Beyond ERP: the quest for returns

By Richard Wallis, guest columnist

"We've spent millions of pounds implementing Enterprise Resource Planning, but we haven't got the results we were promisedno significant savings, no marked improvement in performance." Does this sound familiar? That's not surprising, because this complaint is coming all too often from top-tier businessesand it is a comment increasingly echoing in the law courts, where even the great and good are being called to defend their failure to deliver the benefits they promised to businesses taking the expensive ERP route.

So why are these major systems implementations not delivering promised results? The reasons appear to be as complex as ERP itselfthey are not getting the promised results, for instance, because they are trying to do too much. The tremendous breadth of the ERP remit can in itself lead to a long and painful process of implementation. Because it spreads right across the companyfrom sales and marketing through finance, human resources, purchasing, production, supply and distributionthere are inevitably issues related to who is sponsoring the implementation in the company, and who expects to gain from it. Problems can arise, for example, when some business functions are told they are getting functionality to manage their operations that they do not necessarily want or which does not meet what they really need. Different factors can drive this tendency. Communication is often a key: the decision may be made higher up without proper reference to the local needs; the specifications may use language which is only
thought to be understood by those using it and those hearing it.

The culture of the company can also impact on the success of implementation: an organisation with roots in sales and marketing, say, or one that is financedriven, may not adequately understand and provide for other functions in their ERP such as production or distribution. The degree of change which ERP implementation brings with it adds to its complexity and therefore to the problems. The business has to get its people to accept what can be major changes in what they doi.e. of moving from current to new systems; and in how they do iti.e. moving from current to new processes. Professional conflict within the business, and between the vendor and the business, can also come into play. The decision to implement typically happens as a result of a business case being put forward composed of costs, benefits, performance improvements, timescales. As the time drags on and delivery is delayed, questions will be asked and eventually heads may roll. With careers often hanging on the completion of implementation,
decisio ns can be made with that in mind rather than the achievement of long-term benefits.

Quite often failures in ERP implementation arise as a result of attempts to simplify the process at various stages.

Clearly with these levels of complexity, implementation specifications for ERP need to be scoped really well and the risks carefully assessed. The more functions integrated into the system, the more complex it and its implementation become. With that complexity the risk element increases. Further, as suggested in Figure 1, as the implementation gets more complex, it gets more costly, often reaching the budget and time plan cut-off lines before it is complete.

hen this happens, something has to go. And what goes is generally one or more of the operational functions, typically the last to be implemented, or attempts are made to simplify these to the point that they cannot provide the benefits promised and expected.

Implementing the solution, not the software

Such is the complexity of ERP that the question has to be askedis it just too much for any one vendor, consultant or project team to handle: is there, at the outset, a poor understanding by vendors and contracting companies of the entirety of the ERP project and its full impact on the organisation?

Quite often failures in ERP implementation arise as a result of attempts to simplify the process at various stages. The need to get the implementation approved can lead, for instance, to simplification of the system specification at the planning stage. Equally, the project cost and time explosion, due usually to inadequate initial understanding, will also power a drive for simplification. Further, to keep entropy down, a vendor will resist the addition of best-in-class third-party products, when his own is inadequate, and may push for simplifying or just changing the process to make it fit the software. Moreover, too often the design team lose sight of process improvement because they are too focused on getting the software in and are under considerable pressure for completion.

These forces lend themselves to the limitation or even exclusion of systems support for some of the more crucial operational planning functionsironically, precisely those functions which are most likely to deliver financial and performance benefits to the business.

simplifying supply chain solutions has proved a sure-fire way to guarantee inefficiency.

Areas of opportunity

Manufacturing, inventory and replenishment planning are among the operational functions that can be seriously affected when extensive ERP implementation drags on, either by not providing the right technology in the original solution, or by simplifying the implementation along the way so that the solution falls short of what is required and expected of it. Indeed, simplifying supply chain solutions has proved a sure-fire way to guarantee inefficiency.

The impact on the supply chain of core functions like safety stock planning is traditionally underestimated and, indeed, the functional coverage of this need in ERP is traditionally weak.

Just how serious this can be for a business can be understood from an appreciation of the value of inventory inside a business, in particular a badly planned one. A quick calculation will show the size of the prize in a business turning over hundreds of millions of pounds a year, holding eight weeks or more of inventory where potential efficiencies are of the order of, say, 30 per cent. But there is more. Well planned inventory will not only deliver disinvestment and savings in financial costs, it will deliver improvements in service performance which directly impact the bottom line and limit the somewhat evasive strategic cost of lost sales. Curiously, beyond the supply chain itself, these opportunities relate directly to finance and sales. It is surprising that this mine of opportunity is being largely neglected.

The missing analytical piece in ERP and supply chain systems is strong statistical demand and supply modelling.

The functional gap

Whilst ERP has some rudimentary inventory planning capability, it does not provide for transparent, scientific inventory planning and optimisation. It does not have the tools to enable logistics managers or planners to understand clearly enough the detailed "where" and "what" of their operations: where the inefficiencies are, how costs can be cut, how to improve performance.

So, despite large investments in ERP software for supply chain, many distribution-intensive companies are suffering from poor inventory mixes (wrong stock, wrong place) caused by weak inventory modelling capability. ERP and many supply chain suites model the supply chain deterministically. They determine a forecast and drive that forecast back through the supply chain much as if distribution planning were an MRP type process. But deterministic predictions have an inherent problem. Predicting demand is about as accurate as predicting the stock market. Day-to-day you will be off most of the time, especially when handling a large mix of products. How far off depends on volatility of demand and also supply. A misunderstanding of these elements will drive inventories up without impacting service levels proportionately: the wrong mix.

Addressing the forecast, an approach commonly taken, is good but it will only ever solve part of the problem. Advanced modelling of the conditions of volatility able to calculate reliable levels of safety stocks are needed to keep inventory levels down, on one side, and improve service level performance on the other. In tough business conditions (most cases today), the resident and ERP inventory modelling capabilities are simply inadequate. These situations include, for example:

* high customer service levels required (98 per cent or more)
* slower moving products (increasinglypresent even in CPG)
* short life-cycle products orfashion items
* short shelf-life products
* multiple-level distribution chains.

The missing analytical piece in ERP and supply chain systems is strong statistical demand and supply modelling. Understanding the range of possible outcomes and their statistical functions is critical to successful inventory optimisation.

Impediments to moving forward

So, despite expensive ERP implementation, companies are experiencing:

* excessive aggregate finished goods inventories but inadequate service levels
* powerful retail customers pressing for higher service levels
* high levels of expediting or manual intervention to overcome inventory shortfalls
* inventories becoming obsolete
* a struggle to balance customer service expectations and working capital goals.

Many companies, although reluctant to throw yet more money into IT and consultants after ERP, are looking to specialist inventory optimisation solution providers such as ToolsGroup for answers. For these companies, ToolsGroup offers bolt-on inventory optimisation solutions that apply powerful business models to generate a $ multimillion value proposition.

By adding the missing analytics to ERP and supply chain suites, ToolsGroup solutions allow business to tune inventory in the supply chain enabling service-driven inventory deployment and deliver returns that have been sadly absent from the ERP revolution.

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Richard Wallis is Director Business Development, ToolsGroup. Over the past 14 years, Richard Wallis has been involved in more than 25 implementation projects for forecasting, inventory and replenishment planning systems in mid and top tier companies mostly in project and account management roles. Many of these have involved working closely with ERP implementation teams. Currently responsible for professional services and business development for ToolsGroups northern European operation, he has further matured a vast experience in inventory optimisation strategies and strategic distribution network design projects with a variety of high profile clients.