Still a key success factor

By Zatni Arbi

Unlike the government of Indonesia, businesses around the world have long chanted a three-word mantra: Efficiency, efficiency, efficiency. It is not a new concept, as you would say. What, then, is Enterprise Resource Planning (ERP), which may sound passe to the ear of journalists, analysts and many of us?

JAKARTA (JP): It is becoming an increasingly crucial aspect of doing business because, as the world shrinks and businesses become global, competition makes it impossible for producers, vendors and service providers to set their own prices.

Customers are more educated, and they have access to billions of Web pages that contain information on pricing, benchmarking results and other customers' opinions. In the buyers' market, customers can now make better decisions and find the best prices in just a few clicks.

As the supply side cannot raise prices at will, what they need to do to boost their profit is, naturally, to keep costs -- production, operational, promotion, R&D, etc. -- to a minimum.

Another area that is very often neglected but can have a huge impact on costs is waste. Waste can result from inefficient production processes, in which a lot of raw materials may not end up being used in the final products but, instead, thrown away as garbage. Another more common type of waste is the material that finds its way to the black market through the hands of workers due to lack of control.

This reminds me of the story of a large local company that handles the installation of central air-conditioning systems. Each of its projects usually requires a lot of materials, from screws to cables to ducts to plates, etc.

To give you a good picture of how much material they need, it is not uncommon to ship everything in a container to the site rather than in several smaller trucks.

When a project is near completion, the owner, who is already 70 years old, will go to the site, check whatever material is left over and order that it all be sent back to the warehouse.

The company is very lucky that the owner is still willing to go to the field and do the work that his workers probably wish he would not do.

As production of goods requires materials obtained from suppliers, even the producers benefit from the advent of the Internet.

All e-marketplaces, particularly vertical e-marketplaces, are the online places where they can get the best prices for the supplies that they require.

Lower prices for raw materials and efficient production operations coupled with reduced overall costs are what companies now have to strive for, as the winners will be the ones who can achieve the highest level of efficiency.

Traditional

As we all know, the use of information technology (IT) in enterprises has undergone many rapid transitions. It started as office automation back in 1970s and early 1980s.

As database technologies evolved, IT played the role of electronic data processing (EDP), with very little strategic value beyond automation that was recognized by management.

Then, in the second half of the 1980s, people started talking about strategic information system (SIS), a system that was based on IT to create competitive advantage and, at the same time, build barriers to entry.

Soon, strategic information systems became so commonplace that it was not considered strategic anymore.

Soon, the Internet also took off and people began to find ways to use it to maximize their efficiency. We then had e-commerce, followed by e-business.

The world, in the meantime, became smaller in terms of access to information and trade. E-commerce was segregated into B2C and B2B.

Nevertheless, the need for companies to streamline internal as well as external operations continued to increase.

In the past decade, people began talking about a comprehensive information system that would link and integrate all the processes inside a company or a manufacturer and allow direct communication with external systems belonging to its customers, suppliers and partners.

And so, the term Enterprise Resource Planning was coined, and a new category of software development companies was invented.

The leader, as everybody would be quick to point out, was SAP from Germany.

Its much-coveted product is called R/3, and it has become sort of a status symbol that any large enterprise should be using.

There are others in the top rank, of course, including Oracle, PeopleSoft and JD Edwards.

And then there are others that targeted second-tier enterprises -- those who could not afford the million-dollars ERP systems offered by the leaders. These include IFS, Max International, Lawson and Baan.

ERP is now considered a traditional application.

If we go to the home pages of SAP, Oracle or PeopleSoft, we will have difficulty finding the three-letter acronym there.

Yet, a lot of enterprises have been operating or are in the process of getting their own ERP.

The name may sound passe in the ear of journalists and analysts, but in reality, an ERP system is still needed.

Why do we say that ERP is still alive and kicking?

Like artificial-intelligence technology, we no longer talk about it but it is already embedded in a lot of gadgets and systems that we rely on in our daily lives.

Besides, take a look at the recent merger of Navision Software and Damgaard, both from Denmark.

With their combined strengths, they are now ready to tackle ERP midmarket, competing with hundreds of other companies in the same spot from the U.S., Europe and Asia.

We can see this as a good indicator of how active the ERP market actually is, despite people now talking more about Supply Chain Management, Customer Relationship Management, etc., rather than ERP.

Another testimony to the importance of ERP is, perhaps, the surprising turnover of Baan, which used to be the second-largest ERP vendor from Europe.

The company was founded by the two Baan brothers -- Jan and Paul -- and skyrocketed as ERP became so popular in 1990s.

However, toward the end of the decade, the company began undergoing turmoil.

The two brothers were expelled, but the company continued to roll downhill. In August 2000 it was acquired by Invensys, a company that was not traditionally a known player in the IT industry. The acquisition looked as if it would be the straw that broke the camel's back.

To everybody's surprise, however, Baan has bounced back into the black. Almost 50 percent of its license-based revenues come from the U.S., including Boeing.

This, needless to say, would have been impossible if demand for ERP products had not been strong. A similar story comes from Manugistics, a U.S.-based ERP vendor that almost folded but is now on the path to good health.

Perhaps due to their long history of industrialization, Europe seems to be home to a number of major ERP vendors.

Another strong player from the continent with increasing prominence is the Sweden-based Industrial & Financial Systems (IFS), which has also been very active here in Indonesia.

In fact, the R&D team of IFS Indonesia has been contributing significantly in the development of its Human Resources (HR) Modules, which are currently used worldwide.

This vendor has also been working on a localized version of HR and Taxation modules, which should follow the changing regulations of local government.

In this country, IFS has been serving the needs of companies in petrochemical, pharmaceutical and textile industries, while touting a strong competence in delivering engineering projects.

One important result from the work of the people at IFS Indonesia is the Currency Reevaluation feature.

Sad but true, this feature is badly needed by enterprises in Indonesia that use multiple currencies that include our rupiah.

Modular

In general, an ERP system consists of modular components that can be added as new needs arise for more complex functionalities, or, in many cases, as the company can afford additional modules.

An ERP vendor is typically strong in a few areas, such as HR or Back Office, but is not that strong in others, such as distribution and store-floor management.

Therefore, it is not uncommon that a company wishing to have the best breed of ERP applications will have to mix-and-match between products of competing vendors.

There is a huge risk involved, of course, and the consultants who help customize the system are guaranteed to have a really hard time completing their job.

As mentioned above, people now talk more frequently about supply chain management (SCM) than about ERP.

While ERP covers all business processes of a company, allowing customers to place their orders online and to trigger a chain reaction all the way to the supply sides, the SCM is meant to handle the dynamics of supply chain.

In the past, ERP did not include facilities to handle exceptions, for example, which would be required in cases such as delayed delivery from the suppliers or unexpected changes in base prices.

An SCM system would be more adept in accommodating these situations.

However, over time, ERP vendors keep adding functionalities to their products while SCM developers learn from their experience and expand the scope of their products' capability.

Hence, the two applications are getting very similar.

Implementing an ERP system has never been an easy task, because it may involve business reengineering, identification of best practices, assessment of new business opportunities, careful business planning and, sometimes, total transformation of the entire organization.

There have been many cases where incompetent implementation of ERP systems have brought crippling disasters to a company, causing delays in shipping of products to customers, etc.

However, if done correctly, the results are positive.

And, just to put it in perspective, would you still open an account at a bank that did not have a computer?