The decision to upgrade or implement a new ERP system is one of the most complex and resource intensive initiatives your company will face.
The first step your organization needs to take before investing in a new or upgraded system is to make a business case for ERP. To do so, your organization needs to estimate the return on investment (ROI), total costs and benefits of the new system. You also need to identify and mitigate the risks of the ERP implementation. Documenting the business reasons for your investment in an ERP system is also critical as well as understanding the expected value to offset the cost.
Since this undertaking is huge and complex, few organizations can effectively manage this effort alone. This guide leverages Ultra Consultants' significant experience helping mid market manufacturers and distributors, such as your organization, drive an effective justification process.
The five critical areas outlined here involve:
- Performing an assessment of your company's
internal business environment
- Documenting the current state business
challenges
- Clarifying the desired state and "value" of
improved processes from ERP
- Considering total cost factors of an ERP
upgrade/new selection
- Taking a close look at ROI of the ERP
investment
What's inside.
Assess the Internal Environment
Fully Document the Current State
Clearly Map the Future State
Get a Handle on Total Costs of Upgrade/New ERP
Accurately Calculate ROI
Additional Considerations
ERP Justification Next Steps
Assess the Internal Environment
The first place you should start is assessing the resources and knowledge available within your organization. Does your organization possess:
- Expertise to build the business justification
- Time to spend justifying the business case
- Credibility with company executives
- Ability to coordinate with the LOB (line of business) executives to gain consensus
- Experience with and knowledge of current industry best practices
Many companies do not have a working knowledge of modern ERP systems. Some team members may have gone through an ERP selection at some point in their careers. However, they may lack familiarity and knowledge of what is possible with current ERP systems. In these cases, your organization will benefit greatly from partnering with a consultancy that offers recent ERP experience, preferably in your organization's specific manufacturing sector (food/beverage, automotive, process, etc.).
Fully Document the Current State
A critical component of business justification takes place during Ultra's Business Process Improvement engagements. The goal is to identify how your company operates its business processes today. By documenting your business challenges and opportunities, a case can be made for an ERP investment.
This justification helps your team achieve a full understanding of Business Process Improvement (BPI) initiatives and how BPI is a key component of ERP selection. It also identifies any gaps and risks between the current state and desired future state of operations and identifies the specific systems that help close those gaps.
Typical bottlenecks and costs are associated with:
- Inventory management
- Ordering
- Production scheduling
- Quality management
- Warehouse management
- Invoicing
Clearly Map the Future State
In this phase, the team gets a clear understanding of the desired "future state". This includes improved processes, savings/efficiencies, and revenue increases that are specific to your company's situation. The team uses this information to build a business justification for the change.
- The team reviews existing processes and the facilitator leads the team through a redesign
of the business process.
- These sessions can parallel process redesign activities in Kaizen events or Six Sigma
projects.
- The output of the session is a detailed process map and a definition of the process steps.
Multiple levels of process maps are created similar to the maps used in the documentation of the current processes:
- Level 1 – Enterprise
- Level 2 – Department
- Level 3 – Process
- Level 4 – Sub Process
As the team members develop the new process map, they determine if the process can be implemented with current technology or if it requires new technology. If the process requires new technology, the future state documentation becomes the input to the new technology requirements and to the design phase of the new technology implementation.
Typical areas of future state improvement are seen in:
- Inventory reduction
- Improved sales, new
- Cycle time reduction revenue with enhanced
- Reduction in material
- Reduction in cost of labor CRM
costs and waste
Get a Handle on Total Costs of Upgrade/New ERP
An important part of justifying a possible investment in an ERP system for your business is understanding the true required costs and investment. Consider the total cost of ownership for the various ERP options under consideration.
Typical costs for an ERP implementation include:
- Acquisition
- Cost of expanding the solution
- Training
- Implementation
- Customization
Legacy ERP systems drain resources when it comes to an ongoing effort to maintain the software. Over time, maintenance costs rise, and your organization starts incurring high annual fees, complex upgrades, customizations and other issues. Whether you should deploy a SaaS, cloud or on-premise delivery model is part of the investment consideration. Costs needed for an internal IT department—or a third-party maintenance provider—also impact your organization.
Accurately Calculate ROI
In this stage, the justification for ERP translates to quantifiable metrics. Once the desired state is properly mapped, the improved process map helps drive a return on process improvements in the future state.
Consider the process enhancements facilitated by ERP, such as a smoother order process, fewer physical inventory checks, enhanced production quality, improved scheduling and more.
Focus on savings resulting from access to real-time information. Look beyond hard savings like reduced inventories, cycle times, etc. Recognize those benefits achieved from more accurate materials planning, integrated databases, streamlined information reporting, dashboard reporting and other uses of real-time data.
Additionally, your company needs to assess the economic impact of other "soft" savings. These include the dollars earned from customer satisfaction, enhanced supply chain communication, improved decision-making, delivery performance, etc.
Additional Considerations
For a thorough justification audit, your organization needs to go through additional questions that cover the following areas:
- Functionality
- Reporting Is there a need for new functionality such as
Is there a need for reporting that is not met Customer Requirements Management (CRM), with your current ERP? Consider reporting Manufacturing Execution Systems (MES) or requirements from a variety of regulatory Product Lifecycle Management (PLM)? agencies, government departments and customers. What are the impacts and costs of non-compliance?
- Multi-Plant
- Business Intelligence Is there a move to operate in a multi-company structure in the years ahead? Many companies are challenged to use their existing ERP
Can your current system accurately capture, system to make this process easier and store and trend a range of information such eliminate the need for duplicate data entry. as quality, production, shipping, financial, Perhaps your company only had to track supply chain activity and much more? Great operations from one facility, but they may manufacturing systems should easily generate soon be dealing with complex supply chains timely and accurate data so users can take the and markets from multiple plants. needed action to improve business processes. If your company finds it difficult to access this information, then there are cost considerations that will impact you.
- User Adoption What about ease of use, training and user
- Growth adoption? Today's ERP is much more intuitive and user-friendly, which takes the cost out of training and speeds user adoption.
Changes over time bring new needs that require a new ERP. Has your company acquired new businesses or gone through a merger? Has the marketplace changed? Has the competition gotten more complex? ERP Justification Next Steps Making the business case for ERP is an important effort that sets the framework for success. By determining an expected return on investment, anticipating total costs and fully documenting the business case for investing in a new or upgraded system, your company builds a solid foundation for the ERP project.
Wrestling alone through this complex process can be a challenge. We partner with leading manufacturers and distributors who choose to work smarter by leveraging our experience during ERP justification, rather than "go it alone."
When led by our team at Ultra, the process uncovers the overwhelming reasons to deploy ERP systems for the highest levels of data quality, accuracy, delivery and storage. Having Ultra perform this analysis and business justification will provide a significant return, whether your company proceeds to a new ERP selection immediately or opts to enhance or stabilize your current ERP system.
Follow these guidelines and see how they can positively impact your organization. For more information and additional resources on how to bring our expertise right to your doorstep, visit us at ultraconsultants.com.