ERP Is a Vital Resource

ERP is a Vital Resource to Help Small Businesses Financially Sustain their Competitive Advantage

The rate of failure for ERP implementations in small businesses exceeds those in larger enterprises as smaller enterprises lack the resources to translate strategic objectives into tactical results and also have to contend with significant resistance to change (Loh, Loh, 2004). In addition to these factors, small businesses also often lack the process integration in such critical areas as supply chain management, pricing, logistics, manufacturing scheduling and fulfillment to enable an ERP system to deliver the results it is capable of. One of the most important aspects of an ERP system installation and launch inside a company is the need to first streamline the internal processes it is mean to accelerate and make more automated (Allen, 2008). When small businesses in fact streamline the core processes their companies rely on including supply chain management, distributor and reseller relationship management in the form of pricing management, and logistics integration, they significantly increase their potential for success (Allen, 2008). The intent of this analysis is to present the key success factors that small business owners and Chief Executive Officers (CEOs) need to consider in order for ERP system planning, implementation and use are effective and deliver results. For small businesses that are publicly-held in the United States there is the added complexity of having to report financial results to the Securities and Exchange Commission (SEC) as part of the Sarbanes-Oxley Act (SOX) (Walker, 2008)

Lessons Learned From ERP Failures in Small Business

For the owner or CEO of a small business the top five most critical needs they adopt ERP systems for is financial and accounting management, inventory management, order management, manufacturing coordination and procurement and sourcing. These are the five areas that have the greatest immediate financial impact on small businesses, and also provide the most critically important data about the performance of operations, supply chains, manufacturing and sales (Allen, 2008). These are also subsystems that are predominately focused on the internal performance of the company yet do not provide insights into how to better serve customers over the long-term. The financial and accounting management systems including Accounts Payable and Accounts Receivable subsystems, two of the most integrated financial systems throughout ERP systems in small businesses regardless of industry (Chou, Chang, 2008). Accounts Payable and Accounts Receivable integrate to inventory management and order management systems typically to serve as the system of records for these transaction areas (Kemp, Low, 2008). The integration of these financial systems provides small business owners with costing and variance analyses to better mange supply chains, production, fulfillment and quality management functions in their companies.

More fundamentally, ERP systems and their integration of inventory management, order management and manufacturing are often used as the catalyst of lean manufacturing and services strategies (Holmstrom, Hameri, Nielsen, Niels, Pankakoshi, Slotte, 1997). With the objective of gaining greater levels of yield optimization from their suppliers, production centers, and logistics processes and procedures, companies adopt ERP systems to gain greater levels of efficiency. The adoption of ERP in small companies whose needs center on manufacturing, procurement, sourcing, and supply chain planning and logistics are time- and cost-driven. Again a strong internal focus purely on lean manufacturing performance can potentially blind a small business to the more critical needs of using their ERP system to their competitive advantage in the market. One of the most crucial lessons learned from ERP systems that fail is that they become entirely focused on production efficiency and cost reduction, not staying agile enough to respond to customers' changing needs, preferences and requirements (Michel, 2007). The evolution of ERP systems away from being purely focused on manufacturing efficiency, supply chain cost optimization and the attainment purely of lean manufacturing objectives is well underway. Small businesses that ignore this shift of using ERP systems to better listen, respond, and exceed the expectations of customers will inevitably fail as their competitors take a far more focused and customer-centric approach to integrating customer strategies into their own ERP systems. One of the most often discussed concepts for aligning supply chain, pricing, ERP, and logistics systems to the rapidly changing needs of customers is the Demand Driven Supply Network (DDSN) (Barrett, 2007). The fundamental concept of the DDSN Model is to transform ERP systems away from being purely focused on internal efficiencies towards being more responsive, agile, and focused on responding rapidly and accurately to customers' changing demands.

Customer- and Demand-Driven Strategies Need To Dominate ERP Strategies

The failure of any ERP system in a small business can be attributed to a variety of factors, but one of the most prevalent is when it ceases to be relevant to meeting customers' needs (Loh, Loh, 2004). This occurs when customer management and selling strategies, as diverse as quoting and bidding to pricing and engineer-to-order, are not integrated to an ERP system. When this happens there are silos of information generated by each of these stand-alone systems. When these customer-facing strategies are not interlinked to an ERP system to see for example if a custom-configured product can actually be built, manufacturing companies will take on average seven iterations of a quote to get it right (Allen, 2008). In the meantime customers get increasingly dissatisfied and begin to look for other suppliers to work with.

It's not enough however for a quoting process and its strategies to be integrated into an ERP system if a small business hopes to be more responsive to customers. Instead each strategy the company relies on for attracting, selling and serving customers must also be integrated to the ERP system so that when commitments are made to customers they can be kept. Too often companies will have each of their customer strategies isolated and with varying ways to define delivery dates, prices, even the approach for building the product being ordered. Why ERP systems matter in this context is that they act as the central reference point, the synchronization point of these customer strategies so that when a price is given, it's accurate. When delivery dates for either a standardized or build-to-order product are given, they are actually met. In short, ERP systems that are so tightly integrated to the specific marketing and selling strategies of a company, delivering valuable data when needed to sell and also fulfill orders are the most effective (Chou, Chang, 2008).

Small businesses have just as much if not more complexity in their customer-facing processes, and this is often a weak point in the implementation of ERP systems (Allen, 2008). As small businesses are more dependent on selling by relationship, and often these relationships are managed very manually, attempting to automate these customer relationships and selling processes can increase the complexity of any ERP system. While small businesses implement ERP systems for greater financial accounting, financial management, order management, and manufacturing synchronization, in fact the greatest payoff is in aligning all of these internal systems to the needs of customers. Yet small businesses stumble on this point because the automation of these relationship-based processes defies consistency.

Yet for those small businesses that can automate their customer management and channel management processes, integrating them to their accounting, financial reporting and manufacturing systems in the process, they gain significant competitive advantages. Beginning with the integration of how quotes and bids for business are generated, the integration of this process to manufacturing systems is crucial (Rosenbloom, 2007). Small businesses that use their ERP systems as the foundation of ensuring their product quoting and pricing systems are delivering accurate information to customers generate higher levels of profitability over time (Bellin, 2006). Automating the quoting process includes integrating the quoting, pricing, manufacturing scheduling and logistics systems together to deliver customers accurate delivery dates for the products they order. This is commonly called the quote-to-order process. ERP systems are integral to this process working effectively and delivering accurate Available-to-Promise (ATP) and Capable-to-Promise (CTP) dates to customers (Mendelson, Parlakturk, 2008). These two dates (ATP and CTP) are used by companies to plan when a product will be delivered, and when to coordinate for installation teams to complete their work. To populate a quote with ATP and CTP dates, it is essential for a quoting system to have integration in place to supply chain management systems. This is accomplished by integrating with the ERP system in place that acts as the coordination point for this information, as supplier data is needed throughout the manufacturing scheduling processes as well (Rosenbloom, 2007). Empirical research indicates that quoting systems that have the ability to deliver ATP and CTP in real time to each customer quote produced is considered a best practice other manufacturers and service providers attempt to also achieve (Mendelson, Parlakturk, 2008).

Today the majority of small businesses rely on manual processes to get their quotes completed, and often their sales teams have to call in to get pricing for a specific set of products or a custom product configuration (Allen, 2008). In conjunction with automating the quoting process, small businesses that are successful in transforming their ERP systems into being more customer-focused also rely on greater levels of collaboration with their product management and engineering teams as well (Wu, Cao, 2009). Studies of the effects of channel management and customer management integration with ERP systems indicate that the greater the level of pricing, costing, and quoting system collaboration, the higher the return on investment (ROI) of these systems. Studies specifically suggest that when five or more systems are integrated together, there is a corresponding increases of up to 30% in profitability as a result (Rosenbloom, 2007). Analyzing this dynamic of channel management and customer management systems integration based on analysis from AMR Research, Forrester Research and Gartner Group is compiled in The Roadmap to Value for ERP-enabled Customer Management Strategies, which is Figure A in the Appendix of this document. Most noteworthy about this analysis is the fact that there are causal relationships between the streamlining and improving of channel management and customer management strategies and financial performance. The extent to which a small business can attain this level of performance finally is dependent on how effective they are in integrating customer-facing and channel-facing processes in their ERP systems.

Consider how a maturity model emerges from the extent of systems and process integration and its impact on the financial performance of a small business. At the lowest layers of this maturity model there are only manually-based processes that are managed through time-consuming and often error-filled series of procedures that are sporadic in their performance at best. Manually entering quotes into a system, or the manually-based developed of special pricing requests is an example of the type of processes at this level as well. At the second level is department-wide collaboration. The use of Microsoft Outlook is often the preferred approach to managing collaboration with channel partners and with the sales force. At the third level, there is cross-department and channel management integration. This third level is where ERP system integration begins to contribute to the financial performance shown in Figure A of the Appendix. This third level is also called the Collaborating level or phase. ERP systems at this third level are often defined by their support of one or just a few channels of distribution. The result is that only limited financial performance improvements are made over time. The uppermost layer of the model with the Orchestrating or Multichannel Federation Layer and this is where ERP system integration to customer management and channel management systems makes the greatest financial impact. The following ERP Integration Model illustrates the effects from a process maturity and information maturity standpoint on channel management and customer management processes. This maturity model's structure is predicated on the AMR Research Demand Driven Supply Network Model (Barrett, 2007) and is shown in Figure 1.

Figure 1: ERP Integration Model

For small businesses their ability to attain the level of Orchestrating in the ERP integration Model shown there must be a clear definition of just what the customer-facing objectives are, how they will be measured through analytics and business intelligence (Trott, Hoecht, 2004), and the critical integration link of channel selling strategies to supply chain constraints defined (Vlachopoulou, Manthou, Folinas, 2005). This requires much synchronization of not only selling strategies, but supply chain, procurement and manufacturing strategies as well. The synchronization of all of these factors is managed by the ERP system. As can be seen from the maturity model when applied to small businesses, the perception of these smaller enterprises having less complexity is not true. In fact for a small business to attain the Orchestrating layer of the ERP Maturity Model there has to be intensive process, system, and role-based definitions all in synch with each other. All this level of orchestration on a budget that is already severely strained, small businesses often have performance levels in the Anticipating and Orchestrating levels of performance. For lack of synchronization between customer strategies and manufacturing, small business ERP systems fail (Allen, 2008). A critical success factor for any ERP system in a small business is to focus on how to integrate these customer-facing strategies and their supporting systems including Customer Relationship Management (CRM), Partner Relationship Management (PRM), pricing, quoting, price exception management, and critically important, ATP and CTP for managing expectations with customers. The integration of these systems to support the critical business processes needed for attracting, selling and serving customers can in many industries mean the difference between profitable or growth or not, as is shown in Figure A of the Appendix.

Supply Chain Integration, Procurement and Sourcing

In small businesses, cash is king. The decision to go with an ERP system in the first place is to financially sustain unique competitive advantages through more efficient use of data on customers, logistics, operations, services, and supply chains. Each of these functional areas also significantly impact inventory management, order management and manufacturing, which are the second through fourth most common functional areas that lead small businesses to adopt ERP systems. Financially measuring these functional areas and continually improving their performance is the essence of lean manufacturing and lean process improvements (Holmstrom, Hameri, Nielsen, Niels, Pankakoshi, Slotte, 1997). Logistics as a functional area related to supply chains also often delivers significant cost and time savings over time (Rizzi, Zamboni, 1999). Yet ironically 49% of all small businesses choose to streamline their supply chain and logistics systems at all (Allen, 2008). Only 46% choose to even integrate logistics processes into ERP systems (Allen, 2008). This results in manually-based supply chain and logistics systems being integrated only at the process level to ERP systems, and the result is often errors and costly inventory management mistakes. Between process, discrete and services small businesses, discrete manufacturers choose to automate supply chain and logistics functions as part of their ERP systems. It is surprising that given what a high percentage of a small business' working capital is tied up in inventory that they would choose to leave supply chain management, planning and logistics in a manually-based series of workflows.

How ERP Systems Can Financially Sustain Competitive Advantage in Small Businesses

The hard reality is that the majority of ERP system installations, regardless of company size, fail (Nah, Tan, The, 2004). The larger the company, the higher the failure rate (Allen, 2008). With so much critical financial information in the balance for running any company, what is clearly needed are a series of best practices or benchmarks that small businesses can use to navigate through the ERP planning, development, launch and use phases of these systems. Despite the failures specifically mentioned in customer management and channel management systems integration, the lack of support for demand-driven strategies for better serving customers, and the lack of supply chain integration, small businesses are in fact financially sustaining competitive advantages through the use of ERP systems.

The first half of this document specifically discusses why ERP systems fail in small business and also fail to deliver financially sustainable competitive advantages over time. In this section the analysis shifts to those examples of best practices, or the highest levels of performance attained, through the use of ERP systems in small business and their integration into key customer focused and channel management focused strategies. An analysis of how ERP helps small businesses sustain their competitive advantages through supply chain and logistics integration is also discussed. Adoption of ERP systems throughout small business succeeds when there is a strong vision of the systems' role as a means to better sell, serve and support customers while maintaining high levels of internal process efficiency (Chou, Chang, 2008). The highest performing ERP systems then can attain a unique balance of being customer-centered on the one hand while striving for internal process efficiencies on the other (Holmstrom, Hameri, Nielsen, Niels, Pankakoshi, Slotte, 1997). For the small business owner or CEO of a small company looking to their investments in ERP systems to financially sustain their competitive advantage, this delineation between customer-focused and channel-focused strategies on the one hand and internal process efficiencies on the other is critical. Small businesses that sustain their competitive advantage financially are able to strike a balance between being customer-driven and attaining internal efficiency. Lean manufacturing techniques including Six Sigma, Total Quality Management (TQM) and Just In Time (JIT) are successfully used in smaller companies to re-orient their internal processes towards being more focused on customer needs (Zakuan, Saman, 2009). In effect lean manufacturing strategies are re-defining how small businesses redefine supply chain, logistics, sourcing, and services, all oriented towards being responsive to the customer first (Reichhart, Holweg, 2007). To the extent ERP systems are used for re-aligning supply chains and internal systems both to be more responsive to customer demands is the extent to which they are seen as being demand driven (Barrett, 2007).

Small business owners and CEOs are increasingly turning to business analytics, financial analysis applications and dashboards to manage their businesses to profitability and performance targets. The use of dashboards have given small business owners and CEOs more insight into how their companies' becoming more customer-driven while attaining internal efficiencies is making a difference financially. The longer-term impacts of customer-driven systems coordinated through the use of an ERP system is shown in Figure A: Roadmap to Value for ERP-enabled Customer Management Strategies. The scorecards that small businesses are using to manage their businesses based on the information available from ERP systems is shown in Table 1: Business Owner's Financial Performance Scorecard.

Table 1: Business Owner's Financial Performance Scorecard

Areas of Measurement

Key Performance Indicator

Examples of Results From Previous Studies (*)

Company-specific

Number of orders per year

Determine manufacturing's impact on inventory turns

Current inventory and costs

Inventory turn savings

Customer Data

Lifetime cost per customer; avg. deal size by customer

Order cycle time

Order cycle times reduction of 35% or more recorded with mftrs contacted

Sales

Cost of Sales

Days Sales Outstanding reduction from 55 to 23 days on average

Cross-sell and up-sell revenue

Increase of 46% on aggregate

Average sales price per order

Increase from 7% to 29%

Average costs to complete an order

91% reduction in cost per order

Quote and Order

Special Pricing Requests

Over 92% ROI on automating Special Pricing Requests

Bad or incomplete orders

Incomplete order reductions of 30%

Number of customer complaints

89% reduction in cost of simple requests