ERP and Change

In this post we are going to offer a brief explanation about why and how ERP implementation in any enterprise brings changes to the organization. Nowadays there is adequate evidence that success and failure of implementing and utilizing ERP is tightly related to people side of Change Management. The Change Management is to be followed before, during and after the implementation project.

What is ERP and why ERP is related to Change?

In the beginning we must make it clear that when we are talking about ERP, we mean the ERP solutions which are really following the concepts and characteristics of ERP.
ERP is not only a technology that mechanizes the processes of the organizations but is a solution to run the business more efficient and beneficial. This means implementing a world class ERP involves not only with changes in the technical layer of the organization but also changes in the mission layer of the organization. This happens mainly due to the Best Practices which ERP solutions offer. Best Practices refer to the business models which are stored as work flow engine and the logic of programs in ERP package. Such models are made thorough benchmarking from the practices and business processes of the world class organizations and excellent enterprises.
So when an organization uses such ERP solutions, in fact it employs these Business reference models.
According to this definition, ERP implementation is equivalent to running the business as per new processes and practices. On the other hand the employees of the organization should change to work on a new practice.
This exposes why ERP is tied with change in the organization and organizational change must be considered as a consequence of such ERP implementation.

What areas will undergo change?
The change as told starts from the business processes. This includes new way of doing works and functions to run the business. Furthermore change in the attitude to the organization jobs might become necessary if the current habits of doing tasks have significant gaps with the new processes.


For a very simple example if the employees currently are doing their dedicated jobs separately in their defined boundaries they must to change to work on the basis of an interlocked chain of the tasks called business processes. This is due to the primary feature of any ERP which is process oriented. This obviously needs a change in the attitude and behavior of the organization people from a task oriented approach to process oriented approach. People concentration in such integrated business must move from focusing on their separate tasks not being worried about the other parts, to taking care of the entire process and do what all they can to accomplish the entire process perfect.

Further more process integration also must happen. The business processes themselves are in relation together and each process might trigger other processes to be launched.

In this way team working also makes sense and will get in to the scope. In fact teams are to be formed around the business processes. Team work needs improvements in the horizontal relationships between employees and enhancements in their communication abilities.

You see how fundamental concepts of ERP involve wide changes in the people side of the enterprise.

New business processes consequences with new organizational roles and jobs descriptions for the employees. It may cause some changes in the organizational chart due to adoption to the new processes and job definitions.

In addition the technology also is being changed. The reports and data forms of ERP makes differences in the ways of data transfer as well as reporting in the organization. On line access to required data for any employee and computerized data flow requires the people to change from paper based working to use the computerized data. Trust to mechanized data is not so easy for the people who have been working in a paper based organization for long time. This exactly needs change in habits and attitudes.

Manager also must get used to take managerial reports from the system and spend their time for analyzing information.

Conclusion
As per the above we can easily conclude that implementing and utilizing a world class ERP solution is tightly associated with managing people side of change. In fact even if you setup ERP applications correctly but the people side of change does not happen the company will not be working on the ERP practices and so it will not gain the expected benefits. Further more ERP implementation regardless of changing the employees can cause stoppage in your business. If you look at the failure stories you can see that many of ERP projects are failed after the software implementation, due to organization was not capable to perform as per the ERP business processes and its necessities. In the other world the employees did not adopted with these new practices.

The major reason is lack of a Change Management program. Indeed implementing an ERP solution in addition to a technical project management needs a people side of Change Management program. This Change Management will have its own scenario, activities and responsible. We can say you must run two projects. The goal of the Change Management project is to make the people ready for change and lead and coach them to transit to the new environment and adopt them to the new way of running business.

if you read the first post of our web log which is the Preface you will see that what we are going to say regarding to implementing ERP and Change Management activities which should be done.

As you follow the posts you will confirm that these activities and messages which disseminate to people could be used with a little manipulation in any Integrated System project.

We have to know that Change Management activities are not the same even in one ERP project. That means if you have selected Purchasing, Inventory, HRMS, Order Management … of one ERP system, you have to do Change Management activities regarding to specific module.

In other word because employees in different departments do different tasks, thus we need to do related Change Management activities too.

We have started our web log with the Change Management activities in Inventory. That means we have declared the Change Management activities when you want to implement ERP Inventory.

We wish to complete our web log gradually with almost all the modules.


Enjoy your ERP and Change Management activities!

ERP Impact on Stock Price

This part is continued of the previous post about how balance sheet will be affected by ERP project. In this post we will talk about ERP impact on Stock price.

If you are new with this web log we request you to read preface first.

ERP Impact on Stock Price

If the integration and improved information of an ERP system results in a better balance sheet and increased profits, these improvements should impact stock price for the company. Although stock price is affected by a variety of factors, the typical effect of improved profits and balance sheet ratios can be estimated. Using the already described example of $10 million manufacturer and typical benefits, and assuming 100,000 shares outstanding and an existing stock price of $30.00 per share, the stock price exhibits the effects of an effective ERP, as figure 1-7-3 shows. With a price/earnings multiplier of six, the stock price for the example company could be increased from $30 to $58.80 per share.

Figure 1-7-3 Calculating the potential stock appreciation

	Before ERP	After ERP
Before tax profit	$500,000.00	$980,000.00
Earnings per share	$ 5.00	$9.80
Current stock price	$30.00	6 * 9.80 = $58.80
Multiplier	6	6

These calculations suggest that ERP systems can lead to significant impacts on financial results, including the balance sheet, income statement, key ratios, and stock price.

ERP Impact on Key Financial Ratios

ERP CHANGE MANAGEMENT

If you are new with this web log we request you to read preface first.

This part is continued of the previous post about how balance sheet will be affected by ERP project. As we have mentioned before you have to disseminate the messages to all of the Inventory people.

ERP Impact on Key Financial Ratios

Ration analysis provides another way to look at the impact of an ERP system. Three ratios illustrate the effect---two related to liquidity and one to operating performance.

 

Inventory turnover (Cost of Sales/Inventory). Low inventory turnover can indicate possible overstocking and obsolescence. It may also indicate deeper problems of too much of the wrong kind of inventory, which can create shortages of needed inventory for production and sales. High turnover indicates better liquidity and superior materials management and merchandising. Given the example $10 million company, the current number of inventory turns is 2.5. With a 20 percent inventory reduction, the number of inventory turns increases to 3.1.

 

Days of Receivables (365 * 1/(Sales/Receivables)). This ratio expresses the average time in days that receivables are outstanding. It is a measure of the management of credit and collections. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivable. The lower the number of days, the greater the cash availability. With an 18 percent reduction in receivables, the current day's receivable of seventy-three days can be reduced to sixty. This means $356,200 is available for other purposes.

 

Return on Assets (Profit Before Taxes/Total Assets). This ratio measures the effectiveness of management in employing the resources available to it. Several calculations are necessary to determine the return on assets. In this example, the return on assets can be improved from 5.9 to 12.9 by effectively implementing an ERP system.

Performance evaluation based on ratio analysis can also use comparisons between one's own company and similar firms in terms of size and industry. The Annual Statement Studies provide comparative ratios for this purpose. This use of comparative ratio analysis will use the same three ratios for inventory turnover, days receivable, and return on assets. To perform the analysis, you identify the median and upper quartile ratios for firms in the same industry. These roughly correspond to average and good performance. By comparing the ratios with your firm's current performance, you can calculate how much better your company should be performing to be competitive. The same analysis can be performed using the “BenchmarkReport.com” website.

Using the inventory turns ratio for the example $10 million manufacturer, assume the Annual Statement Studies indicate that the median and upper quartile are four and six turns for other firms in the same industry. Average performance of four inventory turns translates into an expected inventory of $1.875 million ($7.5 million divided by four). If the example firm had this ratio, it would have had $1.125 million less in inventory. With inventory carrying costs at 25 percent, this would produce savings of $281,250 each year.

For the days receivable ratio, assume the Annual Statement Studies indicate that sixty and fifty days are the median and upper quartile. The days receivable in the example $10 million manufacturer is currently seventy-three days; an improvement to sixty days would reduce receivables by $356,200 (using a daily sales rate of $27,400 and a thirteen day reduction). This means that cash is available for other purposes.

Note that the return on assets ratio is 5.9 for the example company. Assuming the Annual Statement Studies indicate the return on assets is ten and fifteen for firms in the same industry at the median and upper quartiles, improving the return on assets to equivalent levels would mean increased profits or asset turnover.