28 December 2009

The New ERP – Part 32

IDC author Michael Faucette published a report in December 2009 entitled "Modifying and Maintaining ERP Systems: The High Cost of Business Disruption". (Faucette 2009)

Interestingly, the "Five Key Drivers of System Change" at the more than 200 companies surveyed by IDC were these:

  1. Regulatory requirements
  2. Organizational change or restructuring
  3. Mergers and acquisitions
  4. Financial management-driven changes
  5. New or changed business processes
Now, while I suppose it could be argued that "new or changed business processes," "financial management-driven changes," or even "mergers and acquisitions" were actually the actions of these businesses to increase Throughput (T), reduce Inventories or demands for new Investment (I), or to cut or hold the line on Operating Expenses (OE) while sustaining significant growth, I find it quite amazing that the first and foremost response by the firms being interviewed was not: "We change out ERP system when we find it necessary to do so in order to achieve more of our goal, which is to make more money tomorrow than we are making today."

Meeting changing regulatory requirements

I am not disputing that some "regulatory changes" may force upon an enterprise the need to make changes to their ERP systems. This is an inevitable part of government interventions in our economy. Organizations should have the goal to accommodate these, of course, with a focus on the smallest possible values of DT and DOE, as they certainly will have a zero-value (or even a negative value) for DT. These should be evaluated using the same basic formula that we have previously introduced:

In the case of changes for regulatory purposes, your ROI will almost always be negative. Therefore, the goal would be to keep that negative as small as possible, thus producing the smallest possible negative impact on the bottom-line.

For all other changes

For changes driven by any of the other four reasons listed above, precisely the same formula for ROI should be applied, with the goal of maximizing the value of ROI. After all, consider the following:

  • Reorganization or restructuring that produces a negative ROI should simply not be done
  • Mergers and acquisitions that produce a negative ROI should simply not be done
  • Financial management-driven changes that produce a negative ROI should never have been considered by "financial management" in the first place
  • New or changed business practices that result in a negative ROI should simply not be undertaken
While these simple rules are nothing more than common sense, it is amazing to me how many organizations undertake reorganization, mergers, acquisitions, or business practice changes without ever considering the impact on T, I, or OE. To do so is not "management," at all. It is simply "acting" without consideration of the basic goals of the organization. It is action in the absence of a theoretical framework by which to understand how "the system" – the enterprise – really works in achieving the goal of making more money.

Failure to manage the enterprise as "a system"

Faucette's IDC report goes on to list nine categories of disruption costs associated with actions taken based on the "drivers" listed above. Here are the nine categories:

  1. Decreased operational efficiency (increased OE)
  2. Decreased decision-making efficiency (lost T? increased I?)
  3. Delayed cost-reduction plans (increased TVC – Truly Variable Costs; reduced T)
  4. Reduced levels of customer satisfaction (reduced T)
  5. Delayed product launch or increased product time-to-market (reduced T; increased OE?)
  6. Lost market share (reduced T; increased OE)
  7. Payment of fines for non-compliance (increased OE)
  8. Missed opportunities for or delayed acquisitions (reduced T)
  9. Decline in stock price (reduced NPV)
Note: If you are not familiar with any of these terms, go back to Parts 1 and 2 in this series and get your bearings.
Executives and managers are not stupid. However, if they fail to manage the entire enterprise as "a system" and, instead, take their various management actions (see "drivers" above) with the goal of optimizing departmental silos, the list above (and worse) are the results they are likely to see. In the absence of a clear "system view" of the enterprise, actions taken for "improvement" may actually lead to achieving less of your goal or achieve your goals only after much painstaking recovery.

I cannot emphasize strongly enough how applying this simple formula to any planned "change" in the enterprise can help executives and managers stop making decisions that do not consider the business as an integral system.

This simple formula enforces a "system view." Essentially, this formula asks executives and managers to consider three factors: If we make the change under consideration…

  • How much will Throughput change (+/-)
  • How much will Operating Expenses change (+/-)
  • How much will Investment/Inventory change (+/-)
Almost any rational ballpark estimates of changes in T, OE, and I are better than forging ahead with changes without giving due consideration to the effects of the impending changes on the enterprise's movement toward the goal of making more money.

Let us now take a brief look at how much money was given up by the 214 enterprises in the IDC survey as changes to their ERP systems were undertaken based on the "drivers" listed earlier. Here is the summary:

Reason for Losses
Percent of Respondents
Losses per Respondent
  1. Financial management-driven changes
From $12 to $296 million
  1. Delays in product launches
From $10 to $255 million
  1. Delayed cost-reduction plans
From $10 to $255 million

Restoring focus

These shocking losses are, to a great degree, attributable to – and testimony of – the unfortunate rigidity to be found in most ERP software today. This rigidity clearly exists – and may cost your company millions of dollars – despite the vendors' and VARs' near constant sales chatter about "flexibility" and "agility" to meet "your company's growing needs" or "changing requirements."

Nevertheless, as W. Edwards Deming put it so succinctly, "It is management's job to know." It is management's job to know what will make a business improve – and what will not. Certainly for improvement to occur, some change must be implemented. But it does not follow that all change will bring about improvement, even if it is management's good intention that improvement be derived from the change.

In the system view, "the system" must have a singular goal. In for-profit organizations, that singular goal is generally to make more money tomorrow than it is making today. The goal is not to make people's jobs easier, faster or more efficient department by department. The goal is to make more money. With that goal in mind, management can go back to restoring focus by employing the Theory of Constraints focusing steps.

When applying these focusing steps, your organization's executives and managers must see the system – the entire organization – as a chain of interrelated functions and not as departmental silos. Once your management team understand the concept of the chain, they can begin to see that the only change that makes sense today is the change that will strengthen the weakest link in the chain. Spending precious resources of time, energy or money on any other factor will not produced improvement for the system. The "weakest link" is the system's constraint to achieving more of its goal.

So, as in the accompanying illustration, here are the Five Focusing Steps:

  1. Identify the weakest link – the system's constraint
  2. Decide how to exploit the system's constraint – to strengthen the weakest link in the chain
  3. Subordinate all other decisions to the constraint and your methods to exploit it
  4. Elevate the system's constraint
  5. Check to see if your system's constraint has changed, then go back to Step 1 and do not let inertia set in (that is POOGI – a process of ongoing improvement)

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(c)2009, 2010 Richard D. Cushing

    Works Cited

    Faucette, Michael. Modifying and Maintaining ERP Systems: The High Cost of Business Disruption. White paper, Framingham, MA: IDC, 2009.

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