ORGANISATION TRANSFORMATIONS

Enterprise Resource Planning (ERP)

Joe O’Mahoney

The Agenda

1. The Context of ERP

2. Supply Chain Management

3. What is ERP?

4. Managing ERP

5. Real World ERP

6. Critical views on ERP

Learning Objectives

1. To understand the context of ERP, how it emerged and how it has become what it is today

2. To appreciate the importance of Supply Chain Management in developing ERP

3. To know what an ERP system is, what its components are and appreciate its basic architecture

4. To understand how ERP can be managed as an implementation and an operation.

5. To possess a more detailed understanding of SAP ERP offerings

6. To have a strong understanding of the costs, weaknesses and dangers of ERP systems

7. To have an overview of the critical (political, social and ethical) views of ERP systems

1. The Context of ERP

Problems of Organisation: Information

• Globalisation, M&A, take-overs

• Functional / Departmental divisions– Disparate systems lead to time delays

– Redundant systems (e.g. 24 different general ledgers)

– Huge software maintenance expenses

• Lack of common data structures – Inconsistent terminologies

– Field mismatches in data bases

– Weak Management Information

– No “Process” information (e.g. how long does it take to order X?)

– Data redundancy / overlap

1950 – 1970: Out of Fordism

• Control, efficiency & scientific management

• 1950s: Inventory Control Systems

• 1960s: Materials Requirements Planning (MRP)

• 1970s: Manufacturing Resource Planning (MRPII)

• But, failures due to:– Organisational & technical complexity

– Long & difficult implementations

– Manual rather than automated

1970 – 2000: The Power of Computing

• 1980s– OO data-driven software & client / server models– Automation of processes– Data-mining & warehousing

• Rise of integrated SCM & BPR– Global supply-chains– Automated value-chains– Re-engineering of e2e processes– Interation with HR, warehousing, CRM & MIS

• Success of 1990’s– Fuelled by Y2K– Internet / Intranet roll-out– Powerful processors– Development by SAP & BAAN

ERP 2003

• Event Driven Processes

• Supported by BPR

• Consulting expertise

• Plug & Play Architectures

• Move towards Decision Making Software

2. Supply Chain Management

(SCM)

Importance of Supply Chain Management

Supply Chain Problems

UNCERTAINTY

In demand forecast

In delivery times & production delays

POOR COORDINATION

With Internal units and business partners

Ineffective customer service

High inventory costs, loss of revenue & extra cost for expediting services.

Push v Pull Supply Chains

Successful Supply Chains

• Extends the chain all the way from sub-suppliers to customers

• Integrates the back-office operations with those of the front office

• Focuses on customer demand generation and service

• Is proactively designed as an “extended enterprise”

• Optimize the value added by information services

ERP

3. What is ERP?

Definition• Integrates disparate information from e.g. finance, accounting,

distribution, production, logistics, human resource, etc.,

• Into a single, enterprise-wide, shared database

• A software architecture that sits on a common database and is supported by a single development environment

• It is customized to support an organization’ s business processes.”

• Interacts with an integrated set of applications, consolidating all business operations in a single computing environment.”

• To provide useful real-time information to support managerial decision making

Practical definition….

• ERP stands for Enterprise Resource Planning– it does not do any planning

– forget about resource too…

– remember the “enterprise”. This is ERP’s ambition.

• Typically, ERP combines Finance and HR departments

• ERP systems automate and standardise business processes

• ERP should contain a “best practice” model of the business

Chaos v Hub & Spoke

ERP Components

• Core Applications– Financials

– Human Resources (HR)

– Manufacturing

– Project Management

• Extended ERP– Business Intelligence

– Customer Relationship Management (CRM)

– Sales Force Automation (SFA)

– Supply Chain Management (SCM)

– E-Logistics

– E-Procurement

– Product Life-cycle Management (PLM)

• Internet Transformation for ERP– Portals

– Exchanges – B2B

– Mobile Access

Typical ERP Components

Sales and

delivery

applications

Service

applications

Central

Database

Reporting

applications Financial

applications

Manufacturing

applications

Inventory and

Logistics

applicationsHRM

applications

Customers Suppliers

Management

Employees

ERP Client / Server Model

ERP Benefits

• Improved efficiency, lowered costs.– Average expected administrative cost reduction = 30%

• Controlled operational disorder– Streamlining of business processes

• Reduce size and cost of the company’s IT– Maintenance of outdated legacy systems

• Managerial effectiveness– Empowered users

– Informed management decisions

4. Managing ERP

Roles• Vendor

– delivery of software– initial training for key users – project support– quality control– conduct modifications

• Consultants– bring/transfer know-how about package– development of detailed work-plans– optimize fit between processes and software– analysis of customization issues

• Company– learn/assimilate information about software (independence!)– make people sufficiently available (reallocation of responsibilities)– keep up motivation (monitoring progress)– responsibility for conversion (data extraction, interfaces) programs

ERP Options

• DIY- Expensive & cumbersome- Few do this

• ASP- The customer leases services rather than builds them.- Services may include SCM, ERP, etc- Good for SMEs – lack resources to build or buy their own- Clients save money,…- But..… the ASP may only offer a 5-year contract to tie in customers- But……ASPs tend to offer a "one size fits all" solution

• Integrated packages-OTS- e.g. SAP R/3

What Approach?

• Big Bang

– Implementing all modules at the same time

– One cutover date for the entire new system

– Very risky

– Cheaper (in total - if everything goes well)

– Faster

• Phased approach

– Implement modules in different phases.

– More expensive (development of temporary interfaces)

– Takes longer (danger of losing speed)

• Series of “Small Bangs”

– Implement subgroups of modules in parallel

– Best of both worlds?

ERP Design• Process-oriented design: based on the operation process.

• Architecture

– One database for all data (minimal redundancy)

– Modular application (independent, but integrated modules)

– Software functionality configurable to customer’s requirements

• Master Data

– Information captured once

– Visibility though Business process

– Workflow management

– Event Triggered processes

Typical ERP Project1. Understand the problem

– Understand business and how package fits, – Determine characteristics of current system– Arrange for training, – Determine how stored data will be migrated.

2. Define the solutions (most critical!)– Define all concepts associated with software implementation– Run simulations of app. processing, – Make definitions for master files, tables, parameters, – Establish degree to which company needs to adapt package.

3. Put hands to the task (most difficult!)– Load initial data– Develop, test, place customization into operations; – Develop, test interfaces put them into operation; – Document new procedures, test new work environment.

4. Make it happen– Run software in parallel w/ old system– Support users– Make final adjustments– Release system for final use.

5. Keep on – going live is just a milestone!

Design & Implementation of ERP

CreateInterfaces andEnhancements

EstablishReporting

EstablishArchiving

Management

EstablishArchiving

Management

PerformFinal Test

EstablishGlobal

Settings

EstablishCompanyStructure

EstablishMasterData

PerformFinalTest

CreateGo - Live

Plan

CreateUser

Documentation

Set UpProduction

Environment

TrainUsers

EstablishSystem

Administration

Transfer Datato Production

System

SupportProductiveOperation

OptimizeSystem

Use

Set Up SystemEnvironment

Train ProjectTeam

DefineFunctions and

Processes

DesignInterfaces andEnhancements

ProjectPreparation

Quality

Con-ceptualDesign

Quality

Appli-cation

System

Quality

Pro-ductionSystem

Check CheckCheck

Project Management

System Maintenance and Release Upgrade

Organization andConceptual Design

Detailed Designand System Set-Up

Preparations forGoing Live

ProductiveOperation

Copyright, SAP AG.

Report & Query Requirements

• Information is produced in standard reports or via Queries

• eg. Financial reports: income statements and balance sheets

• Queries are helpful seeing where the reports do not meet user needs

• Too many queries will slow the system down

Implementing ERP

• Configuration

– Parameters (rules) for business processes

– Local requirements

• Understanding your own business processes

• Making a fit possible

–Reengineering processes - adopting a “best practice”

–Reengineering the system

Successful implementation….?

• Lead from Business Strategy

• Position project as business, not IT, initiative.

• Have a strong project leader: commitment of senior management.

• Get all affected parties to “buy in”.

• Communication within organization about expected change

• Re-engineer before the project: best practice processes

• Set customer’s expectations.

• The customer’s organization and culture.

• The risks presented by politics within the customer organization.

• What software package(s)?

• What consulting company?

• What hardware?

• What approach?

e.g Pasty Makers

• Pasty Makers– Finance system– Sales system– Warehouse system

• Problems– Supply Chain– Timely Information– Communication– Management Reporting– Manual Short-cuts– Forecasting

• Questions– Can I cut costs? How?– Can I improve efficiency?– How much does the process

cost?– When should I order?– What should I order?

• Integrated Database– Single GUI– Document creation– Data Protection

• Supply Chain integration– Triggered by orders– Minimises inventory

• Defined Reporting– Linked to strategy– Order tracking– BPI & costing

• Automated Processes– Ordering– Credit checks– Database management– Billing & Payment

5. Real world ERP

ERP Market

• The global ERP market is about $30bn in 2002

– 4.84 billion in software licensing

– 25.36 billion in information service

– up 2.5% compare with 2001

• The estimated global ERP market annual growth rate

– 2003 - 5.7%

– 2004 - 7%

– 2005 - 8.5%

• 70% of Fortune 500 have implemented ERP

• In 2000-2005, the fast growing area will be:

– Japan - 9.74%

– Asia - 9.58%

– E. Europe - 5.51%

– S. America - 4.97%

Leading Vendors

• SAP

• BAAN (Invensys)

• Oracle

• PeopleSoft

•J.D.Edwards

• SAP stands for Systems, Applications and Products in Data Processing

• SAP is 3rd largest vendor of standard business application software

•More than 17,000 companies in over 120 countries run more than 44,500 installations of SAP software (50% of ERP in top companies)

• 3rd largest software company after Microsoft and Oracle, with subsidiaries in over 50 countries

• SAP R/3 is their 3rd Release

• SAP R/3 implements SAP solutions using three-tier client server computing

• ASAP is a methodology to implement SAP ERP solutions

• SAP R/3 uses a three-tier client server computing, that is, there are three servers with different tasks, database software, application software, and user interface (GUI)

R/3R/3Client / ServerClient / Server

ABAP/4ABAP/4

FIFIFinancialFinancial

AccountingAccounting

COCOControllingControlling

AMAMFixed AssetsFixed Assets

Mgmt.Mgmt.

PSPSProjectProjectSystemSystem

WFWFWorkflowWorkflow

ISISIndustryIndustry

SolutionsSolutions

MMMMMaterialsMaterials

Mgmt.Mgmt.

HRHRHumanHuman

ResourcesResources

SDSDSales &Sales &

DistributionDistribution

PPPPProductionProductionPlanningPlanning

QMQMQualityQuality

Manage-Manage-mentment PMPM

Plant Main-Plant Main-tenancetenance

Integrated solutions

Open systems

Client / serverarchitecture

Designed for all typesof business

Multinational

Comprehensivefunctionality

R/3 Business Architecture

SAP R/3 Implementation Times

< 3months

4 - 6months

7 -9months

10 - 12months

13 - 15months

0

10

20

30

40

50

%

16%

24%21%

16%

9%

Small companiesMedium-size companiesLarge companies

> 15months

14%

6. Critical Views on ERP

Issues with ERP I• Considerable rate of failure in ERP implementation (study by Buckhout)

– 49% of respondents say SAP implementations are never complete

– Average schedule overrun 230%

– Desired functionality 59% below expectations

– Only 10% on projects finished on time

– 35% of projects cancelled

• Maintainance

– In most companies, maintenance of existing systems is at least 70% of application development budget

– Typically 80% of maintainance requests for enhancements

– Maintenance programmers are difficult to find

• Lack of Flexibility

– Difficult to modify processes (electronic concrete)

– Over-reliance on consultants

– Upgrade issues

Issues with ERP II• Technical problems

– ERP software configuration

– Integrating ERP software with hardware, telecommunications, and database software. Rare to have total integration.

– Need for periodic upgrades

• Human, social and political problems

– Inappropriate expectations for software

– Failure to specify strategic objectives

– Inadequate project championship or project management

– Lack of cross-functional approach to implementation

– Need to adopt built-in business processes

– No sensitivity to culture, structure, end-users

– Inadequate resources for training

Cost of ERP• Large company

– $50-500 Million– $30 million in software– $200 million in consulting– $ millions for hardware– Implementation: 4-6 years

• Medium sized companies– $10-20 million– 2 year implementation

• Cost break-up (rule of thumb)– Software – 10%– Hardware – 10%– Change management/training – 15%– BPR – 15%– Severance / re-educating / re-skilling – 20%– Consulting – 30%

Critical examination• Contextualist Critique

– What is a business process (practice?)

– Logical work v actual work

– Is radical possible?

– What is lost / gained (ST vs LT)

– Organisation usually conforms to the software

• Political critique

– Whose interests are being served?

– Often known as a cover for redundancies

– Work deskilling & intensification

– Commodotisation of employee knowledge

– Definition of “known”

– A political project? (surveillance + control)

• Ethical critique

– Sharing of personal information globally

e.g. Cisco

Source: Cisco ERP steering Committee Report, October 20, 1994

Cisco’s total ERP implementation costs = US$15 million

Hardware32%

Headcount14%

System Integration

38%

Software16%

One Size Fits All?

• Global Supply Chains = Supply chains that involve suppliers and/or customers in other countries. Some of the issues involved in global supply chains;

– legal issues, customs fees and taxes

– language and cultural differences

– fast changes in currency exchange rates

– political instabilities

• Different company structures & cultures• Different local configurations• Cultural clash – 'open systems' ERP and 'closed systems'

organisation

e.g. SAP in Singaporean Hospitals

• Types of misfits

– Company-specific misfits

• System’s patient management module does not allow for billing individual patients on installment plan

– Public sector-specific misfits

• System uses internally generated patient ID, instead of government issued ID number

– Country-specific misfits

• Package did not provide reports needed for government reporting

• System requires names entered in Western name format (first, middle, last); operators had trouble parsing Indian, Malay and Chinese names

e.g British Airways – Virgin Atlantic

• Virgin rented space for a customer and sales database – from its key trans-Atlantic rival, BA

• There was a confidentiality agreement – Virgin's data is safe and secured

• But, BA broke the agreement, found the names & addresses of Virgin's top customers, and stole them – with special offers

• Virgin took BA to court – and won. BA forced to pay huge damages and suffered considerable loss of face/reputation

For more information

• WWW.SAPINFO.NET

Appendices

ERP Market Share

ERP Providers Product Name 1997/10~1998/9

2001

SAP AG SAP R/3 37% 29%

PeopleSoft PeopleSoft 7.5 8% 6%

Oracle Oracle Applications 8% 10%

Baan Baan IV 6% 5%

JD Edwards One world 5% 7%

System Software Associates BPCS Client/Sever 5% 5%

Other   31% 38%

SAP R/3 Installation by Industry

SAP ENGINEERING & CONSTRUCTION 10.5%

SAP HIGH TECH &ELECTRONICS 11.3%

SAP CHEMICALS 9.5%

SAP CONSUMER PRODUCTS 10.3%

Consulting & Professional Services 6.0%

SAP RETAIL 6.3%

SAP PHARMA -CEUTICALS 3.4%

SAP PUBLIC SECTOR 3.4%

SAP OIL & GAS 3.2%

Metal, Paper & Wood Products 2.8%

Services 3.1%

SAP HEALTHCARE 2.3%

SAP BANKING 2.0%SAP MEDIA 2.3%

Others 11.5%

SAP UTILITIES 3.9%

SAP AUTOMOTIVE 4.8%

SAP TELECOM-MUNICATIONS 3.4%

SAP R/3 installations by customer size, as of June, 30th, '98 (16,191 R/3 installations)

1000 - 2500

500 - 1000

200 - 500

16.9%

15.1%

12.4%

19.4%

36.2%

Company size in USD mill. revenues

> 2500

< 200

R/3 Implementations by Org Size