ERP in the 21st Century — A New Paradigm

As we move into the 21st Century, the use of ERP as an essential management tool is widespread. The last forty years have seen have seen a massive increases in the functionality of the supporting IT systems; we now have enterprise-wide, fully integrated capabilities that can be used to manage the whole of the order fulfilment process.

However, some observers are now questioning whether business IT is showing signs of becoming mature. If they are right, it means that we need to think about the way we use IT in business, and ERP in particular. The implication is that it’s time to change the paradigm.

The debate has been stirred up by Nicholas G Carr’s article in the Harvard Business Review “IT Doesn’t Matter”, published in May 2003. Not surprisingly, it generated a considerable and lively debate, not least with the software companies. He then expanded the argument in his book, published about a year later, called “Does IT Matter”.

The following web sites indicate the kind of reaction his views have attracted, from industry leaders as well as business observers.

Does IT Matter?

Does Nick Carr Matter?

What Nick Carr is saying is not that IT doesn’t matter, in the sense that you don’t need it. Far from it. What he is saying is that because the technology is becoming mature, and because everyone has it, what you really need to think about is how you are using it. Simply having the technology no longer, just of itself, confers any competitive advantage. It’s time to change the paradigm

His motivation appears to be in trying to answer a simple question:

Why is it that companies spend huge sums of money, sometimes many tens of millions, on sophisticated IT systems, often without getting any measurable advantage from the investment?
 

To answer it he draws parallels from history, tracking the development of different technologies in the past, showing how they initially give the early participants a considerable advantage. He also shows how that advantage diminishes as the technology matures and becomes more widespread, and goes on to demonstrate that the eventual winners are those that have learnt how to use it more effectively than their competitors.

At MML we often ask ourselves the same question that Nick Carr asks.

Our company has worked with business management systems for over twenty years, and the two directors have each done so for almost twice that, in industry as well as in consulting and management education. We have watched the capability of the packages expand, almost exponentially, yet without seeing any concomitant improvement in the level of benefit users enjoy.

We also wonder why, unlike almost any other business investment, spend on IT is rarely subjected to the same, rigorous cost justification as other investments. If you want to buy a new machine or build a new factory, most companies require a carefully evaluated cost benefit. And if the predicted RoI is not delivered, some very pointed questions are asked.

But it seems that they will spend many times that on IT without any intention of getting a return. Even the latest surveys show that something like 85% of companies have not achieved a measurable net RoI. Moreover, they have no clear expectation that they will ever achieve a net RoI. There are even some recent, high profile cases, well documented in the media, where such large investments have done significant harm or where the plug has been pulled because of the risk that it would.

So why is this? It’s hard to avoid the conclusion that something is seriously wrong. Like Nick Carr, we are convinced it’s the existing paradigm.

The current view is that competitive advantage comes from having the latest set of advanced functionality — you simply cannot afford to fall behind — so you have to spend the money. It’s just an unavoidable cost of being in business. And every year, almost, software vendors promote a new TLA for an advanced piece of new functionality that they say you really cannot do without, if you want to maintain/establish competitive advantage. Most recently we’ve seen APS, PSA, LMS, SOA and CPFR for example, emerge as new “must haves”

Nick Carr suggests it is this very paradigm that is driving business in the wrong direction. That competitive advantage does not come from having the latest technological bells and whistles. Of course, he may not be right. But if he is, you can see why the software industry is worried. He suggests it’s now less about investing in the latest upgrade and more about learning how to use the functionality you already have — much, much more effectively. It has not exactly endeared him to the IT industry.

And if he is right, we need a new paradigm — one that focuses on using the management techniques that the software supports, such as ERP, more skilfully. In his preface Nick says:

"as the strategic value of the technology fades, the skill with which it is used on a day-to-day basis may well become even more important to a company's success."
 

So, if the new paradigm must focus on using IT more skilfully, can we describe it in a way that provides a practical guide, as an alternative to the current convention? The following sections of this paper set out to do that and describe a framework for this new approach.

To understand what the paradigm shift means for us, we have look more deeply into how we use IT. The three key questions are:

• What is “skilful” use of IT?
  What do high levels of skill in using IT look like and how can we recognise them?
• How much more skilfully could we use IT?
  How well are we using it now, what more is possible and, most especially, what could more skilful use do for the performance of the business?
• How can we become much more skilful than our competitors?
  What to we need to do to achieve winning levels of skill in using IT?

Recognising skill is one of those things that’s a bit like recognising a face. We all do it all of the time, but it’s very hard to describe how. When we see something that’s been made with skill we’re recognising the outcome of a complex combination of techniques, applied with a depth of understanding of their appropriate use in a whole variety of different circumstances. We can admire the skill, without knowing a great deal about the specific skills the craftsman uses or the knowledge he uses in order to apply them in the right way to each different element of the article he has made.

In the same way the skilful use of IT is hard to describe, but easy to recognise when you see it. One of the signs of skilful use of technology is in the delivery of excellent business performance. Sector-leading delivery performance, time to market, costs and return on capital are rarely achieved without the skilful use of IT. But in all of these situations, it’s not the computer that’s being skilful. It’s not the sort of thing they’re good at because it requires judgement, which is what humans are good at. For example, despite all the computer power now available, computers are still very poor at recognising faces.

Defining skill by simply describing the outcome, doesn’t help us much to understand what “skilful” really means. However, its nature and importance become especially clear when you see a company make a step change in performance through advancing its level of skill. In studying such cases we can start to define the characteristics of “skilful use” more closely.

Case Studies — Using IT Skifully

The first example comes from our work with F G Wilson Engineering, now part of Caterpillar. With erratic demand and highly customised products, the company was wondering why the implementation of SAP had not delivered the expected improvements in customer service and cost. Not surprisingly, when we looked at the technical aspects of the implementation we found it was pretty much OK – the system was working well from an IT perspective. But it was not quite the same story when we looked at the business processes. No one had really worked out how they wanted to use the potential in the functionality and, whilst users had been trained to use the system, they had little understanding of ERP and how it works. On-time delivery was below 50% and inventory was climbing. Both the customers and the company were unhappy.

Addressing this problem delivered a dramatic improvement in on-time delivery, slashed the inventory and reduced final assembly lead times from 15 days to 2. It involved a complete redesign of the order fulfilment process, which started with the board of directors taking time to clarify and formalise how they saw the business working. It included getting them up-to-speed on what they could do with ERP as a management tool, and helping them decide just how they wanted to use it. Once this was done, the re-implementation was rapid and the new processes up and running in about four months.

Another was in a very different environment. GLS Educational Supplies holds inventory of about 15,000 line items that they supply to schools, ranging from pencils to furniture and toilet rolls. Because the business had grown strongly, they were facing a capacity problem in the warehouse and were finding it increasingly difficult to meet orders in full. Reviewing their existing processes revealed that although they could gain some benefit by updating their business management software, major improvements could be achieved with the existing technology. A detailed analysis of the business characteristics and demand patterns, combined with an effectiveness assessment of the current processes pointed to opportunities to make big improvements

In this example the specific aspects within the process that they needed to focus on were the inventory management, forecasting and purchasing activities, and we explored with the board of directors how these could operate differently. Learning how apply a more detailed knowledge of these techniques enabled them to move away from the “one size fits all” approach they had been using and become more selective in the way different products were ordered, stocked and managed. The immediate impact was a fourfold reduction in stock-outs and significant savings in order placement costs. Projected savings included warehouse efficiencies and potential space savings sufficient to defer the need for additional warehouse space.

An aerospace component supplier is the third example, who was six months in arrears on deliveries. As you can imagine, they had some very important and extremely unhappy customers. Had it not been for their technical excellence and reputation for quality they would probably have lost most of them.

What was particularly interesting about this situation was that they had managed to get into it by applying what their software house had told them was best practice. With a firm order book going out two years or more they had been persuaded to feed it directly into the MRP as their master schedule. By the time we were asked to help the situation was chaotic.

The initial review exposed a long list of problems, including an expanding inventory, shop floor shortages, out of date costings, incorrect routings, poor supplier performance and so on, exacerbated by the fact that they were using an unsupported version of MAPICS on an obsolete platform. Identifying what to rectify first was critical.

A review of the processes showed that while huge efforts were being made to identify and deal with priorities, the basic planning and control process at the core of the order fulfilment business process were simply not working. Addressing this required the management as a whole to understand how the decisions they were making would affect how the ERP system recommended what to do, in turn setting the priorities at the lower levels.

They needed to understand the impact their decisions would have on the overall performance of the business in terms of customer service and profitability. With some drive and enthusiasm from the General Manager we were able to help them design a new master planning process, based on the effective management of capacity — and I don’t mean just labour and equipment. Confidence in material availability was equally important. At the same time it meant developing a new decision making process for setting critical priorities, that accepted the constraints of what could realistically be made. It also meant the whole of the executive group were involved and reached a consensus.

Putting this into practice required a lot of detailed work, but once established could be kept in balance with relatively little effort, providing the “doability” of the plan was maintained. It meant that promise dates could be quoted with high levels of confidence, since with realistic and firm information plans rarely needed to be changed.

Despite the fact that they were still using the old technology, rapid improvement followed. So much so, that within three months they had received a supplier of the week award from Rolls Royce for on-time delivery. And, at a time when the aerospace market was shrinking, they started to grow both turnover and profits.

Common Characteristics

If we study these examples we can start to see several common characteristics:

• step-changes in business performance were achieved by changing the business processes — i.e. through changing how technology was used — not through changes to the technology itself;
• the senior executive group took responsibility for designing this new process and had sufficient knowledge and understanding of the IT support available to know where and how they wanted to use it.

In other words, the processes were designed by the businesses themselves to fit both their business needs and the capabilities of the existing technology. It was not a matter of applying a “common IT solution” to every business. You can see this in that:

• every business conducts its business in a different way, giving each some unique characteristics, reflected in that each of these companies designed their own unique business processes;
• achieving excellence was focused on those areas they perceived to be most critical to their business — practices in other areas were merely adequate — but this still led to excellent overall performance and each again was different;
• none of these examples used leading edge technology — one of them was running an out-of-date version of a very old package on obsolete hardware — the choice of technology was not a significant factor in success;

There are some other characteristics that we observe in organisations that are highly skilful in the use of IT:

• excellent performance occurs routinely as a result of how the business processes operate, it isn’t the result of heroic efforts by employees;
• everyone shares a process view of the business. Managers and staff co-operate to optimise the performance of the complete process and where functional conflicts arise seek a compromise that protects the overall performance, even at the expense of functional targets;
• users are comfortable with the system — they don’t rave about it or rage at it, it is just there as something they use routinely, an integral part of how they do their work. For them, it “just works”;
• management and other users trust the information that their systems produce;
• employees understand how the business processes work and what role IT plays in those processes — when the unexpected happens, they have the knowledge and understanding to make good judgements about how to deal with it.

This in itself poses a further question about how skilfully we are using it right now, as well as what best practice might be. And the standard method of answering both questions has been through the use of checklists of “best practice” first developed in the ‘70’s and significantly expanded since.

Some of these checklists now cover every functional element of ERP with hundreds of questions. There is no doubt that they can be useful in identifying how you measure up in relation to what is perceived by the experts to be best practice. But we are not convinced they really help to answer the question.

One particularly worrying aspect is that many companies that have scored well against these lists, including ones that have been accredited by external assessors, nonetheless continue to under perform. At the same time we have worked with companies that would certainly not meet the top measure for each of the different criteria but consistently achieve world-class performance, year after year. Against the check list they would fail to get world class accreditation, but their performance is truly world class.

One of them, for example, produces delivered quality close to 6 sigma, has an on-time in-full delivery performance of less than one failure per year and regularly wins supplier awards from Nissan Sunderland. Yet this business would come nowhere near the top category on a standard ERP checklist. How can this be?

In comparing the performance of these different organisations there seems to us to be some fundamental question we need to ask about the value of the check list approach:

• can a single set of “best practice” standards be applied in exactly the same way to very business, regardless of it’s unique characteristics? The evidence would seem to suggest that this is not the case and the formulaic approach does not work;
• does having all the elements of best practice in place at a functional level mean my business processes are optimised? Once again, the evidence would suggest not.

Somehow the approach has become established with the inherent assumption that, if you can tick all of the boxes, you must be doing it right. We think this is a legacy that dates back to their origin on the 70’s, before business really started to appreciate the importance of “process” and the functional view was predominant. We come back to the conclusion that functional excellence alone is not a reliable route to excellent performance.

We think this is because this rather mechanistic approach does not answer questions that, to us, are much more important:

• what would it be possible to achieve by being more skilful? This is about outcomes, not procedures, and importantly about understanding how ERP can support your processes to help you achieve excellence;
• how do I fit the functional elements together in a way that delivers real benefit to the business? Simply having all the bits tells you nothing about how they go together. If you just think for a moment about assembling something like a flat pack kitchen. Without the instructions the chances are that no two people would assemble it in quite the same way, although they would all have the same bits. You need to do it in the right sequence, in other words to have a process, to get it right.

Thinking of it in this way enables us to see why the standard approach, using “best practice” check lists, does not work consistently well. “Best” is only best in certain specific circumstances. “Best practice” check lists imply a standard approach. In reality, skilful users of IT develop their own unique approach, with processes designed for their business and staff who understand the role ERP plays in making them work. You don’t become a leader by following the pack.

So how can we judge how much room there is for improvement?

One thing we can do is to compare our own business with others in the same sector, since to a certain degree all businesses within a sector are likely to have common customers, suppliers, products, processes and constraints. For example, in aerospace the leaders are turning their inventory somewhere between six and eight times a year. If you're in Aerospace and your turns are well below that, and we came across a company recently turning their inventory less than twice a year, then it’s reasonable to conclude you’re not getting the best out of your ERP system.

Of course, this only holds true providing the measures that you choose are ones that monitor the performance of the overall business process. Moreover, it is quite possible that no one in your sector is using IT very skilfully. As soon as you look outside your own sector it becomes increasingly difficult to make comparisons.

Another, critical, characteristic to assess is how well your people, and particularly your managers, understand the available management tools and techniques. Knowledge of the theories is not enough. They need to understand how to apply them in practice. That means that testing academic learning is of limited value. However, it would be dangerous to use your real operations to test practical skills. The consequences of errors could be far too serious.

The problem is rather like testing the skill of a pilot in handling mid-air emergencies. You don’t want to experiment for real. The consequences of error could be terminal.

Just like the pilot, practical skills can be evaluated without undue risk through the use of a simulator. Computer simulations of business operations can be used to test how well key people are able to put theory into practice. This is a far more searching test of understanding than written examinations, let alone multiple choice questionnaires.

However, none of this tells us how much better than our competitors we could be. As the lean gurus say, the only true benchmark is perfection. Assessing what is possible can only be done by taking the first steps towards doing it.

Returning to those companies where we have experienced at first hand what we recognise as skilful use of ERP, we can identify three key elements:

• a very well defined, quantified and concrete definition of how the business could work in the future, given better use of IT, based on a thorough understanding of the customer requirements, costs and operational constraints that characterise the business. We find this can only be done by the executive group;
• a good understanding of which different management techniques are likely to be most useful in achieving this. And more importantly, sufficient knowledge of how they work to be able to identify how and where they should be used. Logically, this has to be done by the same group of people who created the definition in the first place — but it does not necessarily require them to have a highly detailed knowledge of the individual techniques;
• the development of a critical mass of key users with the inquisitiveness necessary to explore the functionality in the ERP system and sufficient knowledge to be able to select the options that will support the agreed definition. This requires a greater depth of knowledge than that traditionally provided by the software vendor, through what is generally referred to as user training. They will need this but, in addition, they need a very thorough understanding of the way different elements of the functionality can be used and how they are kept in balance. It means that they need a sound education in the underlying principles and concepts.

The art of the possible in this situation is a combination of knowing very clearly what you want to do and knowing enough about how the business works and how ERP works to know what is practical.

Aligning these three things is where we need to return to the central role in all this, the role played by the core business processes. In the 21st century we’ve moved on from the initial hype and disappointment that many experienced with Business Process Re-engineering in the 90’s. But at the same time we’ve also learnt that the functional view, which predominated for most of the latter half of the last century, does not help us to optimise performance. The potential conflicts inherent in any functionally based attempt at management by objectives are now quite well understood.

For example, at the simplest level, how often have you seen Purchasing’s objective, to achieve positive price variances, being realised at the expense of production, where the price saving is reflected in lower quality, unreliable delivery and a consequential increase in problems on the line. No one is looking at the lifetime costs, just price. No one has enough grip on the whole process to understand how a change in one area impacts on others.

Taking a process view changes all this, helps us to look at the overall process and whole life costs, enables us to identify and fix the root cause and achieve an optimal outcome. The formalisation of BPR has provided new tools to help get to grips with the management-by-objectives dilemma and many companies have now started to take a process wide view of where cost is incurred, and value added. However, it’s not all plain sailing — yet.

One of the problems we frequently encounter is a degree of disconnection between the executive “vision” of the company and the operational control processes — most importantly, where decisions are actually made and how consistent those decisions are with the vision. We have found that unless the vision and the real decision making processes, that are operated in practice, are brought into line with each other, it is impossible to achieve the desired performance levels with any degree of consistency.

It’s not something that is particularly difficult or time consuming to do but it does need a different approach. It’s really all part of changing the paradigm – of looking at things a different way.

Let me give you an example. Company X recognised that although quality and price were good, customers were dissatisfied with delivery performance. Lead times were acceptable but delivery reliability was poor. Measured against their own promise dates, less than 50% of product was on-time.

Many attempts had been made to monitor lead times and keep them current, since demand was quite volatile and capacity limited. But even when lead times were recalculated every week, by the time the peak workload arrived in the factory unachievable delivery dates had already been promised.

Working with the executive team to resolve the problem we were able to redefine their role in managing capacity, not at an operational level but at the point where it would affect customer service. By looking at the business process, and by changing the paradigm, they could see the strategic role they needed to play. Re-designing it meant that, at the critical point they became involved in the decision making process.

The improved process resulted in highly reliable delivery dates calculated interactively, at the time the order was being taken. Late deliveries were slashed to less than a twentieth of their previous level and on-time deliveries were close to 99%.

This is just a small example of where aligning the business strategy and business process can have a dramatic effect. And it’s not difficult to do. It’s about turning the “vision” into something that is more concrete and quantifiable. This critical first step often only takes a couple of days to do.

Once it has been done it provides a foundation for the development of the detailed, operational business processes. In turn, this leads on to define the system functionality required to make the processes work well and enables staff skills and knowledge to be assesed against those requirements.

This is why we believe sound business processes design is the core skill in using ERP, or any other business system, to achieve competitive advantage. The new paradigm has a focus on defining an effective business process, designed to deliver the business strategy but based on the art of the possible, from a solid understanding of the business management concepts and principles being applied by the process.

Of course, staff will have to acquire the skills and knowledge they need, but the process definition provides direction. Without that they could be failing to get some of the vital skills that you need while spending time and money acquiring others of no real value to the business at all.

Nick Carr has certainly stirred up a hornets’ nest, but we think he has good justification. There is plenty of evidence out there to support his view and his insight answers questions that have been nagging away at us for years.

Moving your focus away from keeping abreast of the latest technology, to one where you focus on using what you already have more effectively, could give you the edge.

It will mean taking a hard look at your core business processes. Not easy, but the techniques have developed in this area and new thinking has filled in some of the gaps between the “vision”and the detailed processes, gaps that in our experience were the main cause of the poor quality outcomes that gave BPR a questionable reputation in the past.

It will also mean taking stock of your level of skill in using IT. And where gaps exist these too will need to be addressed.

But the potential benefits are significant. If competitive advantage is now all about “wowing” the customer, this offers you a proven means to do just that. It can give you highly reliable on-time delivery performance, increased flexibility and responsiveness, and you can save cost, reduce working capital and improve profitability all at the same time.

In the end, each company will decide for itself. But those that stick with the current convention could soon find themselves falling behind.