Business Value of ERP Dept. of Information Systems SVKM's NMIMS University1

Facts About ERP projects 65% of executives believed that ERP could be harmful to their organizations.( Muscatello & Chen, 2008) Robbins-Gioia,an Alexandria-based program management consulting firm, recently reported that : 51 %of ERP projects are considered failures a full 30 percent far exceed budget and missed their completion dates by a wide margin 25% of organizations adopting ERP systems faced significant resistance from staff 10% of the organizations also encountered resistance from managers(Muscatello & Chen, 2008) 2

The Firm Value Chain and the Industry Value Chain Figure 3-11

Suppliers Human Resources Finance and Accounting Demand Planning Manufacturing Planning Logistics Planning Distribution Planning Order Entry Enterprise Resource Planning Customers Purchasing & Accounts Payable MRP Inbound Inventory Plant Mgmt. Manufacturing & Production Scheduling Inventory Control & Warehousing Distribution & Accounts Receivable Enterprise Resource Planning The Business Value of ERP

ERP ROI ERP success rate low and positive ROI often non existent More than 90% of the companies doesn’t have a success the first time around ERP need to be driven by right strategic and tactical process improvements with documented assumptions and valid ROI expectations and Matrix New processes and ERP must be implemented correctly and quickly However these are barely approached in this manner the first time 5

ERP ROI ROI does not come from ERP. ROI comes from what you do using ERP ROI comes from process improvements ERP software alone brings little business performance improvement ERP and process flows are not mutually exclusive Strategic decisions and commitment of top level exec’s Business process re-engineering Implementation tuned with the overall strategic objectives 6

How ROI Identify business processes Define ROI metrics which should include parameters like inventory levels, number of days for customer outstanding, the type of reports, the number of people in a particular function etc.“ Select the appropriate ERP package (select most appropriate modules) SW application should be flexible and scalable Measure the benchmarks post implementation Use the following methods: Payback, ROI, CBA etc 7

Business Case Create a base case of year-o-year savings from cost cuts that could be made without ERP Create an ERP case of y-o-y savings that could be made with ERP Subtract Step 1 from Step 2 and calculate NPV of the residual cash flow Positive NPV means you can probably proceed with the deployment of ERP Perform sensitivity analysis (withstand slippage and cost overruns) Back-allocate all ERP system deployment costs to individual business units so that they can factor them in their planning 8

ERP ROI Challenges ERP software was installed to mirror a set of existing, inadequate business processes. Many ERP implementation failures were caused by Y2K being the driving force behind the project rather than the defined business performance With Y2K as the driver, ERP became a software replacement project. ERP ROI are so well-hidden and cant be reasonably measured Strategy and its implementation are not considered 9

ERP ROI Challenges Implementations done by inexperienced Consultants/system integration personnel with limited domain knowledge Pre-implementation preparation activities were not understood and done. Executive sponsorship and active, on-going involvement with the ERP implementation were lacking IT personnel were all caught up in beauty contests of technical wizardry Training to transition from the old legacy system technology to the new. 10

Strategic Questions Will ERP help us to improve customer satisfaction? How? How much and when? Will ERP contribute to increasing our market share? How? How much and when? Will ERP decrease our operating expenses? How? How much and when? Will ERP help to increase revenue? How? How much and when? Will ERP decrease our inventory investment? How? How much and when 11

Strategic Questions Will ERP shorten our order-to-delivery cycle time? How? How much and when? Will ERP help us keep pace with or surpass our competitors? How? How much and when? Will ERP shorten our time-to-market? How? How much and when? Will we be able to reduce our material costs through improved supply base management? How? How much and when? Have we appropriately defined responsibility and accountability for these business performance improvements? What are the metrics for measuring performance improvement in both tactical and strategic areas? 12

Critical Success Factors Project Champion/Sponsor Project Management Business Plan and Vision Top Management Support and Executive Commitment ERP Team and Composition Project Support and Effective Communication Legacy Systems and Informaion Technology Business Processes System Integration System Testing 13

Critical Success Factors A Vanilla ERP Approach Software Selection and Support Strategic Initiatives Human Resources Training Data Quality Vendor Resources Organizational Culture Competitive Analysis of Enterprise Integration Strategies Organizational Knowledge Management Risk Management Readiness 14

ROI examples Company: TEI Technologies Pvt. Ltd. ERP: iBaan Modules: Distribution, manufacturing, finance, QMS Time to implement: 70 days Investment: Rs 30 Lakh ROI period: Expected to be two years Company: Pidilite Industries Ltd. ERP: Orion (ICICI Infotech) Modules: S&D, Finance, Purchase, Inventory, Tax Time to implement: 12 months Investment: Rs 50 Lakh ROI period: 2 years Company: Escorts Agri Machinery Group ERP: Oracle E-Business Suite Modules: Finance, discreet manufacturing, business intelligence Time to implement: One year Investment: Rs 4 crore ROI period: Expected to be 3 years Company: Godrej Industries Ltd. ERP: MFG/PRO Modules: Materials, manufacturing, costing, planning, distribution, finance Time to implement: 30 months Investment: Rs 13 Crore ROI: Expected in 4-5 years Company: Emerson Network Power (India) ERP: MFG/PRO Modules: Manufacturing, sales, inventory, finance, service, distribution Time to implement: 6 months Investment: Rs 1.5 Crore ROI: 16 months 15

Costs of Implementing a New ERP

Case studies