In this article, I am going to talk about enterprise resource planning systems or ERPs. You will learn why would you want to have one in your organization. You will find out what challenges and surprises you may face when working on the ERP implementation project. Finally, we will take a look at some failure and success stories of ERP implementation.
Like many other business optimization tools, ERP originates from production operations. Now ERPs are used in organizations of all kinds, be it service startup or a manufacturing giant. Regardless of your organization type, you may expect the following benefits of ERP implementation:
- Efficiency boost. This is the ultimate objective of any ERP system. You may expect efficiency in the usage of all your resources: materials, time of your staff, sales and marketing investments, etc.
- Forecast accuracy increase. ERP systems process and store tons of transactions. Thus, you will have your big data repository which you will use to improve your sales and production forecasting. Some systems can feed data to your analyst team, more advanced solutions will have the built-in forecasting modules. Accurate forecasts allow running on shorter stocks of materials, better management of cash flow and fewer production interruptions.
- Collaboration between departments. ERP system minimizes the human factor: it never forgets, it does not misinterpret the data. You will set all the necessary rules and reminders during the implementation stage. After the ERP is launched, you won’t need to worry about errors caused by important information lost in the lengthy email thread.
- Data security and reliability. Most of the ERP systems provide security functions ensuring your data is protected from the external breach attempts. Moreover, the ERP system becomes the single source of truth for all data. It allows easy access by the management and all the staff with necessary permissions.
- Regulations compliance. Personal data protection is becoming a mainstream requirement in many markets and locations. GDPR is one of the recent examples coming from EU. ERP implementation makes it one reason less for a headache.
Most probably, at least a couple of ERP benefits will appeal to any business owner. Read on to learn what it takes to do the ERP implementation at your organization.
MRP vs ERP – what is the difference
Before we jump into action, let’s try to answer the famous question – what is the difference between MRP and ERP systems. These systems have some functions in common, ERP being broader. Let’s review them one by one going with increasing complexity.
Materials Requirements Planning (MRP)
Introduced back in the 1970s, the system helps production managers to operate the materials requirements. It runs the essential analytical functions for production planning:
- Production scheduling: assigning the production of a given stock keeping unit (SKU) to a specific production line for the particular time span.
- Bill of materials (BOM): keeping the detailed list of ingredients for each SKU, ensuring the consistency of recipe at production.
- Inventory tracking: answers the questions “what is the volume of each SKU at each warehouse”, “when do I need order the next batch of raw materials to keep the safe stock” and many others.
Manufacturing Resource Planning (MRP II)
The second generation of MRP, developed in the 1980s incorporated additional production-related functions:
- Capacity scheduling: short-term and long-term schedule of production lines uptime. Helps to schedule maintenance without production shortages and yield maximum production efficiency from each machine.
- Demand forecasting: the module helping to manage inventory based on market seasonality and marketing activity boosts. The previous version was mostly considering the safety stock indicator.
- Quality assurance: the module allowing to make multiple adjustments by QA department depending on the production line outputs.
- General accounting: the module enabling the analysis of direct production costs and revenue.
Enterprise Resource Planning (ERP)
First launched in the 1990s, ERP included all the functions of MRP II and went beyond production. ERP implementation allows the following functions on top of the ones of MRP:
- Project management
- Procurement management
- Orders management
- HR and payroll management
- Financial management
- CRM and marketing automation
- Documents management
Even though ERP as a concept is the most modern of the three, some organizations keep using MRPs for their production lines. If you represent one of those organizations, we recommend you to upgrade to an ERP. Doing so will facilitate your process improvement efforts. Reading on, you will see that with the current variety of ERP market, there’s a right system for every need.
Types of ERP systems – there’s an option for any every need
If you started researching the ERP market, you already know that the choice is not simple. The landscape is not as cluttered as on the famous infographics. Still, you may want to ask a pro to help you choose the right ERP system.
Let me walk you through some of the classifications to get started.
ERP systems by client type.
Vertical ERP systems
These are ERP systems developed for specific industry. Usually, the developer is a relatively small company trying to find its niche. As a result, you may expect fast customer support, system architecture adjusted to your industry, and competitive pricing.
The list of industries covered by tailored ERP systems is already significant and keeps growing:
- Fashion retail
Generalist ERP systems.
If you are new to the market and heard a couple of names of ERP systems, most probably they are from generalist category. These are the systems adaptable to any organization with any requirements. ERP implementation of this type provides the broadest functionality. As you can guess, these benefits come with a hefty price tag.
This type of system usually suits big organizations that are ready to pay extra for the variety of modules, the highest degree of data protection and a reputable name of the developer.
Small business ERP
The opposite of the generalist type. Small business ERP systems have cost-efficiency as one of the top priorities. They include a limited list of functions to cope with the basic needs of small business. ERP implementation for small business allows saving resources on license acquisition as well as on integration-related expenses. I encourage you to read our review of small business ERPs.
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ERP systems by architecture and operating principle
On-premise ERP systems.
Not ahead of the curve, though still relevant. The architecture implies installation of the software on the servers of the organization. With the development of cloud technology, this section is getting a limited portion of new customers.
Cloud-based ERP systems.
SaaS solutions are booming across all industries, not making ERP market an exception. The benefits of cloud technology for ERP users are similar to any other market. Essentially, cloud technology offers the same level of performance without the need to manage hardware.
With accessible broadband speed and real-time synchronization, this type of architecture becomes a natural choice for the start-ups.
Hybrid ERP systems.
Combines the principles of SaaS and on-premise ERP implementation. This approach makes sense for organizations with legacy ERP systems that are not ready to migrate to the cloud and want to install additional modules. The new module can be cloud-based, while the legacy part keeps working on enterprise servers.
Open-source ERP systems.
This type of ERP provides the high flexibility, and you can adjust it to the smallest detail. Of course, you need to have an in-house development team for that or invite third-party developers. This is the best option for start-ups with a unique set of requirements.
Now when you have the understanding of the landscape of ERP systems, let’s open the conversation about ERP integration.
ERP integration – why you need it and what are your options?
One of the most challenging steps of ERP implementation is the integration of your new ERP with the legacy systems. This is something that most of the organizations will face. Even if you represent a start-up, you don’t usually need an ERP from day one. By the time you are ready for ERP implementation, you might already have some systems up and running.
Let’s examine the most frequently occurring case of ERP integration. It’s the need to integrate the new ERP modules with the existing CRM system. I will talk about the most common implementation options.
This is not integration in the modern understanding of the term. The approach implies extracting data from one system and manual or semi-manual importing to the other system. This is for your info, and please do not consider this approach, as it is counter-productive and error-inclined.
In simple words, this is the tight integration of one system directly into another. In case you need to integrate your existing CRM with the new ERP quickly – it’s the most simple way to go forward. It is fast and inexpensive. Then comes the list of limitations:
- When your organization grows, and you update one of the integrated systems – you might need to update the integration itself.
- If you are in need to install the third system – you need to redo the integration completely. Moreover, it gets more complicated with each subsequent system to add.
The bottom line is: we recommend point-to-point integration only in case you know for sure, that you will not be adding additional systems later on. The probability of this is very close to nil.
Custom application or adapters
The approach implies the custom development of an application that will be handling data transfer between the systems. In case the organization needs to purchase modules from different ERP vendor, it will also need to adjust the adapters. This approach is more flexible than point-to-point. Still, it has similar limitations and may result in high maintenance costs.
Enterprise service bus (ESB)
This is the application that uses the same bus-type principle as in computer hardware. The idea is that each system integrated into the bus talks directly with the bus. Thus, any additional ERP module you may install will not require integration efforts with any of your legacy systems. All you need to do is to adjust the integration between the ERP system and the ESB.
This approach proved to be the most efficient for the majority of our clients. The landscape of ESBs is broad. In most cases, an organization will benefit from the services of an ERP consultant when choosing the best ESB.
As you see, ERP implementation is not an easy process. Still there’s a way to ease out the integration process.
Custom ERP – the shortcut to efficiency
Custom ERP is the system built on open source platform and designed to fit the need of a specific organization. It provides the maximum level of flexibility at the stage of integration. Here are the core benefits of the approach:
- You develop the system to fit your business process instead of trying to squeeze your operations into available workflows.
- You update it as often as you need and only when you need. You don’t get a series of update batches pushed by the developers.
- With proper implementation team, the overall running costs will be lower vs. an off-the-shelf solution.
We are happy to discuss the benefits that custom ERP can bring to your organization. Request your free consultation now.
In case you decide to work on ERP implementation project on your own, please consider the following watch-outs.
Failed ERP implementation – what can go wrong
Like in every complex project, many factors may affect the success of your ERP implementation. Based on our experience, we pointed out the common failure factors of ERP implementation.
- Poor planning. It’s not rocket science that a complex project requires thorough planning. Still, it remains one of the common mistakes. Adjacent errors are insufficient resources, lack of consensus regarding the outcome of the project and lack of expertise in the project team.
- Excessive customization. We often see the mindset: if I’m paying for the system, it must be a perfect fit. This is partly true. The system indeed has to meet all the essential requirement to serve its purpose. The more organization goes in the direction of adjusting design elements and user experience, the bigger the probability of cost increase or project failure.
- Insufficient testing. It is essential that the Management of the organization understands the role of testing in an ERP implementation project. The common misconception is that testing is the way to check if the system works. Thus, it becomes the first candidate for time reduction when overall project timing is tight. The thing is, testing reveals if the system meets the initial business requirements. It also helps to understand if the staff of the organization accepts the new system.
- Modules from different vendors. You need to be strategic when choosing your vendor for the initial ERP implementation. You need to understand that your requirement in two years’ time may vary. Make sure to assess the vendor to be able to accommodate your future needs. Otherwise, later on, you will need to enter the situation with complex integrations of ERP modules from different vendors.
I don’t want you to feel discouraged by the complexity and potential failures of ERP implementation projects. Let’s take a look at a success story.
ERP Implementation Success Story
Roy Hill, an Australian mining company, has the operating center 800 miles away from the actual mine operation. Thanks to well-thought infrastructure they can receive all the necessary data in real-time. This allows demand and supply chain teams work efficiently and react immediately to any variances at operation facility.
In addition to operation-related modules of SAP, they also use finance, payroll and HR modules. This allows effective collaboration between the teams.
Easy access to data from different sources allow the operating center to find solutions to unexpected problems of varying complexity. For example, the operators compiled the data from the tire sensor of a dump truck and its maintenance history. Thus, they found the cause of excessive tire wear. Then they were able to come up with new speed guidelines and adjusted the routes for the truck. This resulted in tire wear KPI normalization and eventual cost savings.
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ERP implementation can bring tons of benefits for business of any size or industry. It is essential to make sure that the whole process of implementation goes all the way smoothly from planning until the testing stages. The average lifespan of an ERP system within an organization is about 12 years. Chances are, you will not have enough expertise and experience with ERP implementation projects within your organization. Our ERP consultants have years of experience with ERP implementation projects with different industries. We are here to help. Request your free introduction call now to get started.