ERP System Selection Methodology
Encyclopedia
An ERP system selection methodology is a formal process for selecting an enterprise resource planning
(ERP) system. Existing methodologies include:
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.
Attempting to select 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.
In the last decade, companies have also become interested in enhanced functionality such as customer relationship management
and electronic commerce
capability.
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, it is understandable that "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.
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 understressed.
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.
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”
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.
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:
Enterprise resource planning
Enterprise resource planning systems integrate internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application...
(ERP) system. Existing methodologies include:
- SpecIT Independent Vendor Selection Management
- Kuiper's funnel method
- Dobrin's 3D decision support tool
- Clarkson Potomac method
Overview
Irrespective of whether the company is a multi-national, multi-million dollar organization 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 investmentReturn on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
for the shareholders.
Since the mid-1970s, when there was widespread introduction of computer packages into leading companies to assist in material requirements planning
Material requirements planning
Material requirements planning is a production planning and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well....
software companies have striven, and for the most part succeeded, to create packages that assist in all aspects of running a business from manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
; supply chain management
Supply chain management
Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
; human resources
Human resources
Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
; 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.
Attempting to select 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.
In the last decade, companies have also become interested in enhanced functionality such as customer relationship management
Customer relationship management
Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
and electronic commerce
Electronic commerce
Electronic commerce, commonly known as e-commerce, eCommerce or e-comm, refers to the buying and selling of products or services over electronic systems such as the Internet and other computer networks. However, the term may refer to more than just buying and selling products online...
capability.
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, it is understandable that "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
Order to cash
"Order to cash" normally refers to the business process for receiving and processing customer sales. It follows "Opportunity to Order" and covers business-to-business and business-to-consumer sales...
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 understressed.
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.
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”
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
Data migration
Data migration is the process of transferring data between storage types, formats, or computer systems. Data migration is usually performed programmatically to achieve an automated migration, freeing up human resources from tedious tasks...
. 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
Bill of materials
A bill of materials is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture an end product...
(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.
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 hereunder: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.