The New ERP – Part 12

Jeepers! Creepers! Where'd you get those numbers?

In the last post, I said that the management team in our unnamed example company had estimated the following for a change proposed in their warehousing operations:

• Change in Throughput (delta-T) = $0
  
• Change in Operating Expenses (delta-OE) = $168,942
  
• Change in Inventory/Investment (delta-I) = $75,000
  

Let us now take a look at a relatively quick way to get to numbers such as these without suffering paralysis by analysis.

One shorthand way to estimate changes in OE is the use of the value of a typical or average FTE (full-time equivalent) in the department or area being affected. This effective and rational method allows us to create estimates of potential savings (or added costs, if that be the case) even if no actual employees are going to be laid off or hired as a result of the proposed change. Here is how: While firms seldom layoff employees as a result of process improvements – and we highly endorse such acts of employee retention – if the firm is focused first and most importantly on increasing Throughput (T), the organization will actually experience these savings over time by being able to support growth in Throughput of 30%, 60% or even 100% or more without adding to Operating Expenses by forestalling the hiring of additional personnel.

So, here's how our example company's team calculated FTE values for their warehouse operations:

By extrapolating from this calculated FTE value ($49,686), here is how the management team took the next step to estimate annualized savings from the proposed changes in the warehouse and picking-shipping operations:

At this point, our example management team also made an arbitrary decision. They established a preliminary investment budget of $75,000 to cover the cost of technologies to provide (at a minimum) the three critical functions of:

1. Integrated bar code printing
   
2. Integrated ASN processing, and
   
3. Paperless (or near paperless) picking and shipping operations
   

Since our management team has no predisposition for an Everything Replacement Project (traditional ERP), they have many options open to them. They are focusing solely on Extended Readiness for Profit – my radical new approach to ERP. Therefore, they could take advantage of any one or more of the following courses of action:

• Develop integrations between existing bar code applications and their inventory management software. Most of the better bar code applications on the market today already provide APIs (application program interfaces) and ODBC (open database connectivity). These capabilities would help keep the cost of development reasonably low and permit relatively easy and low-cost changes as demands on the organization change over time.
  
  
• Purchase and integrate an EDI (electronic data interchange) engine with their existing inventory management and sales order processing software in order to generate and deliver ASNs (advanced shipping notices) for them. This project would have to be coordinated with the solution chosen to handle the paperless picking and shipping operations, however.
  
  
• Acquire a paperless shipping and manifesting application and leverage its APIs to integrate it with the firms existing inventory and sales processing application. They might even hit the jackpot and discover a shipping and manifesting solution that includes ASN processing as part of the package, or has already been successfully integrated with their existing inventory and sales processing application.
  
  
• Roll their $75,000 budget into a large project that may be part of replacing an existing inventory or sales processing application.
  

If they choose the last option, they should still predicate their purchase and implementation budget on the sum total of all measurable improvements and savings anticipated from all outcomes when compared to their Current Reality Tree (CRT). They should not arbitrarily throw money into the budget "kitty" based on some vague feeling that "more technology" or "newer technology" will automatically make the organization more profitable or stop losses. That is to say, never substitute a traditional ERP (Everything Replacement Project) for a focused and measurable Extended Readiness for Profit (the New ERP) program.

[To be continued]