The New ERP – Part 27

Recap

This is Part 27 in our series, so let's take a moment to briefly recap what The New ERP – Extended Readiness for Profit has done for us so far in contrast to traditional ERP – Everything Replacement Project.

Aspect	Traditional ERP	The New ERP
Setting the goal	Lack of focus: Traditional ERP often has several goals (read: lack of focus) or a goal that is entirely generic (read: lack of focus). Therefore, ROI is frequently predicated on little more than hope that throwing new technology at the organization will somehow lead to improvement and better profits.	Laser-like focus: In The New ERP began with uniting executives and managers around a singular goal (in for-profit organizations that is typically making more money both now and in the future). Next, The New ERP applies the Thinking Processes to help management understand what is keeping the organization from achieving more of its goal. This gave management a clear view of: What needs to change What the change should look like How to effect the change
Linking ERP objectives to financial goals (IT alignment)	Loosely bound to financial goals: Far too many traditional ERP projects are bound to financial goals only by a tenuous thread of hope in the hearts of managers and executives. Others may calculate an ROI (return on investment) based on broad estimates of overall "improvement," but these are generally not tied to specific effects and measurable expected outcomes.	Tightly bound to financial goals: The New ERP – Extended Readiness for Profit uses what is learned through the application of the Thinking Processes to tightly aid managers and executives in linking measurable execution metrics to the achievement of financial goals. If "revenue is to increase by 12% in the first year," then the management team knows precisely which actions and improvements are expected to lead to these results.
Invention of the "solution"	Solution is a "package" brought from the outside: Traditional ERP frequently revolves around the organization defining their "needs" or "requirements," and then seeking a "package" brought to them from the outside (by a vendor or value-added reseller) to provide them with the "solution." If the executive team or the vendor cannot achieve enterprise-wide "buy-in" by the end-users, then the implementation of the "solution" may be more costly or less effective than intended, or it may fail entirely.	"Solution" is invented by the executives and managers in charge: By applying the Thinking Processes and determining with precision "what needs to change" and "what the change should look like" in order to achieve more of the organization's goal, the management team employing The New ERP becomes the inventor of their own "solution." By inventing their own solution, and by doing so using a rational toolset, "buy-in" becomes automatic. No one fights against their own invention.
Budget setting	See "Linking ERP objectives to financial goals" above	See "Linking ERP objectives to financial goals" above. The New ERP allows your management team to set rational budgets for specific, highly-targeted and measurable improvements so that the budgets make sense relative to the return on investment calculations. All of this is done with relative simplicity and paralysis by analysis is avoided entirely.
Software selection	Wholesale replacement: Traditional ERP – Everything Replacement Project does just what you would expect. It leads to replacing everything – or almost everything – in the organization. It is not focused on alleviating or eliminating organizational "bottlenecks."	Targeted Extensions: The New ERP – Extended Readiness for Profit is focused on effecting change in specific areas that have been rationally identified as being constraints ("bottlenecks") that are keeping the organization from achieving more of its goal. This focused approach means that the whole organization need not be disrupted to bring about effective improvement. Furthermore, very specific technologies selected to achieve very specific ends is the objective in software selection.
Vendor demonstrations	Unfocused review of functionalities: Vendor demonstrations under traditional ERP approaches often occupy days or weeks, sapping time, energy and money from all of the various departmental silos involved. This process alone may increase operating expenses by driving up overtime costs for "catch-up" work.	Tightly focused "proof of concept": Under the New ERP, vendors or resellers are invited to present proofs of concept around improvements that are very narrowly defined. They are also asked to speak specifically – and convincingly – about how their technologies will allow the "client" organization to achieve its goals within the budget prescribed.

What has been accomplished to date under the New ERP concept for the organization applying it (as in the table above) has likely saved the entire organization no small amount of time, energy and money. In addition, they are in a far better position to see actual results in the near future – results predicated on sound logic and real strategies, not hope and guesswork.

[To be continued]

The New ERP - Part 5

Thinking Processes to the rescue

Dr. Eliyahu M. Goldratt introduced the Theory of Constraints (TOC) to the world in his book entitled The Goal, back in 1984. In the 25 years since its introduction, TOC has been applied successfully in a vast array of businesses, industries, not-for-profit organizations and government entities.

Too many executives and managers are stumbled by the use of the word "theory" in TOC. Unfortunately, this is something you'll likely have to just "get over." Dr. Goldratt was a physicist before becoming involved in the world of business, so he calls it a "theory," under the assumption that someone, someday may prove it wrong -- that an exception may be found. To date, however, no such exception has been discovered.

The "Thinking Processes" are five interrelated methods to allow the rational analysis of any system in support of focused improvement leading to ongoing improvement. By applying these tools, it is possible for an organization to construct a rational framework that accurately describes how an organization works and interacts within its industry and the economy in general. The primary Thinking Process to be applied in mapping the system's (organization's) current state is the Current Reality Tree (CRT). The accompanying figure is an example of such a logical tree.

The Current Reality Tree (CRT)
The CRT is predicated upon the fact that, in most organizations or "systems," the many factors that may be identified as "problems" really arise from a relatively small number of "roots" or "root causes." Applying the CRT Thinking Process allows executives and managers to capture and decode "tribal knowledge" about how their organizations function, and what is or is not working in a logical, re-readable written form.

Once placed in the CRT form, using rules of logic, this written document may be used by the entire management team to read, re-read, discuss and modify the logic until everyone is certain that the logic presented in the CRT reflects the "reality" expressed within the organization's operations. Hence, the tool's name is the "Current Reality Tree."

Constructing a Current Reality Tree
While experience in guiding a team through the Thinking Processes is beneficial, there is no magic in creating a CRT or applying any of the other TOC principles. You do not need me or any other consultant to do this. There are a number of good resources available online and in print that may be used to guide your firm through the effort. However, if you want a short-cut to effective, first-time application the Thinking Processes -- if you'd like to make real progress in the first day of your effort -- then using an experienced consultant may be the most cost-effective way of getting there.

Nevertheless, here are the basic steps:

STEP ONE
To begin constructing a CRT, executives should gather a cross-functional team of ten or 15 key people from across the organization. This team should be briefed on the goal of creating a CRT and why it is important to the organization.

Having gathered the team, the members of the team should be asked select a single "goal" for the system (organization). In a for-profit organization, and where working on the "big picture" for the entire system, we recommend a goal similar to "To make more money -- both today and in the future." (While this is likely not something you want to put on company brochures as a mission statement, it is the true goal of every for-profit organization and every other goal is subsidiary to it. Quality, customer service, market leadership, or any other goal cannot be maintained for long in the absence of making money.)

With the single goal in mind, the next question to set before the team is this: "What is keeping us from reaching this goal?"

Naturally, when this question is asked, you are likely to get different responses from the sales and marketing folks than you will get from accounting or the production department. Ask them to jot down their responses as simple, clear sentences. Generally, I ask them to do so on 3"x3" sticky-notes. Ask them to include an "actor" in each sentence. Also, ask them to NOT include any "because" statements. Simply state the hurdle or blockage to achieving the goal.

Examples might be:

• Salespeople spend too much time in the office doing paperwork
• Our prices aren't competitive
• The warehouse has too many out-of-stocks
• Our lead times aren't competitive
• ... and so forth

In working with the Thinking Processes, we stop referring to these as "problems," right away. We call these "Un-Desirable Effects" or "UDEs" (pronounced: YOU-dee-eez), for short. The reason we do this is because when we have "problems" we want to solve them. But, as we will see, all of these cannot be "solved" by addressing them directly. They are caused by occurrences elsewhere in the "system."

[To be continued]

The New ERP - Part 4

What executives and managers in most organizations lack is a sound "theory" about how their own organization works and responds to its environment as a "system." They know how each department works -- more or less -- but they have never really stopped to think how the "system" works as a whole.

Asked directly, most executives and managers could not tell you -- with specifics -- why three of the initiatives that they have undertaken in the last two years seem to have delivered some improvement (but not all that they expected). Nor could they describe for you precisely why another five of the initiatives they labored over delivered no measurable results -- assuming that they actually did no damage to the organization. (Of course, this whole conversation assumes that you can actually get such executives or managers to admit that things they tried produced no results, in fact. Generally, they have willingly pushed out of their mind those matters over which they have expended precious time and energy to no effect -- only to give up in disgust. Then they tried the next management fad in its place.)

"I am not yet convinced regarding the connection between 'knowledge' and 'theory,'" I hear you saying. Then consider this:

How many people had seen apples falling from trees (or witnessed similar events) for how many hundreds or thousands of years before Sir Isaac Newton postulated a "theory" about a force we call gravity? Everyone had experienced gravity and everyone had information about the effects of gravity, but until Newton, no one had any knowledge about gravity.

Once the "theory" was set forth, cause-and-effect experiments could be developed to measure the effects of gravity. Based on the results of these experiments, one could then postulate if-then correlations: if we do X, then Y should be the result.

If management is anything, it is about being able to propose actions with a predictable -- not random -- effect on the "system" to which the action is being applied.

But, what of the second wrong assumption in the chain of reasoning (in the prior post)?

It should be clear now that it is not more information that will help us manage better. Rather, it is a sound theory or logical framework by which to understand how the "system" functions and interacts with its environment. The second wrong assumption is, then, "More information means we can manage better."

The correct approach would be to say: "If we can develop a sound and effective framework or theory by which to interpret the information coming from our organization (our "system"), then we will be able to manage better."

And, since developing a theoretical framework is likely not a function that will be much enhanced by technologies, then the next step is not to rush out to buy new software or hardware. Clearly, the next step should be to find a way to develop such a sound theoretical framework.

[To be continued]

The New ERP - Part 2

So, what's wrong with traditional approaches to ERP? Why do so many ERP implementations lead to disappointing results? Why do so many companies spend so much money on new technologies and then end up reaping so little return on their investment?

Failure No. 1: Not achieving the planned return on investment (ROI)
It remains today a regrettable fact that many small to mid-sized companies considering new technologies have only the vaguest of notions about the ROI that their new investment should deliver. This is not to say that executives and managers haven't thought out ROI, or even that they may not have already "pinned a number" on the ROI that they'd like to see from the expenditure of their time, energy and money.

What they do not know -- far too frequently -- is precisely how the new technology will deliver results. They have not tied the expected results to specific improvements in Throughput, specific reductions in Investment, or specific savings in Operating Expenses. Rather, there appears to be a general consensus among executives and managers -- despite considerable evidence to the contrary -- that investments in information technologies (IT) sort of auto-magically deliver a return on investment (ROI). That, somehow, IT and automation investments bear an inherent capacity to make the company better and more profitable.

Over the more than 25 years that I have been working with IT from both sides of the desk -- as an executive and as a consultant -- there have been fewer than a handful of companies with which I have worked that actually calculated an ROI for their investment in technology. Fewer still had any measurable objectives for specific IT investments beyond some number clearly picked from the air like "increase revenues by 5%" or "cut manufacturing costs by 7%." Almost none of these firms could tie specific technology functional deployments to the expected ROI.

Given these facts, it is no wonder that traditional ERP (Everything Replacement Project) fails to deliver ROI. The executives and managers deploying the new ERP have not based their ROI expectations on much more than "gut feelings" and some vague sense that having more data will make them better managers.

Failure No. 2: "Go-live" delayed inordinately
Substantial delays to "go-live" in Everything Replacement Projects (traditional ERP) are generally attributable to one or more of the following factors:

• Poor decisions related to customizations or modifications -- when they are selected; how the program code is designed, developed and managed; and the methods chosen for testing and deployment
  
  
• Executive management's improper view of the goals and objectives of a valid ERP project -- thus leading to out-of-control scope creep, usually with absolutely no correlation to project ROI
  
  
• The organization being overwhelmed by an Everything Replacement Project -- rather than being focused on leveraging specific technologies for the benefit of the "system" (i.e., the organization) as a whole

[To be continued]

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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)
   
   

SOME DEFINITIONS

• 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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The danger of "We know!" - Part 3

In this portion of our series, we're going to talk about how to put a "framework" or "theory" around what you already know about your business enterprise. This is not an exercise in "business theory." This is a real and practical approach to gaining effective control of your enterprise after (perhaps) years of "muddling through" with more or less mediocre results.

One of the reasons executives and managers are not able to really "understand" what they "know" about their own organizations is that, since they are unaware of a "tool set" to aid them, they never actually put what management "knows" (we call it "tribal knowledge") about how their organization works -- or doesn't work -- on paper. Therefore, in the absence of such a written document, the managers themselves cannot read and re-read their own logic about cause-and-effect relationships that flow throughout their enterprise.

Our mind makes thousands of assumptions about what we think we know. Our mind processes these assumptions and incoming information so rapidly, we are unable to filter out our incorrect thinking or invalid assumptions adequately. Putting our thoughts down on paper helps us step through the logic that is leading us to certain conclusions.

Equally important, however, is that fact that, if we never get our reasoning down on paper, it is nearly impossible for us to invite others to truly analyze our logic -- to critically review our logic -- in an effort to help us bring about lasting improvement. As a result, not only do we not realize that we have flaws in our thinking about what's happening in our organization, others who might bring beneficial insights to our aid cannot do so because they, too, cannot help us find the flaws in our rationale. This inevitably leads to the fact that these undiscovered flaws in our thinking about how our organization really works -- or does not work -- remain embedded in our decision-making processes.

The good news is that there is an outstanding set of tools that are readily accessible, easily understood, and relatively simple to apply that will help executives and managers lay hold of "tribal knowledge" and reduce it to an understandable framework (or "theory") about how their organizations function in a real and practical way. Others that have applied that tool set have said things like:

• "I have never seen my business so clearly before."
  
  
• "We truly understand our business for the first time."
  
  
• "This process has helped us regain a sense of control over our enterprise."
  
  
• "For the first time in a long time, we are empowered to move proactively toward real, lasting improvement."
  
  
• "We now have a consistent framework for diagnosing problems and planning for improvement."
  

What is this simple, yet amazing, tool set for executives and managers?

It is simply the TOC (Theory of Constraints) Thinking Processes as developed by Eliyahu Goldratt, a suite of logic trees that provide a simple, yet effective, road map for diagnosis and change.

So, continue to say, "We know!" and miss out on the opportunity for real, practical and sustainable improvements to your enterprise, or discover a whole new, easy-to-use and effective tool set for starting down the road to ongoing improvement.

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The danger of "We know!" - Part 1

As a consultant, I meet folks in business very frequently that are pretty much convinced along one or more of the following lines:

1. "We already know about our business." By this owners and managers mean to express the sense that they already understand how their business works and what it will take to make the business better.
   
   
2. "There might be some room for improvement, but the returns on any improvement we could make would be so small, it's not worth the effort." This statement or mind-set by owners and managers is a restatement of the so-called "law of diminishing returns."
   
   
3. "Our business (or industry) is unique, so we have to work this way." This is an argument suggesting that a consultant, being an outsider to the business or the industry, can't possibly bring any valuable insight. Furthermore, even if he or she does, we probably couldn't make the recommended changes anyway.

On far too many occasions, when I meet such owners and managers, I am simultaneously witnessing an organization that started off great, grew rapidly, and still has the entrepreneurs that started the firm in the driver's seat. They are also, quite often, over-the-hill.

I'm not talking about the owners or managers being over 40 (or over 50) years of age. I'm talking about the fact that their once booming organization is now in a state of coasting on its earlier success or even in the early stages of decline. Sometimes management hasn't even recognized that fact yet. They may be thinking that they are just in a temporary slump, that things will inevitably pick up again, and their firm will regain its earlier vigor.

Sadly, the chances of such a revitalization are usually slim.

While it is unequivocally true that a consultant can never learn everything about an enterprise that the owners and management know from all their years in their industry and in their own business, it is equally true that there are more things that are similar about human organizations than there are things that are different between human organizations.

Among the key things that are TRUE about all human organizations is that they all rely upon the same three scarce resources:

1. Time
2. Energy
3. Money

Furthermore, contrary to popular opinion, managing the first two -- time and energy -- is more important than managing the third (money). This is true simply because if you had unlimited time and unlimited energy, you could have all the money you wanted or needed.

For this simple reason, focus is everything. As organizations grow and expand, the entrepreneurs who manage them start to lose focus, and they do not have within their knowledge or skills a set of tools to help them focus again on those few simple things that will revitalize their over-the-hill firms.

Having gained, perhaps, many years of experience in their industry and with their own firm, they frequently find that their experience really does not contribute that much toward discovering effective responses to the new challenges their firm now faces. What is missing is a method for discovering a new theory or framework that clarifies how their grown and expanded organization now works -- or doesn't work -- at making more money.

[Next time: Why is it so difficult for owners, executives and managers to discover how to effectively change their companies for ongoing, vital growth?]

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