Enterprise Resource Planning

Dr. David L. OlsonJames & H.K. Stuart Professor of MIS

Dept. of Management, UNL

History of ERP

• Extension of materials resource planning• Integrate a firm’s computing for reporting, planning,

& control – common architecture– Multifunctional, Integrated, Modular

• In 1990 industry about $1 billion– SAP, Baan, PeopleSoft, JDEdwards, Oracle, others

• Rapid growth in late 1990s– Some relation to Y2K fears, but not the main reason

• Mergers in early 2000s– Peoplesoft bought JDEdwards;– Oracle bought Peoplesoft

History of ERP

• SAP: All-comprehensive in theory, apply best-practices– Very intrusive, very expensive, require massive

changes in operations

– If changes a core business competency, don’t;

• While theory centralized, many implementations modular– PeopleSoft – human resources

– Finance & Accounting a common first module

New Market Shares 2004Van Arnum, www.chemicalmarketreporter.com 24 Jan 2005 22-23

ERP SCM CRM HCM P&S Total

SAP 36% 11% 14% 21% 15% 18%

PeopleSoft 8% 5% 5% 19% 8% 6%

Oracle 12% 6% 3% 7% 8% 6%

Combined 20% 11% 8% 26% 16% 12%

Sage-Best 5% 0 1% 2% 0 2%

Microsoft BS 3% 1% 2% 2% 0 2%

Geographic Sales 2004Van Arnum, www.chemicalmarketreporter.com 24 Jan 2005 22-23

NAmer Europe Asia/P Total

SAP $3.008b $4.211b $0.945b $8.594b

PeopleS $2.160b $0.518b $0.115b $2.880b

Oracle $1.544b $0.612b $0.346b $2.663b

Sage $0.472b $0.491b - $0.963b

Microsoft $0.688b $0.076b $0.024b $0.804b

ERP Project Failure

FoxMeyer Drug Bankrupt

Hershey’s 19% drop in profit

29% increase in inventory

City of Oakland Erroneous paychecks

Miller Industries Inefficient ERP – operating loss

WW Grainger Inc Earnings dropped $11 million

Comparative Modules

SAP Oracle PeopleSoft JDEdwards

SD Marketing, Sales Supply chain Order management

MM Procurement Supplier relationship Inventory, procurement

PP Manufacturing Manufacturing mgmt

QM Enterprise perform Technical foundation

PM Service Enterprise service

HR Human Resources Human capital mgmt Workforce management

FI Financials Financial mgmt sol. Financial management

CO Time & Expense mgmt

AM Asset Management Enterprise asset mgmt

PS Projects Project management

WF Order Management

Contracts Subcontract, real estate

Relative ERP Module Use(Mabert et al. 2000; Olhager & Selldin, 2003)

Module Use reported - US Use reported – Sweden

Financial & Accounting 91.5% 87.3%

Materials Management 89.2% 91.8%

Production Planning 88.5% 90.5%

Order Entry 87.7% 92.4%

Purchasing 86.9% 93.0%

Financial Control 81.5% 82.3%

Distribution/Logistics 75.4% 84.8%

Asset Management 57.7% 63.3%

Quality Management 44.6% 47.5%

Personnel/HR 44.6% 57.6%

Maintenance 40.8% 44.3%

R&D Management 30.8% 34.2%

BAAN Industry-Specific Variants

Discrete Manufacturing Process Manufacturing

Aerospace & Defense Chemicals

Automobile Food & Beverage

Industrial Machinery Pharmaceuticals

Electronics Cable & Wire

Telecommunications Pulp & Paper

Construction Metals

Logistics

Microsoft Great Plains Business Solutions

Accounting & Finance

Customer Relationship Management

E-Business

Human Resources & Payroll

Manufacturing

Project Accounting

Supply Chain Management

Reasons for Implementing ERPmeasured on 1-5 scale (5 best)

Most important Avg Small Large Sig.

Replace legacy systems 4.06 87% 90%

Simplify & standardize 3.85 72% 95% ***

Improve interactions-suppliers & customers

3.55 71% 76%

Gain strategic advantage 3.46 70% 92% **

Reasons for Implementing ERPmeasured on 1-5 scale (5 best)

Less important Avg Small Large Sig.

Link to global activities 3.17 36% 74% ***

Solve Y2K problems 3.08 62% 42% **

Keep up with competitors 2.99 42% 60%

Ease of upgrading systems 2.91 35% 54% ***

Restructure company organization 2.58 33% 35%

Implementation Time Required

• 6 months or less 9%• 7 to 12 months 25%• 13 to 18 months 24%• 19 to 24 months 21%• 25 to 36 months 11%• 37 to 48 months 6%• Over 48 months 2%

Rate of technology change makes 18 month IT projects dubiousalthough ERP a major system, longer times appropriate

Estimated System Life – 20th Century

Less than 3 years 3.1%3-5 years 12.2%5-7 years 30.6%7-10 years 26.5%over 10 years 27.6%

• Now less:– Due to technology change– Designed obsolescence

Expected ROIMabert et al. (2000); Olhager & Selldin (2003)

Expected ROI US Sweden

< 5% 14% 17%

5% to 15% 18% 38%

16% to 25% 36% 30%

26% to 50% 18% 11%

> 50% 13% 4%

SAP: Best Practices

• A key to original product– The most efficient way to perform a task

• SAP devotes considerable research to best practices– 800 to 1000 best practices reported in their R/3 system

• Davenport [1998]: – Firm’s vary in what is best for them– Business world dynamic– Rigid approach has dangers– If a firm develops a competitive advantage, they give it

up by adopting “best practices”

Non-ERP Process

1. Salesperson enters customer order 2. Salesperson notifies CRM of order3. CRM employee records order4. Salesperson notifies accounting5. Accounting employee records sale6. Salesperson notifies warehouse7. Warehouse employee records order8. Warehouse employee notifies packing & shipping9. Shipping employee records order10. Shipping employee notifies procurement11. Procurement employee records order for raw materials replacement12. Procurement employee notifies production to make more13. Production employee records order

ERP System Process

1. Sales person enters customer order on sales order system (SOS)2. SOS:

1. Notifies CRM2. Notifies Accounting3. Records sale in Accounting System4. Notifies Warehouse5. Records order on Warehouse Management System (WMS)

3. WMS 1. Notifies packing & shipping2. Records order on Packing and Shipping System (PSS)

4. PSS 1. Notifies procurement2. Records order for raw materials with Procurement Management System (PMS)

5. PMS1. Notifies production to do work2. Enters manufacturing order on Production Planning System (PSS)

Strategic Approach Mabert et al. [2000]

• Single ERP package 40%

• Several ERP packages best-of-breed 4%

• Single ERP package supplemented 50%

• Multiple ERP packages supplemented 5%

• Totally in-house 0.5%

• In-house supplemented 1%

Over 50 vendors (130 providers on market at that time)

SAP & PeopleSoft 25%

Implementation Strategies Used

months small large

Big bang 41.4% 14.9 47% 14%

Mini big bang 16.6% 16.8 24% 9%

Phased by module 17.3% 22.1 20% 20%

Phased by site 22.7% 30.0 8% 48%

Phased by module & site

2.3% 24.8

System Cost

6% annual revenue (less for larger; up to 50% for smaller)

<$5 million 42.3% <$50 mill revenue

$5 to $25 mill 33.0% $251 to $750 mill revenue

$26 to $50 mill 10.4% Widespread

$51 to $100 mill 7.2% $1.5 bill to $5 bill revenue

>$100 million 7.1% Over $5 billion revenue

Cost Component % of total implementation

Survey Interviews Range Small Large

Software 30.2% 15% 10% to 20% 35% 23%

Consulting 24.1% 30% 20% to 60% 24% 25%

Hardware 17.8% 25% 0% to 50% 21% 14%

Impl. Team 13.6% 15% 5% to 20% 11% 23%

Training 10.9% 15% 10% to 20% 10% 12%

Cost Impact

• Also affects operations– Intent was to lower operations cost– Initially, often the reverse

• Often use data warehouse system– Very efficient data storage– Very expensive

ERP MaintenanceNah et al. (2001)

• Corrective– Incorporate vendor patches, fix problems

• Adaptive– Implement new features, internal customization,

implement interfaces

• Perfective– New versions

• Preventive– Monitor response time, errors, track maintenance

activities

ERP System Migration

• Over time, need to adopt changes– Minor modifications

– Maybe system replacement

– Vendors change products

• WHY– The longer the time between upgrades, the harder

– Easier to support a smaller number of software versions

– Migrations can increase sales of seats, add-ons

BOLT-ON Software

• Demand planning• Inventory management• E-Procurement• BtoB• Integrated suite systems (I2)• Order tracking• Factory planning & scheduling• On-line collaboration• Warehouse management• Data mining

Example Bolt-OnsMabert et al. [2000]

Bolt-On Example Vendor

Demand planning Demand Planner BAAN

E-procurement Ariba Network Ariba, Inc.

Business to business MANAGE:Mfg Cincom

Integrated suites Manugistics 6 Manugistics

Order tracking Intelliprise American Software

Factory plan/schedule Capacity Planning JDEdwards

On-line collaboration Aspen OnLine Aspen Technology

Warehouse mgmt CSW Warehouse Management System

Cambar

Data mining Enterprise Miner SAS Institute

Middleware

• ERP interfaces to external applications difficult to program

• Middleware is an enabling engine to allow such external applications eto ERP– Data oriented products - shared data sources– Messaging-oriented - direct data

sharing

Example of MiddlewareD. Thomas, Computer Weekly 5/18/2004 p. 1

• British American Tobacco PLC– Wanted to reduce the cost of moving data around

Enterprise Application Integration software– Hoped to save 75% of integration projects through

MIDDLEWARE Cast Iron Systems Inc.’s Application Router

– Transfer data between • point-of-sale,

• Oracle databases,

• Siebel CRM,

• SAP ERP

Data Storage Systems

• Data Warehousing– Orderly & accessible repository of known facts &

related data

– Subject-oriented, integrated, time-variant, non-volatile

– Massive data storage

– Efficient data retrieval

• CRM one data mining application– Can use all of this data

– Common ERP add-on

Database Product Comparison

Product Use Duration Granularity

Data warehouse

Repository Permanent Finest

Data mart Specific study

Temporary Aggregate

OLAP Report & Analysis

Repetitive Summary

Supply Chains

• Collections of organizations working together– Raw materials – products – retail– Old manufacturing: vertical integration– Military logistics– Now appropriate for e-business

Supply Chain

• Raw Materials Suppliers

• Processing Plants

• Assembly Plants

• Service Centers (warehouses)

• Retail outlets

ERP Tools in Supply ChainsKelle & Akbulut, Int. J. Prod. Econ. 93-94 (2005) 41-52

• Supply chain integration valuable– Buyers improve production plans & delivery

schedules– Suppliers use buyer inventory info to plan their

production & inventory control• Improve customer service quality

• Speed payment cycle

• Cost savings

• Identify & overcome bottlenecks

ERP ToolsKelle & Akbulut, Int. J. Prod. Econ. 93-94 (2005) 41-52

• Real-time transaction tracking• Internal process integration• Decision Support Tools (through Add-ons)

– Advanced Planning & Scheduling (APS)– Demand Planning & Revenue Management

(DPRM)– Customer Relationship Management (CRM)– Sales Force Automation (SFA)– Supply Chain Management (SCM)

Supply Chain Coordination Effects

• Value– Logistic efficiencies

– Coordinated advertising

– Large scale service

• Joint optimal policy will always save total system cost– 1-30% for supplier

– 25-60% for buyer

– NEED TO NEGOTIATE

Obstacles to Supply Chain Tool Use

• Real-time transaction tracking– Unwillingness to share information

• Need to show monetary benefits & savings

– Too much data, too many details• Data analysis (data mining)• Activity based costing to focus on value-added

• Internal process integration– Doesn’t support operational decisions

• Cooperative models, share benefits

Advanced Planning Systems

• Computer technology makes supply chain capable of dealing with demand uncertainty– Forecasting– Inventory reduction– Optimized transportation costs

• Advanced planning systems use operational data to analyze material flows in supply chain– Use historical demand for forecasts– Easy to collect data– Dynamic nature makes long-range forecasting difficult

Advanced Planning System Providers

i2

Manugistics

Numetrix

CAPS logistics

BAAN SCM components

J.D. Edwards SCM components

Oracle 11i

PeopleSoft Enterprise Performance Management

SAP SAP APO

Open System LinkageB. Bacheldor, Informationweek.com, 19 Jan 2004, p. 30

• Radio-frequency identification (RFID) technology– Allows remote data input– Requires middleware to translate RFID data

into formats usable by applications• Oracle: RFID-ready version for supply-chain

applications soon

• SAP: Auto-ID Infrastructure links RFID data to other systems

RFIDR. Boucher Ferguson, eweek, 17 Jan 2005, p. 32

• Wal-Mart– Top 100 suppliers expected to be RFID-enabled

by mid-January 2005– Electronic bar codes– Allows collaborators to access data quicker

• Bayer Corp.– Acsis software integrates RFID into their SAP– Compare Wal-Mart data with their own

• The Gillette Co.– OATSystems Inc. software links real warehouses to data

warehouses

Portals of Major ERP VendorsStein & Davis [1999]; Stein [1999]

Vendor Portal Function

BAAN iBAAN Application integration

J.D. Edwards ActivEra Portal Interface to ERP, e-mail, spreadsheets, Internet

Oracle 11i Connect to business intelligence

PeopleSoft PeopleSoft Business Network

Tie applications to online communities

SAP mySAP-Employee workplace

Travel reservation, online procurement

SAP mySAP.com Center for SAP users

Lawson Insight II Seaport Files, data warehouse, e-mail, Internet

ERP Security Threats

Type of Security Threat

Physical Theft, damage, copying

Unauthorized access

Natural disasters or accident

Social Tricks to gain information

Network Telephone taps

Dial-up entry

Internet hacking

Viruses

CPU Support

• Originally mainframe– SAP R/2 – 1974

• Client/Server architecture early 1990s– More flexible– SAP R/3

• SAP announced discontinuing R/3– Outcry by customers – delayed to 2011

Expected Benefits from ERPMabert et al. (2000); Olhager & Selldin (2003)

1-not at all; 5-to a great extent

ERP Performance US Sweden

Quicker information response time 3.51 3.81

Increased interaction across enterprise 3.49 3.55

Improved order management 3.25 3.37

Decreased financial close cycle 3.17 3.36

Improved customer interaction 2.92 2.87

Improved on-time delivery 2.83 2.82

Improved supplier interaction 2.81 2.78

Lowered inventories 2.70 2.60

Improved cash management 2.64 2.57

Reduced operating costs 2.32 2.74

Benefits from ERPMabert et al. (2000); Olhager & Selldin (2003)

1-not at all; 5-to a great extent

Area Benefitting US Sweden

Information availability 3.77 3.74

Integration of operations/processes 3.61 3.42

Information quality 3.37 3.31

Inventory management 3.18 2.99

Financial management 3.11 2.98

Supplier management/procurement 2.99 2.94

Customer responsiveness/flexibility 2.67 2.95

Decreased IT cost 2.06 2.05

Personnel management 1.94 2.06

Lessons Learned

• ERP implementation projects problematic• Variety of ways to implement• Benefit assessment problematic• Different ways to design ERP

– Customization of vendors popular

• Many enhancements available• Supply chain opportunities

– Requires open systems

ERP Success Factors Business Horizons 2000

1. Senior management involvement

2. Cross-functional implementation team

3. Extra effort up-front defining detailed plan

4. Clear guidelines on performance measures

5. Clear guidelines on using outside consultants

6. Detailed plans to train users

Apparent Future

Extensions to ERP Implementing Planned Considering No plans

Data Warehouse 32.8% 16.6% 20.1% 30.6%

E-Business 19.9% 31.7% 30.2% 19.9%

Supply chain system 19.7% 24.5% 22.7% 32.2%

Adv plan & schedule 19.1% 19.1% 30.9% 19.1%

CRM 8.8% 12.3% 17.2% 61.8%

Business intelligence 6.1% 15.4% 23.4% 55.1%

Advantages & Disadvantages

• System Integration– Improved understanding across users– Less flexibility

• Data Integration– Greater accuracy– Harder to correct

• Better methods– More efficiency– Less freedom & creativity

• Expected lower costs– More efficient system planned– Dynamic needs, training typically underbudgeted, hidden implementation

costs

Summary

• ERP software has had a major impact on organizational computing

• Technological, financial, organizational benefits

• Also expensive, massive, inflexible

• Many hidden costs

• Complex system meriting study