Evaluating Enterprise Resource Planning Systems

April 1, 2004
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Enterprise Resource Planning (ERP) systems are like bears. Some are pandas, living in very limited environments in western China and subsisting exclusively on bamboo shoots. Others are like grizzlies; they can live anywhere and eat anything. In the world of ERP, the grizzlies are the flexible systems that accommodate ease of parameterization, and the pandas are the ones that don't.

ERP is designed to be comprehensive. Financial systems, logistics and distribution, purchasing, sales, and manufacturing are all part of one system. Using the same software company-wide eliminates most problems with data integration and facilitates oversight of procedures across all company functions.

The downside is that the typical mid-sized company doesn't have an obvious choice when it comes to making an ERP system selection. Although Microsoft is now challenging for mid-market acceptance, many companies have noted the software's "small company" origins and pre-configured, limited functionality design orientation. A panda-like system like this typically works for smaller manufacturing or distribution companies that make or distribute products using well-defined, industry-standard planning and control processes that don't change much over a long period of time.

But for many mid-sized companies, today's rapidly changing business environment means survival of the fittest. The most fit are the ones that are most flexible. If you can only eat bamboo shoots, you're going to die. You need an ERP system that allows you to emulate the grizzly and thrive in any business environment. A company's competitive edge often lies in its ability to make deals, to implement non-standard responses to customer needs, and to innovate in a host of ways. Its ERP system must support flexibility and variability. In other words, don't ask whether a system already does what you want today; you may have a preferred customer tomorrow for whom you are willing to change all the rules. Instead, ask if the system is designed to do what you want today - and may want to do tomorrow and in the more distant future.

When evaluating ERP software, it is easy to get confused by the beauty, elegance and sheer number-crunching ability of most systems. Pandas are cute, too. But you have to look beyond the superficial; to do that, you must understand the kind of data handled by the system and the ways in which it can be parameterized.

Parameters contain the control information that determines the structure and behavior of the system and its potential for adapting to the specific needs of your business. There are a few easy ways to tell whether that impressive ERP bear you're looking at is a panda.

  • The older the ERP system, the more likely it is to have limited parameterization capabilities, or offer parameterization at a prohibitive cost.
  • If the ERP system's early or primary users have been large manufacturing companies, it's likely that what you're being offered has a predetermined and hard-to-change set of parameters.

In both these cases, you can be reasonably sure that as robust-looking as the ERP system looks in demonstration, it will not serve your distribution needs well.

A better understanding of what kind of bear you're buying requires some knowledge in the type of data managed by ERP and the different levels of parameterization that are possible. An ERP system contains several different types of data:

  • Master data - the main information in your system, includes customers, suppliers and products, as well as your own organizational entities such as sales sites and warehouses.
  • Transactional data - the information processed by the system in the normal flow of business, such as sales quotes and orders, shipments, purchase orders and invoices.
  • Historical data - results of business events retained for analysis and audit purposes.

Behind the scenes are the little sets of data that make the system work:

  • Basic codes, used as attributes for master or transactional objects, e.g., countries, languages or product groups.
  • Parameterized codes, marking information such as customer types, order types, tax codes and currencies. These codes also contain control settings that affect how the information they are associated with will be processed.

The major sets of parameters include:

  • System parameters, which define the particular configuration of the system, the functional components it can run and various technical considerations.
  • Organization parameters, which define the structure of the company - that is, the various departments or business processes and their interrelationships.
  • Integration parameters, which specify how the financial modules link to manufacturing and logistics, for example.
  • Functional domain parameters, which determine high-level aspects of sales, purchasing and the other modules.
  • Functional transaction parameters, which define how specific functions such as sales quotations and blanket purchase orders will look and operate.

The ultimate objective of parameterization is to have an ERP system that supports the flexibility that you must have to do business. For example, if you have a panda-bear system that can't distinguish between different customers, you won't have the flexibility to provide incentives to the preferred customer. You'll find it harder to give pricing deals and special freight rates. It will also be difficult to change the commission rate or price to respond to a competitor's moves in a single market. An ERP system without flexibility profoundly impedes your ability to wheel and deal spontaneously, an absolute necessity in today's business environment.

How to Spot a Grizzly

Grizzly-bear parameterization has three important characteristics. First, the parameterization is flexible, meaning that it is user-definable rather than fixed. While traditional ERP systems are relatively fixed, newer systems provide the means for entering complex values. For example, pricing parameters are best defined through expressions or formulas that let the company employ creative, non-traditional modes of pricing.

Second, new parameters can be easily defined and linked to applications or business workflow without the need to perform program modifications. Grizzly-bear ERP, for example, provides user exit points where new parameters can be spliced into the system without affecting the standard software.

Third, parameters can be set at different organizational levels, down to the lowest level possible. For example, a distributor with multiple warehouses might want to operate some as basic stockrooms and others with directed put-away and picking and sophisticated storage control. If parameters can't be changed or set at the warehouse level, differentiation between warehouses will be much more difficult and time-consuming.

There is one very important caveat to bear in mind. With a highly parameterized system, there may be millions of possible combinations of parameter settings, and making a mistake could be disastrous. A grizzly-bear ERP system includes tools and templates, cross-reference checks, consistency validation techniques, error detectors and system behavior simulators to help you set the parameters correctly.

We also strongly recommend that a mid-sized company appoint a "ParaMaster" - an individual responsible for managing the system's parameters. The ParaMaster must thoroughly understand how the system is parameterized, what each parameter does from the standpoint of business processes and how to translate new business requirements into parameter and code settings without having to modify any programs.

An ERP system that meets the criteria for good parameterization enables the mid-sized company to focus on identifying its competitive strengths, then find ways to creatively set up the system to implement them. During the implementation project, the company's attention should remain focused on how the system should be configured to maximize its competitive strengths. Creatively developed, competitively effective parameters can be one of the company's most valuable trade secrets. Like a grizzly bear, the company will be able to survive, and do business, in any environment.

Adonix is a Pittsburgh-based company that develops and markets ERP systems for mid-sized companies. For more information, visit http://www.adonix.com .

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