Why ERP?

And Associated risks

Enterprise Resource Planning
K.S. School of Business Management
_____________________
Krupa Shah
 Consider this process
(Davenport, p123)

Sales Rep in Paris prepares a formal contract using the ERP

system
Sales Rep enters an order for computers into the ERP system
This triggers the following:
System checks the customers credit limit
System schedules the shipment
System determines necessary parts
System reserves parts and orders parts from suppliers, if necessary
System schedules assembly in the companys factory in Shanghai
System updates the sales reps payroll account with the correct
commission
System updates A/P and A/R ledgers
System updates corporate cash levels

Imagine how long it would take to complete these activities with a number of
fragmented information systems throughout the company!
 Examples of ERP Modules (SAP)
Financials Operations & Logistics
A/R and A/P Inventory Management
Asset Accounting Material Requirements Planning
Cash Management Materials Management
General Ledger Production Planning
Profitability Analysis Purchasing
Financial Consolidation Shipping

Sales & Marketing Human Resources

Order Management HR Time Accounting
Pricing Payroll
Sales Management Personnel Planning
Sales Planning Travel Expense
 SAP R/3 Applications

Production Logistics Financial Human Marketing &

Resource Resource Sales
Management Management
PP Production Planning x
QM Quality Management x
MM Materials Management x x
PM Plant Maintenance x
FI Financial Accounting x
IM Investment Management x
CO Controlling x
HR Human Resources x
SD Sales & Distribution x x
ERP How does it work?
Based on a DBMS platform
Eases exchange of information and data among different
corporate divisions
Unites major business practices within a single group of
software modules
Modules run on client / server environment
Each module works separately, performing data processing
functions
ERP How does it work?
5 Major reasons for ERP Projects
1. Integrate financial information
2. Integrate customer order information
3. Standardize and speed up manufacturing
4. Reduce inventory
5. Standardize HR information and processing

Source: ERP Executive Summary, CIO Magazine

Benefits of ERP

Source: ERPs Second Wave, Deloitte Consulting

Benefits of ERP

Source: ERPs Second Wave, Deloitte Consulting

Benefits of ERP

Source: ERPs Second Wave, Deloitte Consulting

Benefits of ERP

Source: ERPs Second Wave, Deloitte Consulting

Success Stories
Microsoft
Spent 10 months and $25 million installing SAP R/3 to replace more
than 30 independent systems supporting the companys financial,
operations and HR groups across 26 subsidiaries
Resulted in annual savings of $18 million, and Bill Gates called the
SAP implementation 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.
Implemented 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 in ERP Implementation
Systems vs. Strategy
It only provides a generic solution
Is the most common reason of ERP failure
Only some degree of customization possible.. But the systems
complexity makes major modifications impractical
In the past, companies would first decide how they wanted to do
business and then choose a software package that would support those
processes. They often rewrote large pieces of software code to ensure
a tight fit.
Now, with ERP, business must be modified to fit the system!

High Initial Investment

$100 - $200 million for large companies is not uncommon
Even smaller ones may spend $1 million!
Consulting (30%), HW / Infra (25%), Implementation Team (15%),
Training (15%), Software (15%)
Risks in ERP Implementation
Tech difficulty in implementing ERP
ABAP, for instance

Lengthy Implementation Time

Typically 1-4 years

Differentiation?
If used by nearly all the companies in an industry, it may affect the
companys competitive advantage
As a CEO says, Competitive advantage in this industry might just
come from doing the best and cheapest job at implementing SAP
 Issues / Obstacles in ERP projects

Source: ERPs Second Wave, Deloitte Consulting

 Issues / Obstacles in ERP projects

Source: ERPs Second Wave, Deloitte Consulting

 Issues / Obstacles in ERP projects

Source: ERPs Second Wave, Deloitte Consulting

UnSuccess Stories
FoxMeyer (Drug Distributor)
Wanted to implement SAP
Appointed Anderson Consulting as the contractor for implementing
SAP in 1993
The $5 billion company went bankrupt in 1996
SAP and Anderson Consulting face a $500 million lawsuit from the
trustee for bankrupt FoxMeyer Corp., charging that the failure of an
SAP system led to the drug distributors collapse a charge that SAP
executives deny

Hersheys (Chocolate Manufacturer)

Reported a 19% drop in Q3 net earnings in 1999
Blamed that SAP software glitches impaired their ability to meet
Halloween commitments with distributors and retailers
Update: Hersheys 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 and others.
Minimizing the Risks of ERP
Stress the enterprise, not the system

Dont 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
Implementing an ERP Application
How can a generic ERP be adapted to the specific needs
of an organization?

Customizing processes: Configuration tables

Extension
Specialized programming language
User exits (to call other applications / custom routines)
Code Modification
Implementing an ERP Application
1. Decide on which functions will be supported by a new
ERP system
2. Decide on which modules to install
3. Customize (configure) the system to achieve the best
possible fit with your companys processes
4. Make a decision on implementation strategies
5. End User Training
Thank You!