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Justifying MRP
Part 2 of 4


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WHERE DO YOU START?

The next obvious questions are, "How do we get started?" and "What are the ground rules?" To properly launch the project, all involved should understand that this is not a computer project, it's a business decision. And like any business decision, we must get an acceptable return on our investment—the tricky part of justifying a project such as this is that the value of the return is often difficult to express in concrete dol­lar figures. Since technology is very expensive, many people embark­ing on a justification project fear they will be unable to find enough tangible cost savings to justify the expenditure. This fear often creates at atmosphere that leads to disaster—grasping at straws to construct a justification that no one believes.

Credibility is the key. Both the cost and the benefit numbers must have credibility. The cost side is easier to quantify than the benefit side, but even the cost side has hidden problems. On the benefit side, we run head first into the problem of tangible versus intangible savings and benefits. Tangible savings can be pretty straightforward—for ex­ample, the $10,000 per month cost of maintaining our existing hard­ware can easily be cut in half by migrating to the newer technology. But major projects are seldom justified on tangibles alone. The intan­gibles are much tougher to quantify, and this is where the credibility issue is really put to the test. What dollar value does one place on im­proving customer service by 10 percent? Is it reasonable to expect that better decision-making achieved with information analysis improved by X degree will increase sales or profits by Y percent? And what are the bottom-line figures resulting from better inventory management? If the projections are not conservative or lack credibility, they will be seen as a scam, and the enthusiasm for putting effort into the project will surely suffer.

 

NONFINANCIAL BENEFITS

So, what are the kinds of benefits that are typically used in justifying the acquisition of a new information system? Most justifications are built on financial benefits—the dollars and cents decisions. Occasion­ally, there are issues that cannot be quantified in terms of dollars but are strong enough to support such huge expenditures. Sometimes these issues boil down to pure survival—live or die decisions for business. One such issue is facing many companies today—it is the Year 2000 dilemma. The pending Y2K problem is the Mother of all Justifiers! This issue, by itself, can justify a new system purchase for many com­panies. If a company's current system will not support proper date se­quencing at the turn of the century, a major change MUST be made to prevent certain disaster. A company faced with this problem has only three options, all of which are expensive and risky: (1) fix the existing system with reprogramming, (2) upgrade to the latest version of the existing software package (assuming the company is running on a pack­age and that software vendor does have a current version that is Y2K compliant), or (3) migrate to a new system. While option 1 will be chosen by many companies because they believe it to be the least-cost option, it could well be the most costly and probably does carry the largest risk.

 

Aside from the current Year 2000 dilemma, there are sometimes other compelling reasons that tend to make the decision a no-brainer. If your competitors gain a significant cost structure or customer ser­vice edge over you through a major technology shift, your very sur­vival may depend on following suit with a matching technology in­vestment. Look back a decade or two and picture yourself in the bank­ing business. Suddenly, all of your competitors are introducing ATM devices. You realize that the cost of the system changes to accomplish this offering is extremely high. On the other hand, you see that your bank will not survive for long if you do nothing. So now, instead of a "cost versus benefit" question, you have more of a "cost versus cost" tradeoff—the cost of the technology change versus the cost of a busi­ness failure.

 

Another significant benefit often realized by changing to a new sys­tem that is almost impossible to quantify in dollars has to do with em­ployee satisfaction—it's falls in the "quality of life" category. If people are struggling with an antiquated, cumbersome system today, the pros­pect of doing their daily jobs with tools that are better, faster, and easier to use is probably a very strong motivator. In such a situation, the new system can improve morale and job satisfaction, and reduce employee turnover (which leads to reduced new employee orientation costs, one of the most hidden and hard-to-quantify costs). Most of today's em­ployees want to feel they are keeping up with the times. The fear of not being fully in step with information technology is one of most preva­lent in the workplace of the '90s (why is it that everything seems to end with "dot com" these days?). The step of moving from a tradi­tional character-based system to a new state-of-the-art, point-and-click, Windows-friendly system can be seen by many administrative and man­agement people as significant career enhancement.

THE GRAY AREA FINANCIAL BENEFITS

There are many benefits expected from a better information system that are very difficult to quantify in financial terms in spite of the fact that common sense tells us they may be worth a lot of money. This is where benefit estimates must be able to withstand extensive credibility testing. It stands to reason that a better-structured information system will result in improved resource utilization and cost control, which in turn will lead to greater profits. Unfortunately, the "how much?" ques­tion is unanswerable in such cases because there are too many com­plex interdependencies and the future holds too many unknown vari­ables. We must resort to educated estimates in these cases. Consensus is the key to credibility here. If it is one person's estimate, suspicion will be high. If, however, the estimate to be used for final justification is a composite of the opinions of a representative group of knowledge­able people, it is likely to be widely accepted. This is especially true when the participants have shared their reasoning with each other be­fore arriving at the final figures.

A prime example of gray area benefits is projected increases in sales volume. These make good justification material if they carry the weight of credibility. Rationalization is often achieved through the following factors which should result from an improved information system:

     Scheduling credibility in the marketplace positions the company as
supplier of choice to its customers.

     Integrated quality assurance reduces returns against sales while keep­
ing costs in check.

     Better order status information increases responsiveness and cus­
tomer confidence level.

     More effective and efficient communication links with customers
can help gain a competitive edge.

To Be Continued


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