ERP Systems

Experts Vision
 ERP - Definition
• ERP is a process of managing all resources and
their use in the entire enterprise in a
coordinated manner
 ERP - Definition
• An Enterprise Resource Planning (ERP) is an
integrated system which supports various
modules such as sales and marketing,
production and inventory control, human
resources, finance and accounting,
distribution, quality, procurement etc.
• It is stressed that the various modules are
integrated to each other without any
duplication of information.
 What is ERP?
• Enterprise Resource Planning
• Support business through optimizing,
maintaining, and tracking business functions
• Broken down into business processes
– HRM
– Distribution
– Financials
– Manufacturing
 Why ERP?
• The key motivation behind this integration of
various sub systems is to provide the real time
updated information to the organization so that a
consequence of change of decision in one sub
system of the organization is immediately reflected
to other parts as well so that they can plan their
actions effectively.
• What is the rule of ERP?
– Managing each area of you business ‘efficiently’
 History of ERP
• ERP term suggested by Gartner in 1990 but its
roots date to 1960
• Manufacturing sector in 1960 applied this concept
to inventory management and control
• Software engineers created programs to monitor
inventory, reconcile balances, and report on status
• By the 1970s, this had evolved into Material
Requirements Planning (MRP) systems for
scheduling production processes
 History of ERP
• In the 1980s, MRP grew to encompass more
manufacturing processes, prompting many to
call it MRP-II or Manufacturing Resource
Planning. 
• By 1990, these systems had expanded beyond
inventory control and other operational
processes to other back-office functions like
accounting and human resources, setting the
stage for ERP as we've come to know it.
 Evolution of ERP

Source: http://www.intelligententerprise.com/020903/514feat2_1.shtml, viewed September 19, 2002. 8

 Evolution of ERP
• ERP at core
– At its heart is the ability to match inventories with
demand: schedule manufacturing operations, create work
orders, track labor and materials, and tie manufacturing to
other areas of the business, such as sales and distribution,
accounting, production monitoring, and reporting.
• ERP evolved:
– Now ERP has broadened to encompass many more
functions. It has expanded to include elements of
customer relationship management (CRM), warehouse
management systems (WMS), electronic data interchange
(EDI), and even integrated quality management (IQM),
which goes beyond the four walls of the enterprise.
 Evolution of ERP
• High-growth and mid-size companies are now
rapidly adopting ERP systems
• Cloud computing (Saas) has made ERP software
more adoptable, economical, easy to
implement and manage.
• Cloud ERP enables real-time reporting and
business intelligence (BI), making them even
valuable to executives and staff seeking visibility
into the business
Vendors
 How Do ERP Systems Work?
Managers and
Stakeholders
Financial
Reporting Applications
Human
Sales and
Resource Applications
Delivery
Management
Applications
Applications
Sales Force Central
Manufacturing Back-office
Customers And Customer Database
Service Reps Applications Administrators Suppliers
And Workers

Service Human
Applications Resource Inventory
Management And Supply
Applications Applications

Employees

Source: Davenport, Thomas, “Putting the Enterprise into the Enterprise System”, Harvard Business Review, July-Aug. 1998.
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 ERP Components
• Finance: modules
Manufacturing andfor bookeeping
Logistics: and of
A group making sure the
applications forbills are paid on
planning
time. Examples:
production, taking orders and delivering products to the customer.
– General ledger
Examples:
–
– Accounts
Productionreceivable
planning
– Accounts payable
– Materials management
• HR: software for handling personnel-related tasks for corporate managers
– Order entry and processing
and individual employees. Examples:
– Warehouse management
– HR administration
– Payroll
– Self-service HR

Source: http://www.computerworld.com/printthis/1998/0,4814,43432,00.html, viewed September 19, 2002.

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 An ERP Example: Before ERP

Orders
Parts
Sends report Customer
Demographic
Sales Dept. Files Customers

Checks for Parts

Calls back “Not in stock”
Accounting “We ordered the parts”
Files

Accounting
Invoices Sends report
Sends report accounting
Ships parts
Vendor
Warehouse
Order is placed
“We Need parts #XX”
with Vendor
Inventory
Purchasing Files
Files “We ordered the parts”
Purchasing
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 An ERP Example: After ERP

Orders
Parts Inventory
Data
If no parts,
Customers Sales Dept. order is Accounting
placed
through DB
Financial Data exchange;
Books invoice against PO

Order is submitted
to Purchasing. Database
Purchasing record Books inventory
order in DB against PO

Order is placed
with Vendor

Warehouse
Vendor Purchasing

Ships parts
And invoices accounting 15
 The Significance and Benefits of ERP
Software and Systems
• More efficient business processes that cost less than
those in unintegrated systems
• Easier global integration
• Integrates people and data while eliminating the need
to update and repair many separate computer systems
• Allows management to manage operations, not just
monitor them
• Can dramatically reduce costs and improve
operational efficiency

Concepts in Enterprise Resource Planning,

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Fourth Edition
 Questions About ERP
• How much does an ERP system cost?
• Should every business buy an ERP package?
• Is ERP software inflexible?
• What return can a company expect from its ERP
investment?
• How long does it take to see a return on an ERP
investment?
• Why do some companies have more success with
ERP than others?
Concepts in Enterprise Resource Planning,
17
Fourth Edition
 How Much Does an ERP System Cost?
• Size of the ERP software
– Corresponds to the size of the company it serves
• Need for new hardware that is capable of running
complex ERP software
• Consultants’ and analysts’ fees
• Time for implementation
– Causes disruption of business
• Training
– Costs both time and money
Concepts in Enterprise Resource Planning,
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Fourth Edition
Should Every Business Buy an ERP Package?

• Some of a business’s operations, and some

segments of its operations, might not be a
good match with the constraints of ERP
• Sometimes, a company is not ready for ERP
• ERP implementation difficulties result when
management does not fully understand its
current business processes and cannot make
implementation decisions in a timely manner

Concepts in Enterprise Resource Planning,

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Fourth Edition
 Is ERP Software Inflexible?
• Many people claim that ERP systems, especially the
SAP ERP system, are rigid
• Options for customization offered by SAP ERP
– Numerous configuration options that help businesses
customize the software to fit their needs
– Programmers can write specific routines using
Advanced Business Application Programming (ABAP)
• Once an ERP system is in place, trying to
reconfigure it while retaining data integrity is
expensive and time-consuming
Concepts in Enterprise Resource Planning,
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Fourth Edition
What Return Can a Company Expect from Its
ERP Investment?
• ERP eliminates redundant efforts and duplicated data;
can generate savings in operations expense
• ERP system can help produce goods and services more
quickly
• Company that doesn’t implement an ERP system
might be forced out of business by competitors that
have an ERP system
• Smoothly running ERP system can save a company’s
personnel, suppliers, distributors, and customers
much frustration
Concepts in Enterprise Resource Planning,
21
Fourth Edition
What Return Can a Company Expect from Its
ERP Investment? (cont’d.)
• Cost savings and increased revenues occur over
many years
– Difficult to put an exact dollar figure to the amount
accrued from the original ERP investment
• ERP implementations take time
– Other business factors may be affecting the company’s
costs and profitability
– Difficult to isolate the impact of the ERP system alone
• ERP systems provide real-time data
– Improve external customer communications
Concepts in Enterprise Resource Planning,
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Fourth Edition
How Long Does It Take to See a Return on an
ERP Investment?
• Return on investment (ROI): assessment of an
investment project’s value
– Calculated by dividing the value of the project’s benefits
by the project’s cost
• ERP system’s ROI can be difficult to calculate
• Peerstone Research study
– 63 percent of companies that performed the calculation
reported a positive ROI for ERP
– Most companies felt that nonfinancial goals were the
reason behind their ERP installations
Concepts in Enterprise Resource Planning,
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Fourth Edition
Why Do Some Companies Have More Success
with ERP Than Others?
• Usually, a bumpy rollout and low ROI are caused by
people problems and misguided expectations, not
computer malfunctions
– Executives blindly hoping that new software will cure
fundamental business problems that are not curable by
any software
– Executives and IT managers not taking enough time for a
proper analysis during planning and implementation phase
– Executives and IT managers skimping on employee
education and training

Concepts in Enterprise Resource Planning,

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Fourth Edition
Why Do Some Companies Have More Success
with ERP Than Others? (cont’d.)

• Usually, a bumpy rollout and low ROI are caused by

people problems and misguided expectations, not
computer malfunctions (cont’d.)
– Companies not placing ownership or accountability for
the implementation project on the personnel who will
operate the system
– Unless a large project such as an ERP installation is
promoted from the top down, it is doomed to fail
– ERP implementation brings a tremendous amount of
change for users
Concepts in Enterprise Resource Planning,
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Fourth Edition
Why Do Some Companies Have More Success
with ERP Than Others? (cont’d.)

• For many users, it takes years before they can

take advantage of many of an ERP system’s
capabilities
• Most ERP installations do generate returns

Concepts in Enterprise Resource Planning,

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Fourth Edition
 Difficulty in implementation
• Very difficult
• Extremely costly and time intensive
• Typical: over $10,000,000 and over a year to
implement
• Company may implement only certain
modules of entire ERP system
• You will need an outside consultant
 Common Pitfalls
• Do not adequately benchmark current state
• Did not plan for major transformation
• Did not have executive sponsorship
• Did not adequately map out goals and
objectives
• Highly customized systems to look like old
MRP systems
 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.
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
 Best Practices of ERP Implementation
• A Business Strategy aligned with Business Processes
• Top-Down Project Support and commitment
• Change Management
• Extensive Education and Training
• Data Clean up and Data Integrity
• Implementation is viewed as an ongoing process

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 Best Practices of ERP Implementation
• A Business Strategy aligned with Business
Processes
– Business strategy that will give you a competitive
advantage
– Analyze and map your current business processes
– Develop your objectives
– Evaluate your business strategy and ERP plan before you
commit to software acquisition and installation.

Source: http://www.rmdonovan.com/pdf/perfor8.pdf, viewed November 5, 2002.

35
 Best Practices of ERP Implementation
• Change Management
– Changes in business procedures, responsibilities,
work load.1
– As a result, ERP implementations are times of high stress,
long hours, and uncertainty.1
– Mid-level managers must2
• facilitate continual feedback from employees,
• provide honest answers to their questions, and
• help resolve their problems.

Sources:
1. Yakovlev, I.V., “An ERP Implementation and Business Process Reengineering at a Small University”,
Educause Quarterly, Number 2, 2002;
36
2. Umble, M. Michael, “Avoiding ERP Implementation Failure”, Industrial Management, Jan/Feb 2002.
 Best Practices of ERP Implementation
• Extensive Education and Training
– General education about the ERP system for everyone.
– Massive amount of end users training before and during
implementation.
– Follow-up training after the implementation.
– 10 to 15% of total ERP implementation budget for training
will give an organization an 80% chance of a successful
implementation.

Source: Umble, M. Michael, “Avoiding ERP Implementation Failure”, Industrial Management, Jan/Feb 2002.
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 Best Practices of ERP Implementation
• Data Clean up and Data Integrity
– Clean-up data before cut-over.1
– “Near enough is no longer good enough.”2
– To command trust, the data in the system must be
sufficiently available and accurate.3
– Eliminate the old systems, including all informal
systems.3

Sources:
1. http://www.bpic.co.uk/checklst.htm, viewed November 5, 2002;
2. http://www.projectperfect.com.au/info_erp_imp.htm, viewed November 5, 2002;
38
3. M. Michael Umble, “Avoiding ERP Implementation Failure”, Industrial Management, Jan/Feb 2002.
 Best Practices of ERP Implementation
• Implementation is viewed as an ongoing
process
– Ongoing need for training and software support
after implementation.
– Ongoing need to keep in contact with all system
users and monitor the use of the new system.
– Ongoing process of learning and adaptation that
continually evolves over time.

Source: Umble, M. Michael, “Avoiding ERP Implementation Failure”, Industrial Management, Jan/Feb 2002.
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 Total Cost of ERP Ownership (in millions of $) -
META Group Survey

System Medium Average SmallestLargest 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
 Conclusion
• The benefits of a properly selected and implemented
ERP system can be significant.
– An average, 25 to 30% reduction on inventory costs; 25%
reduction on raw material costs.
– Lead-time for customers, production time, and production
costs can be reduced.
• BUT cost of implementing can be quite high and risks
are great.

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 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
 ERP II

• Integrates the front and back office to enable an “information

visibility” strategy that pushes the right information to the right
people at the right time through the right communications
channels.
• A competitive strategy that integrates a centralized, core ERP
system with highly specialized solutions.
• In 2001, $4 billion (or 20%) of the $20 billion of total vendor
revenue was spent on extensions to the ERP system. In 2006,
AMR predicts this percentage will increase to 50%.

Source:
1. http://www.intelligententerprise.com/020903/514feat2_1.shtml, viewed September 19, 2002;
2. http://www2.cio.com/metrics/2002/metric381.html, viewed September 19, 2002.
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 ERP II Architecture

Source: http://www.intelligententerprise.com/020903/514feat2_1.shtml, viewed September 19, 2002. 44

 ERP II: A Revolutionary Change

Source: http://www.intelligententerprise.com/020903/514feat2_1.shtml, viewed September 19, 2002. 45

 ERP II: A Revolutionary Change

• Technology
– Technology goals aligned with internal
business processes and those of diverse partners,
customers, suppliers, and distributors.
• Business Process
– Implementation cannot be made without a change of business
processes.
• People
– ERP II implementation success depends on the business
community’s cultural acceptance of the system.

Source: http://www.intelligententerprise.com/020903/514feat2_1.shtml, viewed September 19, 2002. 46