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Justifying MRP
Part 1 of 4


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So, your company has decided it may be time to toss out that anti­quated information system you've been struggling with for the past 10 or 15 years and get one of those new, high-powered integrated soft­ware packages you've been hearing about. Well, just like any other major capital investment, this means that someone will have to com­pile and document a cost versus benefit analysis to justify the project. The formidable task of putting together such a justification document is not for the faint of heart. It is a complex job with extremely serious consequences lurking in the weeds. What if your assumptions are wrong? What if your cost estimates miss the mark completely? How do you know if you've found all the hidden costs? What if projected cost savings fail to materialize? How is anyone going to believe all these numbers?

There are a thousand questions to be answered—and as many things that can go wrong in the process. So let's get started laying out a road map for this ominous journey. Here are the issues I'll be addressing that will lead to a successful project justification exercise:

      Why must you do a formal justification for a new system?

      What exactly is a formal justification, and what are some general
guidelines for preparing one?

      What are some common pitfalls to avoid?

      What are some common, and maybe not so common, sources of
tangible cost savings that can be itemized as benefits?

      What are the various hard dollar components of the cost side of the
equation?

      What are the intangible factors that enter into the cost/benefit
decision?

WHY JUSTIFY IT? LET'S JUST DO IT!

Our first order of business is to examine the need for taking on this task in the first place. Is a formal justification exercise really necessary? Some companies skip over this justification exercise because they feel it's a foregone conclusion that they really need a new system. And since they accept that as reality, why waste the time putting together a formal cost/ benefit justification model? But, while an edict from upper management to go out and replace the old system with a new one may seem appropri­ate in some cases, skipping the very important cost justification step can create serious problems down the road. On the surface, most project managers would thrill to hear the boss say, "Just spend what you have to spend, but get me a new system!" Let the buyer of the system beware— these words will come back to haunt you later.

Let's look at why the justification step is not only important, it is a critical component required to succeed. A sound project justification is key to garnering the management and employee support so important to a successful installation. Genuine support comes from a firm belief that when implemented, the new system will provide benefits in ex­cess of the costs (money, time, frustration, etc.) incurred. Without a delineation of quantified benefits, people must accept the project on faith, and faith is often the first thing to disappear when the trauma of a major system change manifests itself.

The justification activity is a project's "rite of passage." It is the definitive statement that says, "This project is worth doing, and this is why." It is the basis for believing the business will operate more effectively (doing the right things) and efficiently (doing things right) with the proposed system in place. If the justification exercise fails to rally adequate support and commitment for the project, the com­pany may be better off doing nothing for the time being. If the project cannot be justified on paper, attempting it with real money and real people will most likely result in disaster. You are better served by putting off the project until a later time rather than risking a debacle of gigantic proportions.

WHAT DOES IT LOOK LIKE?

So, now that we know we need one, just what does it look like? First of all, it should bear no resemblance to War and Peace, nor to a statistical abstract of the theory of relativity. The shorter, the better—as long as all key points are addressed and all pertinent numbers are included. What is "key" and what is "pertinent" are subjective judgment calls, but a guiding principle is that brevity should overrule verbosity. A proper justification is a cost/benefit analysis matching the project goals and costs to the company's business objectives and financial projections. The backbone is a simple formula that says the value of the benefits minus the costs of doing the project equals a positive return. The bot­tom line is that the value of the benefits over the life of the system will exceed the costs of purchasing, installing, and operating it over that same life span. As a rule, the spreadsheets of cost and benefit dollars should cover a period of not less than five nor more than seven years. While dollar figures are the required measuring stick, the justification document must be rich with explanatory narrative—both to explain the assumptions behind the various dollar estimates and to provide a full and accurate picture of the intangible issues. In many respects, it is as much a sales and marketing presentation as a financial document.

To Be Continued


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