Managing Information Technology

distribution system. Better information would enable

us to significantly reduce our finished goods inven-

tory and at the same time provide better service to

our customers. The integration of sales, production,

and inventory information that an ERP system pro-

vides would enable me to do a much better job of

managing my department.

Pat L. Miller, vice president for manufacturing,
joined Benton as an engineer 20 years ago and worked in
many positions in the manufacturing area prior to
becoming a vice president four years ago. Miller is con-
cerned about the possible impact of an ERP system on
the manufacturing area:

For the past several years we have been concentrating

on lean manufacturing through the Continuous-

Improvement approach, and have increased produc-

tivity over 25 percent and reduced inventory by

30 percent in our factories. The Continuous-

Improvement approach avoids going for the “home

run.” Rather, it concentrates on producing many rela-

tively small improvements, each of which can be

quickly and easily implemented. It seems to me that

an ERP project costing over $30 million is the

antithesis of our Continuous-Improvement approach

that has been so successful. First, it is one huge step,

not a progression of small improvements. Also, in the

ERP approach you must use the process dictated by

the designer of the ERP system, and that is inflexible.

How can you do Continuous Improvement?

I have another concern. We have a unique cul-

ture here at Benton that, in my opinion, is responsi-

ble for the success we have enjoyed. I have read that

installing an ERP system may well force you to

change your culture to be more compatible with the

ERP system. That sends shivers down my back!

Lee L. Gibson has been vice president for finance for
10 years. Until about three years ago the information systems
department reported to Gibson. Gibson, who is responsible
for financial analysis of Benton’s investments, asserts:

The IS department has developed excellent financial

systems for me that are quite adequate for our needs,

so I see no major need for an ERP system as far as

the finance department is concerned.

Also, I am very concerned about the high cost

of an ERP implementation and about whether the

bottom-line return from such a system would justify

this huge expense. We have always subjected our IT

investments to a rigorous cost/benefit analysis, and

452 Part III • Acquiring Information Systems

I don’t see any reason why we should treat an ERP

system any differently. In my view, the larger the

investment, the more important it is that it be care-

fully justified, and an ERP system would cost many

times as much as the largest IT system we have ever

developed.

Cost/Benefit Analysis

Meyer shudders at the thought of trying to use cost/benefit

analysis to justify an ERP system:

The costs of an ERP system are readily apparent up

front, but many of the benefits are results of more

complete and timely information that enable you to

better manage the enterprise. These intangible bene-

fits do occur, but they are not easy to identify and

quantify beforehand.

At conferences we talked with a number of

people that are delighted with the results of their

ERP systems, and we always asked how the cost

justified the system. We got a lot of strange looks

and blank stares. The identifiable cost reductions

will seldom justify the cost of an ERP system, but

people are installing them because they realize that

they have to in order to compete in the future. And

many companies are beginning to get bottom line

results that they ascribe to their ERP investments.

Gibson’s concern prompted Cook and Meyer to

develop the analysis presented in Exhibits 2 and 3. This

analysis is based on a study they obtained that reported the

experience of over 60 firms that have successfully installed

ERP systems and used them for at least three years. Using

the figures from this study, the team estimates that it will

cost Benton some $34 million to install an ERP system and

$750,000 a year for a maintenance contract. The benefits

are estimated to be about $11.593 million a year after

installation is complete. Over a seven-year period this

produces an Internal Rate of Return of 20 percent and a

Net Present Value (at a 20 percent discount rate) of just

over $156,000, which just barely meets Benton’s criteria

for such investments.

Cook explains how the yearly benefits were devel-

oped, as shown in Exhibit 2:

In each area of benefits (inventory, centralized

operations, etc.), the table shows the industry low

and high as a percent of the Base Amount column,

which contains the current cost to Benton of the

category in each line, except for the last line where it

contains Benton’s total revenue. The three Estimated