Introduction to ERP Systems

William E. Sullivan, MS, CPA

Virginia Commonwealth University
December 6, 2001
Ojelanki K. Ngwenyama, Ph.D.
Overview of Talk
• Historical Context of ERP
• What is ERP?
• Why all the fuss about ERP?
• What is ERP offering?
• What is driving the ERP Movement?
• Phases of ERP Implementation
• ERP Failure and Success
 Historical Context of ERP

Historically, companies created “islands of

automation”. A hodge-podge of various
systems that operated or managed various
divergent business processes. Sometimes
these systems were integrated with each
other and sometimes they weren’t.
Sometimes they were loosely interfaced and
sometimes they were more tightly
interfaced.
 Historical Context of ERP

The total organizational costs of maintaining a

patchwork of redundant and overlapping
systems has grown over the years to the
point where the cost of maintaining these
systems is greater than installing a new
system.
 Historical Context of ERP

Analysts have speculated that widespread

adoption of the same ERP package by the
firms in a single industry (an observed
phenomenon for semi-conductor
manufacturers) might lead to the
elimination of process innovation-based
competitive advantage (Davenport, 1998).
 Historical Context of ERP
Most companies have failed to implement ERP
packages successfully or to realize the hoped-for
financial returns on their ERP investment.
Companies have had similar difficulties with each
new wave of information technology since the
first mainframe systems. It takes years to realize
some envisioned IT-enabled changes in
organizational processes and performance, and
there are many ways to fail along the way.
 What is ERP?
“The notion that a company can and ought to
have an expert (or a group of experts) create
for it a single, completely integrated
supersystem – an “MIS” – to help it govern
every aspect of its activity is absurd.” (John
Dearden, 1972)
 ERP Definition

Enterprise systems are commercial software packages

that enable the integration of transactions-oriented
data and business processes throughout an
organization (and perhaps eventually throughout the
entire inter-organizational supply chain).
Enterprise systems include ERP software and related
packages as advanced planning and scheduling,
sales force automation, customer relationship
management, product configuration, etc.)
 Characteristics of Enterprise Systems

Integration: seamless integration of all the

information flowing through a company –
financial and accounting, human resource
information, supply chain information, and
customer information.
 Characteristics of Enterprise Systems

Packages: Enterprise systems are not developed in

house.
• IS life cycle is different: 1)mapping organizational
requirements to the processes and terminology
employed by the vendor and 2) making informed
choices about the parameter setting.
• Organizations that purchase enterprise systems enter
into long-term relationships with vendors.
Organizations no longer control their own destiny.
 Characteristics of Enterprise Systems
Best Practices: ERP vendors talk to many different
businesses within a given industry as well as
academics to determine the best and most efficient
way of accounting for various transactions and
managing different processes. The result is claimed
to be “industry best practices”.
The general consensus is that business process change
adds considerably to the expense and risk of an
enterprise systems implementation. Some
organizations rebel against the inflexibility of these
imposed business practices.
 Characteristics of Enterprise Systems
Some Assembly Required: Only the software is
integrated, not the computing platform on which it
runs. Most companies have great difficulty
integrating their enterprise software with a package
of hardware, operating systems, database
management systems software, and
telecommunications suited to their specific needs.
• Interfaces to legacy systems
• Third-party bolt-on applications
• Best of Breed Strategy (American Standard,
Starbucks)
 Characteristics of Enterprise Systems

Evolving: Enterprise Systems are changing

rapidly.
Architecturally: Mainframe, Client/Server, Web-
enabled, Object-oriented, Componentization
(Baan).
Functionally: front-office (ie. sales management),
supply chain (advanced planning and
scheduling), data warehousing, specialized
vertical industry solutions, etc.
 Why all the fuss about ERP?

• Market statistics
– US ERP sales grew from under $1 billion in
1993 to $8 billion in 1998 (Dataquest, $14.5
billion worldwide).
– In 1998 US companies spent $80 billion on
ERP systems integration.
– Industry analysts expect an average rate growth
of 37% per year for the next 5 years.
 Why all the fuss about ERP?

• Market statistics
– AMR estimates worldwide ERP software sales
to grow to $52 billion by 2002.
– If systems integration costs stay constant firms
will be spending $552 billion by 2002.
– Firms also spend about 15-20% annually to
keep ERP systems up to date.
What is ERP offering?
• ERP is business process infrastructure
– ERP is a software mirror image of the major
business processes of a firm, such as customer
order fulfillment and manufacturing.
– ERP software automates and integrates the
basic processes of a firm, from finance to the
shop floor, and eliminate complex, expensive
links between computer systems that were
never meant to talk to each other.
What is ERP offering?

• ERP is business process infrastructure

– ERP provides enterprise wide business process,
information and data management
– stream-line and standard business processes and
operating procedures
– provide interorganizational collaboration
– intraorganizational information sharing
 What is ERP offering?

• ERP Business Technology architecture

• Business Process Workflow Management
• Functional Information Management
– Marketing, Operations, HRM, etc.
• Decision Support Models and Tools
• Data Management
 What is ERP Offering?

• ERP Functional Architecture

– Information Systems Modules
• Human Resources Management
• Manufacturing Management
• Financial Management
• Accounting
• Marketing Management
• Workflow Management
 Examples of ERP Packages

ERP Packages

• BAAN www.baan.com
• JD Edwards www.jdedwards.com
• Oracle www.oracle.com
• PeopleSoft www.peoplesoft.com
• SAP www.sap.com
Motivation for Implementing ERP

Achieving and maintaining competitive

advantage requires better information
management
– Information Quality
– Information Reliability
– Information Access
– Information Sharing
Motivation for Implementing ERP

• Firms View ERP As A System:

– to provide better information management
– to transform the competitive space
– to transform relationships between
• their customers
• their suppliers
• their competitors
Motivation for Implementing ERP -
Competitive Space
Potential
entrants
Threat of new entrants

Industry
Bargaining power competitors Bargaining power
of suppliers of buyers
Suppliers Buyers

Rivalry among
existing firms

Threat of substitute
products or services

Substitutes

Five forces driving industry competition (Porter 1980).

Motivation for Implementing ERP

• FIRMS ACHIEVE COMPETITIVE

ADVANTAGE BY
– Locking in customer and suppliers
– Locking out the competition
– Attracting away competitors’ customers by
• product functionality
• cost performance
• service, reliability and flexibility
• quality and innovation
• response time/ time-to-market
Motivation for Implementing ERP
Search-related
costs

Unique product Bargaining

features Power

Switching Competitive
costs advantage

Internal
efficiency
Comparative
Interorganization efficiency
efficiency
 Motivation for Implementing ERP-
(inter-organizational efficiency)
• Better Supply Chain Management
• Inbound Logistics
• Operations
• Outbound Logistics
• Marketing And Sales
• Service
• Disintermediation and Market Reach
• Online Store Front
• Internet Banking
• Allows an organization to Reengineer all their
processes.
 Reasons for Not Adopting Enterprise Systems

Lack of Feature-Function Fit: between a company’s

needs and the packages available in the marketplace.
Company growth, strategic flexibility or decentralized
decision-making style. Many ERP systems are not
easy to change once they are configured and installed.
Availability of alternatives for increasing the level of
systems integration: Data Warehousing (Kraft,
CapitalOne?), Middleware (Dell)
 Phases of ERP Implementation
The Chartering Phase
Comprises the decisions leading up to the funding
of an enterprise system.
• Key Players: Vendors, Consultants, Company
Executives, IT specialists.
• Key Activities: Build a business case for ERP,
Select a software package, Identify a project
manager, Approve a budget and schedule.
 Phases of ERP Implementation
The Project Phase
Comprises the activities performed to get the system
up and running in one or more organizational
units.
• Key Players: Project Manager, Project team
members, Internal IT specialists, Vendors, and
Consultants.
• Key Activities: Software configuration, system
integration, testing, data conversion, training, and
rollout.
 Phases of ERP Implementation
The Shakedown Phase
The organization’s coming to grips with the ERP System.
Ends when “normal operations” have been achieved.
(Or they give up and pull the plug on the system)
• Key Players: Project Manager, Project team members,
Operational Managers, and End users.
• Key Activities: Bug fixing and rework, system
performance tuning, retraining, staffing up to handle
temporary inefficiencies. This is the phase in which
the errors of prior phases are felt. New errors can
arise in this phase also.
 Phases of ERP Implementation
The Onward and Upward Phase
Continues from normal operation until the system is
replaced with an upgrade or a different system. This is
where the organization is able to ascertain the benefits
(if any) of its investment.
• Key Players: Operational Managers, End-users, IT
support personnel (Vendors and consultants may be
involved – upgrades)
• Key Activities: Continuous business improvement,
additional user skill building, post implementation
benefit assessment. Most of these activities are not
performed.
 Phases of ERP Implementation

There are several possible outcomes for

each phase of the implementation.
Unresolved problems from one phase are
inherited by the next phase.
Just like the SDLC, the longer problems
go undetected and unresolved, the
more expensive it is to fix them.
 ERP Scope and Impacts
The ERP phenomenon is all encompassing for companies
and their key business partners:
1. Financial Costs and Risks
2. Technical Issues
3. Managerial Issues
4. IT Adoption, use and Impacts
5. Integration
ERP systems have strong conceptual links with every
major information systems area.
 ERP Failure
Standish Group Study of ERP Implementations:
• 35% are Cancelled
• 55% overrun their budgets
• Less than 10% are on time and under
budget.
 ERP Failure
Standish Group Study of ERP Implementations:
Implementation Averages
• Cost: 178% over budget
• Schedule: 230% longer
• Functionality: –59%
– or: the system will only perform 41% of the
functions it was intended to perform.
 Why Implementations Fail
1. People Don’t want the systems to succeed
2. People are comfortable and don’t see the need
for the new system.
3. People have unrealistic expectations of the
new system.
4. People don’t understand the basic concepts of
the system.
5. The basic data is inaccurate.
6. The system has technical difficulties.
 What is ERP Success?
KPMG Management Consulting’s recent
report Profit-Focused Software Package
Implementation showed some worrying
results. Eighty-nine percent of respondent
companies claimed that their projects were
successful, but only a quarter had actually
obtained and quantified all the planned
benefits. (KPMG, 1998)
 What is ERP Success?
• How do you measure success?
• What are we trying to achieve? Scope,
Vision.
• Project Metrics.
• Early Operational Metrics.
• Longer Term Business Results.
 What is ERP Success?
• Success is multidimensional and relative to both time
and objectives.
• What is success today may not be success in two years.
(Or 6 months)
• An ERP system that gives competitive advantage today
may not do so when competitors catch up and this large
ERP system simply becomes a cost of doing business.
• Success is often judged relative to the organization’s
unique goals for the system.
 Factors in ERP Success
Factors External to an Organization’s Control
Starting conditions: Competitive position, industry,
financial position, prior relevant experience, size,
structure, management systems.
These conditions may change over the course of the
implementation.
ERP Implementations are highly fluid and subject to
radical and unforeseen changes.
An organization’s goals and plans for the ERP system
may not be realistic when viewed objectively in light
of their starting conditions.
 Organization’s Motivated Behavior
An organization’s goal-directed enterprise systems
behavior can be defined in four categories:
1. Goals: Some goals are more conducive to success
than others. Some are too limited, some are too
unrealistic.
2. Plans: The methodology is critical for success.
3. Execution: A good methodology does not guarantee
quality in execution of the plan.
4. Response to Unforeseen Problems: Successfully
resolve problems – changing goals, plans and
actions to ensure a favorable outcome.
 Conclusions

End of Presentation