Developing a financial view in an ERP system as part of a value based management initiative

De Kock, Jacques (2000-12)

Thesis (MBA)--Stellenbosch University, 2000.

Thesis

ENGLISH ABSTRACT: Modern companies need to compete on a global level to obtain sufficient capital from investors. That is why it is becoming increasingly important for companies to concentrate particularly on fulfilling the expectations of the investment community. With this in mind, companies have begun to optimise their operational business processes in order to gain a greater degree of efficiency and in doing so greater security. This movement started in the early nineties with intensive Business Process Reengineering (BPR) exercises. A key enabler for increased efficiency through Business Process Reengineering was the infrastructure provided by the development of integrated software packages called Enterprise Resource Planning (ERP) systems. BPR exercises are normally part and parcel of an ERP implementation project. After the implementation of an ERP system in any business, management will also be in a vastly better position to control the business operations through better information delivery. Most companies are still controlled and managed on the basis of historical financial figures such as profit. Traditional financial statements are increasingly being viewed with distrust due to the perceived ease with which they can be manipulated. As many investors value companies and their performance on the basis of expected "future free cash flows" (excess cash after investment in all positive NPV projects), many companies are now switching from profit-based management to the more comprehensive Value Based Management principles, that takes this into account. A key enabler of the Value Based Management approach is the development of a Balanced Scorecard (BSC) that contains the measures whereby the business should be controlled and measured. With the BSC, a business strategy is translated into a strategic measurement system that focuses on more than just the traditional financial aspects by including measures in other areas of a business, such as customer satisfaction or internal efficiencies. In the BSC financial view the primary indicator of business success is Economic Value Created (EVe). Eve is a true indicator of shareholder wealth created and takes the cost of capital into account. EVC performance becomes the ultimate barometer of business success. Value Based Management companies that invested heavily in the implementation of ERP systems want a good return but normally don't know how best to achieve this. They are wondering how to best make use of the wealth of information that is suddenly at their disposal. In driving shareholder value they are faced by the following questions: • How to translate investor expectations into business strategy and how to link this strategy to day to day operations. • How to use the acquired ERP system in support of this Value Based Management approach to enable maximum return on the investment. In this study project a real South African company, XX Automotive (fictitious name), that recently implemented SAP R/3 as an ERP system is covered as an example to illustrate how these questions can be answered. In Part I, this study project begins by describing all the elements and basic principles of a Value Based Management System such as a Balanced Scorecard (BSC) with EVC as prime measure. Part II illustrates how the XX Automotive financial strategy is translated into a Balanced Scorecard with Economic Value Created (EVC) as main financial measure and how these defined measures were represented by SAP reports that were specifically developed for this purpose. The Balanced Scorecard represented by the SAP reports serves only as a one way measurement system. The next critical step is to determine how to influence the results. The information that populates the SAP reports in XX Automotive's Balanced Scorecard is generated all over the business by the end users in their respective departments. The influence on EVC through business actions by these individual units is discussed in depth as it provides the keys that illustrate how the value of EVC can be impacted positive or negatively by each. Giving individuals the power to influence EVC through incentive schemes is crucial for long term success. It is illustrated how improving EVC became the new business focus at XX Automotive and how each individual employee can visually see his role in influencing the outcome. Meeting the value-based "Expected EVC Improvement" targets will generate target level bonus payments. Each XX Automotive employee is encouraged to think and act like an owner because he is going to be paid like one.

AFRIKAANSE OPSOMMING: Moderne maatskappye moet op globale skaal kompeteer vir genoegsame kapitaal vanaf beleggers. Daarom word dit al hoe meer belangrik vir maatskappye om te konsentreer daarop om aan die verwagtinge van die beleggers gemeenskap te voldoen. Met dit in gedagte, het maatskappye begin om hulle operasionele besigheidsprossesse te optimeer om sodoende 'n beter vlak van effektiwiteit te bereik en daardeur groter sekuriteit aangaande hul eie voorbestaan te verseker. Hierdie beweging het in die negentigerjare begin met intensiewe besigheidsherontwerp, die sogenaamde 'Business Process Reengineering' (BPR) oefeninge. 'n Belangrike katalisator vir verbeterde effektiwiteit deur BPR is die infrastruktuur wat voorsien is deur die ontwikkeling van geintegreerde besigheidssagtewarepakkette nl. 'Enterprise Resource Planning' (ERP) stelsels. Met 'n ERP implementeringsprojek word gewoonlik intensiewe BPR gedoen. Nadat 'n ERP pakket geimplimenteer is behoort bestuur ook in 'n baie beter posisie te wees om besigheidsoperasies te beheer deur die verbeterde inligting verkry uit die ERP sagteware. Dit word ook duidelik dat die meerderheid van maatskappye steeds beheer en bestuur word op die basis van historiese finansiële maatstawwe soos wins in die inkomstestaat. Weens die feit dat baie beleggers maatskappye waardeer op grond van hul sogenaamde "future free cash flows" (oorblywende kontant na investering in alle NPV positiewe projekte), skakel maatskappye oor van 'n winsgebaseerdebestuurstelsel na die meer omvattende' Value Based Management' stelsel, waarvan 'Economic Value Created' (EVC) die hoofkomponent is. 'n Belangrike skakel in die 'Value Based Management' initiatief is die ontwikkeling van 'n 'Balanced Scorecard', 'n bestuurskonsep waarin die maatstawwe opgesluit lê waarmee die besigheid beheer en bestuur moet word. 'Value Based Management' gedrewe maatskappye wat groot investerings gemaak het in die implementering van ERP sagteware wil 'n goeie opbrengs op die belegging hê maar weet gewoonlik nie wat die beste manier is om dit te doen nie. Hulle wonder hoe om die maksimum voordeel te trek uit die skatkis van besigheidsinligting wat skielik tot hulle beskikking is. In 'n strewe om beleggers waarde te verbeter kom hulle voor die volgende vraagstukke te staan: • Hoe om beleggers verwagtinge om te skakel in besigheids strategie en hoe om hierdie strategie te skakel met daaglikse besigheids operasies. • Hoe om die ERP stelsel te gebruik ter ondersteuning van die 'Value Based Management' prinsiep om die maksimum opbrengs op belegging te kry. In hierdie studieprojek word 'n Suid Afrikaanse maatskappy, XX Automotive (fiktiewe naam), gedek wat onlangs SAP R/3 as 'n ERP stelsel geimplimenteer het as 'n voorbeeld gebruik om te illustreer hoe hierdie vrae in die praktyk beantwoord kan word. In Deel I van hierdie studieprojek word al die elemente en basiese beginsels van die 'Value Based Management' sisteem bespreek. Deel II illustreer hoe die XX Automotive finansiële strategie omgesit is in 'n 'Balanced Scorecard' met Economic Value Created (EVC) as die hoof maatstaf en hoe al die finansiële maatstawwe in die Balanced Scorecard deur middel van SAP verslae, wat spesifiek vir hierdie doel ontwikkel is, weergegee word. Die 'Balanced Scorecard', soos voorgestel deur die verslae in SAP, vorm net 'n metings instrument. Wat van groter belang is, is om te bepaal hoe die resultate beinvloed kan word. Die bestuursinligting waaruit die SAP verslae in die XX Automotive 'Balanced Scorecard' bestaan word gevorm deur die besigheidseindgebruiker op die SAP stelsel elke keer wanneer 'n besigheidstransaksie uitgevoer word. Die invloed op EVC deur individuele besigheidseenhede word in diepte bespreek aangesien dit deurslaggewend is ter illustrasie van hoe die EVC waarde positief of negatief geraak word deur hul besigheids aksies. Om individue die mag te gee om die waarde van EVC te beinvloed deur middel van 'n aansporingstelsel is kritiek vir lang termyn sukses. Elke XX Automotive werknemer word aangespoor deur 'n bonus stelsel om soos 'n aandeelhouer op te tree aangesien hy soos een vergoed sal word.

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