WHAT IS THE VALUE OF THE NEW ERP TECHNOLOGY?

How should one assess the true benefits of any new technology? Dr. Eli Goldratt, the author of The Goal and the father of the Theory of Constraints (TOC), suggests the following six questions for checking the value of any new technology. We have used them for the particular topic of ERP.

What Is the Main Power of the New Technology?

The key to this question should be the term enterprise. The main power is the ability to centralize all the relevant information of the organization under one database. In this way every data item appears only once and can be visible to anybody who has the permission to access this item. It can also be modified by anybody who has the permission to do so. When the more recent Internet/Intranet technology is combined with this main ERP power, the whole organizational database can be accessed by those whom the organization allows—no matter what function they are in or where they are geographically.

What Limitation Does the New Technology Diminish?

This is a key question. If the new technology has any value it means it eliminates or vastly reduces a certain current limitation that prevents us from getting certain benefits. We better verbalize what is this specific limitation. Then we can assess the new benefits that can be materialized. From the definition of the main power of ERP, it seems that the limitation that is diminished by ERP is the capability to provide timely cross- organizational information. The new management philosophies emphasize the need to unite the organization and align synchronized efforts. In order to achieve this goal, the previous technical limitation of not having available timely cross-organizational information is a serious obstacle. This kind of limitation is very damaging for very large organizations that are geographically dispersed. For such large organizations the difficulty is getting cross-organizational information. For example, this results in too much inventory everywhere and many mistakes in logistics and invoicing. Certainly the early ERP adopters were the large organizations, which seems to validate this claim.

What Rules Helped Us to Accommodate the Limitation?

Once the verbalization of the previous limitation is clear, the next question targets our understanding on how the limitation was handled previously. Why is this important to understand? The full benefits to be materialized are dependant on the difference between the behavior that had been subject to the limitation and the behavior without the

limitation.

Suppose a new jet technology allows 1-hour flights from Los Angeles to New York. The flight time limitation is vastly reduced. What are the benefits? Saving time to passengers? Spending the time in more convenient ways? Let us examine the topic from an executive point of view. The way some executives handle the inconvenience and the waste of time during flight is to fly first/business class and to collect sufficient work they can do with their laptops during the trip. Another aspect is that to get to a business meeting in New York from Los Angeles, the executives have to either take a red-eye flight during the night, which is quite grueling, or come the previous day, which is really a serious waste of time. Now here is the opportunity: if a flight from Los Angeles takes off early in the morning and it takes only 1 hour, then the executive can still arrive to a noon meeting in New York. In order for this the timetables of both the airlines and the company need to be adjusted to provide much better use of the time.

Let us come back to ERP. How did we handle the synchronization of efforts across the organization before ERP? The required information across the organization was transferred to each function in a batch mode in a certain period of time (i.e., weekly, bimonthly, etc.) Within that time the function had to do its best, based on targets and its own information. This led to strengthening the local view of the organization: each part acts partially independently and gets periodic updates to its targets. Generally speaking, the sales department runs independently, but has to promise fairly long lead-times. Operations is updating the master production schedule (MPS) weekly or monthly and instituting time fences such as a frozen period where the plan should not be altered. Likewise, purchasing plans according to long horizon forecasts are updated periodically when sales figures are available. In such an environment where the information traffic is done in periodical batches, the following two generic effects are clearly seen:

1. Each function behaves according to its own local optimum.

2. Batching policies are used everywhere. For instance, retail stores order both fast moving and slow moving products once a week.

These are the rules that were created over time to deal with the problem of not having the cross organizational information available online in real time. Organizations that stay with the same old rules get very little improvements from their new ERP systems. Now that the technology is well-established and the old limitation is gone we will address our next question.

What Rules Should We Use Now?

TOC is fully focused to give that critical question a valid, simple, common sense, and effective answer. Developing the holistic approach is the objective of TOC. All the new management philosophies claim that every organization can do more if the organization would act as one unity. The problem is that the holistic rules need to be established and implemented and these rules have to be supported by appropriate cross-organizational information. Keep in mind that these organizations can be both inside and outside the enterprise. ERP is just a necessary, but not sufficient, condition for being able to vastly improve the performance of the organization. In order to make the organization act

synchronically towards its goal, some of the basic managerial norms, procedures, processes and performance measurements need to change. The rest of this chapter is devoted to outlining the basic principles of the holistic approach and also to pointing to the answer to the next question.

Do the New Rules Require Any Change in the Way We Use the Technology?

Do the current ERP packages fully support the new managerial rules that synchronize the whole organization to achieve as much as possible from the goal? Not quite. Most of the current ERP vendors did not internalize the need to support cross functionality in order support full enterprise planning and control. ERP packages are still built around the traditional isolated functions, in spite of the common database. Thus, the manufacturing part was developed without any direct links to finance or sales. Most ERP packages, for instance, do not support enterprisewide sales and operations planning, which should also include finance. Suppose that Marketing and Sales see a great opportunity for a certain product family in a new market niche. Such a decision should consider production capacity, raw materials supply, and its net financial impact. Do current ERP packages support such an analysis? Very few ERP vendors have introduced some of the holistic tools to provide it. The other alternative is to use a holistic package to access the ERP package that supports the holistic cross-functional requirements. In some cases those tools need to replace some of the ERP traditional functionality and even add necessary data items missing in the traditional ERP.

This technical aspect is just one part within the implementation of the full “necessary and sufficient” strategy that would be able to move the organization to capitalize on the elimination of the old limitation and achieve significantly better bottom line results. This implementation issue brings us to look for the answer to the final question:

How Do We Cause the Change?

As we have seen, introducing a new technology should trigger changes in the rules of the system, or the benefits would not be materialized. The conclusion is that the technical change is necessary, but definitely not sufficient to success. How do you successfully implement a solution that will vastly improve the performance of the organization? Any solution is a change, and any change faces various obstacles in its implementation. People resist change and they have a very good reason, as change is also a threat. In order to implement a change in a way that the entire organization would profit, a careful implementation plan should be in place that addresses the concerns and fears of all stakeholders.

The necessary and sufficient approach combines analysis of the managerial aspects of the organization, designing the new rules for the organization to excel, and defining the supporting information technology. The implementation project should be managed according to the best project management practice that can be offered. Certainly project management the TOC way should be relevant for managing such a sensitive but promising project.