Limitations of Enterprise Resource Planning (ERP) Systems

In today’s increasingly competitive world where the world is converging into a single market place, organizations are looking for ways to become globally competitive. Companies must be able to meet customer requirements in the shortest possible time faster than competition and this requires extensive production planning and close coordination between the company and it’s suppliers and customers. MRP (Materials Requirement Planning) was one of the most widely used systems for production planning but it’s main focus was only on managing the production requirements in an organization. MRP systems helped in time phase release of production orders and aggregating planning for material requirements.

Limitations of Enterprise Resource Planning (ERP) Systems

With time, companies realized that there needed to be an integration of all the functions in an organization and this lead to the development of ERP (Enterprise resource planning) systems. ERP is defined as an Enterprise wide system that facilitates integrated and real-time planning, production and customer response. ERP has multilingual capability, multi-currency handling ability, and can recognize legal and tax reporting needs of various nations across the world.

Traditionally, each department of an organization uses a software application of it’s own and the interaction between these systems is very limited. Thus there is no way of generating consolidated information that is accessible to the entire company. ERP systems were created to address this issue by treating the entire organization as a single enterprise and making information available to all the departments as and when needed.

Many companies across the world have either implemented or are in the process of implementing ERP systems across their organizations with the intention of making their businesses globally competitive. Despite their best intentions, there are widespread instances where ERP systems have failed to live up to their expectations and have even lead to the demise of companies. Some companies have been able to absorb these losses (Hershey’s, Whirlpool, Nestle, IBM, Apple, etc.) but most haven’t. Even those companies that have successfully implemented ERP have found it difficult to realize the true potential of the system.

A few findings as reported by Panorama consulting in their 2010 ERP Report are as follows:

  • Close to 57% of the ERP implementations take longer than expected
  • About 54% of ERP implementations cost more than expected
  • Most ERP implementations under-deliver business value
  • Companies do not effectively manage the organizational changes of ERP

Limitations of Enterprise Resource Planning (ERP) Systems

Enterprise Resource Planning (ERP) is an evolution of MRP which was solely focused on manufacturing and materials planning. ERP systems were designed to manage more functions of enterprises thus integrating all business management functions, including planning, inventory and materials management, engineering, order processing, manufacturing, purchasing, accounting and finance, human resources, etc. Though considered as a revolution during it’s time, ERP did not take into account any of the external relationships that a company had as enterprises were run as independent entities during those times. Within an organization the system was able to support all functions but was unable to handle the various interactions that the enterprise had with it’s suppliers and customers.

Conventional ERP helped automate individual departments but did not integrate its back-office benefits into the front-office to help businesses manage people, workloads and supply-chain issues; it could not establish consistent control of all the processes of the business.

Even within the organization, some of the difficulties faced by managers were

  • Only the current status could be accessed, such as open orders. But managers often need to look beyond the current status to find trends and patterns for better decision-making.
  • The data in the ERP application was not integrated with other enterprise systems and did not include external intelligence.
  • ERP systems could not meet all of the analytical and reporting needs of organizations.

Enterprise Resource Planning (ERP) systems are generally very expensive to install. They call for voluminous and exorbitant investments in terms of time and money without guaranteeing the said benefits. The time taken for an organization to migrate to an ERP system is quite substantial. Extensive training has to be provided at the expense of existing working hours which can also result in a loss of business during the transition period. Apart from the installation costs, companies also charge annual maintenance and renewal costs. These costs put together may not justify the implementation of ERP systems especially for companies that are smaller in scale.

Since each business has different needs there has to be a level of customization to ensure that the all the factors relevant to the industry are considered. This may call for changing the ERP software structure to match the business workflow which is generally not allowed by the software vendors.

Enterprise Resource Planning (ERP) systems are built as per industry standards and when company wants to implement the system, it may have to change it’s way of functioning to match these standards. This can either be beneficial or can lead to the business loosing it’s competitive advantage.

Some companies have relatively simple operations and the use of ERP may complicate the existing setup thus leading to an over-engineering as compared to customer’s needs.

The biggest advantage of ERP is it’s ability to provide an information across the organization. There are instances where departments are unwilling to share information due to reasons best known to them thus reducing the effectiveness of the ERP system.

Many companies run on legacy systems and implementing ERP results in compatibility problems across departments. Conversion of these legacy systems into modern ones in itself results in huge cost overruns.

The easy availability of information also raises the question of security and privacy. Access to the various functionalities has to be carefully regulated to prevent unauthorized access and information theft.

The time frame to realize the full benefits of a successful ERP implementation is longer that most companies would have initially expected. There would be a dip in the performance immediately after it goes live as employees take time to adjust to the new systems.

With time, there will be changes in the requirements of the organization. Since the ERP system would be customized during the installation phase, there would be a limit to which the system can be scalable. Like for example, if a company wishes to add more fields to a data recording system there may be a pre set limits for the same. In order to overcome this, companies would have to pay the vendor an extra fee for such future upgrades.

Ongoing support – After the implementation, companies would require constant support. The technical support provided by the software vendors maybe insufficient if the ERP systems encounter some major issue.

Overcoming the Limitations

Enterprise Resource Planning (ERP) as discussed before is a very comprehensive when it comes to handling the transactions within an enterprise but fails when there is an interaction with systems external to the organization. To overcome this, the concept of ERP II has been developed which integrates the ERP systems of an enterprise with that of the suppliers and event the customers.

Using Enabling Technologies

Enterprise Resource Planning (ERP) can be considered as the backbone of an enterprise’s applications, but successfully handling the complexities of modern business will depend on a company’s ability to share information promptly, securely, and effectively with customers, partners and suppliers. Organizations must seamlessly integrate their supply and value chains. The figure below shows the enabling technologies that will help organizations achieve the same

Companies should constantly work towards integrating new technologies with their existing ERP systems. ERP systems are expensive to implement, but if they are not constantly updated they tend to get obsolete and may result in lost opportunities in terms of meeting customer needs. ERP is the central or the core component around which the various technologies are integrated, and these combine to enable an organization automate most of it’s processes. The technologies that will enable companies to do business at Internet speed when integrated with the ERP system are Business Intelligence (BI), Data Warehousing, Data Mining, On-line Analytical Processing (OLAP), Supply Chain Management (SCM), Product Lifecycle Management (PLM), Customer Relationship Management (CRM) and Geographical Information Systems (GIS).

A case in point is A&M machines which is a world leader in the design manufacture, and support of automobile engines and power systems. The market demand for this industry is to develop high performance components at lowest cost. A&M was one of the first organizations to use an ERP system to improve the efficiency of its manufacturing process systems. The ERP systems so developed were used across various functions such as finance, quality management, plant maintenance, materials management, controlling, program management, logistics, accounting, and sales and distribution transactions. Even though the ERP solution replaced a number of disparate legacy systems and provided a common ground to pull a lot of business functions together, the manual processes for managing large volumes of unstructured content (information such as digital photos, scanned images, and CAD drawings, not easily managed by any ERP system) still remained.

To overcome this difficulty, A&M realized that it needed to complement its ERP solution with a Product Data Management (PDM) solution. PDM is the use of software or other tools to track and control data related to a particular product. The data tracked usually involves the technical specifications of the product, specifications for manufacture and development, and the types of materials that will be required to produce goods. The PDM system integrated the document repository and ERP applications, empowering ERP users to collect, securely store, find, link, and easily retrieve the required documents.

Retaining Customers

Traditional Enterprise Resource Planning (ERP) packages generally include functions that are required for Sales Force Automation (SFA) and other call center operations but not on personalizing customers’ experiences. In today’s times the focus of companies is retaining customers and after a given point, ERP systems fail in contributing to this objective. ERP implementations leave many companies saddled with massive, isolated systems containing vital customer, product, or service data. These systems lack the functionality needed to optimize customer-facing operations.

The solution is to integrate a Customer Relationship Management (CRM) system with the ERP system. CRM is not just a software application or a database that is used to store customer information, it is an effort taken by the company to continuously improve the relationship it has with it’s customers. Automated CRM processes are used to generate personalized marketing and customer care based on the customer information stored in the system.

Integrating the CRM and ERP systems makes customer information available across the organization. One of the immediate benefits would be in improving the ability of companies to deliver personalized services to their customers based on information that has been stored previously. CRM systems also help companies in launching targeted promotional campaigns and also in informing customers about new product launches based on their previous usage patterns. The call center operations are also improved as preferential treatment can be provided using past data.

Understanding the Importance of Information

When companies are competing for one another more or less in the same markets, just having information from within the organization would not be sufficient. Organizations must thus have information from the external environment to modify their business decisions accordingly. Knowing the external factors such as changes in the business environment, customer preferences and trends, new rules and regulations, competitor strategy, market trends, etc. are more important. This information is critical for survival and is more difficult to get when compared to the internal information.

Another important factor is the manner in which companies manage historical information. As companies grow older, they collect a gold mine of information that can provide valuable insights regarding demand, customer demographics, customer preferences, etc. The challenge faced by enterprises today is to avoid information overload by intelligently selecting available data and presenting it in a way that is intuitively meaningful.

Business and Competitive Intelligence

Business Intelligence was term coined by the Gartner group in a report as early as 1996. It can be said that Business intelligence (BI) is a broad category of applications and technologies for gathering, storing, analyzing, and providing access to data to help enterprise users make better business decisions. BI applications include the activities of decision support systems, query and reporting, online analytical processing (OLAP), statistical analysis, forecasting, and data mining.

Using the existing data warehouses as a foundation and then building upon them using BI helps organizations predict the future in terms of trends, preferences and market variations. A data warehouse organizes ERP data so that it is easily accessible for online analysis. Business intelligence systems improve business competitiveness by providing reporting and analysis tools to the desktop, enabling communication with the entire supply chain via the Web thus automating alerts and actions.

Competitive intelligence (CI) is a branch of BI which deals with managing the hyper-competitive environments that are a part and parcel of today’s markets. CI gathers information that helps organizations formulate strategies to beat competition and assists decision-makers predict future trends and take smart decisions. Arik R. Johnson Managing Director of the CI consultancy Aurora WDC, describes CI as “CI is the purposeful and coordinated monitoring of your competitor(s), wherever and whoever they may be, within a specific marketplace… Your “competitors” are those firms which you consider rivals in business, and with whom you compete for market share. CI also has to do with determining what your business rivals WILL DO before they do it”. Strategically, there is a need to gain fore knowledge of your competitor’s plans and to plan your business strategy to countervail their plans. This will involve many methods at the tactical collection level, but it will also require integration into your existing information infrastructure, analysis and distribution of the information, and finally, the calculation of business decisions on the grounds of that information and the analysis of same. This is the “intelligence” part of the formula.

Valuable in its own right, ERP information becomes even more valuable when it is combined with information from other sources. A BI system allows this. For example, a marketing manager might want to combine sales information from the ERP system with consumer demographics from A. C. Nielsen or business demographics from Dun & Bradstreet. With this information, the company can better segment its customers and improve customer relationship management. An automobile manufacturer for instance, can combine its internal ERP data with external databases to identify customers likely to be receptive to advertisements for a sports car, sedan, van or sports vehicle. Similarly the purchasing department of a computer manufacturer might combine its ERP data with external data about sales forecasts for microprocessors. With this information, the purchase department can react to rising demand by consolidating all purchases stored in memory to obtain a better price from a single supplier

Businesses can thus optimize their investment in ERP systems by closing the loop between the BI system and the ERP system. The loop begins when the company discovers valuable business information from the ERP system; it closes when the company feeds those discoveries back into the ERP system to continually improve business processes.

The reports generated by traditional Enterprise Resource Planning (ERP) systems provide only a fraction of the useful information in the system. Using data warehousing and BI overcomes this limitation and unlocks the true potential of an ERP system.

Leveraging on the Internet

The true value of an Enterprise Resource Planning (ERP) investment results from integrating the ERP system not only with a business intelligence front end, but also with the Internet. When a Web-based interface is provided to the information in the business intelligence system, the Internet becomes an enterprise information utility for employees, partners, suppliers and customers.

An early application for integrating ERP business intelligence with the Internet is supply chain management. All participants like engineering and product design, vendors and suppliers, production, marketing, distributors and customers can get the information at real time, from wherever they want it, like they want it over the internet. This enables for example, the marketing people to provide customers with the latest product details and pricing information. Inventory management can be done based on real-time information, production can be fine tuned so that the right quantities are produced, as and when required. The suppliers and partners in turn, can share the information with their suppliers. Product designers, both for manufacturing and service companies, can capture customer information in real-time, refining their products for greater market appeal or customizing them for key customers.

By adding a Web-based interface to the ERP business intelligence, the supply chain can be integrated thus speeding time to market and gaining manufacturing efficiencies.

Role of CIO

The CIO plays a pivotal role in the implementation of an ERP system in an organization. In most cases the CIO is appointed as the process owner for the implementation as the CEO would be in charge of the core operations of the business. The CEO and upper management would be involved in the pre implementation phase and would play a major role in the selection of the ERP vendor, external consultants and the implementation team members. The CIO would be in charge of the implementation and in ensuring that the project is on schedule as per the requirements agreed upon.

Apart from the implementation, the CIO should also ensure that all the end users are provided with sufficient training and education to ensure that the full benefit of the system is exploited. Most of the employees are generally apprehensive of ERP systems fearing the change it brings about and the impact it will have on their jobs. The CIO should put to rest such fears through effective communication, constant updates and sharing details of the future plans after ERP implementation. The CIO should ensure that knowledge transfer happens from the external consultants and ERP vendor representatives to the employees before they leave. There should be enough trained employees within the company who are capable of handling the system to ensure it’s smooth functioning.

The CIO thus plays an important role in successfully managing the transition to ERP systems and ensuring that the full potential of the ERP system is utilized after implementation.

Conclusion

World class competition, modern business environment and the availability of the Internet are the premises which stress the need for Enterprise Resource Planning (ERP). These systems are effective in integrating the different functions across an organization but should not be used in isolation especially during current times. Many ERP implementations end up as failures and the ones successfully implemented face limitations of their own as mentioned.

This should not dissuade companies from implementing ERP systems as the benefits of a successful implementation outweigh the limitations. Organizations should now graduate to the next level of ERP systems that are termed as ERP II which integrate the organization and the members across the value chain with the help of enabling technologies.

A sound management with clear focus, long term vision and well defined achievable targets set from ERP systems will help overcome the limitations of these systems

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