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Stages of ABC in ERP

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Stages of ABC in ERP

Post by Namrata on Mon Dec 26, 2016 4:37 pm

1. Is top management outwardly committed to ABC?
ABC is not only the concern of your accountant. Once an ABC system is initiated, management must be prepared to support that implementation by providing additional short-term resources. When management shows this level of commitment, the organization will begin to believe that it "must be important, or they wouldn't be spending money on it."

2. Is the firm ready for change? Be prepared to initiate some tests prior to implementing ABC.
Stable organizations may resist change at any level. Use pilot projects to test your readiness. Employees must believe that changes to ABC will improve matters. Instill and promote education. Educating your work force about ABC before the change is also important. In any implementation of ABC, operational data must be collected. Reassignments may also be a part of the changes that naturally occur within your organization.

3. Do performance measurement and reward systems take ABC into account? As far as employees know, the company is changing the rules of the game when it introduces ABC. Until the reward system demonstrates that rewards are tied to the new performance evaluation rules, employees will experience confusion and dissonance. The ultimate goal is for employees to gain confidence that using ABC will cause the company to make better decisions based on more equitable and meaningful allocations cost.

4. Do performance measures help you manage the "forest" or the individual? One of the weaknesses of traditional management practice is the demand for efficiency in each department, which too often leads to increased work-in-process and ending inventories -- and, thus, to higher inventory costs. Optimizing each activity does not necessarily lead to a more productive company as a whole; often the contrary is true. Companies must therefore establish overall performance measures that monitor and encourage both managers and employees to take the "forest" view rather than the "tree" view.

5. Does the cost system emphasize managing activities rather than managing costs? Probably the most exciting difference between traditional costing and ABC is the direct influence ABC can have on non financial operations management. The notion that managing activities efficiently will reduce total costs is fundamental to ABC.

6. Have you "kept it simple"? An ABC system should be as accurate as it reasonably can be, but the costs of implementing the system must justify the desired improvements in managing the business. For this reason, companies should do a cost-benefit analysis that considers the costs of:

Data collection;
Data maintenance;
Time required to keep the ABC system up-to-date;
Staffing; and
Computer and software requirements.
7. Are you prepared to reassign or terminate personnel as excess resources are identified? Employees need to have the correct skills; they must not spend their time performing non-value-added activities. Managers and employees must use ABC to identify value-added functions and eliminate functions that do not directly relate to the company's success. The good news is that ABC implementations take time -- as do retraining, re deployment, and thoughtful terminations.

8. Do you understand ABC is a management system -- not a costing system? ABC is not in accordance with generally accepted accounting principles (GAAP), and for a good reason: All costs need not to be absorbed or included in product costs under ABC, because ABC costs are not intended for use in inventory valuation. Instead, the purpose of ABC costs is to provide information for managing the business.

Summary: Reviewing these questions should make it clearer the primary issues involved in ABC implementation are management issues, not costing issues. An ABC system does not replace the company's cost accounting department, because ABC is a management system, not a costing system.

ABC supports a shift in how businesses operate to a much more humanistic approach. ABC should bring rewards to those organizations that commit the time and resources required to view the workplace from the standpoint of activities.

Namrata

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Re: Stages of ABC in ERP

Post by mahendra on Mon Dec 26, 2016 5:25 pm

Initial investment in acquiring and implementing an ERP system is substantial in terms of both human efforts and financial resources. After, successful implementation, the system goes to maintenance mode and organizations start getting value out of their investment. After a prolonged period, due to changes in business and technological paradigm, it becomes more and more difficult and expensive to maintain and extend the system. The process of reimplementation and beginning of a new cycle starts.

ERP life cycle Phases
ERP life cycles, which encompass entire 10 to 20 years of effective operating life, are often confused with ERP Implementation Life Cycle. Some of the phases of ERP life cycle is shown in following diagram.

ERP Life Cycle
ERP Roll out: The initial roll out of an ERP system itself consists of various phases commencing with Request for Proposal (RFP) and vendor selecton and ending with go live and hand holding phase. Some important matter concerning this phase,as given below, will have direct bearing on subsequent phases of ERP lifecycle:
Degree of matching of vanila ERP product to current business need and extent of customization done, particularly source code customization.
Commitment of the vendor for future development and their financial health
Support issues including License fees and escalation thereof.
Optimization: After the system is live and rolled out, there will be a period of turmoil. Due to lack of understanding, a lot pf confusion will prevail amongst users. There will be teething problems and some software bugs will invariably appear. With retraining, some tweaking of the system and assistance from a responsive help desk, this phase should be over within six months to one year and the system should start stabilzing.
Maintenance: This is the longest period of life cycle, when the organization start realizing value of their investment. Users will get familiar and start owning the system. Some changes will be continuing such as new reports, different workflows, some localisation on taxes etc. Maintenance will be covered by service level agreement, entailing payment of license fee to the vendor. For a complicated system, there may be a third party vendor, helping maintenance at site. The license fee, due to provision of escalation, gets escalated at regular intervals and after some years, adversely effects Total Cost of Ownership (TCO).
Extending Values: This phase overlap with the phase of maintenance. New or changed business processes necessiate minor or moderate changes in the system. There may be extensive changes under scenario such as i) implementing a new accounting system e.g. International Finance Reporting standard (IFRS) ii) A new regulatory requirement like Sarbanes=Oxley iii) Margers and acquisations/ restructuring.iv) Extending the system with add on poducts suchy as Customer Relationship Management and Business Intelligence (BI). Sometime the cost changes may be prohibitive, particularly for systems where a lot of customization has been done during implementation phase.
Parallel to business changes, technological changes also occur. New release and versions appear for underlaying technologiocal platforms like Operating System and Data Base. ERP vendors release patches and versions of their producdts at regular intervals which needed to be incorporated in the existing system. This usually involves minor or modeate efforts. But, problem arises where many softwae objects were customized during implementation. Retrofitting these objects for making them compatiable with later versions, may turn out to be a major migration exercise involving exorbitant cost and effort.

Decaying Performance: For an enterprise, business need and technological requirement, continue to evolve. Cost, Complexity and difficulty to modify and update the existing system mount. Fixing existing system is no more viable and provides diminishing return. Alternatives are investigated and decision of reimplementation is taken.
Reimplementation: Similar to Roll Out phase as mentioned above. However, the organizations are better organized now. Initial process will be carried out more professionally. It is likely that they will adopt more of a vanilla version with minimum need of customization, so that the next cycle gives a better Return on Investment (ROI).

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