Managing Differently After Implementing Enterprise Resource Planning

January 1, 2011

The information contained in this article is based on the results of a poll of independent ERP consultants. The consultants were asked to answer the question posed by an executive at a company that was just about to go live with their ERP implementation. “‘Assume the implementation is complete. Now what do I do differently than I did before? How do I do my job differently?”

Enterprise Resource Planning (ERP) implementations take months or even years and cost 3% to 6% of a company’s gross annual sales to make it happen. When the big day comes, the switch is thrown. It’s alive! So now what?

What do the executives of the company do differently today then they did yesterday? One possible answer is nothing. Senior managers don’t use ERP systems. The system is for people who enter customer orders, who create purchase orders, or who record labor or track inventory. Executives don’t do any of that. Executives have a business to run, bigger issues to deal with. You could, then, answer the question by saying executives do nothing differently once the ERP system is implemented. That is one answer, but it’s the wrong answer. The correct answer is, everything; executives should do everything differently. Here’s why.

The major difference between a modern ERP system and your old legacy systems is integration. You’ve gone from a series of independent or interfaced systems to a single interdependent system. That changes everything.

“The company’s departments are now like a high wire trapeze act. Any slip by even one person may cause everyone to fall. When the teamwork is well executed, on the other hand, the result is thrilling.” Kirk Prather, Sr. Manager, California Manufacturing Technology Consulting

Integrated ERP systems make the elements of the company highly interdependent. The interdependence of the elements of the company is best explained by looking at some typical examples. In many legacy systems, the sales order system may have been disconnected from the production planning system. If someone in sales made and error in entry, it was likely to be caught when the order was re-entered in the planning system. In an ERP system, sales is integrated with production planning. Any error in sales entry may cause the wrong products to be built or shipped. Like wise, in old systems the shipping function was not connected to anything else. Anything that showed up on the dock could be shipped. In an integrated system, the shipping function is linked directly to the warehousing information. If the system doesn’t recognize that the item to be shipped is in inventory, it can’t be shipped. Inventory errors can prevent you from making your projected sales forecast. In an integrated ERP system all functions, all departments directly affect the performance of the operations downstream of them.

That integration is why senior management typically authorizes the large expenditure of an ERP system. Integration will reduce redundant data entry and save money. Integration will speed time to market and reduce customer delivery time. An integrated, real time system will give executives quicker access to the information that they need to run the business, and that information will be more complete. But that time and money will not be saved if you do not change the way you run the business.

“If management attitudes, approaches and daily behaviors do not change from the “C” group down (CEO, CFO, CIO, etc.), the implementation will not reach its potential; the promised return on investment will not be achieved.” Don Frank, President Frank and Associates.

The change to an integrated ERP system requires a change in management behaviors. The experts queried for this article agreed that the required management changes fall into three categories; organizational design, process design and metric design. The exact way in which these three elements have to change will depend somewhat based on what the business was trying to achieve with the implementation in the first place but the broad categories of change are required for all implementations.

Organizational Design

“After the cut over from the old system to the new, the focus shifts from implementation to leverage,” Norm Raffish, Consultant, California Manufacturing Technology Center.

Management should ask, “Now that the system is up and running, how can we achieve and even expand its benefits? How can we assure the return on investment we predicated?” One of the more common reasons to have purchased an ERP system is to bring diverse pieces of the company together. To assure the company achieves the benefits of integration it was seeking when the purchase and implementation of the system was approved, executives must use the ERP system to create an integrated strategic direction for the company. Senior management should create strategies and plans that require the business units to work together. They should require that the various business entities develop and execute common business processes, common ways of using the new system. They must manage the business as a whole, not a collection of parts. The new strategies must avoid local optimization and stress global efficiency. The ERP system is integrated; the way the company is managed must be integrated too.

“Implementation nay require redesign of intra and inter departmental structures and reporting relationships,” Kirt Behera, CFPIM, Behera & Associates.

Executives need to examine how the company can exploit the process structure that ERP creates. For example, a company organized around traditional functional departments like Sales, Engineering, Scheduling and Purchasing may need to reorganize around business processes. So the traditional departments may be combined along the Supply Chain Operations Reference (SCOR) Model in to Plan, Source, Make, and Deliver. There may also be a need to develop new job descriptions and responsibilities to perform work in an ERP system. In the old system, the steps required to execute a process may have crossed and re-crossed departmental boundaries. The integrated ERP system may require management to reexamine who does the steps in the process to minimize hand offs from department to department.

To achieve that integration, the processes by which the organization does its work must change.

Process Design

“The most important change that management can make, must make, after an ERP implementation, is to use the system to operate the business. The formal system must rule over the informal systems. Top Management must understand this concept, practice it, and enforce it at all levels. The president that asks for a hot list, or who accepts a financial report created in Excel or accepts information not pulled out of the ERP system just doesn’t understand. Failure to recognize this one concept is the primary reason that many of these implementations fail to achieve the desired results,” Jim Strong, consultant, The ACA Group.

Our panel of experts all agreed with the statement above. Executives must run the business by the numbers, the ERP system’s numbers. Every piece of operational and financial information management looks at must come from the system. As soon as a manager accepts a spreadsheet or other type of manual report, they are sending the message that not using the system is acceptable. If managers are not using the ERP system then they are creating and storing data in personal or departmental systems. Soon the company will right back where it started with a set of disconnected systems.

“At least 90% of the daily activities must be executed by standard systems and procedures. While there are always exceptions, no more then 10% of daily activities can be exceptions handled outside the ERP system and then only due to the limitations of the ERP system. The 90% rule means management must demand that all operational requirements be put into and executed through the system,” Kirt Behera.

Getting standard data out of the system is made possible by developing standard business processes. When developing these new processes executives should insist that the processes are used by all segments of the business. Line managers will tend to say, “We’re different. We can’t use the common processes.” This cannot be allowed. The business must be managed in a disciplined manner.

There must be a zero-tolerance policy against expediting, red lining engineering drawings, midnight over-the-fence part requisitions, non-documented routing changes, desk inventories, and other non-standard behaviors. Product delivery schedules must be realistic, not dates in the past or dates that can’t be made. Using the formal system and standard processes must be the default position and must be enforced by senior management. The return on the ERP system investment will be directly linked to how well the system is used. How well the system is used depends on everyone using the system and everyone using standard processes. The company’s executives can exercise direct control over use of the system and use of standard processes by demanding adherences to the 90% rule and using only system data to run the business. This is the most important change that senior management can make after the ERP systems goes live.

Metrics Design

“The system’s original objectives, the savings used in justifying the expense, become the measurements that the company needs to track,” Sam Thomas, Adjunct Faculty Member, University of Phoenix, and President, Agility Training.

The way management assures they are achieving the results they desire from implementing a new system is by creating and tracking appropriate metrics. Management of the system should involve tracking the organization’s performance to see how well the original objectives are being met. The company’s executives must redesign performance goals to drive ERP ROI. Jim Tarr said it best.

“Tracking organizational performance requires managers to develop and implement a comprehensive, fact based, integrated, performance measurement system. This system should be designed to drive behavior toward overall organization performance and away from maximizing individual department performance and empire building. From a top management point of view, the best performing department (and department manager) is not the one who has the best “numbers” but the one who contributes most to the overall performance of the organization,” Jim Tarr, president of JD Tarr and Asscoiates.

Another of our experts stresses the need to make the entire chain of command feel responsible for assuring the return on the effort.

“Senior managers should ask each of their direct reports exactly how they intend to use the ERP system to increase profits for the company, decrease costs, run their departments more efficiently, or provide higher levels of customer satisfaction,” Gunnar Sunstrom, Consultant.

For example, if part of the justification for the system was based on the reduction of inventory costs then every manager down the chain needs to be accountable for that reduction not just the Materials Manager. All managers should be asked what actions they will take to help achieve the goal. Everyone should be measured against that collective goal. We either all make it or we all don’t make it. The same would be true if the original justification was to decrease delivery time, or increased customer satisfaction. Everyone defines his or her role in achieving the goal and everyone is equally accountable for the results. Integrated systems must lead to integrated actions, which must lead to integrated rewards.

Process design will drive metrics design. That means the data used in the metrics must come out of the formal system and nowhere else. ERP creates plans; cost, schedule and quality plans. ERP collects actual performance data; cost, schedule and quality data. The ERP system must be THE source of the plan and of the data to used measure performance against the plan. Executives can assure adherence to the process design by creating and monitoring metrics using systems data.

If management doesn’t have the right people organized in the right way, doesn’t make sure the fundamentals are well executed, standard and integrated processes, doesn’t put the key performance measurements in place, and if management doesn’t change its behavior, nothing will change by merely implementing a new ERP system. The investment will have been lost.

Spending a lot of money on a new Ferrari doesn’t do one any good unless they know how or quickly learn how to drive it safely and effectively. In fact this expenditure frequently results in a fatality. Would you give your 15 year old son who has just got his learning permit, the keys to your Ferrari that can go 160 miles an hour? Hopefully not.

The organization’s senior managers attitudes, approaches and behaviors have to change if the implementation of the ERP system is to reach its potential. Old behaviors will continue unless top management sets the stage and leads by example in using the new system. Executives must drive new behaviors by creating appropriate new organizational structures, insisting on new, standard processes, demanding adherence to those processes and by holding their people accountable to new measures.

We started by asking the question, what do the executives of the company do differently after the implementation of a Enterprise Resource Planning system then they did before the implementation? The right answer is, everything.

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