James & Wolf; Mckinsey Quarterly - A Second Wind For Erp, E-book, do posegregowania
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INFORMATION TECHNOLOGY
A second wind
Dorien James and Malcolm L. Wolf
Implementing enterprise resource-planning systems can be intensely
painful, and once you have them up and running they may seem to interfere
with the speed and nimbleness required for electronic business. Are they a
waste? No, but the real benefits aren’t always obvious.
hroughout the 1990s,
most large industrial companies installed
enterprise resource-planning (ERP) systems— that is, massive computer
applications allowing a business to manage all of its operations (finance,
requirements planning, human resources, and order fulfillment) on the basis
Dorien James
is a consultant and
Malcolm Wolf
is a principal in McKinsey’s London office.
Copyright © 2000 McKinsey & Company. All rights reserved.
This article can be found on our Web site at www.mckinseyquarterly/infotech/sewi00.asp.
for ERP
T
of a single, integrated set of corporate data. ERP promised huge
improvements in efficiency— for example, shorter intervals
between orders and payments, lower back-office staff require-
ments, reduced inventory, and improved customer service.
Encouraged by these possibilities, businesses around the
world invested some $300 billion in ERP during the decade.
What most attracted many a chief information officer was
the opportunity to replace a tangle of complex, disparate, and
obsolescent applications with a single Y2K-compliant system
from a reputable and stable vendor; one major oil company,
for example, managed to switch off 350 old systems when
ERP went live. By entering customer and sales data in an ERP
system, a manufacturer can generate the next cycle’s demand
forecast, which in turn generates orders for raw materials, pro-
duction schedules, timetables for shifts, and financial projections
while keeping close track of inventory.
For many businesses, installing ERP was traumatic. Following long,
painful, and expensive implementations, some companies had diffi-
culty identifying any measurable benefits. Those companies that
were
able to point to them thought they could have been achieved without the
help of the computer system. One chief information officer concluded that
“80 percent of the benefit that we get from our ERP system comes from
changes, such as inventory optimization, which we could have achieved
without making the IT investment.” Today, as the information technology
spotlight shifts to electronic business, where “nimbleness” and “Web
speed” are the buzzwords, monolithic ERP systems look more and more
like cumbersome relics of an older IT world.
Yet companies shouldn’t bemoan the cost of their investment: the hard-won
skills and capabilities they acquired during the ERP installation process will
permit them to improve their ERP applications incrementally, and these
improvements collectively add considerable value. ERP can also accommo-
date technologies that facilitate promising developments, such as electronic
commerce and continuous-relationship marketing (CRM), that didn’t exist
when ERP systems were first installed.
Back-door gains
“What we bought was sustainability,” said one ERP director. “Many of the
benefits that we are able to achieve today could not have been predicted at
the time that we started work on ERP.” In fact, in hindsight it appears that
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THE McKINSEY QUARTERLY
2000 NUMBER 2
much of the value of these large systems lay in the infrastructure foundation
they created for future growth based on information technology.
The first element of this foundation is common data. To make an ERP
system work in an enterprise or business unit, everyone must agree to enter
information using the same vocabulary and format. This discipline renders
the data both transparent and easy to compare, exposing anomalies— for
instance, the use of different exchange rates to calculate the financial results
of different plants— that must be resolved.
Standardized business processes are the second part of the foundation. ERP
demands standardization to reduce the number of process variants that must
be supported. Painful changes in even the best local traditions may be needed
so that orders can be fulfilled consistently throughout a business. When cus-
tomers demand consistent global quality, globally consistent processes become
essential. At least the new processes resulting from ERP are a consequence
of design rather than evolution.
EXHIBIT
1
The third and last part of the foundation is an organization that has been built
to change continually. The implementation of ERP gives many people their
first experience of an IT project that truly changes the way a business works.
Companies learn—sometimes the hard way— the need for business leadership
of IT initiatives and for operating in project rather than line structures. The
ability to execute such business initiatives is a valuable asset at a time when
fast and flexible IT deployment
has become a major success factor
in almost all industries.
Climbing the staircase of value
Competitive
advantage
Ascending the value staircase
For companies that already have
ERP systems in place, the key
problem is translating this infra-
structure into bottom-line value.
Think of such companies as
standing at the foot of a “staircase
of value” (Exhibit 1). In most
cases, the initial implementation
will have generated IT cost savings
and process efficiencies. Ascending
the lower steps of the staircase
requires many small adjustments that will cut IT costs and improve business
processes further. Reaching the summit means placing applications that
can support new initiatives such as e-commerce and CRM on top of ERP.
Process
effectiveness
Process
efficiencies
Build on ERP
infrastructure and
extend capabilities
through use of new
technologies
IT cost
savings
Improve business
processes and
capture more savings
through incremental
initiatives
A SECOND WIND FOR ERP
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The bottom steps
At the beginning of the ascent, you have to revisit the business case for ERP—
or develop one for the first time— to see where further efficiencies and savings
can be realized. You must also introduce a continuous-improvement mindset,
which may not be popular with employees. One implementation consultant
compared installing ERP to running a marathon; few teams that
have flogged themselves to complete the initial systems, reengi-
neering, and change management work on time and on
budget are keen to revisit the course.
Still, the push to deliver the original implementation
punctually is likely to have left value on the table, and
that value can be captured through incremental initiatives.
The key to continued success is pushing responsibility
for change outward by appointing a network of “initiative
owners,” from different functions and sites, who understand the
ERP system. Their task should be to find the best ways to implement and
sustain each of the improvements locally and to discover new opportunities
for improvement.
Refining the system.
One such initiative involves refining the ERP system’s
technical and commercial operation in order to drive out costs. For example,
service functions, such as accounts payable or IT operations, that are dupli-
cated in different locations can be consolidated.
“Nice-to-have” features.
Deadline pressures probably forced the original ERP
implementation team to jettison inessential but useful functions. Look for
add-ons, such as electronic-ordering and -payment systems, whose payback
times could be very short.
Captured data.
ERP systems capture reams of information on customers,
suppliers, and internal processes. By analyzing all this, businesses can find
opportunities to sell more or spend less. Information from a payment data-
base, for example, may show that a company buys comparable products
from a number of suppliers. Placing orders with just a few could win a
substantial discount.
Extending uniformity.
Sometimes the desire to optimize local operations
exacts a global price. One manufacturer, finding that its different distribu-
tion processes interfered with its ability to manage its stock-control system
in a number of European countries, unified the distribution process. “It
was obvious in hindsight,” a manager said, but employees “needed the
experience to understand why we all had to do it the same way.”
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THE McKINSEY QUARTERLY
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The top steps
With these initiatives in hand, you can start mounting the top steps,
which build on the ERP infrastructure, to achieve competitive advantage.
A range of technologies, many of which emerged after ERP began to be
implemented, can extend and enhance the capabilities of the original
system. The four examples given here by no means exhaust the possibilities.
Sell-side e-commerce.
It is easy to build a World Wide Web site to adver-
tise products and accept credit card numbers. But to become an industrial-
strength, high-volume on-line retailer, a company must have world-class
order fulfillment and distribution— one of the biggest challenges for
electronic retailers. Whatever advantages nimble new on-line entrants
may enjoy, there is tremendous value in having a system that can handle
not only order fulfillment but also returns, partial shipments, and refunds.
Internet commerce applications such as BroadVision,
INTERSHOP, and InterWorld can build on existing
ERP systems to offer customers high-quality service
through the Internet channel.
Electronic procurement.
On the buy side, attaching
an e-procurement module to an ERP system can
restrict purchases to preferred suppliers and cut
out maverick spending by employees who have too
little time to go through required procedures. Say an
accountant needs a new computer. An e-procurement
module allows that person to choose “computer supplies” from the pro-
curement folder appearing on everyone’s desktop and to select the desired
model from the company’s preferred supplier. If the price exceeds the limit,
the order automatically circulates to all designated approvers, and once
they sign off, it goes to the supplier for fulfillment. The clincher is that the
ERP system also receives and pays the invoice electronically, cutting out
liaison with the accounts organization. E-procurement specialists such as
Ariba and Commerce One have developed such systems, as have estab-
lished ERP systems vendors, including SAP and Oracle.
Continuous-relationship marketing.
Electronic orders yield far more infor-
mation about customers than over-the-counter sales do —not only who
those customers are, but also what else they looked at and even, if you care
to track this, how much time they spent on each screen. An add-on appli-
cation can combine customer data obtained from e-commerce with infor-
mation in the existing ERP system, helping you cater to individual tastes
and create lifelong relationships with customers. Such tools—supplied, for
example, by the specialists Siebel Systems and Vantive—and by the major
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