There is a way to improve the odds for a successful ERP implementation: stack the deck with improved business processes. While the benefits of enterprise resource planning (ERP) are well documented, the key to a successful implementation is more elusive, given the business process and culture change such a project demands. Corporate Australia is littered with victims -- companies that veered off course and paid the price in budget blow-outs, protracted roll-outs, or more disastrously, a terminated implementation such as that which befell Tenix, formerly Transfield Defence, earlier this year. When the tough business climate of 1992 spurred oversupply in the timber products industry, CSR Timber Products was forced to rethink its customer delivery system. Faced with rising costs and decreasing ability to cope with the delivery demands of its customers, the company's long-term viability was suddenly on the line. Like more and more companies, Timber Products bet its future on the belief that ERP was the answer. The punt paid off to the tune of more than $58 million dollars in cost savings over the last two years alone, as well as growing customer confidence through a vastly refined delivery model.
Owen Aubrey, the nominated project leader and now general manager, IT/Business Processes, faced the challenge of navigating the panels manufacturer and distributor through an ERP roll-out across complex and geographically disparate operations. He was resolved to getting it right the first time. Aubrey believes that CSR Timber Product's experience shows that companies can reap the rewards of ERP if they have the full support of management and pay heed to the people side of the process. "Many companies put in systems and then wonder why they haven't got the value out of them. This is usually because they haven't addressed the re-engineering and the change management. It's bringing those two elements together that's important," Aubrey says. From the outset, CSR Timber Products sought counsel from external advisers, who warned the manufacturer that given the size and complexity of the company, an ERP project would take no less than three years. The advisers also told Timber Products that implementation in that time frame would only be successful if it had full management commitment, if the company provided full-time resources to the task, and if it upgraded its technology infrastructure to handle an ERP architecture.
According to Aubrey, in the eighties Timber Products unintentionally compounded its distribution problems by placing product in a number of new distribution centres in order to solve delivery delay. However, deliverability to the customer did not improve, and the new system actually led to higher stock levels, obsolescence and warehousing costs. Thirty-three distribution centres Australia-wide, 10 factories in four states and 50,000 line items produced each year all added up to a fairly complex problem for a national business. "We offered poor customer service. Not only could we not deliver as often as we should have, but we had long and variable lead times as well," Aubrey says.
Each state had its own distribution information system. For supplies from interstate, staff had to transmit and receive orders in a cumbersome batch process which was error-prone and led to costly delays. But the real problem was poor communication between sales and factory. "Timber Products lacked a clear philosophy. People in their own areas tried to do the right things, but they didn't have the big picture," Aubrey says.
Paving the Way
As advised, Timber Products planned for a three-year implementation, aiming to have the ERP project fully operational by April 1996. Cost benefits were to be measured for a full year after implementation (that is, the 12-month period ending March 31, 1997). According to Aubrey, Timber Products set its sights on benefits of $15.2 million in the first year.
In early 1993, Timber Products selected a full-time project team of four: two from the factory, one from distribution and Aubrey at the helm. While IT personnel began to evaluate ERP systems, the project team started the cultural change work of educating staff on better ways to do business. Two factories, one in Sydney and one in Tumut -- plus a Queensland regional distribution centre -- were selected to pilot the culture change process. "We used our pilots to learn how to do things better," Aubrey says. "In each site, we educated staff, formed teams to address key issues, and worked our way from there." The project team decided the key to sharpening up Timber Products' distribution operations was the ability to forecast demand, maintain accurate stock records and have a clearly defined inventory policy. A main requirement in an ERP system was automatic replenishment functionality at the distribution centre and factory level, Aubrey says. The IT department reviewed 95 ERP packages, short-listed 10 and examined three in detail. It finally chose to trade in its old in-house applications and distributed ICL 25 systems, for QAD's MFG/PRO on a central Unix box. Meanwhile the project team was effecting cultural change within the company as the team demonstrated the business and productivity benefits of the ERP implementation to various divisions.
For example, a "sample" of the MFG/PRO package was made available to sales and distribution staff; they were encouraged to tinker with it and discover how it could enhance their operations. "By the time we were ready to roll out the MFG/PRO system, the order entry and the sales people were really keen for it because they could see how the product was going to make their life easier," Aubrey says. "Also, in the factory we set up little project teams, who worked away at changing the business processes in the factory." Teams from planning, financials, manufacturing and distribution departments looked at each MFG/PRO module to determine how Timber Products could re-engineer its business processes to fit the ERP system -- or if the ERP system needed changes to make it fit the business. The priority, according to Aubrey, was to make as few changes to the MFG/PRO system as possible.
Full Steam Ahead
Prior to roll-out, nine people from order entry and inventory roles in the distribution centres were trained as trainers. "They helped write the training manuals, and when we rolled out they were a key resource. They have gone back into the business and are one of the major forces in continuous improvement and positively driving the business to extract value out of the system," Aubrey says. Timber Products avoided a big bang roll-out due to limited resources.
Implementing state by state, Timber Products chose to start small by first rolling out in South Australia, according to Aubrey. "We trained people there for three weeks, learned what we could, then left a few people there to hand hold. We followed the same process in Western Australia, Queensland, Victoria and finally in NSW." During the progressive roll-out, the company had to run interfaces between the new systems and the old ICL system operating in some states, Aubrey says. During 1995, Timber Products was able to roll the ERP system out in just 11 months across all of its distribution centres and factories. It brought nine of its 15 major distribution sites to class A status by its April 1996 deadline.
Per the original plan, Timber Products measured cost benefits a year later. An independent audit of the project showed the company had exceeded the initial aim of $15 million cost savings, achieving benefits of $23.7 million for the 12-month period ending March 31, 1997. Timber Products has determined that for the 12-month period ending March 31, 1998, cost savings exceeded $35 million as a result of further opportunities flowing out of the project. On top of material gain, the ERP project also saw the company reap numerous intangible benefits, Aubrey says. Timber Products can now offer increased reliability, dependability, and speed of service, which over time inspires customer confidence, he says. "The result is that customers will stick with you over tough times," Aubrey says.
Owen Aubrey has walked the walk and he's talking the talk before and after the ERP implementation - Where previously CSR Timber Products had long and variable lead times for delivery, today most of its standard products are delivered the next day.
- Where previously only about 50 per cent of customers received products on the first promised delivery date, this number now exceeds 95 per cent.
- Previously, Timber Products had an inventory of $56 million of finished goods in warehouses. Today this equals just $23 million -- a 60 per cent reduction in inventory -- allowing the company to shut down 30 of its warehouses. The remaining three warehouses also hold much less stock than before.
- Out of the above $56 million inventory, 25 per cent was problem stock. Today this is more to the order of $1 million dollars.
- Previously, 50 per cent of sales went through Timber Products' distribution channel and 50 per cent directly to customers. This often meant unpacking and repacking product at regional centres. Today, direct deliveries exceed 95 per cent.
- Prior to the ERP implementation, one Timber Products factory could load and send out 20 trucks in a day at best. Now the same factory can ship out 33 trucks -- a 60 per cent improvement in productivity.
- Where previously "hot lists" circulated around Timber Products' factories requiring wasteful chopping and changing of production schedules, there is now a procedure to follow and people sign off on any changes.
Apples to Oranges to Strawberries
When CFOs look at enterprise resource planning (ERP) spending projections, their eyes often get as big as silver dollars. To reassure themselves that their maths isn't completely out of whack, most companies want to compare notes with someone who has already lived through an ERP project. "Total installed cost is probably the hottest issue in the market right now; users want to gut-check with someone else," says Chris Jones, research director of business applications at GartnerGroup. Unfortunately, a total cost number -- even if you can find a company willing to share its figures -- won't necessarily mean much.
Jones notes that everyone delves into ERP from a unique situation, depending on hundreds of variables, including the existing hardware and network infrastructure, the number of corporate divisions and users, the specific functions targeted for the ERP system and the amount of process redesign. The cost of the software itself is universally known to be a small slice of the total project outlay.
One attempt at a useful comparison is to look at the total cost as a multiple of the software cost. There's no consensus, however, on what that multiple should be. Meta Group's Barry Wilderman, a vice president of application delivery strategies, for example, says ERP implementation costs should fall in the range of $US3 to $US10 per dollar spent on the software itself. Such a wide range offers little predictive value, other than serving as a red flag for users who anticipate spending $US15 per software dollar. And even the use of such broad numeric ranges has sceptics. "Never use a rule of thumb. This nonsense about one-to-one, two-to-one -- that's exactly what it is: nonsense.
There is no such thing as a standard cost to implement ERP," says Gartner's Jones. A different benchmark compares the cost per user. Monsanto's Gary Banks, IT lead for the company's SAP implementation, says the overall price tag for ERP can be intimidating. However, his unscientific survey indicates that while other software projects typically have a lower overall price, the cost per user is higher than with ERP because fewer employees benefit from other kinds of software. Again, remember that many variables affect the cost-per-user number.
"I'm sure it could be done for less with a more aggressive implementation," says Banks, noting that Monsanto has invested a lot of time in choosing the processes and business models best suited for the company.
-- Derek Slater
The move to ERP is a project of breathtaking scope; Owen Aubrey passes on five helpful suggestions from his ERP experience - One of the key things is to learn from others -- before starting. Both the project and management teams should visit companies that have successfully completed ERP implementations, and try to understand how they did it.
- Senior management needs to get involved early in the ERP project. Management needs to understand the issues, walk the talk, and ask the right questions. To do that they need to understand where the project is coming from -- and where it is going.
- If the ERP project takes more than three years to roll out, the company runs the risk of management losing focus, the project management team getting tired, and people changing positions. When someone new is brought in, whether in the factory or at senior corporate level, that area will tread water for six months until that person understands what the project is all about and starts driving it.
- Companies frequently underestimate the training and education needs for an ERP project. Companies need strong disciplines to run an ERP system and culture because of the tight rules as to how things are done. In order to make it work efficiently, training is needed to help people understand what they need to do and why they need to do it.
- Training needs to be updated. Many companies work hard to get to class A planning and control, and then lose focus; the system and the benefits then deteriorate. Management must understand there is an ongoing investment to maintain and improve what they've got. -- M Bryan
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