ERP Systems as a Financial Lifeline for Small Businesses

Introduction: ERP Implementation Challenges in Small Business

The rate of failure for ERP (Enterprise Resource Planning) implementations in small businesses exceeds those in larger enterprises, as smaller enterprises lack the resources to translate strategic objectives into tactical results and also must contend with significant resistance to change (Loh & Koh, 2004). In addition to these factors, small businesses often lack process integration in critical areas such as supply chain management, pricing, logistics, manufacturing scheduling, and fulfillment — gaps that prevent an ERP system from delivering its full potential.

One of the most important aspects of an ERP system installation and launch is the need to first streamline the internal processes the system is meant to accelerate and automate (Allen, 2008). When small businesses streamline the core processes their companies rely on — including supply chain management, distributor and reseller relationship management, 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 so that 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 driving ERP adoption are: financial and accounting management, inventory management, order management, manufacturing coordination, and procurement and sourcing. These five areas have the greatest immediate financial impact on small businesses and provide the most critically important data about the performance of operations, supply chains, manufacturing, and sales (Allen, 2008). These subsystems are predominantly focused on the internal performance of the company, yet they do not provide insights into how to better serve customers over the long term.

Financial and accounting management systems — including Accounts Payable and Accounts Receivable subsystems — are among the most integrated financial systems throughout ERP deployments in small businesses, regardless of industry (Chou & Chang, 2008). Accounts Payable and Accounts Receivable typically integrate with inventory management and order management systems to serve as the system of record for these transaction areas (Kemp & Low, 2008). This financial integration provides small business owners with costing and variance analyses to better manage supply chains, production, fulfillment, and quality management functions.

More fundamentally, ERP systems and their integration of inventory management, order management, and manufacturing are often used as the catalyst for lean manufacturing and services strategies (Holmstrom, Hameri, Nielsen, Pankakoski, & Slotte, 1997). With the objective of gaining greater levels of yield optimization from suppliers, production centers, and logistics processes, companies adopt ERP systems to improve efficiency. The adoption of ERP in small companies whose needs center on manufacturing, procurement, sourcing, and supply chain planning is time- and cost-driven.

A strong internal focus purely on lean manufacturing performance can potentially blind a small business to the more critical need of using its ERP system to maintain 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 rather than 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 and supply chain cost optimization is well underway. Small businesses that ignore this shift — using ERP systems to better listen to, respond to, and exceed the expectations of customers — will inevitably fall behind competitors who take a more customer-centric approach.

One of the most frequently 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 a purely internal efficiency focus toward greater responsiveness and agility in meeting 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 & Koh, 2004). This occurs when customer management and selling strategies — ranging from quoting and bidding to pricing and engineer-to-order processes — are not integrated with the ERP system. When this happens, silos of information are generated by each stand-alone system. When customer-facing strategies are not interlinked with an ERP system — for example, to verify whether a custom-configured product can actually be built — manufacturing companies will take an average of seven iterations of a quote to get it right (Allen, 2008). In the meantime, customers become increasingly dissatisfied and begin looking for alternative suppliers.

It is not enough for a quoting process to be integrated into an ERP system if a small business hopes to be more responsive to customers. Instead, every strategy the company relies on for attracting, selling, and serving customers must also be integrated with the ERP system so that when commitments are made to customers, they can be kept. Too often companies isolate each of their customer strategies, with varying methods for defining delivery dates, prices, and product-build approaches. ERP systems matter in this context because they act as the central reference and synchronization point for these customer strategies — ensuring that when a price is given, it is accurate, and when delivery dates are promised for either a standardized or build-to-order product, they are actually met (Chou & Chang, 2008).

Small businesses have at least as much complexity in their customer-facing processes as larger enterprises, and this is often a weak point in ERP implementation (Allen, 2008). Because small businesses are more dependent on relationship-based selling — and because these relationships are often managed very manually — attempting to automate customer relationships and selling processes can increase the complexity of any ERP system. While small businesses implement ERP systems for greater financial accounting, order management, and manufacturing synchronization, the greatest payoff lies in aligning all of these internal systems to the needs of customers. Yet small businesses frequently stumble here because the automation of relationship-based processes resists standardization.

For those small businesses that can automate their customer management and channel management processes — integrating them to their accounting, financial reporting, and manufacturing systems — they gain significant competitive advantages. Beginning with the integration of how quotes and bids are generated, linkage to manufacturing systems is crucial (Rosenbloom, 2007). Small businesses that use their ERP systems as the foundation for ensuring that product quoting and pricing systems deliver accurate information to customers generate higher levels of profitability over time (Bellin, 2006).

Automating the quoting process includes integrating quoting, pricing, manufacturing scheduling, and logistics systems 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 are used by companies to plan when a product will be delivered and when to coordinate installation teams. To populate a quote with ATP and CTP dates, a quoting system must be integrated with supply chain management systems — accomplished through the ERP system, which acts as the coordination point for this information, as supplier data is needed throughout manufacturing scheduling processes as well (Rosenbloom, 2007). Empirical research indicates that quoting systems capable of delivering ATP and CTP in real time to each customer quote represent a best practice that other manufacturers and service providers aspire to achieve (Mendelson & Parlakturk, 2008).

Today the majority of small businesses rely on manual processes to complete their quotes, and their sales teams often must call in to obtain pricing for a specific set of products or a custom product configuration (Allen, 2008). Small businesses that successfully transform their ERP systems into more customer-focused platforms also rely on greater collaboration with their product management and engineering teams (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). Research specifically suggests that when five or more systems are integrated together, there is a corresponding increase of up to 30% in profitability (Rosenbloom, 2007).

An analysis of this dynamic — drawing on research from AMR Research, Forrester Research, and Gartner Group — is compiled in The Roadmap to Value for ERP-enabled Customer Management Strategies (Figure A in the Appendix). Most noteworthy is the causal relationship between the streamlining of channel management and customer management strategies and financial performance. The extent to which a small business can attain this level of performance depends on how effectively it integrates customer-facing and channel-facing processes into its 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 layer of this maturity model, only manually-based processes exist — time-consuming, error-prone procedures that are sporadic in performance at best. Manually entering quotes into a system or manually developing special pricing requests are examples of processes at this level. At the second level is department-wide collaboration, where tools such as Microsoft Outlook are often the preferred approach for managing collaboration with channel partners and the sales force.

At the third level, there is cross-department and channel management integration — where ERP system integration begins to contribute measurably to financial performance (as shown in Figure A of the Appendix). This third level, also called the Collaborating phase, is characterized by ERP systems that support one or just a few channels of distribution, resulting in only limited financial performance improvements over time. The uppermost layer — the Orchestrating or Multichannel Federation layer — is where ERP system integration with customer management and channel management systems makes the greatest financial impact. The ERP Integration Model shown in Figure 1 illustrates the effects from both 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).

Figure 1: ERP Integration Model

For small businesses to attain the Orchestrating level in the ERP Integration Model, there must be a clear definition of customer-facing objectives, a plan for measuring them through analytics and business intelligence (Trott & Hoecht, 2004), and a defined integration link between channel selling strategies and supply chain constraints (Vlachopoulou, Manthou, & Folinas, 2005). This requires synchronization of selling, supply chain, procurement, and manufacturing strategies — all managed through the ERP system. Contrary to the perception that small enterprises are less complex, attaining the Orchestrating layer in fact requires intensive process, system, and role-based definitions all working in concert. On an already severely strained budget, small businesses often operate at the Anticipating or Collaborating levels of the maturity model. A critical success factor for any small business ERP system is therefore to integrate customer-facing strategies and their supporting systems — including Customer Relationship Management (CRM), Partner Relationship Management (PRM), pricing, quoting, price exception management, and ATP/CTP date management — into a unified platform. In many industries, this integration can mean the difference between profitable growth and stagnation.

Conclusion

Throughout this paper, the reasons why ERP systems fail in small businesses have been examined, as these lessons form a strong foundation for illustrating how best practices can help small businesses financially sustain themselves. For any small business to remain financially viable, it must be aligned with customers' and channel partners' needs, and must seek to continually improve those processes through ERP system integration, application development, and the ongoing pursuit of lean manufacturing and lean process objectives.

ERP systems are more than financial reporting, manufacturing planning, or cost analysis tools; they are the coordination point for transactions and financial reporting across the enterprise. For any small business to financially sustain its competitive advantage, ERP is best used as a system that coordinates many diverse processes and systems — all aligned with customers' needs and requirements.

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