ERP system selection methodology
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- SpecIT Independent Vendor Selection Management
- Kuiper's funnel method
- Dobrin's 3D decision support tool
- Clarkson Potomac method
Irrespective of whether the company is a multi-national, multi million-dollar organization, non-profit, or a small company with single digit million turnover, the goal of system selection is to source a system that can provide functionality for all of the business processes; that will get complete user acceptance; management approval and, most importantly, can provide significant return on investment for the shareholders.
Since the mid-1970s, when there was widespread introduction of computer packages into leading companies to assist in material requirements planning, software companies have striven, and for the most part succeeded, to create packages that assist in all aspects of running a business from manufacturing; supply chain management; human resources; through to financials. This led to the evolution of ERP Systems.
Accordingly, a significant number of packages purporting to be ERP systems have entered into the marketplace since 1990. There are packages at the upper end of the market and a vast quantity of other packages that vendors claim to be ERP Systems. There are also packages that claim to be best of breed for certain processes [such as planning] and sold merely as an add-on to an ERP System. The options are many and this, in reality, creates a problem for the company who has to make a decision.
The complexity of selecting an ERP system is further exacerbated by the fact that some systems are geared for discrete manufacturing environment where a distinct amount of items make up a finished product while others are more suited to process industries such as chemical and food processing where the ingredients are not exact and where there might be re-work and byproducts of a process.
Given all of the potential solutions, it is not uncommon for companies to choose a system that is not the best fit for the business and this normally leads to a more expensive implementation. Thus "ERP Costs can run as high as two or three percent of revenues". A proper ERP system selection methodology will deliver, within time and budget, an ERP system that is best fit for the business processes and the user in an enterprise.it is used in small scale Enterprises for implement their organization towards the MIS.
Poor system selection
Companies seldom use a fully objective selection methodology when choosing an ERP system. Some common mistakes include:
- Incomplete requirements
Because implementation of a new ERP system "requires people to do their job differently" (Wallace and Kremzar), it is very important to understand user requirements, not only for current processes, but also future processes (i.e., before and after the new system is installed). Without detailed user requirements, review of systems for functional best-fit rarely succeeds. The requirements must go into sufficient detail for complex processes, or processes that may be unique to a particular business.
- Reliance on vendor demos
Vendor demonstrations tend to focus on very simplistic processes. A typical demonstration shows an ideal order to cash process where a customer orders a quantity of product that is in stock. The reality in most businesses is that most customers have varying and more complex commercial arrangements, and products are not always in stock.
- Over-emphasis on system cost
According to Finlay and Servant, “The differential in purchase price between packages is unlikely to be the dominant factor". While the cost of an ERP system is significant for a company, other important decision criteria, such as functionality; future proofing; underlying infrastructure [network & database]; and e-commerce capability among others, may be under-stressed. Further evaluation of potentially hidden expenses or recurring charges should be taken into account which would help determine whether the system can be afforded on a continuous basis. Such expenses may include annual maintenance, hardware replacement costs, employee training, integration, and upgrades.
Careful Analysis of Change Management
During the ERP software implementation, most of the processes and systems require deep analysis to effectively manage the change. Also, the most important point would be to manage the skill set of the employees as well as the executives. The training of the department heads should be prioritized as they would be the guide to the end users to ensure effective use of the software.
Under-emphasis on system support
By under-valuing the support options provided by the vendor, an organization may inadvertently select the wrong ERP system solution. Depending on the fee structure for support and or training, an organization may find that they have not properly budgeted for full system support or training necessary to fully adopt the solution by their employees. Every organization should carefully identify their needs for continuing support and training during and after full implementation to ensure that the vendor's contract spells out exactly how they will meet those needs.
- Selection bias
It is not unusual that the decision on which system to purchase is made by one individual or by one department within the company. In these situations, an ERP system that may be excellent at one function but weak at other processes may be imposed on the entire enterprise with serious consequences for the business.
- Lack of understanding of own business processes
Without clear view on where things are at present it is difficult, if not impossible to define expectations from the new system. ERP system selection may become a nightmare very quickly if the company does not have clear expectations of what must be accomplished by a new solution.
- Failure to use objective professional services
One of the main reasons for failure in system selection is the understandable lack of knowledge within the company. Experienced consultants can provide information on all of the packages that are available in the marketplace; the latest functionality available in the most common packages and, most importantly, can assist the user in deciding whether a specific requirement would provide added value to the user and to the business. However, it is worth noting that the professional help must be provided by objective consultants who have no affiliation with ERP system vendors. "If a consultancy has built up an expertise in the use of a particular package then it is in its interest to recommend that package to its client." Issues can also arise from consultants that are not familiar with the specific offerings of an industry, and can push offerings that are not the best choice for the customer.
- Inability to understand offering by ERP vendor
"It is estimated that approximately 90% of enterprise system implementations are late or over budget". A plausible explanation for implementations being late and over budget is that the company did not understand the offering by the vendor before the contract was signed. A typical example of this would be the scenario where a vendor may offer 5 days of services for the purpose of data migration. The reality is that there is a huge amount of work required to input data onto a new system. The vendor will import the data into the new system but expects the company to put the data into a file that is easy to import into the system. The company are also expected to extract the data from the old system; clean the data and add new data that is required by the new system. "ERP, to be successful, requires levels of data integrity far higher than most companies have ever achieved – or even considered. Inventory records, bill of materials (BOM), formulas, recipes, routings, and other data need to become highly accurate, complete and properly structured". This typical scenario is one of many issues that cause implementations to be delayed and invariably lead to requests for more resources.
- In-house Expertise
For selecting an ERP system to implement, an organization can choose to hire a knowledgeable source for in-house management or use a consulting firm. With a third party vendor, it can be easy to not fully comprehend the system capabilities and the gap of requirements the ERP system does not offer. For that reason, organizations need to weight the costs of hiring an ERP knowledge expert or trusting a third party vendor for implementation. If an organization decides to use a vendor, they will need to decide how to handle the ongoing maintenance of the system.
A proper system selection methodology
To address the common mistakes that lead to a poor system selection it is important to apply key principles to the process, some of which are listed below:
- Structured approach
The first step in selection of a new system is to adopt a structured approach to the process. The set of practices are presented to all the stakeholders within the enterprise before the system selection process begins. Everyone needs to understand the method of gathering requirements; invitation to tender; how potential vendors will be selected; the format of demonstrations and the process for selecting the vendor. Thus, each stakeholder is aware that the decision will be made on an objective and collective basis and this will always lead to a high level of co-operation within the process.
- Focused demonstrations
Demonstrations by potential vendors must be relevant to the business. However, it is important to understand that there is considerable amount of preparation required by vendors to perform demonstrations that are specific to a business. Therefore, it is imperative that vendors are treated equally in requests for demonstrations and it is incumbent on the company [and the objective consultant assisting the company in the selection process] to identify sufficient demonstrations that will allow a proper decision to be made but will also ensure that vendors do not opt out of the selection process due to the extent of preparation required.
- Objective decision process
"Choosing which ERP to use is a complex decision that has significant economic consequences, thus it requires a multi-criterion approach.". There are two key points to note when the major decision makers are agreeing on selection criteria that will be used in evaluating potential vendors. Firstly, the criteria and the scoring system must be agreed in advance prior to viewing any potential systems. The criteria must be wide-ranging and decided upon by as many objective people as possible within and external to the enterprise. In no circumstance should people with affiliations to one or more systems be allowed to advise in this regard.
- Full involvement by all personnel
The decision on the system must be made by all stakeholders within the enterprise. "It requires top management leadership and participation… it involves virtually every department within the company". Representatives of all users should:
- Be involved in the project initiation phase where the decision making process is agreed;
- Assist in the gathering of requirements;
- Attend the Vendor Demonstrations;
- Have a significant participation in the short-listing and final selection of a vendor.
- Frédéric Adam, David Sammon (2004), The enterprise resource planning decade, p. 94, ISBN 978-1-59140-262-6
- Orlicky's material requirements planning by Joseph Orlicky, George W. Plossi 1994 ISBN 0-07-050459-8
- Daniel Edmund O'Leary, Enterprise resource planning systems: systems, life cycle, electronic commerce, and risk, Cambridge University Press, 2000. ISBN 0-521-79152-9.
- Thomas E. Vollman, William L. Berry, D. Clay Whyberk, F. and Robert Jacobs, Manufacturing Planning and Control Systems for Supply Chain Management, 2005, page 96. ISBN 0-07-144033-X.
- C. Escalle, M. Cotteleer, and R. Austin, Enterprise Resource Planning (ERP), Report No 9-699-020, Harvard Business School, Cambridge, MA, USA, 1999.
- Thomas F. Wallace and Michael H. Kremzar, ERP: Making it Happen. ISBN 0-471-39201-4.
- Paul N. Finlay and Terence Servant, Financial Packaging Systems, 1987. ISBN 0-85012-584-7.
- Martin, M., 'An ERP Strategy', Fortune, 2 February 1998, pages 95–97.
- Oyku Alanbay, 'ERP Selection using Expert Choice Software', ISAHP 2005, Honolulu, Hawaii, July 8–10, 2005.