introduction to erp systems prof (dr) sps saini. contents historical context of erp what is erp? why...

INTRODUCTION TO ERP SYSTEMS

PROF (Dr) SPS SAINI

CONTENTS

• 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.


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.


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).


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.

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.

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.


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.


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.


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)


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.


• 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


• 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


• 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

Five forces driving industry competition (Porter 1980).

Substitutes

Potentialentrants

Suppliers Buyers

Industrycompetitors

Rivalry amongexisting firms

Threat of new entrants

Threat of substituteproducts or services

Bargaining powerof suppliers

Bargaining powerof buyers


• 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


Search-relatedcosts

Unique productfeatures

Switchingcosts

Internalefficiency

Interorganizationefficiency

BargainingPower

Comparativeefficiency

Competitiveadvantage

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.


The Project PhaseComprises 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.


The Shakedown PhaseThe 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.


The Onward and Upward PhaseContinues 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.


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 succeed2. 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)


• How do you measure success?

• What are we trying to achieve? Scope, Vision.

• Project Metrics.

• Early Operational Metrics.

• Longer Term Business Results.


• 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 SuccessFactors 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.

introduction to erp systems prof (dr) sps saini. contents historical context of erp what is erp? why...

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