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Can your eCommerce business afford to not have a ERP system?

Enterprise Resource Planning (ERP) can be simplified to the core functions of managing an infinite number of multiple-complex scenarios, having precise multi-tasking skills whilst exhibiting the most detailed time management, all at the same time. You would agree, that if it was a person holding these credentials, then they would be a game changer in the organisation and worth a lot of money.

If you were to try and imagine an ERP system in an alternative context, then imagine that you were holding a birthday party for around 30 people and you decided to hire an external venue and provide food and drinks for the guests.  Planning of an event like this requires you to immediately perform interrelated decisions that involve volume (quantity) and timing of materials.   By estimating how many people are likely to attend, how much food and drinks will be needed, minus the amount of current food & drink (stock) that you already have, the proportion of frozen food and when exactly the frozen food needs to come out. Estimation of any food that needs to be cooked from a recipe and the calculation of multiplying by 30 to meet the demand and the timing of when to shop.  When the invitations need to be prepared and sent out for RSVP’s, the availability of suitable venues and not to mention all the communication from the potential guests that have any questions.

In business, especially e-commerce, the ERP system is the latest and most significant development that has been built on the predating philosophy of the Materials Requirement Planning (MRP) system.  The MRP system was originally devised in the mid-1960s to support the British Nuclear power efforts and subsequently developed further to match the integrated socio-technical system that Toyota car production had developed.  The general concept around MRP was the use of calculating the product information or ‘component structure’ with the demand information to precisely form a ‘Master Production Schedule’ that was the basis of controlling and planning the perfect execution of materials arriving at the very point of manufacture, with built-in consequence factors, that saw avoiding delays in production and benefitted cashflow as stock was only called upon, on precise demand.  In the 1970s the MRP system witnessed a radically overhaul that changed the basic planning and control mathematics of MRP with a turbo injected boost of ‘computer power’ as the ERP system became part of the early game changers that kicked starting the digital revolution.

Figure 1: The Holistic view of an organisational ERP system.

Through development, the ERP system is now widely acknowledged as a sophisticated tool that integrates all departments and all functions within a whole organisation into one single computer system that can serve all departments and all personnel.  By housing all departments into a single network of communication allows transparency across the whole spectrum, as figure 1 shows the from sales and marketing, multiple warehousing, inventory control, supply chain management, manufacturing, human resources, accounts, finance and strategic reporting with all levels of management control that meets the needs for every department without duplication of information.

An unlikely benefit of allowing the transparency of an integrated system and database manipulation is the immediate reflection of any consequences of decisions that are taken in one part of the organisation that will always be shown in the planning and control system of another part of the business.  This is recognised with multiple warehousing and stock control that may be on different continents or the accounts position of a customer before dispatching of goods and the transparency of a CRM system that can traverse across the world to ensure that information is accurate and up to date as all information is updated in real time by those who use it.  However, the real clever abilities are the streamlining of processes that reduces errors and saves money with the wider integration with other ERP systems of supply chains that can work in collaboration to organise an effective stock movement, logistics and purchasing ordering efficiencies all of which save time and money and reduce mistakes. This, of course, will only ever be truly effective when more and more businesses accept the benefits of ERP and trust the collaboration.

By its very nature, an ERP system directly addresses organisational fragmentation and therefore the process of integration can take a period of time to achieve as it is a difficult system to meet the needs and expectations of cross organisational boundaries,  that have to ensure the correct functionality of the overall business. Furthermore with the concept of moving everybody into a single integrated system that operates within a single database will invariably create resistance to change, which management will need to manage carefully by articulating a clear business vision, outlining achievable goals and timeframes, build a positive user acceptance through comprehensive training and clear communication.  Concluding in a requirement for owner/managers to not only understand the amazing benefits an ERP system can bring to a business but equally to understand the levels of complexities that are also associated with the implementation and that a full and comprehensive consultation is required before embarking on an ERP project.

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Clay Cowie is an eCommerce specialist at business management consultancy S.M.A.R.T Turnaround Ltd. He often writes blogs on topics designed to help businesses thrive and grow online.

The Four V’s

The main characteristics of the processes that transform the resources into outputs are generally categorised, into four dimensions Volume, Variety, Variation and Visibility.

The heartbeat of operations management lays in the ability to manage core activities that transform key resources into deliverable products or services.  The process of creating the products and services are based fundamentally on converting original input resources through a conversion process that creates value by eventually outputting transformational products and services.

Volume

Denotes the process of managing volume output dimensions.  If the volume of an operation demands it, a streamlining of the processes to create a uniform system will provide the quality of goods being common and offers an opportunity for an increase in the speed of production.  If significant volumes can be met, with bespoke equipment, will produce a uniformed result, the operation ultimately will lead to lower unit costs. A biscuit factory is a perfect example of this.

Variety

Denotes the dimension that clarifies the differences between standardised goods and services V’s non-standardised, providing flexibility.  Providing services that are standardised, attracts the lower costs and creation of profitability as, flexibility and additional goods and services increase the core transformational costs.

Variation

Variation dimension addresses the contrasts in the business model and the impact on costs and volume as the businesses address the variation. The advantages of a low variation of business allow predictability as a strong consideration for lowering costs.

Visibility

Allows the amount of visibility to the customer, of its operations, as most manufacturing operations have very little visibility to the customer.

The role of operations is to transform the original resources to goods and services that create value.  The characteristics of the four V’s confirm that there are many clear principles to monitor processes.  By understanding the holistic processes this opens up opportunities for management to address and change the operation, to become a far more efficient business that gains lower unit costs and more profitability, which goes some way to claw back the advantage over the competition.

Five Performance Objectives

 

The Five Performance Objectives of quality, speed, dependability, flexibility, and cost can be grouped together to play a pivotal role in business. Interwoven through every aspect of operations allows management to draw attention to areas within an organisation that is not performing well and provides opportunities to address them.  The characteristics of each objective allow management to assess operations both internally and externally to benefit the business by gaining and creating the competitive advantage.

 QUALITY

Quality is the most visible part of what an operation does and acts as a consistent indicator of customers’ expectations, in other words, ‘doing things right’, but the things which the operation needs to do right will vary according to the kind of operation. All operations regard quality as a particularly important objective. Quality is something that a customer finds relatively easy to judge about the operation. Is the product or service as it is supposed to be? Is it right or is it wrong? There is something fundamental about quality. Because of this, it is clearly a major influence on customer satisfaction or dissatisfaction. A customer perception of high-quality products and services means customer satisfaction and therefore the likelihood that the customer will return.

When quality means consistently producing services and products to specification it not only leads to external customer satisfaction but makes life easier inside the operation as well.

Quality reduces costs – The fewer mistakes made by each process in the operation, the less time will be needed to correct the mistakes and the less confusion and irritation will be spread.

Operation principle
Quality can give the potential for better services and products and save costs.

SPEED

Speed means the elapsed time between customers requesting products or services and them receiving them. The main benefit to the operation’s (external) customers of speedy delivery of goods and services is that the faster they can have the product or service, the more likely they are to buy it, or the more they will pay for it, or the greater the benefit they receive.

Fast response to external customers is greatly helped by speedy decision making and speedy movement of materials and information inside the operation.

Speed reduces inventories – The material’s journey time is far longer than the time needed to make and fit the product. It actually spends most of its time waiting as stocks (inventories) of parts and products. The longer items take to move through a process, the more time they will be waiting, and the higher inventory will be.

Operation principle

Operations principle is that speed can give the potential for faster delivery of services and products and save costs.

DEPENDABILITY

Dependability means doing things in time for customers to receive their goods or services exactly when they are needed, or at least when they were promised. Customers might only judge the dependability of an operation after the product or service has been delivered. Initially, this may not affect the likelihood that customers will select the service – they have already ‘consumed’ it. Over time, however, dependability can override all other criteria. No matter how cheap or fast a car mechanic garage is, if it always later than promised to finish or the same parts continue to fail, the customer will go elsewhere.

Dependability saves time –  Managers and workers spending time firefighting chaos, simply waste time!  If they had machinery and services that they could depend on, much valuable time would be saved to concentrate on other aspects of the business.

Dependability saves money – Ineffective use of time will translate into extra costs.

Dependability gives stability – The disruption caused to operations by a lack of dependability goes beyond time and cost. It affects the ‘quality’ of the operation’s time.

Operations principle
Dependability can give the potential for more reliable delivery of services and products and save costs.

FLEXIBILITY

Flexibility means being able to change the operation in some way. This may mean changing what the operation does, how it is doing it, or when it is doing it. Specifically, customers will need the operation to change so that it can provide four types of requirement:

product/service flexibility – the operation’s ability to introduce new or modified products and services.

mix flexibility – the operation’s ability to produce a wide range or mix of products and services.

volume flexibility – the operation’s ability to change its level of output or activity to produce different quantities or volumes of products and services over time.

delivery flexibility – the operation’s ability to change the timing of the delivery of its services or products.

Holding the flexibility to change and adapt quickly to market conditions provides the business with a competitive edge, as larger centralised companies that do not have that flexibility will at times take weeks and months to adapt, meanwhile the more flexibility can capitalise.

Operations principle
Flexibility can give the potential to create new services and products, in a wider variety and with different volumes and with different delivery dates, as well as save costs.

COST

To the companies which compete directly on price, the cost will clearly be their major operations objective. The lower the cost of producing their goods and services, the lower can be the price to their customers. Even those companies which do not compete on price will be interested in keeping costs low. Every pound removed from an operation’s cost base is a further pound added to its profits. Therefore, low cost is a universally attractive objective.

All operations have an interest in keeping their costs as low as is compatible with the levels of quality, speed, dependability, and flexibility that their customers require. The measure that is most frequently used to indicate how successful an operation is at doing this is productivity. Productivity is the ratio of what is produced by an operation to what is required to produce it.

Both the reduction of cost through internal effectiveness is as important as the focus on making improvements to all the other operational objectives.

Cost operation principle
Cost is always an important objective for operations management, even if the organisation does not compete directly on price.

Figure 1.0 shows the internal and external effects of which objective influences the other and their nett outcome. Despite the various nett effects that each has on each other, the one common effect is on cost, so it is fair to state that the quickest and most efficient way to improve the cost performance would be to improve all of the other elements.

Figure 1.0 The performance objectives and their effects.