July 1997 • Volume 7 • Number 7
Justifying A System Implementation Project
By Dick Kuiper
When contemplating a project to select and implement a new integrated manufacturing system, one of the most daunting tasks surfaces at the very beginning — the task of justifying the project. A sound justification is key to garnering the management and user support so important to a successful installation. Genuine support comes from a firm belief that 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 with the proposed system in place. If the justification exercise fails to rally adequate support for the project, the company may be better off putting it on the back burner and revisiting the subject at a later date.
For starters, everyone involved should understand that
this is not a computer project, it's a business decision. A
proper justification is a cost/benefit analysis matching the
project goals to the company's business objectives. Let's
take a look at the major elements of a justification model
for such a project.
The benefit side
There are two varieties of financial benefits. The first is
direct day-to-day savings affecting the company's bottom
line. The second is increased working capital (cash
availability) gained by minimizing temporary assets —
inventory and receivables.
Sales volumes are positively affected by the following factors:
- Scheduling credibility positions the company as supplier of choice to its customers
- Integrated quality assurance reduces returns against sales while keeping costs in check
- Better order status information increases responsiveness and customer confidence level
Profitability is improved with cost and time efficiencies:
- Reduced purchasing and manufacturing lead times with planning and simulation
- Reduced waste and labor inefficiency through accurate scheduling and early warning signals
Reducing inventory investment increases profit and optimizes working capital:
- Less raw material and in-process inventories needed for a given output volume
- Reduced obsolescence by shortening the time between purchase and use
- Reduced purchase prices through better planning for bulk buys and Just-in-Time scheduling
Cash management improvements:
- Working capital can be optimized through more effective handling of accounts receivable
- Timely customer invoice processing brings cash in quicker, and tighter credit controls reduce bad debts
- Proper management of accounts payable — taking
of discounts, avoiding early payment — makes more
cash available to the business
The cost side
Project costs include capital expenditures, one-time project
expenses and ongoing support activities. These costs include
computer hardware, application software, communications
network, development, training and education,
implementation, and ongoing maintenance. Hardware and
software costs are typically the most visible costs. Too
many people have stopped there, including only nominal
percentage add-ons to cover remaining items. In reality,
hardware and software account for one-third the total cost
of many projects.
Initial investment costs should include:
- Computer hardware and communications equipment — purchase, installation, testing and integration
- Development expenses: program modifications, documentation changes, screen and report customization, integration to existing systems, and conversion programming
- Training expenditures: management training for key managers, train the trainer costs, classes for key personnel, and hands-on training
- Implementation costs: loading system data files, maintaining dual systems for a multi-phase start-up, personnel expenses (in-house and consultants) during the first critical weeks of installation, and the costs of anticipated business disruptions
Ongoing cost of ownership:
- Many systems will require ongoing post-implementation support. Resources are needed to maintain the operating environment, install new releases and/or fixes, monitor performance and modify the programs, procedures and reports. The big question: Will this require additional staff?
- Software and hardware maintenance licenses are generally changed at the rate of 12 to 18 percent of the current list price of the product. Software maintenance agreements can include support services such as hotline, new releases, software fixes, user meetings and literature.
If you find that your project is not demonstrably
justified, don't do it. No gain, no pain. But if it is
justified, widespread support will be a natural follow-on,
not the missing factor.
Dick Kuiper is vice president of Expert Buying Systems Inc.,
Vancouver, Wash.
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