06 November 2009

The New ERP - Part 1

Unfortunately, the trade press has been rife with horror stories describing ERP (enterprise resource planning) projects that have gone off-track or failed entirely. The stories have gone on for well more than a decade and, although the number seems to be decreasing, in part that decrease is due to the smaller number of companies actually making their first leap in ERP solutions.

In a KPMG Canada survey from 1997, more than 61% of the respondents deemed their ERP implementation as less than a success. Four years later (2001), a Robbins-Gioia survey found that 51% reported their ERP implementations were not successful. And, Bob Lewis, writing in InfoWorld has suggested that only about 30% of ERP implementations are actually considered "successful" by some measures.

It appears that traditional approaches to ERP software selection, planning and deployment have, by almost any measure, proven to be capable of delivering any sustainable business advantage in fewer than half the reported cases.

In the following series of posts I will begin introducing what I believe to be a radical new approach to ERP, an approach I call Extended Readiness for Profit -- The New ERP. The results of this approach on the working relationship between business (financial) goals, measurable business objectives, and new technologies include:
  1. A holistic view of the enterprise that encompasses its people, its processes, its products and services, its trading partners, and its technologies

  2. Clarity and focus on finding and making the changes in the organization and supplying technologies when and where they will deliver a sustainable business advantage

  3. Concepts that help executives and management in the organization establish sound budgets for each key component of any technology initiative based on calculated and measurable benefits expected to flow from the implementation

  4. Sound techniques that will help executives and managers unlock the enterprise's "tribal knowledge" in order to leverage what the organization already knows in a process of ongoing improvement (POOGI)

  • Revenues (R) - We will employ the standard accounting definition of revenues or sales where this term is employed.

  • Truly Variable Costs (TVC) - Here we include only the costs involved in producing a unit of Revenue that truly variable with the unit of Revenue. Typically, TVCs include direct materials, subcontract or piece-rate labor, commissions, royalties, other outside services, and so forth. However, since normal employee labor is not directly variable with a unit of production, production labor is not included in TVC calculations.

  • Throughput (T) - Throughput is equal to Revenues less Truly Variable Costs, as in the formula: T = R - TVC.

  • Inventory or Investment (I) - In most inventory-based enterprises, the most volatile form of investment is inventory. However, since a key component in the calculation of ROI (Return on Investment) is the value invested, we will not limit discussions of "I" to only inventory.

  • Operating Expenses (OE) - Operating Expenses is all the money the organization pays out day-after-day, month-after-month to support the production of Revenues. Since most employees -- even so-called "direct labor" employees -- are paid on this basis (i.e., they are not sent home early if work is slow; they are seldom laid off; they get paid the same whether their work unit produced 100 widgets or 1,000 widgets in a given period of time). If Revenues are down in a given month, for example, chances are the payroll amount was the same (within a few percentage points, anyway).

  • Return On Investment (ROI) - As with Revenue, the traditional calculation method may be used. However, for clarity and for improved accountability, we will link specific initiatives to specific measurable results. Therefore, when considering any specific POOGI initiative, we calculate ROI for that initiative using the following formula:

    If no change in Investment (I) is required, then a simpler formula may be applied:
  • Net Profit Before Taxes (NPBT) - Our definition will be equivalent to the general accounting definition, but calculated using the following formula:

    NPBT = R - TVC - OE

    Or, since T = R - TVC, we may substitute and shorten the formula to read:

    NPBT = T - OE

[Next time: What's wrong with traditional ERP approaches?]

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