ERP Session : 1

A Foundation for Understanding Enterprise Resource Planning Systems


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Develop an understanding of how ERP systems improve the effectiveness of information systems in organizations Recognize the business benefits of ERP systems Understand the history and evolution of ERP

ERP Market

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One of the fastest growing markets in software industry 34.5% of companies with revenues over $1 billion plan to purchase or upgrade $180 billion in sales in 2002 Maybe as much as $1 trillion by 2010

ERP Systems

Major investment

Cost between $50,000 and $100,000,000+ Replace legacy systems Reduce cycle times Lower operating costs Enables better management decisions
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Variety of business justifications
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Real-time On-line

What is ERP?
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Software tools Manages business systems

Supply chain, receiving, inventory, customer orders, production planning, shipping, accounting, HR

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Allows automation and integration of business processes Enables data and information sharing Enterprise-wide system Introduces “best practices”

Evolution of ERP      1960s: software packages with inventory control 1970s: MRP systems  Production schedule with materials management Adds financial accounting system Integrated systems for manufacturing execution Integrated manufacturing with supply chain 1980s: MRPII systems  1990s: MRPII  Late 1990s: ERP  .

MRP I schematic .



Integrated Systems Approach   Common set of applications Usually requires re-engineering business processes  Better alignment    Limited customization  Easier upgrades Overcomes inefficiencies of independent systems Integrated data supports multiple business functions .


Overall Business Benefits  Information    Maximizes information throughput Provides timely information Integrates information throughout supply chain      Minimizes response time Pushes decision making down to lowest levels Reduces costs Cuts inventory Improves operating performance .

Department Benefits  Sales  Increased efficiency  Lower quotes. improved responsiveness  Manufacturing   Concurrent engineering Faster design and production Accurate customer service history and warranty information  Data Service   Accounts Payable  Suppliers paid accurately . reduced lead time.


using common data Improves operational performance Re-engineering around a business model that conforms with best practices Productivity Lack of responsiveness to customers Improvements in and suppliers financial management and customer service . cost of overdue accounts receivable Proliferation of fragmented processes with duplication of effort With ERP Time and cost reduction of business processes Faster transactions.Before and After ERP : Business Stand point Before ERP Cycle time Transaction processing Financial mgmt Business process Costly bottlenecks Multiple transactions use multiple data files Increased cost of excess inventory.

Before and After ERP : Business Stand point Before ERP Supply chain management eBusiness Lack of integration Web based interfaces support isolated systems and their components Lack of tactical information for effective monitoring and control of organizational resources With ERP Linkages with suppliers and customers Web based interfaces are front end integrated systems Allows cross functional access to the same data for planning and control. Provides widely available information Information Communications Lack of effective communications Facilitates organizational with customers and suppliers communications with customers and suppliers .

Systems Benefits  Eliminating legacy systems   Reduces incompatible data Can cause fragmentation      Allows sharing and monitoring of information across organization Foundation of eBusiness  Back-office functions Standardization Helps obtain and maintain competitive advantage Improved interactions with customers and suppliers .


4% 2.D.8% 8.ERP Vendors          SAP Oracle Multiple Packages Baan J.5% 2.5% 2. Edwards People Soft QAD SSA/BPCS Others 25.5% 27.2% 9.8% 7.0% 14.3% .

ERP Basic Modules Figure 12.1 .

Billing Multi-company IM Support Investment FI Mgmt Financial ISComprehensive Accounting Retail CO Controlling IS-P AM Fixed Assets Mgmt. functionality Client/Server Layered Architecture PP Production Planning EDI Process Oriented Modular Design & “Plug-In” Capability Telecom Extensions AFUDC QM PS SFA Quality Client / Server Project Scalable Sales ManageSystem ABAP/4 Force ment MSM Open WF AutomMaintenance RF / Workflow Systems ation & Service Mobile ISMgmt HR IS Dispatch RE Human Industry Resources Solutions IS-T / Network GUI & Internet RF&NF Mgmt SAP R/3 LEGEND .Industry Solutions .Systems.Partner Solutions C/W Certified Interfaces (Existing. Developing.Runtime System Three .R/3 Core HR .R/3 Technology .SAP Enterprise Solution Integration & Interoperability “Configurable” Cable Packaged IA Imaging & Solution Archiving CS- Hand Helds EH&S Bar EH&S SD Coding Sales & Distribution MM Materials Mgmt. Planned) Enabled Enterprise data model/databases Workforce Mgmt CAD AM / FM GIS IS-T / CCS SAP .R/3 Core Financials .R/3 Core Logistics . Applications & Products in Data Processing R/3 .

ERP System Architecture SAP R/3 System Architecture System Architecture 3 layers Three-tier Client/Server Database Database Business logic Application User Interface Presentation SAP R/3 + MySAP and PeopleSoft version 8.0 Reflect Web-enabled technology .

ERP Feasibility  ERP is a large investment and must be treated as such investment entails more than cash outlays  Commitment to focus on interacting business processes   Benefits are not always economic Many feasibility issues need consideration .

Economic Feasibility   Concerned with justifying an expenditure by considering both costs and benefits in monetary terms Investment costs for ERP   Very high: $10 million for a moderate sized application High likelihood of negative ROI   Tangible and intangible benefits must be considered Opportunity costs of NOT implementing ERP .

.Costs of ERP  The costs and risks of failure in implementing a new ERP system are substantial.

Hidden Costs of ERP       Integration and Testing Data Analysis Consultants and infinitum Implementation teams turn over Waiting for ROI Post-ERP depression .

ERP Total Cost of Ownership (million $) .

Example of NPV of ERP Project .

Technical Feasibility   ERP must be viewed as technically complex systems resting organizational database management systems ERP may reside on single computer or be distributed   May strain computing resources May strain communications resources  Usually requires latest technology particularly in larger organizations .

Operational Feasibility  Is business process standardization desirable?   Loss of personalization of customer data Cultural changes   Persons in the organization must be willing and able to achieve the change from current IS to an ERP Need for ERP Champion .

Change Management     Crucial to ERP People resistant to change Examine cause of change May require organizational culture shift .

Lewin-Schein change theory steps Management Prepare for Change Retrain Moving (i) Develop new methods and behaviors (ii) Create and maintain momentum Reinforce Change Refreezing (i) Reinforce desired changes (ii) Establish stable environment Unfreezing (i) Create awareness of need for change (ii) People support what they help create Cease old habit Learning Employees New Culture .

A Model for ERP Adoption .

ERP Champion    Person or group who serves as driving force behind the organization’s change to ERP Variety of people can be ERP champion Lead the organization to a fundamental revamping of core business processes .

Possible ERP Champions 1. Collection of well-respected middle managers from a wide spectrum of organization operations . Chief executive officer 2. Teams of senior management a) Chief information officer b) Vice president of manufacturing c) Chief financial officer d) Other senior managers 3.

ERP Implementation   Particular attention must be paid to software vendors. training. and cutover Takes months   Average is about two years Due to complexity and legacy systems developed years earlier  Variety of approaches can be taken .

ERP Vendor Selection    Choice of vendor is important Underlying business concepts in vendor’s system should be major criteria After major ERP pieces are in place. firm may want to consider bolt-on systems  Software that takes advantage of ERP features    Customer relations management Demand forecasting Logistics .

User Training      Cannot be an afterthought Must be part of the initial design Requires users to understand business processes beyond their normal jobs ERP vendors provide training services SAP is a leader in Training .

also after the system is implemented Especially helpful after the implementation of ERP projects .Training Related to ERP Software Type of Training Learning ERP Vendor Software Training by ERP Vendor (or company specializing in ERP training) Peer-to-peer training such as conferences When Training Should Occur Before the ERP is planned and designed As the is being designed and implemented.

Example of ERP Implementation Time Line .

Example of ERP Implementation Time Line (Texas Instrument) .

Team Training Techn. Business Org. Req.Implementation Methodology Project preparation Business blueprint Realization Final preparation Go live & support Program Management Communication and Quality Management Change Enablement Initial Project Planning Project Procedures Project Kick-off Org. Project Reestimate Quality Check Baseline Configuration Set-up of Prototype Final Configuration Integration Tests User Profiles User Documentation Training Materials Key User Training Quality Check End User Training System Management Old Data Take-over Cut Over Quality Check Production Support Project Conclusion Quality Check . Planning Quality Check Team Training Develop System Env. Business Process Def. Struct.

Cutover Approach Old system Pilot System cutover Immediate cutover Phased cutover Parallel cutover Immediate approach Phased approach Parallel approach Old system New System Old system New System Old system New system .

and training required Failure to involve affected employees in the planning & development phases and change management programs Trying to do too much. too fast Insufficient training Believing everything the software vendors and/or consultants say .Causes of ERP failures      Underestimating the complexity of the planning. development.

Minimizing ERP Failures    Understand the organization’s span of complexity Recognize processes where value cannot be maintained if standardization is imposed Achieve a consensus in the organization before deciding to implement an enterprise information system .

ERP Critical Success Factor Top Management Commitment Change Management IT Infrastructure Business Process Reengineering .

Design Alternatives  “Vanilla” implementation   Complete vendor package Benefits   Total integration across all functional areas Re-engineering of all business processes Expensive Time-consuming  Deficits    Selected ERP modules  Benefits  Less costly and time-consuming Lacks total integration of data Limited applicability and use  Deficits   .

continued  Build in-house  Benefits   Can create system based on its needs Competitors will not have access to similar system Time.Design Alternatives.and resource-consuming Expensive Risky May not provide competitive advantage  Deficits      Maintain concurrent legacy systems   Benefits  Familiarity May be a competitive disadvantage Deficits  .

software. consulting. training.Cost-Benefit Analysis  Net Present Value     Time value of money 5-year timeframe for ERP Non-recurring costs:  Hardware. implementation Licenses. teams Recurring expenses:  . maintenance. consulting.


Maintaining Competitive Advantages      Implement ERP system better than competitors Migrate to new versions faster Use “vanilla” ERP for core systems and build customized modules for others Increase availability of operational data Better use of data for analysis .

on-budget implementations Applying multi-stage approach  Markus   Three phases: project. and onward and upward phases Business results not achieved until last phase Four phases: planning. design.Challenges    Realization of benefits On-time. shakedown. re-engineering. and configuration and testing phases Benefits not achieved until last two phases Benefits occur after implementation of advanced modules  Parr and Shanks    Holland and Light  .

and accuracy Implementing an ERP system helps the organization obtain and maintain a competitive advantage .Summary     ERP systems can improve the effectiveness of organizations through automation and integration of business processes ERP systems allow data and information sharing across the organization Departmental benefits include increased efficiency. faster design and production.

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