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The ABC’s of ERP

To maximize the return on this massive software investment, plenty of planning is needed, even if you've been using ERP for years.

Even as Y2K ushered in boom times for ERP vendors, they were beset by a string of negative press reports regarding the complexity and cost of getting their software to run effectively — assuming it could be made to run at all. ERP horror stories abounded, with Hershey Foods Corp.’s perhaps the best-known example. In 1999, the company attributed a 19 percent drop in third-quarter net income in large part to problems associated with its big-bang implementation of SAP software.

Ancient history? Maybe, but as recently as last year, Goodyear Tire & Rubber Co. saw one of its units make a $19 million adjustment to operating income due to “several factors relating to the company’s ERP systems,” including an “inability to locate or re-create account reconciliations for prior years.” More notably, NASA blamed an ERP foul-up for its financial woes related to the audit of its 2003 financial statements (see “NASA, We Have a Problem,” CFO, May). It should be noted that Goodyear’s problems were “more an issue with the implementation, not the software itself,” according to a company spokesman. Similarly, NASA says conversion to its new ERP system caused the problems with its audit. But the question remains: does ERP have to hurt? Years after cost overruns and disappointing returns became press staples, has anything improved?

Although ERP sales, which expanded at more than a 30 percent annual rate in the late 1990s, have flattened, companies spent a robust $20.7 billion on ERP packages last year, including about $6 billion in maintenance and support fees. So if there is widespread disenchantment, it hasn’t dragged down sales, although it may have helped usher in a remarkable buyer’s market: testimony during the Oracle-PeopleSoft antitrust trial revealed that some customers paid only a fraction of the software’s list price.

Disasters aside, most companies of a certain size — generally $100 million and above, although simplified ERP software is often pitched to much smaller companies — find ERP virtually indispensable. ERP serves as an all-important information pipeline that links finance, manufacturing, logistics, sales, and other departments, with new functions being added continuously, further extending its presence in an organization. The “resource planning” that gave it its name is now just a very small part of the capabilities it brings to an enterprise.

How to avoid an embarrassing blurb about ERP in your next annual report? First, stay focused on why you’re moving to, upgrading, or otherwise changing your approach to ERP. That way, you won’t be misled into thinking of it as a technology project. “The benefits come from changing your business processes, not from installing ERP,” says Bill Swanton, a vice president at AMR Research in Boston. Adds Buzz Adams, president of Peak Value Consulting, a Pasadena, California, consultancy that specializes in process improvement, “The technology will work the way you implement it, so what’s important is how you improve the processes — the way you do things.”

When Agri Beef Co., a privately held, family owned company that custom feeds 400,000 head of cattle annually, and fabricates and sells 230 million pounds of beef a year to retailers and restaurants, determined that its financial systems were antiquated and its accounting processes out-of-date, a move to ERP seemed warranted. Casey R. McMullen, director of information systems at the Boise, Idaho, company, says that not only did Agri Beef get a new system up and running in six weeks with no glitches, but that the benefits began to accrue at once.

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