared Database & Multiple Software Modules | Data is shared from a single source across multiple functions and/or departments. While all users have access to the same data, they may not have control over the data, and therefore may not place significant value on it. |
| 3. Operational Perspective | There are common rules and procedures used for planning, executing, controlling and reporting actions in the system. Two-way feedback loops exist between the execution elements and the planning elements of the organization. Tactical and operational components are in harmony. |
| 4. Business System | Incorporates all of the elements of the previous level, and in addition includes exceptions for all to see, as well as more strategic planning elements. The organization relies on the system information to guide and direct it toward its goals. |
| 5. Continuous Learning & Knowledge Management | The ERP system contains a significant historical knowledge base of information, trends and requests. The organization embraces the knowledgebase as a catalyst for continuous learning and improvement. Executive level decisions and daily employee level decisions are made and supported based upon the information in the system. |
The purpose of the model is to determine where your organization is on the scale. You may want to ask yourself one or more of the following questions.
- Are you where you thought you were?
- More importantly, are you where you want to be?
- Is there value to be derived for your organization by going to the next level?
- Could major problems be solved or strategic goals achieved by getting to the next level?
Perhaps you liked what you saw after looking in the mirror, and then again maybe you didn’t. If not, then you should know that there are plenty of options avaiable for addressing the concerns. The real question is what action are you going to take to make it happen? As they say, a journey begins with the first step.