Korea Telecom 2007 Olson: ERP 2
ERP Systems Overview
Introduction to ERP
System Options
Korea Telecom 2007 Olson: ERP 2
ERP Claims
• Create value through integrating activities across organization
• Implementation of best practices
• Standardization of processes
• One-source data
• On-line access to information
Korea Telecom 2007 Olson: ERP 2
Role in Business
• Accounting basis
• US products – some extension of MRP
• Combine business computing– Unified system sharing one set of data– Advantages in efficiency, accuracy
• Best Practices– Apply the best process for each function
Korea Telecom 2007 Olson: ERP 2
Historical Growth
• 1970s & 1980s – more development than growth• 1990s – became widely adopted by large firms• Late 1990s – growth exploded with fears of Y2K
problems• Post-2000 – growth slowed
– Saturated market, economy dipped– Seeking to
• Fill in gaps with larger firms• Make products useful for smaller firms• Emphasize Internet
Korea Telecom 2007 Olson: ERP 2
Benefits of ERP
• Davenport [1998]:– Increases speed of information flows
• O’Leary [2000]:– Create value through integration of activities– Best practices improve operations– Standardization increases efficiency– One-source data more accurate, easier to access
Korea Telecom 2007 Olson: ERP 2
Benefits of ERP
• Better organizational planning• Better communication• More collaboration• Weil [1999]:
– Applied Robotics increased on-time deliveries 40% through ERP
– Delta Electronics reduced production control labor requirements 65%
Korea Telecom 2007 Olson: ERP 2
Why ERP?
• Technical:– Integration of computer systems foster
consistency, efficiency
• Financial:– Integrating applications saves money
• Organizational:– All members of organization use same system
Korea Telecom 2007 Olson: ERP 2
Conception vs. Reality
• Integrated System
• In fact, vendors usually sell modules– Would like to sell full system– Buyers reduce cost, risk, by starting smaller
scale• Risk of converting entire system
• Complex cost impact
Korea Telecom 2007 Olson: ERP 2
SAP: Best Practices
• A key to original product
• 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”
Korea Telecom 2007 Olson: ERP 2
ERP Supported Functions
Financial Hum Res Ops & Log Sales & MAccts receivable Time accounting Inventory Orders
Asset account Payroll MRP Pricing
Cash forecast Personnel plan Plant Mtce Sales Mgt
Cost accounting Travel expense Prod planning Sales plan
Exec Info Sys Project Mgmt
Financial consol Purchasing
General ledger Quality Mgmt
Profit analysis Shipping
Standard costing Vendor eval
Korea Telecom 2007 Olson: ERP 2
CPU Support
• Originally mainframe– SAP R/2 – 1974
• Client/Server architecture early 1990s– More flexible– SAP R/3
• Something new?– Portal systems (MySAP.com)
Korea Telecom 2007 Olson: ERP 2
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
Korea Telecom 2007 Olson: ERP 2
ERP System Options & Selection Methods
Alternative ERP project forms
Budgeting methods
Korea Telecom 2007 Olson: ERP 2
IS/IT Projects
• Typically – Late– Over budget– Fail to satisfy design specifications
• ERP projects– Are larger than normal– Can be expedited (if you do it vendor’s way)– Cost range $5 million to over $100 million (+)
Korea Telecom 2007 Olson: ERP 2
Alternative ERP OptionsForm Advantages Disadvantages
In-house Fit organization Most difficult, expensive, slowest
In-House + vendor supp.
Blend proven features with organizational fit
Difficult to develop
Expensive & slow
Best-of-breed Theoretically ideal Hard to link, slow, potentially inefficient
Customize vendor system
Proven features modified to fit organization
Slower, usually more expensive than pure vendor
Select vendor modules
Less risk, fast, inexpensive If expand, inefficient and higher total cost
Full vendor system
Fast, inexpensive, efficient Inflexible
ASP Least risk & cost, fastest At mercy of ASP
Korea Telecom 2007 Olson: ERP 2
Changing Nature of IT
• Technology is highly dynamic
• ERP projects often take years to install– Vendors are responding by expediting
• As long as you do it their way
• Improved versions may be on market by the time you install your system– This is one advantage of an ASP
Korea Telecom 2007 Olson: ERP 2
Financial techniques for Capital Budgeting
1. Payback2. Discounted cash flow3. Cost-benefit analysisThese are the more formal mechanisms implied by
Hinton & Kaye as capital budgetingAnything with as great an impact as ERP needs to
have some estimate of cost, benefits– Need to recognize that precise numbers not worth
obtaining
Korea Telecom 2007 Olson: ERP 2
Survey of ManufacturersMabert et al. (2000); Olhager & Selldin (2003)
FORMAL METHOD
Use in US Use in Sweden
ROI 53% 30%
Payback 35% 67%
Expected NPV 15% 12%
Other 11% 20%
Korea Telecom 2007 Olson: ERP 2
Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)
Time to Install ERP US Sweden
12 months 34% 38%
13 to 24 months 45% 49%
25 to 36 months 11% 8%
37 to 48 months 6% 4%
> 48 months 2% 1%
Korea Telecom 2007 Olson: ERP 2
Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)
Installation Cost US Sweden
< $5 million 42% 40%
$5 million to $25 million 33% 35%
$26 million to $50 million 10% 18%
$51 million to $100 million 7% 7%
> $100 million 7% In prior
Korea Telecom 2007 Olson: ERP 2
Cost ProportionsMabert et al. (2000); Olhager & Selldin (2003)
Where money spent US Sweden
Software 30% 24%
Consulting 24% 30%
Hardware 18% 19%
Implementation team 14% 12%
Training 11% 14%
Other 3% 1%
Korea Telecom 2007 Olson: ERP 2
Mabert et al. [2000]Survey of 400+ manufacturers
Expected ROI Reported
< 5% 14%
5% to 15% 18%
16% to 25% 36%
26% to 50% 18%
> 50% 13%
Korea Telecom 2007 Olson: ERP 2
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%
Korea Telecom 2007 Olson: ERP 2
Mabert et al. [2000]Survey of 400+ manufacturers
• Even for ERP systems, only 53% used formal methods– For smaller IT projects, payback most popular
• Most systems expected to take years to install– Trend is to make much faster
• Cost varies widely– You have a choice as to where you spend– Training tends to be underbudgeted
• Not all expect big return
Korea Telecom 2007 Olson: ERP 2
Taiwan ERPC.-T. Yeh, M. Miozzo, T. Vurdubakis, Journal of Enterprise Information
Management 19:1, 2006, 30-49
• International vendors (like SAP)– BPR based on Western practice– The rest of the world not necessarily the same– Has created many misfits
• Especially in small-to-medium sized enterprises
– Business opportunity for small domestic vendors
Korea Telecom 2007 Olson: ERP 2
Taiwan’s industrial success
• Flexible, decentralized network of SMEs– Focus on export trade in consumer goods– Agility & adaptability important
• Vendor ERPs don’t support that– BPR forces clients of ERP to “do it their way”
• They (SAP) think they know better
– Problems• First, middle, last name doesn’t fit Indian, Chinese• Egypt – pricing determined after receipt of goods – Oracle
didn’t do it that way
Korea Telecom 2007 Olson: ERP 2
ERP Revolution
• SAP claims organization can create its own solution– By selection of modules
• In reality, organizations required to re-engineer their business processes to conform to ERP– Standish Group – 90% of ERP implementations have
cost, schedule overruns
– Many failures – FoxMeyer, Hershey’s
Korea Telecom 2007 Olson: ERP 2
Vendor Response to Market
• 1990s market (large organizations) saturated• Vendors built
– products for new end-users• Non-profit• SMEs
– New types of ERP• Web-enables• CRM, SCM products
– New markets• China, India
– Less system rigidity• Faster implementation• Industry-focused systems
Korea Telecom 2007 Olson: ERP 2
Vendor efforts
• Make systems less rigid
• End-user organizations often modify– Between standardization & customization
• Complications– Implementation– Upgrades
Korea Telecom 2007 Olson: ERP 2
Taiwan ERP market
Case studies – 14 organizations in Taiwan
• SAP – 38%
• Oracle – 16%
• Domestic get rest
• Prices– $600,000 to $1,400,000– Much lower than US
Korea Telecom 2007 Olson: ERP 2
Implementation Options
• DIRECT– Vendor implements system for customers– Domestic vendors
• INDIRECT– Vendor trains consultants who implement ERP– International vendors
• In Taiwan, Direct option usually used– Few reliable consultants available– Consultants prefer large vendors (more experience with)– Competitive domestic market
• Lower prices
Korea Telecom 2007 Olson: ERP 2
Taiwan ERP trends
• More Wide Enterprise Systems
• From hi-tech to traditional manufacturing
• From Large to SME
• From growth stage to maturity
• From internal information integration to external information communication
Korea Telecom 2007 Olson: ERP 2
China ERP Market
• Growing rapidly– Government support– Accession to WTO– Need for competitiveness
• International vendors play the major role• Domestic vendors have software more akin to
accounting packages• Taiwan ERP vendor collaboration
– R&D, distribution, joint ventures, investment
Korea Telecom 2007 Olson: ERP 2
Summary
• ERP software has had a major impact on organizational computing
• Technological, financial, organizational benefits
• Also expensive, massive, inflexible
• Many hidden costs
• Complex adoption decision