ERP Session : 1

A Foundation for Understanding Enterprise Resource Planning Systems

Objectives

Develop an understanding of how ERP systems improve the effectiveness of information systems in organizations Recognize the business benefits of ERP systems Understand the history and evolution of ERP

ERP Market

One of the fastest growing markets in software industry 34.5% of companies with revenues over $1 billion plan to purchase or upgrade $180 billion in sales in 2002 Maybe as much as $1 trillion by 2010

ERP Systems

Major investment

Cost between $50,000 and $100,000,000+ Replace legacy systems Reduce cycle times Lower operating costs Enables better management decisions

Variety of business justifications

Real-time On-line

What is ERP?

Software tools Manages business systems

Supply chain, receiving, inventory, customer orders, production planning, shipping, accounting, HR

Allows automation and integration of business processes Enables data and information sharing Enterprise-wide system Introduces best practices

Evolution of ERP

1960s: software packages with inventory control 1970s: MRP systems

Production schedule with materials management

Adds financial accounting system Integrated systems for manufacturing execution Integrated manufacturing with supply chain

1980s: MRPII systems

1990s: MRPII

Late 1990s: ERP

MRP I schematic

MPS

MRP II

Integrated Systems Approach

Common set of applications Usually requires re-engineering business processes

Better alignment

Limited customization

Easier upgrades

Overcomes inefficiencies of independent systems Integrated data supports multiple business functions

Overall Business Benefits

Information

Maximizes information throughput Provides timely information Integrates information throughout supply chain

Minimizes response time Pushes decision making down to lowest levels Reduces costs Cuts inventory Improves operating performance

Department Benefits

Sales

Increased efficiency

Lower quotes, reduced lead time, improved responsiveness

Manufacturing

Concurrent engineering Faster design and production Accurate customer service history and warranty information

Data Service

Accounts Payable

Suppliers paid accurately

Before and After ERP : Business Stand point

Before ERP Cycle time Transaction processing Financial mgmt Business process Costly bottlenecks Multiple transactions use multiple data files Increased cost of excess inventory, cost of overdue accounts receivable Proliferation of fragmented processes with duplication of effort With ERP Time and cost reduction of business processes Faster transactions, using common data Improves operational performance Re-engineering around a business model that conforms with best practices

Productivity

Lack of responsiveness to customers Improvements in and suppliers financial management and customer service

Before and After ERP : Business Stand point

Before ERP Supply chain management eBusiness Lack of integration Web based interfaces support isolated systems and their components Lack of tactical information for effective monitoring and control of organizational resources With ERP Linkages with suppliers and customers Web based interfaces are front end integrated systems Allows cross functional access to the same data for planning and control. Provides widely available information

Information

Communications Lack of effective communications Facilitates organizational with customers and suppliers communications with customers and suppliers

Systems Benefits

Eliminating legacy systems

Reduces incompatible data Can cause fragmentation

Allows sharing and monitoring of information across organization Foundation of eBusiness

Back-office functions

Standardization Helps obtain and maintain competitive advantage Improved interactions with customers and suppliers

ERP Vendors

SAP Oracle Multiple Packages Baan J.D. Edwards People Soft QAD SSA/BPCS Others

25.0% 14.2%

9.8%
8.8% 7.4% 2.5% 2.5% 2.5% 27.3%

ERP Basic Modules

Figure 12.1

SAP Enterprise Solution

Integration & Interoperability

Configurable Cable Packaged IA Imaging & Solution

Archiving

CS-

Hand Helds EH&S Bar EH&S SD Coding Sales & Distribution MM Materials Mgmt.

Billing

Multi-company IM Support Investment FI Mgmt Financial ISComprehensive Accounting Retail

CO Controlling IS-P AM Fixed Assets Mgmt.

functionality

Client/Server Layered Architecture

PP Production Planning EDI

Process Oriented Modular Design & Plug-In Capability Telecom Extensions

AFUDC QM PS SFA Quality Client / Server Project Scalable Sales ManageSystem ABAP/4 Force ment MSM Open WF AutomMaintenance RF / Workflow Systems ation & Service Mobile ISMgmt HR IS Dispatch RE Human Industry Resources Solutions IS-T / Network GUI & Internet RF&NF Mgmt

SAP R/3

LEGEND
- R/3 Core Financials - R/3 Core Logistics - R/3 Core HR - R/3 Technology - Industry Solutions - Partner Solutions C/W Certified Interfaces (Existing, Developing, Planned)

Enabled

Enterprise data model/databases

Workforce Mgmt

CAD

AM / FM GIS

IS-T / CCS

SAP - Systems, Applications & Products in Data Processing R/3 - Runtime System Three

ERP System Architecture

SAP R/3 System Architecture System Architecture
3 layers
Three-tier Client/Server

Database
Database

Business logic
Application

User Interface
Presentation

SAP R/3 + MySAP and PeopleSoft version 8.0 Reflect Web-enabled technology

ERP Feasibility

ERP is a large investment and must be treated as such investment entails more than cash outlays

Commitment to focus on interacting business processes

Benefits are not always economic Many feasibility issues need consideration

Economic Feasibility

Concerned with justifying an expenditure by considering both costs and benefits in monetary terms Investment costs for ERP

Very high: $10 million for a moderate sized application High likelihood of negative ROI

Tangible and intangible benefits must be considered Opportunity costs of NOT implementing ERP

Costs of ERP

The costs and risks of failure in implementing a new ERP system are substantial.

Hidden Costs of ERP

Integration and Testing Data Analysis Consultants and infinitum Implementation teams turn over Waiting for ROI Post-ERP depression

ERP Total Cost of Ownership (million $)

Example of NPV of ERP Project

Technical Feasibility

ERP must be viewed as technically complex systems resting organizational database management systems ERP may reside on single computer or be distributed

May strain computing resources May strain communications resources

Usually requires latest technology particularly in larger organizations

Operational Feasibility

Is business process standardization desirable?

Loss of personalization of customer data Cultural changes

Persons in the organization must be willing and able to achieve the change from current IS to an ERP Need for ERP Champion

Change Management

Crucial to ERP People resistant to change Examine cause of change May require organizational culture shift

Lewin-Schein change theory steps

Management Prepare for Change Retrain Moving
(i) Develop new methods and behaviors (ii) Create and maintain momentum

Reinforce Change Refreezing

(i) Reinforce desired changes (ii) Establish stable environment

Unfreezing
(i) Create awareness of need for change (ii) People support what they help create

Cease old habit

Learning Employees

New Culture

A Model for ERP Adoption

ERP Champion

Person or group who serves as driving force behind the organizations change to ERP Variety of people can be ERP champion Lead the organization to a fundamental revamping of core business processes

Possible ERP Champions

1. Chief executive officer 2. Teams of senior management

a) Chief information officer

b) Vice president of manufacturing c) Chief financial officer d) Other senior managers 3. Collection of well-respected middle managers from a wide spectrum of organization operations

ERP Implementation

Particular attention must be paid to software vendors, training, and cutover Takes months

Average is about two years Due to complexity and legacy systems developed years earlier

Variety of approaches can be taken

ERP Vendor Selection

Choice of vendor is important Underlying business concepts in vendors system should be major criteria After major ERP pieces are in place, firm may want to consider bolt-on systems

Software that takes advantage of ERP features

Customer relations management Demand forecasting Logistics

User Training

Cannot be an afterthought Must be part of the initial design Requires users to understand business processes beyond their normal jobs ERP vendors provide training services SAP is a leader in Training

Training Related to ERP Software

Type of Training Learning ERP Vendor Software Training by ERP Vendor (or company specializing in ERP training) Peer-to-peer training such as conferences

When Training Should Occur Before the ERP is planned and designed As the is being designed and implemented; also after the system is implemented Especially helpful after the implementation of ERP projects

Example of ERP Implementation Time Line

Example of ERP Implementation Time Line (Texas Instrument)

Implementation Methodology
Project preparation Business blueprint Realization Final preparation Go live & support

Program Management Communication and Quality Management Change Enablement

Initial Project Planning Project Procedures Project Kick-off Org. Team Training Techn. Req. Planning Quality Check

Team Training Develop System Env. Business Org. Struct. Business Process Def. Project Reestimate Quality Check

Baseline Configuration Set-up of Prototype Final Configuration Integration Tests User Profiles User Documentation Training Materials Key User Training Quality Check

End User Training System Management Old Data Take-over Cut Over Quality Check

Production Support Project Conclusion Quality Check

Cutover Approach
Old system
Pilot System

cutover
Immediate cutover Phased cutover Parallel cutover

Immediate

approach Phased approach Parallel approach

Old system

New System

Old system

New System

Old system New system

Causes of ERP failures

Underestimating the complexity of the planning, development, and training required Failure to involve affected employees in the planning & development phases and change management programs Trying to do too much, too fast Insufficient training Believing everything the software vendors and/or consultants say

Minimizing ERP Failures

Understand the organizations span of complexity Recognize processes where value cannot be maintained if standardization is imposed Achieve a consensus in the organization before deciding to implement an enterprise information system

ERP Critical Success Factor

Top Management Commitment

Change Management IT Infrastructure

Business Process Reengineering

Design Alternatives

Vanilla implementation

Complete vendor package Benefits

Total integration across all functional areas Re-engineering of all business processes Expensive Time-consuming

Deficits

Selected ERP modules

Benefits

Less costly and time-consuming Lacks total integration of data Limited applicability and use

Deficits

Design Alternatives, continued

Build in-house

Benefits

Can create system based on its needs Competitors will not have access to similar system Time- and resource-consuming Expensive Risky May not provide competitive advantage

Deficits

Maintain concurrent legacy systems

Benefits

Familiarity
May be a competitive disadvantage

Deficits

Cost-Benefit Analysis

Net Present Value

Time value of money 5-year timeframe for ERP Non-recurring costs:

Hardware, software, consulting, training, implementation Licenses, maintenance, consulting, teams

Recurring expenses:

Maintaining Competitive Advantages

Implement ERP system better than competitors Migrate to new versions faster Use vanilla ERP for core systems and build customized modules for others Increase availability of operational data Better use of data for analysis

Challenges

Realization of benefits On-time, on-budget implementations Applying multi-stage approach

Markus

Three phases: project, shakedown, and onward and upward phases Business results not achieved until last phase Four phases: planning, re-engineering, design, and configuration and testing phases Benefits not achieved until last two phases Benefits occur after implementation of advanced modules

Parr and Shanks

Holland and Light

Summary

ERP systems can improve the effectiveness of organizations through automation and integration of business processes ERP systems allow data and information sharing across the organization Departmental benefits include increased efficiency, faster design and production, and accuracy Implementing an ERP system helps the organization obtain and maintain a competitive advantage