Home
 > Research and Reports > TEC Blog > Justification of ERP Investments Part Two: The Intangible...

Justification of ERP Investments Part Two: The Intangible Effects of ERP

Written By: Dr. Scott Hamilton
Published On: February 11 2004

The Intangible Effects of ERP*

The intangible or non-financial benefits of an integrated enterprise resource planning (ERP) system can be viewed from several perspectives. For illustrative purposes, the discussion will focus on the benefits for accounting, product and process design, production, sales, and management information system (MIS) functions. From the overall company standpoint, ERP provides a framework for working effectively together and providing a consistent plan for action.

Each of the intangible effects could be quantified in terms of cost savings. Duplicate data maintenance, for example, requires personnel time in entering data (and possibly managerial time in determining which set of data should be used for decision making). Expediting efforts have a visible effect of consuming personnel time. These quantified cost savings can also be used to show impacts on financial results.

*This is Part Two 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. 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.

Effects on Accounting

With a common database from ERP, accounting no longer requires duplicate files and redundant data entry. Product costing, for example, can be performed using accurate and up to date product structures. Product costing simulations can be used to analyze the impact of changing material costs, labor rates, and overhead allocations as well as planned changes to bills and routings. Differences between actual and standard costs are highlighted as variances. Order related variances help pinpoint problem areas.

Customer invoices can be based on actual shipments (without duplicate data entry), which helps speed invoice processing. Payables can use purchase order and receipt data for three way matching with supplier invoices.

As manufacturing transactions are recorded, the financial equivalents are automatically generated for updating the general ledger. This provides a complete audit trail from account totals to source documents, ensures accurate and up to date financial information, and permits tracking of actual versus budgeted expenses. Detailed transaction activity can also be easily accessed on line for answering account inquiries.

Since manufacturing transactions automatically update the general ledger, time consuming manual journal entries can be eliminated. Period end closing procedures can be performed in hours or days, rather than weeks. This improves reduces clerical accounting work, and improves the timeliness of financial reports.

Financial reports can be easily customized to meet the needs of various decision makers. Financial projections can be based on detailed ERP calculations for future requirements. Cash planning, for example, can account for current and projected sales orders and planned purchases, as well as current receivables and payables. Decision support tools (such as spreadsheets, graphics packages and data managers) can use the financial data maintained in the ERP database.

Effects on Product and Process Design

The product structure database offers engineering much greater control over product and process design, especially in terms of engineering change control. Planned changes can be phased in and emergency changes can be communicated immediately.

ERP systems offer numerous analytical tools for the engineering function. When diagnosing the impact of changes to materials and resources, for example, engineers can check where used information to identify the affected products. Lead time reduction efforts can use critical path analysis of item lead times in multi-level bills to focus attention on those key components affecting cumulative manufacturing lead time. Costed multi-level bills can be used to focus cost reduction efforts on high value items. Bill comparisons can be used to highlight differences between products or between revisions of the same product such as to identify upgrade kit requirements.

ERP systems support custom product configurations. Rules-based configurators reduce the need for expert assistance from engineers, and ensure sales personnel (or even customers) can develop timely accurate configurations. Cost estimates and pricing for custom product configurations can also be quickly calculated.

Effects on Production and Materials Management

ERP systems help establish realistic schedules for production and communicate consistent priorities so that everyone knows the most important job to work on at all times. Visibility of future requirements helps production prepare for capacity problems, and also helps suppliers anticipate and meet your needs. As changes to demands or supplies do occur, ERP helps identify the impact on production and purchasing.

Finite scheduling capabilities in ERP ensure production activities get scheduled based on capacity, tool and material constraints. Scheduling rules help minimize setup times and optimize sequencing. Changes in factory demands, as well as changes in available machine time, labor headcount and skill levels, tools, and material, can be immediately simulated to assess the impact on production and purchasing. ERP helps eliminate many crisis situations, so people have more time for planning and quality. Buyers can spend more time in vendor negotiation and quality improvement. When the shortage list is no longer used to manage the shop, the quality of working life can improve.

Effects on Sales

Customer service can be improved by making valid delivery promises and then meeting those promises. Custom product quotations can be developed faster and more accurately, which improves job estimating. Delivery lead times can be shortened and customer inquiries on order status can be answered immediately.

E-commerce capabilities enable customers to place orders and check status over the internet at any time. In addition to customer convenience, this reduces the time requirement for sales and customer service personnel.

Effects on the MIS Function

An ERP system implemented as an integrated software package offers several advantages to the MIS function. The software package can offer a growth path from simple to comprehensive applications built on top of a database management system. It provides an upgrade path to technology and functional enhancements supported by the software vendor. It can reduce the development time and cost for software, documentation, and training classes. These costs would be incurred before the firm can start obtaining the benefits of an ERP system. It permits the MIS staff to focus their attention on organizational change and servicing user needs for customization and professional assistance.

*This concludes Part Two 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. 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.

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.

 
comments powered by Disqus

Recent Searches
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Others

©2014 Technology Evaluation Centers Inc. All rights reserved.