enterprise resource planning (erp)/ enterprise systems

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Enterprise Resource Planning (ERP)/Enterprise Systems

Jai-Yeol Son

Credits: Yair WandMIS Division, Sauder School of Business

University of British Columbia

Jai Son, Sauder School of Business, UBC 2

OUTLINE

ERP BackgroundWhat is ERP?Benefits & Risks of ERPERP Implementation ERP Market and VendorsERP Trends


Toward ERP:Information Systems in Organizations

ERP

Individual ISSupport individual

functional units and operational tasks

In-house Development ISs are developed by IT

people inside the organization

Integrating ISsIntegrate various

information systems

Off-the-shelf Products Ready-to-use information systems purchased from

the market

ERP Background


Toward ERP: From MRP to ERPInventory control systems

1960s

MRP (Material requirement planning)Inventory + purchasing + production scheduling 1960s, 1970s

MRP IIMRP + finance, HR 1970s, 1980s

ERPMRP II + other functions of mktg and sales1980s, 1990s

ERP Background


Toward ERP:Business Process Reengineering

BPR• Radical redesign of

processes to exploitinformation technology (IT)

• “Abandon the outdated rules that underline current business processes.”

• Not just automation

• Start from scratch and redesign processes

• Internal Staffs• Hire consultants

• Adopt ERP Packages

Common Approaches

ERP Background


The Role of ERP in BPR

ERP includes “best business practices in the form of a blueprint.”

Choose the best business practices built into ERP systems

This blueprint equipped in ERP serves as a model for BPR.Therefore, it is essential to understand what ERP can do before designing the business process.

ERP Background

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ERP – What is it?

A set of applications to operate and manage most aspects of an organization, based on an integrated database.

What is ERP?

A Business Software system that enables an organization to effectively and efficiently manageits resources including material, people, plant and equipment across the entire enterprise.

Source: ERP’s Second Wave. Deloitte Consulting


ERP – What is it?

ERP is fully integrated off- the- shelf software!facilitates the flow of information among all the processes of an organization’s supply chain. software solution that addresses that enterprise needs taking the process view of an organizational goals tightly integrating all functions (usually TPSs) of an enterprise

ERP allows data sharing b/w different systems (modules).joint execution of business processes among different systems (modules).

What is ERP?


ERP Process Example (Davenport p. 123)

Sales rep in Paris prepares a formal contract using the ERP system.Sales rep enters an order for computers into a ERP system. It triggers all other activities in other part of the system such as:

The system checks the customer’s credit limit.The system schedules the shipment.The system determines necessary parts.The system reserves the parts and orders parts from suppliers, if necessary.The system schedules assembly in the company’s factory in Taiwan.The system updates sales and production forecasts.The system updates the sales rep’s payroll account with the correct commission.The system updates A/P and A/R ledgers.The system updates corporate cash levels.

Imagine that how long it would take to complete these activities with a number of fragmented information systems throughout the company!

What is ERP?


Examples of ERP Modules (SAP)

Financials• A/R and A/P• Asset accounting• Cash management• General ledger• Profitability analysis• Financial consolidation• and more

Operations & Logistics• Inventory management• Material req’t planning• Materials Management• Production planning• Purchasing• Shipping• and more

Sales & Marketing• Order management• Pricing• Sales management• Sales planning

Human Resources• Human-resource time accounting• Payroll• Personnel planning• Travel Expense

What is ERP?


Production Logistics Financial Human Marketing Res.mngt Res. Mngt & sales

PP Production Planning xQM Quality Management xMM Materials Management x xPM Plant Maintenance xFI Financial Accounting xIM Investment Management xCO Controlling xHR Human Resources xSD Sales & distribution x x

SAP R/3 ApplicationsPartitioned by the five functional areas

What is ERP?


ERP - How does it work?

Based on a DBMS platformEases exchange of information and data among different corporate divisionsUnites major business practices within a single group of software modulesModules run on client/serverenvironment Each module works separately, performing data processing functions

InventoryControl

Purchasing

Payroll

ERP

...DB

Productionplanning

Client/server environment

Order Mgt

Modules

A/P and A/R

DBMS

What is ERP?

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5 Major Reasons of ERP Projects

Integrate financial informationIntegrate customer order information Standardize and speed up manufacturing Reduce inventoryStandardize HR information

Source: ERP Executive Summary – CIO Magazine

Benefits and Risks of ERP


Benefits of ERP




Benefits of ERP




“Success” Stories

MicrosoftSpent ten months and $25 million installing SAP R/3 to replace more than 30 separated systems supporting the company’s financial, operations, and human resource groups in 26 subsidiaries. Resulted in annual savings of $18 millions and Bill Gates calls SAP “an incredible success story”

Owens-Corning (building supplies manufacturer)Wanted to offer one-call shopping for all the exterior siding, insulation, pipes, and roofing material that builders need.Implement SAP R/3 and the sales staff was able to come up with a single product list and a single price list. Was able to track finished goods inventory more easily The estimated savings were more than $65 million annually



Risks of ERP

Systems and strategy clash!It only provides “a generic solution” (Davenport, p. 125)Most common reason in ERP failureOnly some degree of customization possible … but the system’s complexity makes major modifications impracticableIn the past, companies would first decide how they wanted to do business and then choose a software package that would support their proprietary processes. They often rewrote large portions of software code to ensure a tight fit. With ERP, the business must be modified to fit the system.



Risks of ERPHigh initial investment

$100M~200M for large companies is not uncommonEven small organizations may need to spend more than $1 million.Consulting (30%); HW/Infrastructure (25%); Implementation Team (15%); Training (15%); Software (15%)

Technical difficulty in implementing ERP Lengthy implementation time

Typically 1 to 4 years

If used by nearly all the companies in an industry, it may undermine a company’s sources of differentiation –competitive advantage.

As a CEO says, “competitive advantage in this industry might just come from doing the best and cheapest job at implementing SAP.” (Davenport, p127)


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Issues/Obstacles of ERP Projects




“Unsuccess” StoriesSAP and Anderson consulting (contractor for installing SAP for FoxMeyer) faces a $500 million lawsuit from the trustee for bankrupt FoxMeyer Corp., charging that the failure of an SAP system led to the drug distributor's collapse--a charge SAP executives deny.

Hershey’s reported a 19% drop in 3rd quarter net earnings in 1999, and they blamed that SAP software glitches impaired their ability to meet Halloweencommitments with distributors and retailers.

Updates: Hershey finally fixed the problems with a newly upgraded SAP R/3 4.6 in 2001. The $4.6 billion company is now able to track daily sales and shipments of classic Halloween candy.



Minimizing the Risks of ERP

Stress the enterprise, not the system (e.g. Elf Atochem, Davenport, p. 128)

Don’t be too ambitious!Make decisions on what processes should be supported by ERP, then install only the necessary modules

Redefine/rework processes so that they can be aligned with the requirements built into an ERP system to be implemented

Necessary to take full advantage of the new ERP system May need to establish a new position (e.g. demand manager at ElfAtochem, Davenport, p. 130)



Implementing an ERP Application

How can a “generic” ERP be adapted to the specific needs of an organization?

Customizing processes: configuration tablesExtension:

Specialized programming languageUser exits (to call other applications and custom routines)

Code modification

ERP Implementation


ERP Implementation

1. Decide on which functions will be supported by a new ERP system

2. Decide on which modules to install3. Customize (configure) the system to achieve the best

possible fit with your company’s processes4. Make a decision on implementation strategies 5. End user training

ERP Implementation


ERP Market and VendorERP Market and Vendors

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ERP Vendors: SAPCountry of origin: GermanyFounded - 1972, by five former IBM employees in Germany1979: R/2 (R- realtime) for mainframe applications1992: R/3 for Client Server environmentsMarket Share: about 25% (2001)Translated into “Systems, Applications, and Products in Data Processing”Went public in 1988Recognized as the leader of ERP market in the worldAcquired Kiefer&Veittinger, a leading German CRM vendor in 1998Suitable for wide range of industries and organizations

Particularly strong in automotive, banking, consumer products industries

ERP Market and Vendors


ERP Vendors: Oracle

Country of origin: USAYear: 1977Name of product: Applications 11iMarket Share: 8% (2001)Typical client: Fortune 1000

Particularly strong in service intensive environments like finance and banking industriesStrong in Financials and Supply Chain Mgt Modules

Leader in adding E-commerce capabilities such as CRM features (built own CRM)



ERP Vendors: PeopleSoft

Country of origin: USAYear: 1987Name of product: PeoplesoftMarket Share: 8% (2001)Target the service sector with products designed to help companies handle their intangible costs; Has a powerful HR module, with additional packages of varying quality.Strong in Service intensive environments

Well suited for government, municipalities, and professional services




Moderate Growth after 1999

The revenue of major ERP companies will grow at a 14 percent improving to $36 billion in 2005 from $21 billion in 2001, due to strong growth in other products like CRM. However, ERP sales growth would slow, growing at only a 5 percent from $16.9 Billion in 1999 to $21.4 Billion in 2004

Source: AMR Research




Top 5 Worldwide ERP Software Application New License Revenue Market Share

100.0100.0Total Market Share

50.351.1Others

4.64.9Microsoft Business Solutions

4.65.4SAGE

7.66.5PeopleSoft

7.97.0Oracle

24.725.1SAP AG

2001 Market Share (%)

2002 Market Share (%)

Company

Source: Gartner Dataquest (June 2003)

- In 2002, worldwide ERP new license software revenue totaled $5 billion, down from $5.5 billion in 2001.



ERP Vendor Comparison: ERP Packages for Manufacturing Firms

Continuous

Batch

Repetitive

Make-to-Stock

Assemble-to-Order

Engineer-to-Order

Process

Discrete

<Source: Gartner Group: ERP Vendor Guide>


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ERP Vendor Comparison: ERP Packages for Manufacturing Firms

0

1

2

3

4

5

6

7

8

Continuous/Batch

Batch/Repetitive

Repetitive/Make-to-Stock

Assemble-to-Order

Engineer-to-Order

0

1

2

3

4

5

6

7

8

SAP BaaN Oracle PeopleSoft Average

<Source: Gartner Group: ERP Vendor Guide>



ERP Trends and Future

Small to midsize companies are targeted.The Accelerated ERP implementation approach

E.g., SAP’s ASAP (accelerated SAP) methodology

Providing ERP services via ASPAdding more decision support tools Adding more functionalities such as CRM and SCM

ERP II (named by Gartner Group)“Bolt-on” software

ERP Trends


ERP II Components

<Source: Gartner Report>

ERP Trends


ERP Trends and Future

Toward more open, flexible Internet-based technologies (e.g., XML, HTTP) that makes a firm easier (1) to integrate with other systems in the company, and (2) to collaborate with its business partnersFreestanding components, not interdependent modules, that enable firms to

Choose different vendors for each of the componentsManage the integration of components of multiple vendors

A “single instance” ERPERP Makeover

ERP Trends


Questions/Comments


Selected References“ERP’s Second Wave: Maximizing the Value of ERP-Enabled Processes,” Deloitte Consulting.James and Wolf, “A second wind for ERP,” The McKinsey Quarterly, 2000, Number 2. Kalakota and Robinson, e-business: Roadmap for Success, Addison Wesley, 1999.“ERP Executive Summary,” CIO Magazine. Davenport, T. H. “Putting the Enterprise into Enterprise Systems,” Harvard Business Review, July-August 1998, pp. 121-131. Mabert, V. A., Soni, A., and Venkataramanan, M. A. “Enterprise Resource Planning: Common Myths vs. Evolving Reality,” Business Horizons, May-June 2001, pp.69-76.

enterprise resource planning (erp)/ enterprise systems

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