Magazine article Strategic Finance

Improve Your Business Processes for ERP Efficiency: Eight Examples Illustrate Cost Cutting, Labor Savings, and Improved Profitability That Can Result from Self-Funding Improvements That Automate Processes Using Already Available Software

Magazine article Strategic Finance

Improve Your Business Processes for ERP Efficiency: Eight Examples Illustrate Cost Cutting, Labor Savings, and Improved Profitability That Can Result from Self-Funding Improvements That Automate Processes Using Already Available Software

Article excerpt

There's a burning pain in companies today as the cost of business skyrockets while the ability to lower headcount and expenses has hit bare bone. Frustrations run deep as executives yearn to run leaner, faster, and cheaper. And the aching question in the back of many CFO minds goes directly to their disappointment with an apparently inefficient enterprise resource planning (ERP) system: Why isn't it helping the company cut costs?

The answer to ERP's return on investment (ROI) goes beyond the purchase of functionality to the deeply established policies and procedures that define a company's business processes. Unless operational and supporting processes are aligned with the software, the efficiency of an ERP system suffers tremendously.

The Horizontal Nature of ERP Systems

Unfortunately, companies are plagued by "vertical thinking"--single division or department tasks. Executives need to think about their businesses horizontally, which is how ERP systems are made to work. When horizontal processes that span the entire enterprise are aligned within a horizontal system, significant cost savings result.

Consider the classic case of procurement incentives: Most purchasing departments buy using the purchase price variance (PPV) approach to find the lowest possible cost of goods. Their year-end bonus is predicated on this one metric. But that's vertical thinking. Even at the best price, goods that have to be transported, handled, and stored create new costs downstream for manufacturing and distribution. Waste can occur through damage, perishability, and quality issues.

"Horizontal thinking" would take into account the total cost of ownership (TCO) to procure goods. Although this can be difficult to measure because of all the variables, the underlying processes can be identified, mapped out, and aligned with the ERP system. The result is what's best for the entire business--rather than the best price--and not how one vertical department of people is paid to perform.

Fixing Broken Processes

Businesses operate daily with broken processes that never touch the ERP system. It's common for employees to work around the system because they don't understand how to use the software's functionality. For example, they develop stand-alone spreadsheets that reside in desktop files and drawers that no one can access easily. When offline spreadsheets get handed off in the workflow process, information is rekeyed, which creates a chance of error.

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These wasted process steps add labor costs that have no value to the organization. Again, this is vertical thinking when people enter and manipulate data in a spreadsheet instead of the ERP system. And it leads to frustration at the top of the organization because executives can't make good decisions with poor or "hidden" data.

The process performers--the cross-functional group of employees who operate the process--must help fix the broken ones. Working together with an experienced consultant who has deep knowledge of best practices and/or a representative from the ERP vendor, they can discover and diagnose the horizontal "disconnects" of each process, then align them in the ERP system.

Disconnects are opportunities for improvement where waste is being generated within a process. Waste in the lean manufacturing context, for example, includes wait time, motion, transport, extra processing, inventory, overproduction, and defects.

Waste is nonvalue-added activity from a customer perspective, it increases total costs, and it doesn't support a company's business strategies. When compiling a list of process disconnects, it's imperative to capture clear descriptions and document any known financial impacts. To obtain a clear view of the disconnects and subsequent improvement opportunities, it's necessary to carefully map the business process at a low level of activity, often called the "configuration level," where the ERP software operates. …

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