ERP: NOT SUITABLE FOR CHINA?
ERP has met with mixed success in China. Is it incompatible with the Chinese style of business?
By He Yinyu

Since its debut in the China market a few years ago, ERP has either commanded high expectations, or taken the blame for a company's woes. A widespread saying in business circles - "You are doomed without ERP, you are doomed with ERP" - clearly expresses the view many managers in China have of enterprise resource planning. At the same time, more and more companies are embracing ERP, and are benefiting from it enormously. Why has an IT technology commonly adopted abroad been subject to so much debate in China?

For starters, there were unrealistically high expectations of ERP programs. These can be pegged to the vendors themselves, who came to China with high prices and made exaggerated claims for their products. To European and American companies, the price of an ERP suite is not punishing. But compared with general prices in China, the initial cost sounded astronomical. Sales representatives of ERP vendors, in order to hit their targets, had to persuade companies to accept these prices by mystifying the functions of ERP. They claimed that ERP was some sort of panacea to improve enterprise management.

Now managers have a more realistic view of the software. "Things have changed," says Zhang Hongwei, a senior consultant with D'Long International Strategic Investment, a Shanghai-based private conglomerate. "ERP is seen more like a piece of equipment, indispensable to a company," he says. Zhang has worked with ERP and ERP vendors for more than 20 years, successfully implementing ERP projects for several of his former employers, among them Brilliance (Jin Bei) Automobile and Hua Chen Automobile. The better understanding, he says, has simply exposed the more fundamental issues.

Many Chinese companies, particularly in the state-owned sector, must embrace significant management reform and restructuring in order to become competitive as markets continue to open, whether through greater penetration of foreign businesses, or via more competitive Chinese private sector firms. In order to make ERP's cost-saving and efficiency-building features work, managers must be willing to take measures that can be anathema in the state-owned sector, such as selling businesses, laying off workers, and changing long-standing vendor relationships. All of this can be tough to do, says Zhang."

Sizing Up

No wonder then that the saying, 'you are doomed with ERP' reflects managerial anxiety. Buying an ERP program forces finance chiefs to make the tough call about whether to restructure and how. To borrow from a Chinese bon mot, ERP is like a pair of shoes, the existing management process like feet. When ERP conflicts with the existing system, should a company "cut its feet to fit the shoes", or should it have a tailor-made pair of shoes? On this point, management experts and ERP vendors seem to differ.

Dai Ziqiang, a senior manager with Deloitte Consulting, has many years of experience with ERP implementations. He explains that presently there are two approaches. One is to make huge changes to existing organizational and management systems; the other is to keep the existing systems, making only slight modifications. In the former case, a company uses ERP implementation as an opportunity to restructure the organization; in the latter case, a company needs ERP to support its existing management and organizational system. Dai himself favors the latter approach. "In the second situation, direct as well as indirect costs for a company in implementing ERP won't be too high. Also, the ERP project will not interfere with the normal operations of the company. It will not result in any chaos. Furthermore, it is less of a risk to an ERP service provider." Dai says that there are more second-case scenarios of ERP implementations in China at present.

Zhang takes the opposite view. "Some companies desire stability, and hope that ERP implementation will not change their existing management systems. If this is the case, the ERP project has already lost half of its value (before implementation)." He believes that with ERP implementation, companies should take the opportunity to restructure their business processes and organizational structures.

The need to restructure business processes is one result of the redefinition of traditional business functions under ERP. Zhang uses an example in the supply chain. Before ERP, a purchasing department needs to produce a procurement plan manually, based on goods-in-transport, inventories and so on, a process that usually takes several days or longer if the suppliers' production and transportation time are taken into consideration. Following a B2B ERP implementation, the procurement plan is automated, the time to report shortened, and purchasing becomes a logistics system managed entirely by suppliers. Zhang thinks that this restructuring is a must in today's business environment.

Take the automobile industry, where up-to-date market demand has been incorporated into a "menu" system; in other words, vehicle production has become individualized. "On a car production line, there are no two cars that are exactly the same," says Zhang. Production models like that are impossible without the support of ERP.

Zhang says that some car manufacturers run into problems exactly for this reason. Without ERP, it takes these manufacturers at least two months to fulfil an order, from purchasing components, to production, and final delivery. After two months, the preferences of customers might have changed, resulting in inventories that do not meet the updated requirements.

Manufacturers have to sell these inventories at a discount, causing big losses. With ERP, order fulfilment can normally be shortened to two weeks, and even one week in the fastest case. Risk is reduced to a great extent as a result. Zhang points out that ERP is bound to bring organizational changes as well.

Certain departments might no longer be needed while others might take on very different functions. "Corruption is rife in the purchasing function of domestic companies," says Zhang. "Post-ERP however, many functions in the old purchasing departments might become redundant (automated procurement plan, logistics managed by suppliers). The key roles of purchasing departments change to suppliers selection according to procedures, certifications of product quality, and the like. Vested interests in the purchasing departments go away. And there is no longer a need to keep so many staff. If, in order to keep the existing organizational structure, a company creates job positions for current employees, what's the point of ERP?" asks Zhang.

In addition, Zhang believes the claim that customizing ERP to a company's existing structure saves costs can be misleading. First of all, it is difficult for ERP to have positive effects in an organization with unsuitable systems. Second, in the long term, a problematic organizational structure has to change sooner or later. If a company customizes ERP based on its old system, when it changes its management practices in the future it would have to undergo a second round of development and recustomization of its ERP software suite.

Zhang acknowledges that once its organizational system has been changed, the company might experience some confusion when it initially implements ERP. "Things are messy in the beginning, but it is only because management finds that there are mistakes in the original system - in inventories, in capital accounts, mistakes that were impossible to detect in the past. Accounts and statements used to be produced manually and corrections were also made manually. Now ERP does not tolerate any mistakes and problems cannot be fixed manually.".

Navigating ERP

If ERP is a ship, what type of captain should navigate it to the Promised Land? Many companies entrust running the ERP implementation to the head of their IT department. Zhang opposes this practice. He thinks that ERP does not aim to address a purely technical issue, nor a purely financial problem. ERP implementation is more about the design of the business process and organizational structure. The role played by IT is merely to turn management practices into computer language.

"I think top management and the quality assurance function in its broad sense are best positioned to be directly involved in pushing for ERP implementation, and the number two of a company should be the project leader." Zhang refers to the quality assurance function defined in broad terms - not just product quality, but also higher level management issues, including cost control.

Many others agree with this view. ERP should be a project pushed by senior management, and headed by someone with a broad view. "Understanding ERP is an integral part of the tool kit of a qualified manager," says Zhang.

There is an important reason for the insistence that a senior manager with a broad perspective should navigate the ship of ERP. Implementation of ERP demands collaboration between various units, whose direct benefits from the project can vary greatly. Some units may lack the motivation to implement ERP, and may therefore need to be pushed from above. Heads of IT normally cannot accomplish the task. For example, sales and logistics units usually cannot benefit directly from ERP. However, for ERP to work, many tasks rely on the cooperation of sales and logistics, such as standardization of data entries. The finance department is the biggest beneficiary of ERP - it gets timely and accurate data in a convenient way, although its workload in ERP implementation might be disproportionate. As a result, in the actual implementation process, top management needs to align lines of authority and responsibilities. When ERP is up and running, top management has to ensure that a system is in place to guarantee its smooth functioning. In reality, it is not uncommon for the implementation and operation of ERP to have been interfered with due to conflicts between different functions.

Dai Ziqiang gives such an example. A Shanghai-based fast-moving consumer goods company that had adopted ERP later wanted to use ERP to change its distribution system - from decentralized distribution (regional warehouses respond to market demand and the central warehouse delivers upon requests) to centralized distribution (central warehouse sets the minimum inventory level for each regional warehouse and replenishes automatically when current inventory level falls below the pre-set minimum level). The purpose was to ensure that regional markets would be supplied in adequate amounts in a timely manner, and to prevent shortages of supply caused by the inaccurate analysis of regional centers.

When the change was implemented, the company indeed captured more sales opportunities. However, transportation costs increased dramatically. And due to the shortened delivery cycle and higher frequency, the logistics department saw its costs soar and its workload increase. The logistics department opposed the new approach, while the sales department supported it staunchly because of reduced loss of sales opportunities. Under the circumstances, top management was called in to offer explanations and analyses and smooth the feathers of different units. Through a cost-benefit analysis, top management informed all units clearly that although transportation costs rose, increased sales opportunities actually brought in more revenues, which more than offset the higher expenses. Compared with the old arrangement, the new scheme was in fact good value. With this analysis, conflicts were resolved.

Certainly, not all conflicts can be resolved peacefully - indeed some call for draconian measures. But decisions on changes to business process, especially in organizational structure - such as restructuring units and reducing staff - have to be supported by top management. "After ERP implementation, some units will unavoidably disappear, while others will undergo restructuring and job positions will be cut. These decisions need to be made by the head of an organization. The key role that top management plays in ERP implementation," says Zhang, "is to support it unreservedly."