Introduction to Enterprise Resource Planning (ERP

)
(System Analysis and Design - Lecture 7)

Institute of Information Systems Dr. Sarah Spiekermann

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Agenda

• • • • • •

What is ERP? ERP evolution About the Impact of ERP Systems on Organizations ERP Implementation (I) – Project Phases, Tasks and Approaches to Re-engineering After going live Risks associated with ERP introduction

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© HU-IWI 2006 · Dr. Sarah Spiekermann

What is ERP?

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© HU-IWI 2006 · Dr. Sarah Spiekermann

What is an ERP system?

1. 2. 3. 4. 5. 6. 7.

ERP systems are packaged software … ...designed for a client server environment. ERP systems integrate the majority and/or major business processes of a company. ERP systems process a large majority of a company‘s transactions. ERP systems use an enterprise-wide relational database ... ... that typically stores each piece of data once. ERP systems ideally allow access to data in real-time.

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Sources of Software

BUY • Packaged software producers (Commercial off the shelf) • Enterprise solution software (e.g. ERP modules) • (Hardware manufacturers (only for system software)) BUILD • In-house development • Custom software producers

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© HU-IWI 2006 · Dr. Sarah Spiekermann

The Making vs. Buying Decision

Trend?
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Criteria for Choosing Off-the-Shelf Software (COTS)

• • •

Cost • In-House versus purchased Functionality • Mandatory, essential and desired features Vendor Support*** • Installation • Training • Technical Support Viability of Vendor***

• • • •

Flexibility • Ease of customization Documentation • User documentation • Technical documentation Response Time Ease of Installation

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Indirect costs play a role when deciding for a software solution.

Direct Cost

Indirect Cost – Peer Support – Casual learning – Formal training – Application development

– SW and HW – Support Costs – Staffing Costs

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© HU-IWI 2006 · Dr. Sarah Spiekermann

ERP systems consist of modules for different business functions – Example SAP R/3
• • • • • • • • • AM (Fixed asset management) CO (Controlling) : CCA (Cost Centre Accounting), PC (Product Cost Controlling), ABC (Activity Based Costing) FI (Financial Accounting): GL (General Ledger), AR (Accounts receivable), AP (Accounts payable), LC (Legal consolidation) HR (Human Resources): PA (Personnel Administration), PD (Planning and Development) MM (Materials Management): IM (Inventory Management), IV (Invoice Verification, WM (Warehouse Management) PM (Plant Maintenance): EQM (Equipment and Technical Objects), SMA (Service Management), WOC (Maintenance Order Management) PP (Production Planning): SOP(Sales and Operations Planning), MRP (Materials Requirements Planning), CRP (Capacity Requirements Planning) QM (Quality Management): CA (Quality Certificates), IM (inspection processing), PT (planning tools), QN (quality notifications) SD (Sales and Distribution)

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Process Flows, Systems and Access before ERP.

Old Process Flow and Models

Separate Data Storage and Access

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Process Flows, Systems and Access with ERP.

New Process Flow and Models

Central Relational Database Datawarehouse
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ERP evolution

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The Evolution of ERP (1)

1.

MRP – Material Requirements Planning • in the 1960s • bill of material processing Closed-Loop MRP • Contains tools to plan priority and capacity • Supports both planning and execution • Goes beyond material planning by considering aggregate sales and operations planning, build schedules (master scheduling) and demand management (e.g. forecasting)

ClosedLoop MRP MRP

2.

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Closed-Loop MRP

Production Planning

Demand Management

Master Scheduling

Capacity Planning

Material Requirements Planning

Plant & Supplier Scheduling

Execution

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© HU-IWI 2006 · Dr. Sarah Spiekermann

The Evolution of ERP (2)

3.

MRP II – Manufacturing Resource Planning • Direct outgrowth and extension of closed-loop MRP • Enhanced sales & operations planning on a detailed level • Financial interfaces that allow to translate the operating plan (in pieces, pounds, gallons, etc.) into financial terms (dollars) • Simulations – the ability to ask “what-if” questions

MRP II ClosedLoop MRP MRP

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© HU-IWI 2006 · Dr. Sarah Spiekermann

The Evolution of ERP (3)

4.

ERP – Enterprise Resource Planning • Fundamentals are the same as with MRP II • ERP is more powerful than MRP II, because it is based on… • …a single set of planning tools across the entire enterprise • …provides real-time integration of sales, operating, and financial data • …connects resource planning approaches to the extended supply chain of customers and suppliers.

ERP MRP II ClosedLoop MRP MRP

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Enterprise Resource Planning (ERP)

Strategic Planning

Business Planning

VOLUME Sales & Operations Planning Forecasting and Demand Management Sales Plan Operations Plan

Capacity Planning

MIX - Master Scheduling

Detailed Planning: MRP, Plant Scheduling, Supplier Scheduling, etc.

Execution

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© HU-IWI 2006 · Dr. Sarah Spiekermann

There are different notions of what an ERP system actually is.

• • • • •

…containing the ability to link customers and suppliers into a complete supply chain,

“[ERP is] an enterprise-wide set of management tools that balance demand and supply,

employing proven business process for decision-making, and providing high degrees of cross-functional integration among sales, marketing, manufacturing, operations, logistics, purchasing, finance, new product development, and human resources, thereby …enabling people to run their business with high levels of customer service and productivity, and simultaneously lower costs and inventories; and providing the foundation for effective e-commerce.”

( “ ERP: Making it Happen”, Wallace and Kremzar, 2001)
• ERP systems are “packages of computer applications that support many, even most, aspects of a company’s information needs.”

(T.Davenport, “Mission Critical – Realizing the Promise of Enterprise Systems”, 2000)
• „ERP is the electronic embodiment of re-engineering.“

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© HU-IWI 2006 · Dr. Sarah Spiekermann

ERP introduction drives the development of new MAPs.

What are MAPs? • • • Models ...e.g. organizational model Artefacts ...e.g. lists, numbering Processes ...e.g. manufacturing

Why do firms need common MAPs? • • • • • Software requires it Improved customer response Regaining control of processes Need for a common view of the organization Value creation and cost reduction

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Multisite ERP implementations can take very different forms.

• Total local autonomy • Headquarters control only at the financial level • Headquarters coordination of operations • Network coordination of operations • Total centralization

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Multisite ERP implementations can take very different forms (2).*

Total local autonomy
Subunits have nearly total decision-making autonomy (may lead to different ERP systems for different plants of the same company in one country) - fails to capture the potential of ERP systems to integrate data, systems, and processes across locations and business units + avoids conflict associated with changes in headquarters-business nit relationships + allows companies to pursue future acquisitions and divestitures free of systems complications + reduces risk of implementation project failure

* source: CACM, April 2000

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Multisite ERP implementations can take very different forms (3).*

Headquarters control only at the financial level
Subunits have autonomy in all matters except for financial accounting. - fails to capture the potential of ERP systems to integrate data, systems, and processes across locations and business units + most effective when units do different things! + allows companies to pursue future acquisitions and divestitures free of systems complications + reduces risk of implementation project failure

* source: CACM, April 2000

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Multisite ERP implementations can take very different forms (4).*

Headquarters coordination of operations
• A high degree of local autonomy in operations, but • Headquarters retain the ability to manage the global supply chain through access to local information about • Purchasing • Inventories • Production schedules • Strong headquarter involvement in chartering and managing ERP implementation projects. + Most effective when there are benefits from common purchasing or + when there are global as well as regional customers.

* source: CACM, April 2000

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Multisite ERP implementations can take very different forms (5).*

Network coordination of operations
• Local operations have access to each other‘s information • Not a high degree of centralization, but • A great deal of cooperation.

+ Most effective when units sell to each as + as well as to the same customers.

* source: CACM, April 2000

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Multisite ERP implementations can take very different forms (5).*

Total centralization
• All decisions are made centrally and communicated top-down to local operations for execution + Most effective when companies need to maintain a single global ‚face‘ to their customers worldwide.

* source: CACM, April 2000

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Is an „As-is“ Process Model of an organization needed?

Quality of Fit of Software to „As-is“ Processes

LOOSE FIT

„As-is Requirements Analysis is not necessary“

TIGHT FIT

„As-is Requirements Analysis is critical“

MINIMAL

EXTENSIVE

Extend of Change to Organizational Process Planned

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Potential Problems of Using an „As-is“ Fitting Software

Quality of Fit of Software to „As-is“ Processes

LOOSE FIT

„Lost Chance to Choose Software that Meets Needs“

TIGHT FIT

„Potential to Back-Slide to Existing Processes“

MINIMAL

EXTENSIVE

Extend of Change to Organizational Process Planned

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ERP and Data Input Principles

1. 2. 3. 4. 5.

SMALL

Gather data only once Gather more data Gather data straight into the computer Gather data where it is generated Gather data with a process focus

Ratio of No of data input screens: ERP/Legacy

LARGE

Negatives • Data input may take longer (more screens)

M

e or

ul fc f di

o tt

im

pl

en m e

t

SMALL

LARGE

Number of Data Entry Transactions

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ERP and Data Output

Data Access through: • • • Customized Reports Intranets Data Warehouses

ERP Vendor Portals:
Vendor
J.D. Edwards

Portal
MyActiveEra Insight II Seaport MyWorld MySAP

Trend to: • Datawarehouses and Access through Portals

Lawson PeopleSoft SAP

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Different options for Software Configuration

• Single financial / single operation • Single financial / multiple operations • Multiple financial / single operations • Multiple financial / multiple operations

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Technology Platform

Centralized Architecutre Central site with remote access to the central site via telecommunication lines and access devices.

Distributed Architecutre Data and processing capabilities are distributed to various locations.

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© HU-IWI 2006 · Dr. Sarah Spiekermann

How does ERP create value?

• • • • • • • •

ERP integrates firm activities ERPs employ use of „best practices“ ERP enables organizational standardization ERP eliminates information asymmetries ERP provides on-line and real-time information ERP allows simultaneous access to the same data for planning and control ERP facilitates intra-organizational communication and collaboration ERP facilitates inter-organizational communication and collaboration

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Why is ERP important?
• • • • • • • • • • • ERP affects most major corporations in the world ERP affects many SMEs ERP affects competitor‘s behaviour ERP affects business partner requirements ERP has changed the nature of many consulting firms ERP provides one of the primary tools for re-engineering ERP has diffused „best practices“ ERP has changed the nature of the information systems function ERP has changed the nature of jobs in all functional areas ERP cost is high ERP has experience huge market growth

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Rationale to Go ERP

• • •

Technology Rationale • Year 2000 issue • Disparate and poor existing systems • Difficult-to-integrate acquisitions Competitive Rationale Business Process Rationale Strategic Rationale; e.g. Electronic Commerce capability

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Thank you for your attention!

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Still there are many failures of ERP introduction, leading to an ERP success categorization.

Class A

Effectively used company-wide; generating significant improvements in customer service, productivity, and costs. Supported by top management; used by middle management to achieve measurable quality improvements. Operated primarily as better methods for ordering materials; contributing to better inventory management. Information inaccurate and poorly understood by users; providing little help in running the business

Class B

Class C

Class D

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How to go about ERP: Technology driven re-engineering versus clean slate re-engineering

Quality of Fit of Software to „To-be“ Processes

LOOSE FIT

„To-be Analysis is Clean Slate Re-engineering“

TIGHT FIT

„To-be Analysis is Technology-Enabled Portfolio Choice“

MINIMAL

EXTENSIVE

Extend of Change to Software Planned
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How to go about ERP: Technology driven re-engineering versus clean slate re-engineering

Extend of Change to Organizational Process Planned

B
LOOSE FIT

„Big R“

C

„Small r“
TIGHT FIT

A
MINIMAL EXTENSIVE

D

Extend of Change to Software Planned
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Benefits of Technology Enabled Re-Engineering

• • • • • • •

ERP provides an ideal goal for re-engineering Tools help structure complex re-engineering efforts (e.g. ERPs provide a starting and a completion point) Technology helps rationalize and explain the re-engineering effort Tools help build better solutions than would otherwise be built (best practices can be used) Technology enabled re-engineering puts „bounds“ on the design (e.g. how many people should be involved) The design chosen is feasible for the software and readily available (and thus cheaper to implement) There is evidence that the design will work in an organization

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Drawbacks of Technology Enabled Re-Engineering

• • • • • •

Re-engineering is limited by the particular tool used for the implementation Re-engineering is limited by knowledge about artefacts and processes that are embedded in the tools Evolution of the system may be limited by the technology The design chosen is one that other firms have access to There may be some confusion as to whether it is a technology implementation or a re-engineering activity There may be no best practices available for some settings, limiting its use

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Benefits of Clean Slate Re-Engineering

• • • • • •

Not constrained by the limitations of any particular tools Not constrained by knowledge about artefacts and processes available in the tool Future versions are not necessarily limited by changes in a particular technology (no „buy in“ into future software versions) Developing a design to which others do not have ready access Re-engineering is treated separately from technology implementation (do not cement old processes!) Sometimes inevitable to do it „clean-slate“ – e.g. when new technology becomes available (e.g. RFID)

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Drawbacks of Clean Slate Re-Engineering

• • • • • • • • •

There may be no structure to help with the design There is no rationale for re-engineering The designs may be suboptimal There are no bounds on the initial design A chosen design may not be feasible A design might not work with the chosen ERP software It may be costly and time-consuming to develop and implement the chosen design There can be many waves of consultants and layers of reports summarizing their work There may be no software available

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ERP Introduction requires Business Process Re-engineering (BPR)

Strategy

Panel A: Original implementation strategy

Panel B: After implementation, which implementation strategy would be selected 51% 35% 3% 1% 10%

BPR and SAP R/3 implementation simultaneously BPR before SAP R/3 BPR after SAP R/3 BPR before and after SAP R/3 No BPR
Source: Gemini Consulting, 1996

48% 16% 3% 1% 33%

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© HU-IWI 2006 · Dr. Sarah Spiekermann

Still there are many failures of ERP introduction, leading to an ERP success categorization.

Class A

Effectively used company-wide; generating significant improvements in customer service, productivity, and costs. Supported by top management; used by middle management to achieve measurable quality improvements. Operated primarily as better methods for ordering materials; contributing to better inventory management. Information inaccurate and poorly understood by users; providing little help in running the business

Class B

Class C

Class D

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Process Flows, Systems and Access with ERP.

„Practitioners and researchers have agreed that the real benefits of ERP are its ability to standardize business processes, build accurate, trouble-free databases, and minimize data complexity.“ (CACM, Feb. 2003)

BUT…

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…still EPR is not the final stage of IT evolution in companies …because

• ERP is traditionally a centralized scheme which consequently • drives an internalization of processes. Hierarchical view on co-operation

• It is bottom-up in that it resides on business processes, which are • pre-defined best practices • pushed onto the organisation. Leadership style

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The centralized scheme was often accompanied by a traditional pointto-point integration of systems.

For each connection it is possible to determine: – Base terminology/ Artefacts – Syntax – Process

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© HU-IWI 2006 · Dr. Sarah Spiekermann

New industry structures and dynamics call for more integration of more and more applications. This can only be handled by an interapplication middleware.

Selected industry dynamics
• Increased supply chain coopertion that needs to be flexible and adaptive („responsive“) • Trend towards an outsourcing of management functionality • Myriad mergers & acquisitions • Rapid innovation cycles • …

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EAI is therefore regarded as an important current trend in information systems.

• EAI is a decentralized scheme which • drives an externalization of processes. Delegating view on co-operation

• It is top-down in that it focuses on business objectives (existing applications) • and is pulled as a support into units that continue to follow their business practices. Leadership style

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Characteristics of ERP and EAI in technical and behavioral perspectives

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© HU-IWI 2006 · Dr. Sarah Spiekermann

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