Justification of ERP Investments Part Four: Replacing or Re-implementing an ERP System

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Replacing or Re-implementing an ERP System*

An investment analysis focusing on enterprise resource planning (ERP) benefits frequently applies to those firms initially justifying an ERP implementation. It can also be used to justify a "re-implementation" when the initial efforts have failed to produce desired results. The box describing "Classifications of ERP success" identifies situations where the ERP implementation falls short of producing desired benefits.

*This is Part Four of a four-part article reprinted from Maximizing Your ERP System by Dr. Scott Hamilton. Bridging the theory and realities of current ERP systems, Maximizing Your ERP System provides practical guidance for managing manufacturing in various environments. Drawing on case studies from Dr. Scott Hamilton's first-hand experience in consulting with more than a thousand firms, it covers common problems and working solutions for how to effectively implement and use ERP systems. The book can be ordered on amazon.com. This excerpt on "Justification of ERP Investments" is presented in four parts:

  • Quantifiable benefits from an ERP system

  • The intangible effects of ERP

  • Costs of implementing an ERP system

  • Replacing or re-implementing an ERP system

Reprinted with permission of McGraw-Hill.

Classifications of ERP Success

Several measures have been used to gauge the successful implementation of an ERP system. The impacts on business performance and bottom-line results provide the best measure of success. Another measure of success is the degree to which the formal ERP system is used to run the business. Four classifications -termed Class A through Class D--have often been used to characterize success.

Figure 3.5 summarizes these classifications of ERP success.

Class A User. The formal ERP system is effectively used to run the entire company. The manufacturing database defines the way products are really built, and efforts have been undertaken to simplify factory layouts and business processes. The ERP system defines realistic agreed-upon S&OP (sales and operations planning) game plans that cover all demands, sales orders have realistic delivery promises, and the schedules are actually used to coordinate supply chain activities. Coordination efforts reflect action messages, with a manageable number of exceptions. The ERP system correctly updates accounting and provides useful management information. The ERP system typically reflects the latest releases from the software vendor.

Class B User. The formal ERP system is partially effective in being used to run the entire company. It defines S&OP game plans, but they typically lack company-wide agreement and completeness. Supply chain activities are frequently initiated that do not reflect schedules from the ERP system, and the volume of action messages frequently makes them difficult to use. Unrealistic delivery promises on many sales orders contribute to the problem, and also create a larger-than-necessary volume of exception conditions requiring expediting. Some informal and parallel systems are employed to manage expediting outside the formal system. While the manufacturing database provides a reasonably complete and accurate model of how products are really built, there are just enough exceptions to make some people question the formal system. The accounting applications are closely coupled to operational reporting, but sufficient exceptions exist to make the financial impacts suspect.

Class C User. The formal ERP system is only used in part of the company, typically in recording information about sales orders, shipments, purchase order receipts and accounting applications. The manufacturing database provides an incomplete or inaccurate model of how products are really built. S&OP game plans are typically non-existent, and unrealistic delivery promises are made on many sales orders. Several informal or parallel systems are required to coordinate procurement and production activities, typically with excessive expediting efforts and duplicate data maintenance. The accounting applications are not closely coupled to the activities reported in production. The ERP system reflects an old version of the software package.

Class D User. The formal ERP system is not used to run any part of the company, and might be "running" only in the management information system (MIS) function. Informal and parallel systems are being used to manage the business.

Over the last twenty-five years, field surveys about ERP success indicate approximately 10percent of firms achieve Class A status, 40percent are Class B, 40percent are Class C and the remainder (10percent) are failures.

Many manufacturers think they need a "new system" when they really need to upgrade and re-implement their current ERP software package. They can be characterized as a "Class B" or "Class C" user, and are not achieving the possible benefits--both quantifiable and intangible. In many cases, they are using an older version of the software package and have made significant customizations. The estimated costs to upgrade and re-implement are typically less than a "new system", as illustrated in figure 3.6. In this example, some general rules of thumb (or ratios) have been used to estimate the one-time costs.

The costs to re-implement an ERP system should be significantly lower than implementing a new system. The users have familiarity with system usage, and should know the system strengths and weaknesses. Many firms can live with the shortcomings of their existing system. External assistance from the software vendor and consultants can help develop solutions to shortcomings, and should in any case be part of continuous improvement efforts. With a firm understanding of the re-implementation costs and shortcomings, the investment decision should be justified on the basis of benefits.

Many manufacturers are faced with decisions about replacing their current ERP software package or homegrown system. The replacement decision can stem from any number of situations. The current ERP software package is no longer supported; is too expensive to maintain; is heavily customized and cannot be upgraded; runs on old technology; is too complex and expensive to implement; and so forth. A homegrown ERP system provides partial solutions or non-integrated solutions; it's not on the right technology platform; nobody knows the system and can support it; nobody can upgrade the system; and so forth. The investment decision in these cases tends to use cost comparisons between alternatives.

The starting point for cost comparisons should be the previously discussed classification of costs, both one-time and ongoing annual costs. The following case study illustrates the use of cost displacement as the basis for ERP investments.

Case Study: Cost Displacement as the Basis for ERP System Replacement

Several autonomous plants of a multisite manufacturing firm implemented a stand-alone micro-based ERP package at each site because it was a cheaper alternative than the corporate standard. The corporate ERP system was a complex mainframe system that required very high levels of external assistance, large expenses for customizations, and high charge-out rates from the corporate MIS function. The one-time and ongoing costs for the corporate system were two to three times higher. The plant management even argued (successfully) that they could implement the new system in three months, obtain the benefits over a six month payback period, and ultimately throw it away in two years when the corporate MIS function was finally ready to implement the mainframe system at their plants. Three years after these plants successfully implemented the single-site ERP system (with three month implementation periods), the plants are still using the system while other sites within the company have struggled to even partially implement the mainframe system. The cost displacements (and benefits) have been estimated to be more than one million dollars.

About the Author

Dr. Scott Hamilton has specialized in information systems for manufacturing and distribution for three decades as a consultant, developer, user, and researcher. Scott has consulted for over a thousand firms worldwide, conducted several hundred executive seminars, and helped design several influential ERP packages. He previously co-authored the APICS CIRM textbook on How Information Systems Impact Organizational Strategy and recently authored Managing Your Supply Chain Using Microsoft Navision. Dr. Hamilton is currently working closely with Microsoft partners involved with manufacturing and distribution, and can be reached at ScottHamiltonPhD@aol.com or 612-963-1163.

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