Executive Summaries on Enterprise Apps© Number 7: How to measure the performance of your ERP System

June 18, 2015
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You went through all the effort and expense of implementing a new ERP system, so how is it working out? Do you have a way of measuring how well it’s being used?

An ERP implementation is usually a sizable investment in relation to your yearly sales. Every company who has been through the pain can tell you exactly how much they spent and how long it took. Most companies can tell you if they achieved a return on that investment and how they got the ROI, but what’s happening today? How do you measure how well the system is being used? What is the right measure of an ERP system’s on-going performance?

Profit and cash flow are the most important measures of a business. Planned orders and exception messages are the most important way ERP affects those measures. Therefore the right measure of an ERP system is how well the planners are reacting to planned orders and exception messages.

When supply and demand are out of balance you build inventory. It takes cash to buy or build inventory. Most companies borrow to support their short-term cash needs. When you borrow, you pay interest. Every dollar paid in interest comes right off the bottom line. To avoid paying interest on excess inventory, planners make sure supply and demand are in sync in both quantity and time.

Demand and supply are changing every day. Planners get more action messages than they can work. I know of environments where planners get hundreds of messages every day. They could never work them all. All the un-worked orders and messages represent supply and demand that are out of balance so the best way to measure how the planners are reacting to planned orders and exception messages is measure the backlog of un-worked orders and messages.

If all the orders and messages in the backlog were created equal you could develop a simple measure of ERP performance by just counting them. All items in the backlog are not created equal so we need a measure of their individual impact. I have always advocated the best way to measure the order and message backlog is by measuring the dollar value of the part referenced in that order or message. Every message and every order refers to a part. Every part has a cost. Multiple the part’s cost times the quantity in the message or order and you get the best measure of the impact of the backlog. In other words, to measure the performance of your ERP system, follow the money. Focus on the dollars not the parts, not the quantities, and not the dates. Put a dollar focus in your ERP system.

I know of no ERP system that provides a dollar focus to the backlog of orders and messages. There are two ways to make up for this shortcoming; you can buy a solution or build a solution. There are prebuilt business intelligence (BI) tools like the Inventory Quality Ratio, IQR, (www.InventoryPerformance.com) that are designed to provide the dollar focus that is lacking in ERP systems. Alternatively, you can use your existing BI tool set to develop a dollar focused measure of the backlog of planned orders and messages. Either way, the planners can be much more efficient, can have a bigger impact on the business with less effort by focusing on dollars instead of part quantities.

How do you measure ERP performance? Get a dollarized measure of planned orders and exception messages that are not being worked.

 

To learn more details about how to ensure the success of your ERP system is successful, contact Doug Howardell at DH@theACAgroup.com or 626-836-9261

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