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Riste Kelepurovski, Supply Chain Management, ERP Research, HBR Submitted, Non Peer

Balancing on the edge


ERP design and Implementation
Modern companies have gained and lost millions of dollars in designing and implementing
Enterprise Resource Planning ERP systems. Analyzing the success rate of the design and
implementations of ERPs, the conclusion is not very positive.
The annual 2015 ERP report highlights following findings:

The ERP cost of ownership increased from 2.8M USD last year to staggering 4.6M USD in
2015. In average, this figure represents a 5.9% of annual revenue on ERP implementations.
ERP failure rates increased year to year, from 16% to 21%. The number of companies that
would choose another ERP vendor is also increasing from 69% to 76%.
ERP software customization increased to staggering 93%. Only 7% used off the shelf or
vanilla software.
Software as a service is increasing (finally and fortunately) from 4% to 33%
Post implementation challenges are still present, and question of benefits and operational
disruption are still open.

Worth to mention that this report reflects on a survey from 562 ERP implementations around the
globe, and total cost of ERP ownership exceeds 2.5B USD in 2015.
What goes wrong here?
There are many unanswered questions regarding ERP adoption and implementation. The initial
question begins with the definition of ERP as an enterprise-wide information system that is used
as a tool to effectively plan and manage all resources of an enterprise and aims to improve
internal efficiency by integrating different business functions in an organization. The key words
here are: tool, enterprise-wide, integration, efficiency and business function. Remember these for
a while.
In the past decade, the scholars and academia are continually attempting to define the critical
success or failure factors in ERP implementation, but somehow, based on the reports, the
companies are not actually listening to the scholars, or academics are wrong. There is even a
disagreement among the scholars on the definition of an ERP system. If a company install a SAP or
Microsoft Dynamics AX, conceptually this is an ERP implementation. Nothing could be more
wrong. The origin of the ERP system could be foind in the early 90s with the deployment of
Material and Resource Planning systems (MPR) to utilize and increase the internal efficiency of the
manufacturing apparatus. Customers and suppliers were completely excluded from the equation.
Unfortunately, many of the modern ERP implementations are a remnant of this internal supply
management focus. It is not until Chopra and Meindl present their fantastic Transaction
Management Foundation, and Mller outlined the ERPII conceptual framework, we are realizing
and understand the concept of an ERP (Figure 1; Table 1).

Riste Kelepurovski, Supply Chain Management, ERP Research, HBR Submitted, Non Peer

The ERP is a foundation of entire transactional platform, from supplier and their suppliers to final customer
product or service and as minimum contains following elements:

Supply Chain Management and Supply Relationship Management


Customer Relationship and Service Management
Business Process Management or Internal Supply Chain Management

Understanding the concept of an ERP as end to end framework enable us to analyze and discuss the major
success or failure criteria.

Riste Kelepurovski, Supply Chain Management, ERP Research, HBR Submitted, Non Peer

Success or failure?
Do you remember the keywords from the ERP definition: tool, enterprise-wide, integration, efficiency and
business function? I hope you do, as these particular words are the difference between success or failure of
an ERP design and implementation. To simplify the discussion, I will introduce some well-known aspects of
the management books and explain in details their impact on an ERP design and implementation.
1. Processes is a series of actions to produce something or lead to a particular output. If the
customer requires a product or service, this will trigger a series of actions towards suppliers,
internal resources in production, production planning and at the end, the customer gets what he
pays for. However, this could be a complex series of actions, even in a most simple transaction
foundation. If a customer books a shipment service in DHL, this event triggers a series of internal,
as well as supplier actions. It affects the air capacity planning, the facility resource planning, Quality
Control Center monitoring, external couriers route planning etc. Designing and Implementing an
ERP system should focus on end to end process. In this example, from shipment booking (CRM),
across internal capacity planning (ISCM) to supply chain management (SCM). The design and
implementation of an ERP CAN NOT compensate for a lack of existing process capabilities. It can
only enhance current process capabilities, but if your current process is incapable and doesnt
produce the desired output, an ERP will just worsen the situation. Many companies are just failing
in this discipline, with false expectations that ERP will rectify the current process capability. Believe
me. It wont. The ERP report highlights that Business Process Reengineering aspect is the most
common reason for failures of an ERP System Implementation. You cant re-engineer something
that doesnt exist.
2. An Organization is a social unit of people that is structured and managed to meet a need or to
pursue collective goals. In the 21st century, we are operating in exhausting organizational
complexity, where the organizational efficiency is decreasing. We are deeply compartmentalized
and have difficulties to look beyond our department silos. The most common question while
implementing an ERP is: how this will affect my department? What is it for me in this change? An
ERP as a technology system doesnt recognize organizational and departmental boundaries. It does
systemize the value creation across the entire transaction foundation, from supplier to customer.
The modern organizational setups are the biggest misfit and obstacle to the success of an ERP
implementation. We are trying to apply the theory and practices of compartmentalization on the
design and implementation of an ERP foundation. Please remember that ERP is a Business Process
Redesign and Process Management and the organization should be prepared for such change of
transactional practices. Another aspect is organizational capacity and capability in the
implementation of an ERP system. Systemizing the entire transaction foundation requires a serious
approach from process knowledge, change management, organizational ability, organizational
capacity and strategic project management skills. Jumping on ERP wave, without the previous
mentioned organizational properties is a formula for disaster.
3. Information Technology (IT) is broad concept of using new tools, processes and data to
encompass and increase the effectiveness and efficiency of an organization. The IT is the most
critical aspect of designing and implementing ERP solutions. Technological blindness affects many
companies in taking irrational and expensive decisions. Just Ask DHL Global Forwarding, which
wrote off 345M Euro in 2015 due to failed ERP implementation. The companies should be seriously
aware of these three factors in the technology implementations:
Data. Big data issue is an expensive affair in every modern company. The medical industry
is spending millions in data management from clinical and laboratory studies due to system

Riste Kelepurovski, Supply Chain Management, ERP Research, HBR Submitted, Non Peer

incompatibilities. The data architecture and managing historical data is a crucial


technological factor in ERP implementations. Mller clearly indicates it in Table 1. The data
is the foundation layer of every ERP. Unless you are in control of your data architecture and
have a clear overview of data interchangeability, the risk of implementation failure will be
obvious.
Vendor and Systems. As 93% of all implemented ERP systems are customized, the choice of
vendor and system provider plays a crucial role in the success of the ERP. The significant
cost of implementation is not related to the cost of licensing, servers and infrastructure. It
is related to the customization of the system done by the vendor. The vendor is not familiar
with your company processes, neither the implementation risk. As a company, the liability
and damage are purely yours. Choose the provider and the system carefully and check the
success history of the vendor and the consulting providers. The technology used should
also be future proof and data generated from the ERP should also be compatible in the
next many years to come. Proper risk evaluation, defining the system requirements and
early involvement of the vendor are just some of the recommendations from the ERP
consulting industry and research in this area. We all know the increasing the level of
complexity does increase the level of risk. Fortunately, the modern ERPII systems are
modular and can be extended going forward. Dont design an elephant if you need a lean
race horse.

Discussion
If properly designed, the ERP systems can significantly improve the efficiency and to a certain level the
effectiveness of an organization. But the risk of failure is significant and omnipresent. I highlighted a couple
of management aspect for a purpose of decreasing the statistical probability of a failure. Bottom line, the
organization, process framework and technology are the main reasons for success or failure of an ERP
design and implementation. According to the statistics and ERP reports, the risk of failure is still increasing
and ERP implementation is still compared to balance on the edge.

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