Fixing ERP System Erosion to Unlock Business Value

Implementing an Enterprise Resource Planning  (ERP) system, such as SAP, JD Edwards or Oracle Netsuite, is a significant financial investment, particularly if the implementation is global in scale and involves multiple business units. While the benefits of an effective ERP system can outweigh the high cost of implementation, challenges invariably arise when companies grow via mergers or acquisitions or into new markets. In such situations, achieving short-term commercial goals is often prioritized over ERP considerations.. This can lead to system customizations and process workarounds that meet short-term objectives but that erode the original benefits of the ERP implementation by adding additional costs and complexity. These workarounds eventually become codified in standard operating procedures, additional technology is built upon the existing foundation, and the technical debt compounds rapidly, eventually outstripping any efficiency gained by the ERP system in the first place. 

Companies end up with complicated, disparate product, customer and vendor master data that result in complex or ineffective offline operational and financial reporting.  This may also result in “data silos" by business unit, further undermining the benefits of an integrated ERP. So, how do companies maximize their investment in these large ERP systems, while realizing the commercial benefit of new business integrations?  How do companies unravel established workarounds and system customizations without risking a negative impact on the business?

In order to undo this “system erosion” of poorly executed integration projects, companies must adopt an approach built on Lean and Continuous Improvement principles that consider both process requirements and installed ERP system capabilities. This approach is supported by a measured, phased program methodology focused on delivering business value by considering ERP system capabilities - integrated across all (new and existing) business units of the company.

Continuous Improvement is a management / operational framework whereby organizations, business units, and individual teams methodically and routinely analyze and refine their respective operations to ensure that they align with and support the overarching strategic objective of the organization to the greatest degree possible.

Lean is a formal Continuous Improvement practice that focuses on eliminating waste and maximizing efficiency in business processes. Some of the specific Lean principles that apply to this approach are:

• Value: Identifying and focusing on the value that the ERP system can bring in simplifying and standardizing processes and data across the organization. Examples: Rationalizing master data to reduce duplication; automating workflow to simplify processes across functions.

• Flow:  Identifying and eliminating any bottlenecks or delays that impede the flow of information and processes across the organization Example: Ensuring all data have a single system of record; application interfaces with the ERP are seamlessly integrated.

• Pull:  Prioritizing and implementing changes based on the needs and priorities of the business and customers. Understand business rules and ensure these are configured in the ERP.

• Perfection: Continuously identifying and addressing inefficiencies in processes and ERP technologies. Continually assess system performance against business objectives.

The Lean model for ERP improvement projects is built on these 3 key steps:

1. Define Areas of Improvement
• Gather information from process experts to understand the problem to be solved
• Understand business requirements in terms of functional specifications and business rules
• Understand the ERP capabilities related to these requirements so that technical requirements are specified
2. Execute Improvement Projects
• Prioritize the identified opportunities with defined business objectives
• Create a program plan for delivering sustainable improvements
• Ensure agreed targets are met
3. Create Culture of Continuous Improvement
• Obtain executive sponsorship and leadership around these projects
• Dedicate the necessary resources to deliver improvements
• Organize around value creation from existing system capabilities

Fixing ERP system erosion cannot be addressed by fixing one-off issues based on the loudest voice pushing support tickets through the IT Support group.  Fixing ERP system erosion sustainably relies on following the approach of Lean / Continuous Improvement described above.  This approach guarantees that fixes are permanent and that business value is front and center of prioritizing system improvements.  Over time, your ERP system will become fully utilized to drive the business benefits that were promised when it was first implemented! 

ERP Systems Production Support's role in Continuous Improvement

"As you wander on through life, whatever may be your goal,

keep your eye upon the doughnut, and not upon the hole."

Deborah Osgood, Chief Architect and Cofounder of BUZGate.org

I recently came across a good article on ITtoolbox Blogs entitled Building a "SAP Support Model". The author, Bob White, outlines a step by step approach for building an ERP support model. This article was SAP-centric. This model also aims to support and solve the technical issues that you would find. Great if you are looking to only support your IT investment.
The question is, having made such a great investment in your system, and then this ongoing cost of supporting your application, how can you sweat this asset to drive real business benefit and continuous business improvement?

The answer lies in understanding the Continuous Business Improvement cycle for ERP systems. This cycle of

1. Adopting (the ERP system);
2. Sustaining (customizing, implementing and supporting the ERP system); and
3. Exploiting (driving business benefit from your ERP system)

This is what aligns technology-based business improvement to business strategy. The illustration above shows this cycle more clearly. Once the ERP system has been implemented, and is stablised with an effective support model (as the article above describes it); then it is time to make System Support a cornerstone of initiatives to drive real business benefits.

How does System Support help drive continuous improvement?

• Great support data gathered from users that will point to improvement opportunities.
• Issues identified by System Support are related directly to the ERP system. Any changes to address these issues will exploit the system capabilities - 'sweat the asset'.
• System Support team are often well positioned between Solution Managers who understand the system capabilities; the users who identify opportunities for improvement; and the deployment teams who can make the changes happen.

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How can you apply this to smaller businesses? Look into the capabilities of your current applications and the needs of your users to identify opportunities to drive productivity and improvement via automation in your business. No need to reinvent the wheel. Use what you have.Keep your eye on the doughnut around and not on the hole ...

Imagine tracking net-profit by customer, by product - on demand!

In a previous article, "Optimize profitibilty by managing value", I discussed the use of an application called ProfitFinder which allows you to analyze net profit by product AND customer along your value chains. This is an unique innovation around how profitibility is tracked and measured, that allows businesses to look at how value really can be managed to increase company net profit.

These would be the benefits of having this information at your fingertips:

• Customers Net Profit – compare to today’s Gross Margin – you can then focus resources on more profitable customers and their buying patterns and manage the less profitable customers.
• Customer / prospect costs – you can adjust the amount of sales activities and decide when to stop working on prospects when target marketing costs are reached.
• Resource capacity utilization – giving you the capability to do marginal marketing to maximize utilization of your resources to lower the fixed costs and increase total profit.
• Sales force effectiveness - track net profitability by sales person. This information allows you to better set sales targets based on profit, as well as allows you to manage sales accounts more effectively.
• Supporting departments costs per Value Chain – the ability to adjust the different departments costs involved in the value chains related to the profit that the respective VC brings in.
• Decision-making information by Value Chain from products/services/procurement through inventory/warehousing to customers/ markets, on a real-time basis or in batches on order.

RELATED BLOG ARTICLE:

• Data rich information poor

Optimize Profitibilty by Managing the Value Chain

I recently came across an interesting innovation that actually drives product profitibilty. The innovation comes from a Sweden-based company called Scorebase. According to the founder, Börje Paulsson, what started as a technique for analysing business data to track profitibility at the various phases that the product goes from production to market, has developed into a powerful analysis tool which has become a valuable piece of software for his clients. The application is called ProfitFinder and is more than a profitibility analysis tool.

Gross Profit is defined as sales minus all expenses directly related to these sales. PROBLEM: GP does not consider fixed costs in production and marketing

Net Profit is defined as total revenue minus total expenses. PROBLEM: NP is normally measured monthly and is not easy to measure by customer/ product combination more frequently.

(Click on Picture)

ProfitFinder will allow you to see, based on actual production and billing, your net profit by product/customer combination - along the value chain!

Imagine what you can do with this information.

• You can identify and reduce waste in your production process, & reduce direct costs;


• You can understand and manage how indirect costs impact your product cost;


• Quantify and manage your direct sales costs by customer. How much more are you paying in shipping for the same product for different customers? How much of a sale-person's time is being spent on marketing/ selling to a specific customer? Are yoru marketing dollars spent in the right area?


• Indentify and manage how indirect marketing costs are being allocated to products.


• Rank performance across market segements more accurately - better plan your marketing campaigns.


• Not have to wait until the end of the financial period to know what you net profit is!

How the best differ from the rest

"Only the mediocre are always at their best." Jean Giraudoux (French dramatist: 1882 - 1944)

Why is it that some companies perform better than others. Is it luck? Their people? Their products/ services? Their markets?

Some time ago, I reviewed the top-rated book "Six Disciplines for Excellence" . In that book, Gary Harpst defines five key reasons for why the best differ from the rest. Here's the top five - in order of their importance:

1. Strength of the Leadership Team. Top-performing organizations rated 155% higher than the lower performers. The two primary factors were the ability of leadership to define a clear vision for the company, and the appropriate involvement of leadership in leading and supporting projects that were strategic to the organization.


2. Ability to Attract and Retain Quality People. Top-performing organizations rated 142% higher than the lower performers. The best small businesses have found that success in this area all starts with recruiting.


3. Disciplined Approach To Business. Top-performing organizations rated 114% higher than the lower performers. Top performers are also good planners, but are practical and are disciplined about the commitments they make.


4. Strategic Use of Technology. Top-performing organizations give more emphasis to using technology to impact the business in strategic ways (114% more) than the lower performers.


5. Effective Use of Trusted Relationships. Top-performing organizations rated 100% higher than the lower performers in their ability to utilize the expertise and talents of external organizations.

Other factors contribute to top-performing organizations and how they differ from lower performers (i.e., work ethic/attitude, teamwork, commitment, etc.). The five described above highlight the areas of greatest difference.

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• Why do Start-ups Fail?
• 14 Commandments of creating a Wealth Pulling Niche
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Three Phases of Continuous Business Improvement

Our responsibility is to do what we can, learn what we can, improve the solutions, and pass them on.

Richard Feynman

US educator & physicist (1918 - 1988)

After an improvement has been made to a business - through a system implementation/ enhancement and/or a process change - many companies struggle to keep the momentum going to drive continuous improvement. In my recent publication in Techlinks about driving business benefit from an ERP implementation, I outlined the 3 phases of Continuous Business Improvement. Below, I have adapted these for process changes as they relate to Organizational Change.

Phase 1: Adopt
After the change, most teams focus on supporting and/or rolling out the changes with little or no attention to the formalization of these changes. The objectives of the Adopt Phase are:
• The establishment of effective leadership/ ownership of the new process/ system.
• Making changes part of the day-to-day business process.
• Clearly documented new processes and procedures.

This will result in business ownership of the changes. This ownership is a key requirement if you want to ensure that improvement is not a once off event.

Phase 2: Sustain
Once the initial improvements have been made, you can put process controls in place to ensure that you don't go back to they way you were before. In fact, process control is part of and Six Sigma implementation. However, it is just as improtant to get the organizational side of this equation right too. Thus the objectives of the Sustain Phase are:
• The establishment of end user competency programs.
• Process support and capability.
• The retention of employees with portable business process skills.

This phase must result in a competent resource base and a formal process for managing issues and defects.

Phase 3: Exploit
Apart from driving value for the business, process improvement intiatives also build capabilties for additional imprvements. How? The experience of going through an improvement project builds valuable experience in your people. Also, with systems implementations, the full capability of the new system is fully exploited in the begining. Thus, the objectives of this phase are:
• The formalization of the process for identification and prioritization of exploitation opportunities driven by business value proposition.
• A structured process for planning and execution of continued improvement initiatives.
• The organizational alignment of resources.

This phase must result in well managed improvement initiatives and resources that are aligned to effectively exploit opportunities.

RELATED ARTICLES:

• Driving Business Benefits from your ERP Implementation
• DFSS: Monte Carlo Simulation in Business Process Design

The Six Disciplines: Building Excellence in Small Businesses

"Unfortunately, many of us are caught trying harder and harder to "whistle a symphony" when we should really be building an orchestra."

According to Gary Harpst, author of "The Six Disciplines", even though small businesses collectively generate $5 trillion in sales in the U.S., the biggest challenge of an individual business is 'survival'. 80% of all new business start-ups are out of business within five years. And 80% of the 20% that survived do not survive another five years! That means that, on average, only 4% of small businesses starting this year will be around in 10 years.

What makes it so hard?

In his book "Six Disciplines for Excellence", Gary Harpst details a roadmap for small businesses to learn, lead and last. This book is based on over 30 years of experience and research into more than 300 small businesses - each with 10 to 100 employees. The result is a book which is lays out a systematic approach for building and sustaining a successful business - driven by excellence. This systematic approach is what Harpst has termed The Six Disciplines:

1. Decide what's important. Based on your mission, values, strategic position and vision, what are your vital few objectives? What are you doing that you should stop doing?
2. Set Goals that Lead. What are your business measures, targets and initiatives? And how do you engage your team?
3. Align Systems. What in your business is not aligned with your strategy? How do you align your processes, policies, measures, technologies and people?
4. Work the Plan. How and when do you define, review, rate and prioritize Individual Plans to ensure that your business goals are being worked at?
5. Innovate Purposefully. How do you tap into the creativity of your team to create new and innovative ideas to solve problems and drive excellence in your business? As business owner, how do you recognize individual contribution?
6. Step Back. How and when do you review the internal and external factors impacting your business? How do you review performance of people?

Gary Harpst and his team have put a tremendous amount of work into detailing the steps within each of these disciplines so that this book can really be used as a small business owner's manual. They have succeeded in developing a practical methodology for those of us who spend too much time "working in the business, instead of on the business". These disciplines define solid well structured approach that supports the small business from strategic and tactical planning to the execution of tasks to meet the business' goals every day.

This approach is not for large businesses - it is targeted at small businesses that employ between 10 and 100 people. It is also not for those who are looking for a 'quick fix'. Success in using The Six Disciplines takes ... well, discipline. You would not expect to see results of this approach within 6 months.

I like the approach and would recommend the book, as it is uniquely tailored for small businesses; it is well written with a lot of substance; and gives business owners a practical tool that they can use to implement business improvement for sustainability, growth and excellence.

RELATED LINKS:

• Be Excellent Blog
  

DFSS: Monte Carlo Simulation in Business Process Design

When designing or re-designing a business process it is often difficult to model changes based on deterministic factors (using simple math, or empirical formulas). Business processes are dynamic and so stochastic methods work better to model them. Stochastic models help to understand the probabilities of things happening (or not) and thus can quantify risks better in design.

Martha Gardner of GE Global Research recently spoke about this topic. You can find her paper here. Ms. Gardner talks about DFSS in an engineering environment, and her examples include problems like the stiffness of helical springs. However, these methods can be sucessfully implemented in solving business process problems.

Translating the initial business problem statement, usually based on the 'voice of the customer', into the final problem statement in very clear terms will require understanding the relationship between the process input and process outputs. This will help us define the process "Y's" and "X's". The process "Y's" are the metrics or indicators that we will want to optimize or improve. These "Y's" will be related to process "X's" - the process measures which you would be able to capture data around.

For example - if you are trying to improve the service level at your call center, you may have identified 'Abandon Rate" - the rate at which callers hang up - as one of your process Y's. In this case, by reducing Abandon Rate you would be improving service level. Abandon rate would depend on numbers of calls at a time, the length of the hold time, and the number of call center agents. So these would be your process "X's".

You could capture data on all of these "x's" - number and time of calls; hold length of calls; and of course you know how many call center agents are taking calls. Empirically, you would be able to use all of this data to see very easily when you have your highest abandon rates, and thus take measures to adress these (adding additional agents, adding call options, etc.) However, your solution is limited to the data that you have. You are not exploiting the distribution of the data, and what this tells you.

Stochastic Methods like Monte Carlo will do this. All of the process "x's' will have different distributions of data. Monte Carlo simulation will use these distributions to generate data for these "x's'', and over thousands of iterations, simulate your best "Y" for your solution.


MORE INFORMATION

• More about Designing for Six Sigma on the iSixSigma website.
• Recording of a Martha Gardner web siminar on the subject.

FREE Six Sigma Lessons

Yes - I thought that I would get your attention by using FREE in the blog title. But this is true!

I found this link on the Motorola University website and wanted to share it with you. Click on the link below and enjoy.

Free Six Sigma Lessons

Why Six Sigma now?

So what is the difference between Six Sigma, TQM and SPC? What is the big deal around Six Sigma? Why are so many companies investing millions in Six Sigma programs now? I had to think about these things as I tried to answer these questions to someone new to Six Sigma recently.

There really are several answers to what is different about Six Sigma, however, the fundamentals are the same. You need to understand the quality principles that underpin TQM as well as the mathematics of SPC to be able to succeed with Six Sigma. However, what Six Sigma has added to the mix is a methodology for improving quality (reduce defects). So you can consider Six Sigma to be like TQM/SPC on steroids. Add to this the principles of Kaizen and Lean, and you have a very powerful toolbox for improving processes.

Furthermore, Six Sigma has been marketed in a way that TQM never was. Also Six Sigma training and the progression of a trainee to a Six Sigma Master Black Belt is a powerful way of establishing Six Sigma as the way many companies do business. Six Sigma has become part of many a corporate culture. This is what makes Six Sigma work.

Actually making a Six Sigma project work is a subject for another blog ...

Let me know how you have used Six Sigma to drive value for you.

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SMALL BUSINESS VIEW

Applying Six Sigma to small to mid sized enteprises is more than just scaling down on the timeline of the Six Sigma method. The rigor that Six Sigma brings to large projects is great - but not normally necessary for a smaller operation. Smaller operations have the flexibility to take on changes that have an immediate impact on performance. They are also generally less complex, and thus it is normally quicker and easier to get to the cause of problems and address them. However, as with larger operations, what Six Sigma brings to the table which is often ignored, is process control to ensure that the process does not 'drift' back to it's old wasteful ways a few months after the project is implemented.

Driving Business Benefits from your ERP Implementation

Companies spend millions on implementing ERP Systems like SAP every year. Many of these implementations are global in nature, integrating several business units across the world. Generally this major investment is supported by a solid business case based on expected business benefits.

But, what happens when these business benefits are not realized? You cannot go back to where you were before the implementation. You cannot unspend your money. More and more companies are tackling this exact issue today. How to exploit your investment in a large ERP system with minimal cost to drive the maximum business benefit.

You need a solid business-centric process to solve this challenge. Implementation teams are pretty good at getting complex ERP systems to go-live and then to support them after go-live. However, immediately after going live, performance, productivity and morale usually decline as people adapt to the new system and processes. This is the "DIP" in the a new system's lifecycle. Most teams are not structured, or funded to help the business recover from this dip, as this is generally not planned for. So how do companies recover from this dip to stabilize the operating environment as soon as possible; and better still - to achieve the benefits of an integrated system?

The answer is a Continuous Business Improvement process. Such a CBI process has 3 phases:

• Adopt: Business ownership of the ERP system and new business processes.
• Sustain: Business ownership of the ERP system and new business processes.
• Exploit: Drive business value through continuous improvement of the ERP system.

Successful execution of this program depends on the following key factors:

• The establishment of stewardship programs and clear links between the ERP solution and business directed initiatives at all levels of the organization.
• Formalization of methods and drivers related to identifying and prioritizing opportunities that will drive business value.
• Defined process for managing improvement opportunities and ensuring business benefits are met.
• Movement of resources from rollout/support-driven to exploitation-driven environment.

More here about the CBI Model, or contact us for a full copy of this paper.