ERP Systems Overview

Introduction to ERP
System Options
 ERP Claims
• Create value through integrating activities
across organization
• Implementation of best practices
• Standardization of processes
• One-source data
• On-line access to information
 Role in Business
• Accounting basis
• US products – some extension of MRP
• Combine business computing
– Unified system sharing one set of data
– Advantages in efficiency, accuracy
• Best Practices
– Apply the best process for each function
 Historical Growth
• 1970s & 1980s – more development than growth
• 1990s – became widely adopted by large firms
• Late 1990s – growth exploded with fears of Y2K
problems
• Post-2000 – growth slowed
– Saturated market, economy dipped
– Seeking to
• Fill in gaps with larger firms
• Make products useful for smaller firms
• Emphasize Internet
 Benefits of ERP
• Davenport [1998]:
– Increases speed of information flows
• O’Leary [2000]:
– Create value through integration of activities
– Best practices improve operations
– Standardization increases efficiency
– One-source data more accurate, easier to access
 Benefits of ERP
• Better organizational planning
• Better communication
• More collaboration
• Weil [1999]:
– Applied Robotics increased on-time deliveries
40% through ERP
– Delta Electronics reduced production control
labor requirements 65%
 Why ERP?
• Technical:
– Integration of computer systems foster
consistency, efficiency
• Financial:
– Integrating applications saves money
• Organizational:
– All members of organization use same system
 Conception vs. Reality
• Integrated System
• In fact, vendors usually sell modules
– Would like to sell full system
– Buyers reduce cost, risk, by starting smaller
scale
• Risk of converting entire system
• Complex cost impact
 SAP: Best Practices
• A key to original product
• Davenport [1998]:
– Firm’s vary in what is best for them
– Business world dynamic
– Rigid approach has dangers
– If a firm develops a competitive advantage,
they give it up by adopting “best practices”
 ERP Supported Functions
Financial Hum Res Ops & Log Sales & M
Accts receivable Time accounting Inventory Orders
Asset account Payroll MRP Pricing
Cash forecast Personnel plan Plant Mtce Sales Mgt
Cost accounting Travel expense Prod planning Sales plan
Exec Info Sys Project Mgmt
Financial consol Purchasing
General ledger Quality Mgmt
Profit analysis Shipping
Standard costing Vendor eval
 CPU Support
• Originally mainframe
– SAP R/2 – 1974
• Client/Server architecture early 1990s
– More flexible
– SAP R/3
• Something new?
– Portal systems (MySAP.com)
 Advantages & Disadvantages
• System Integration
– Improved understanding across users
– Less flexibility
• Data Integration
– Greater accuracy
– Harder to correct
• Better methods
– More efficiency
– Less freedom & creativity
• Expected lower costs
– More efficient system planned
– Dynamic needs, training typically underbudgeted, hidden implementation
costs
ERP System Options & Selection
Methods
Alternative ERP project forms
Budgeting methods
 IS/IT Projects
• Typically
– Late
– Over budget
– Fail to satisfy design specifications
• ERP projects
– Are larger than normal
– Can be expedited (if you do it vendor’s way)
– Cost range $5 million to over $100 million (+)
 Alternative ERP Options34
Form Advantages Disadvantages
In-house Fit organization Most difficult, expensive,
slowest
In-House + Blend proven features with Difficult to develop
vendor supp. organizational fit Expensive & slow
Best-of-breed Theoretically ideal Hard to link, slow, potentially
inefficient
Customize Proven features modified to Slower, usually more expensive
vendor system fit organization than pure vendor
Select vendor Less risk, fast, inexpensive If expand, inefficient and higher
modules total cost
Full vendor Fast, inexpensive, efficient Inflexible
system
ASP Least risk & cost, fastest At mercy of ASP
 Changing Nature of IT
• Technology is highly dynamic
• ERP projects often take years to install
– Vendors are responding by expediting
• As long as you do it their way
• Improved versions may be on market by the
time you install your system
– This is one advantage of an ASP
 Financial techniques for
Capital Budgeting
1. Payback
2. Discounted cash flow
3. Cost-benefit analysis
These are the more formal mechanisms implied by
Hinton & Kaye as capital budgeting
Anything with as great an impact as ERP needs to
have some estimate of cost, benefits
– Need to recognize that precise numbers not worth
obtaining
 Survey of Manufacturers
Mabert et al. (2000); Olhager & Selldin (2003)

FORMAL Use in US Use in Sweden

METHOD
ROI 53% 30%

Payback 35% 67%

Expected NPV 15% 12%

Other 11% 20%

 Expected Installation Time
Mabert et al. (2000); Olhager & Selldin (2003)

Time to Install ERP US Sweden

 12 months 34% 38%
13 to 24 months 45% 49%
25 to 36 months 11% 8%
37 to 48 months 6% 4%
> 48 months 2% 1%
 Estimated Installation Cost
Mabert et al. (2000); Olhager & Selldin (2003)

Installation Cost US Sweden

< $5 million 42% 40%
$5 million to $25 million 33% 35%
$26 million to $50 million 10% 18%
$51 million to $100 million 7% 7%
> $100 million 7% In prior
 Cost Proportions
Mabert et al. (2000); Olhager & Selldin (2003)

Where money spent US Sweden

Software 30% 24%
Consulting 24% 30%
Hardware 18% 19%
Implementation team 14% 12%
Training 11% 14%
Other 3% 1%
 Mabert et al. [2000]
Survey of 400+ manufacturers
Expected ROI Reported
< 5% 14%
5% to 15% 18%
16% to 25% 36%
26% to 50% 18%
> 50% 13%
 Expected ROI
Mabert et al. (2000); Olhager & Selldin (2003)

Expected ROI US Sweden

< 5% 14% 17%
5% to 15% 18% 38%
16% to 25% 36% 30%
26% to 50% 18% 11%
> 50% 13% 4%
 Mabert et al. [2000]
Survey of 400+ manufacturers
• Even for ERP systems, only 53% used formal
methods
– For smaller IT projects, payback most popular
• Most systems expected to take years to install
– Trend is to make much faster
• Cost varies widely
– You have a choice as to where you spend
– Training tends to be underbudgeted
• Not all expect big return
 Taiwan ERP
C.-T. Yeh, M. Miozzo, T. Vurdubakis, Journal of Enterprise Information
Management 19:1, 2006, 30-49

• International vendors (like SAP)

– BPR based on Western practice
– The rest of the world not necessarily the same
– Has created many misfits
• Especially in small-to-medium sized enterprises
– Business opportunity for small domestic
vendors
 Taiwan’s industrial success
• Flexible, decentralized network of SMEs
– Focus on export trade in consumer goods
– Agility & adaptability important
• Vendor ERPs don’t support that
– BPR forces clients of ERP to “do it their way”
• They (SAP) think they know better
– Problems
• First, middle, last name doesn’t fit Indian, Chinese
• Egypt – pricing determined after receipt of goods – Oracle
didn’t do it that way
 ERP Revolution
• SAP claims organization can create its own
solution
– By selection of modules
• In reality, organizations required to re-engineer
their business processes to conform to ERP
– Standish Group – 90% of ERP implementations have
cost, schedule overruns
– Many failures – FoxMeyer, Hershey’s
 Vendor Response to Market
• 1990s market (large organizations) saturated
• Vendors built
– products for new end-users
• Non-profit
• SMEs
– New types of ERP
• Web-enables
• CRM, SCM products
– New markets
• China, India
– Less system rigidity
• Faster implementation
• Industry-focused systems
 Vendor efforts
• Make systems less rigid
• End-user organizations often modify
– Between standardization & customization
• Complications
– Implementation
– Upgrades
 Taiwan ERP market
Case studies – 14 organizations in Taiwan
• SAP – 38%
• Oracle – 16%
• Domestic get rest
• Prices
– $600,000 to $1,400,000
– Much lower than US
 Implementation Options
• DIRECT
– Vendor implements system for customers
– Domestic vendors
• INDIRECT
– Vendor trains consultants who implement ERP
– International vendors
• In Taiwan, Direct option usually used
– Few reliable consultants available
– Consultants prefer large vendors (more experience with)
– Competitive domestic market
• Lower prices
 Taiwan ERP trends
• More Wide Enterprise Systems
• From hi-tech to traditional manufacturing
• From Large to SME
• From growth stage to maturity
• From internal information integration to
external information communication
 China ERP Market
• Growing rapidly
– Government support
– Accession to WTO
– Need for competitiveness
• International vendors play the major role
• Domestic vendors have software more akin to
accounting packages
• Taiwan ERP vendor collaboration
– R&D, distribution, joint ventures, investment
 Summary
• ERP software has had a major impact on
organizational computing
• Technological, financial, organizational
benefits
• Also expensive, massive, inflexible
• Many hidden costs
• Complex adoption decision
Enterprise Resource Planning
(ERP) Systems
 What is ERP?

• An ERP system is an attempt to integrate all

functions across a company to a single
computer system that can serve all those
functions’ specific needs.
• “Integration” is the key word for ERP
implementation.
 What is ERP?

• It may also integrate key customers and

suppliers as part of the enterprise’s operation.
• It provides integrated database and custom-
designed report systems.
• It adopts a set of “best practices” for carrying
out all business processes.
 Major Reasons for Adopting
ERP
• Integrate financial information
• Integrate customer order information
• Standardize and speed up operations
processes
• Reduce inventory
• Standardize Human Resources information
 Potential Benefits of ERP
• Internal Benefits
– Integration of a single source of data
– Common data definition
– A real-time system
– Increased productivity
– Reduced operating costs
– Improved internal communication
– Foundation for future improvement
 Potential Benefits of ERP

• External Benefits
– Improved customer service and order fulfillment
– Improved communication with suppliers and
customers
– Enhanced competitive position
– Increased sales and profits
 ERP Implementation Approaches

• The big bang – install a single ERP system

across the entire organization
• Franchising – Independent ERP systems are
installed in different units linked by common
processes, e.g., bookkeeping.
• Slam dunk – install one or several ERP modules
for phased implementation of key business
processes.
 Major Phases of ERP Implementation (Kent Sandoe,
Enterprise Integration)

• Initiation – develop business case, project

scope, and implementation strategy
• Planning – establish implementation team,
determine goals and objectives, establish
metrics
• Analysis and process design – analyze and
improve existing processes, map new processes
to be adopted by the system
 Major Phases of ERP Implementation (Kent Sandoe,
Enterprise Integration)

• Realization – install a base system,

customization, and test the system
• Transition – replace the formal system with the
new system, data conversion
• Operation – monitor and improve system
performance, provide continued training and
technical support
 Major Challenges to ERP Implementation

• Limitations of ERP technical capabilities

• Inconsistency with existing business processes
• Costs - implementation (hardware, software,
training, consulting) and maintenance
• Impact on organizational structure (front office
vs. back office, product lines, etc.)
• Changes in employee responsibilities
 Major Challenges to ERP Implementation

• Flexibility of software system upgrades

• Implementation timelines
• Availability of internal technical knowledge
and resources
• Education and training
• Implementation strategy and execution
• Resistance to change
 Total Cost of ERP Ownership (in millions of $) -
META Group Survey

System Medium AverageSmallest Largest Baan

16.1 13.6 0.8 26.5 JD Edwards 3.9
5.7 0.8 21.6 Lawson 1.9
4.1 0.4 16.4 Oracle 5.4
11.2 1.4 42.8 PeopleSoft 7.4 15.5
1.3 58.6
SAP 13.9 52.2 0.8 308.2
SSA 1.7 7.6 0.7 29.6
From: “ Implementation Study Reveals Costs, Benefits,” The Performance
Advantage, APICS, October 1999, p.7
 Benefits of ERP Implementation
(META Group Survey)

• Benefits are mostly in terms of cost containment rather than

revenue increase.
• 53 companies (out of 63) reported annual savings of over $5
millions with the median annual saving of $1.6 million. Nine
companies account for 73.4% of the reported savings.
• The study found that much of the ERP value is in indirect,
non-quantifiable benefits.
• A number of companies surveyed had a negative net present
value.
 ERP Implementation - Key Enablers (APQC
Best-Practice Report)
• The organization is prepared for the change.
• The executive leaders are active and visible in their
support.
• The initiative is seen as a business imperative by the
organization.
• The resources are available to conduct the project
completely.
• A good packaged system is used and not customized.
• The user group is trained to use the software before it is
implemented.
 ERP Implementation Practices
(APQC Best-Practice Report)
• Project Management
– Organizations link implementation teams to both the technical
(IS) and functional departments.
– They tightly control implementation processes
– They appropriately use consultants throughout the
implementation process
– They manage turnover of key implementation employees
– They have basic business reasons for implementation
– They align implementation with organizational strategies
 ERP Implementation Practices
(APQC Best-Practice Report)

• Change Management
– Redesigned jobs call for higher levels of skills and
accountability
– Change management is viewed as more than just
increased training and communication
– Enterprise-wide systems drive redesigned changes.
– The executive sponsor is the change agent.
– Resistance from the work force (including management)
is the most significant obstacle.
 ERP Implementation Practices
(APQC Best-Practice Report)

• Technology Excellence
– Organizations rely heavily on the ERP package as
the majority of their application configuration.
– Organizations implement ERP packages on time
and within budget
– Organizations centralize support groups within
their IT departments
 New Developments In ERP

• Availability of web-based and wireless ERP

systems
• Adoption of easy-to-install ERP systems
• Linkage to other software systems, e.g., supply
chain management system, e-commerce,
customer relationship management system