Blog 3: Implementing an ERP, is it really cost efficient?

At Issue
India's IT e-newspaper, CXO Today, published the article, "ERP Moves Toward Cost Efficiency" that announced an opportunity for an affordable enterprise resource planning (ERP) system. An ERP system is software and hardware, such as a database, that integrates and centralizes all data and processes within an organization. Organizations are finding it difficult to obtain the data with out any redundancies. Redundancies are costly because it increases wasteful processing time and requires extra storage space. Although ERP systems solve redundancies, they are costly and hard to implement. The article describes how Oracle, a well-known database solution provider, is offering a "predictable monthly" ERP cost and "a lower total cost of ownership" for firms in India.

Although this may sound like a great bargain, firms in India must first consider other options. It is a huge decision to implement an ERP since it is an entire new system and is usually costly. In addition, other problems may arise due to the ERP implementation.

Modeling the Decision
The firm should first look at their current direct costs such as maintenance of the data and indirect costs such as time wasted on redundant data entry. Also, the company should complete an in-depth analysis of all the waste and data issues due to different data in different departments. Next the company should either decide to build an in-house ERP system or purchase one from a vendor such as Oracle. A cost-benefit analysis is needed to compare which ERP system is better suited. Data collected should include costs, current work that each worker completes and the possible elimination of certain tasks, and the time it takes to complete these tasks. While building a model to represent the ERP implementation (either the in-house or vendor-purchased), the new system should be carefully planned and simulated.

Model Results
The model results should represent the costs and possible time saved from implementing an ERP system. Although costs may decrease, firms need to consider other factors such as extra training to learn how to use the ERP system and consulting costs to execute the system. Also, firms should take in consideration the illusion of false savings from staff cuts. When purchasing an ERP system from a vendor, firms think they can lay off IT (information technology) workers since the software is pre-written, but this is only a misconception. A company may need to hire additional IT application specialists.

How does this decision support model help top management make decisions?
This model shows the physical costs and time that is possibly saved or increased due to the implementation of the ERP. These cost savings may be significant, but experienced decision makers should be able to see if the efficiency and uniformity of an ERP system outweighs the other costs that result from the ERP implementation (additional training and staffing). If the decision makers are inexperienced, then a detailed cost-benefit analysis should be presented with a clearly stated recommendation.

References
ERP Moves Toward Cost Efficiency. CXO Today. 19 July, 2007. Retrieved February 20, 2008 from
http://www.cxotoday.com/India/News/ERP_Moves_toward_Cost_Efficiency/551-82287-911.html