ERP Can Boost Internal Efficiency, Profitability


	Jeff Bither

November 2009

In Synch: ERP Can Boost Internal Efficiency, Profitability

Enterprise resource planning combines diverse business functions into a single system

A typical business may use a number of computer systems to manage its many functions. As a consequence, it’s a rare business owner who doesn’t regularly complain about his departments’ seeming inability to “talk to each other.”

Perhaps you have experienced this dilemma first-hand. Over time, your departments have independently accumulated a conglomeration of incompatible systems and procedures (as well as hardware and software) designed for their specific needs.

Employee records (hours, payroll, benefits, etc.) are probably held by your Human Resources department. Financial data processing and storage – which may include payroll computations and employee compensation as well as billing, accounts payable and accounting – are typically the domain of the Finance department. Production data is managed by Manufacturing, inventory records are held by Warehousing, customer orders are processed by Sales, and so on.

As a consequence, a sales person may not be able to access the finance database to find out the customer's billing status, nor can he easily access the warehouse, inventory or delivery to check on the status of the customer's order.

ERP. For many companies, the answer to the technological Tower of Babel is enterprise resource planning. The purpose of ERP is to consolidate all of a company's departments and functions into a single integrated computer system that services each department's needs and runs off of a single database. The main benefit is that your various departments can more easily share information and communicate with each other.

An ERP system often has modular hardware and software units that communicate on a local area network. The modular design allows a business to add or reconfigure modules (often from different vendors) while preserving data integrity in one shared database that may be centralized or distributed.

Benefits. A frequently cited example of the positive impact of ERP is in customer order fulfillment, where a customer's order moves smoothly from (a) Sales to (b) Warehousing, which retrieves and packages the order for delivery, to (c) Finance, where invoicing, billing and payments are handled, and on to (d) Manufacturing, where replacement of the bought-and-paid-for product is done.

With ERP, all elements in the supply and production chain can be more easily accessed by everyone who needs the information. This leads to efficiency in customer management and perceived company effectiveness in delivering on customer expectations.

Another benefit, often overlooked, in having a workable and efficient ERP system in place is savings in energy consumption and data management.

Challenges. While the potential benefits of ERP are significant, it is important to recognize the challenges.

To maximize the advantages of ERP, your managers and workers probably have to do their jobs differently, and people tend to resist change. The software is less important than the changes companies make in the ways they do business. If you use ERP to improve the ways your people take orders, manufacture goods, ship them and bill for them, you will see value from the software. If you simply install the software without changing the ways people do their jobs, you may not see any value at all. In fact, the new software could actually be an impediment if it is perceived as a hard-to-use replacement for a familiar, if somewhat dysfunctional, old friend.

ERP also requires patience. A 2002 Meta Group study of 63 companies found that it took an average of eight months after the new system was implemented before measurable benefits began to be realized. But the study also concluded that, once the benefits became evident, the ERP-related savings were significant and enduring.

Conclusion. In the end, prospects are very good that the savings generated from reducing incompatibility and redundancy, coupled with operational efficiencies created from a single system across all departments, will translate into higher customer loyalty, greater internal efficiency and effectiveness, lower costs, higher revenues, and a more successful and valuable company.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.