*STRATEGIC APPLICATION OF IT I

E. R. P

What is Enterprise Resource Planning (ERP)?

ERP is an enterprise-wide information system designed to coordinate all theresources,information, activities needed to complete business processes such as;order fulfillmentbilling.

So ERP?An ERP system is an attempt to integrate all functions across a company to a single computer system that can serve all those functions specific needs. Integration is the key word for ERP implementation.ERP delivers a single database that contains all data for the software module

BENEFITS OF ERP

OperationalManagerialStrategicIT InfrastructureOrganizational

Operational BenefitsCost reductionInventoryManpowerMaterial costCycle time reductionOrder to ship lead times reducedBetter coordination among departmentsProductivity improvementFewer shortages and interruptionsQuality improvement excellence, specification, value for moneyCustomer services improvementBetter coordination between sales and productionDelivery schedules commitmentE commerce facilities

Managerial ImprovementImproved resource managementLoad resources according to production scheduleBetter decision making with real time informationBetter planning-Capacity planningPerformance improvement

Strategic ImprovementSupport business growthSupport business alliancesBuild business innovationsBuild cost leadershipGenerate product differentiationBuild external linkages

IT Infrastructure ImprovementBuild business flexibilityIT cost reductionIncreased IT capabilityLatest use of technologyInformation Integration

OrganizationalSupport organizational changeFORCE organizational change!!Facilitate business learningBPR does a good job of thisEmpower employeesBuild common vision

Total Cost of ERP Ownership (in millions of $) - META Group Survey System MediumAverage SmallestLargest Baan 16.1 13.6 0.826.5 JD Edwards 3.9 5.7 0.821.6 Lawson 1.9 4.1 0.416.4 Oracle 5.4 11.2 1.442.8 PeopleSoft 7.4 15.5 1.358.6SAP 13.9 52.2 0.8 308.2SSA 1.7 7.6 0.729.6 From: Implementation Study Reveals Costs, Benefits,

Benefits of ERP Implementation(META Group Survey)Benefits are mostly in terms of cost containment rather than revenue increase.53 companies (out of 63) reported annual savings of over $5 millions with the median annual saving of $1.6 million. Nine companies account for 73.4% of the reported savings.The study found that much of the ERP value is in indirect, non-quantifiable benefits.

IncreasedIncreased Decreased Decreased Increased Increased

Companies before ERP Systems

Companies after ERP Systems

Major Phases of ERP Implementation Project Preparation ( Initiation) develop business case, project scope, and implementation strategyBusiness Blue print Planning establish implementation team, determine goals and objectives, establish metricsAnalysis and process design analyze and improve existing processes, map new processes to be adopted by the systemRealization install a base system, customization, and test the system

Major Phases of ERP Implementation Final Preparation - Transition replace the formal system with the new system, data conversionGo Live - Operation monitor and improve system performance, provide continued training and technical support

Stages of ERP Implementation

Phase-1 Project Preparation

Phase- 2 Business Blueprint

Phase-3 Realization

Project Plan Outline for Realization

Phase-4 Final Preparation

Phase-5 Go Live & Support

The cost of implementation

TimelineBig Bang ImplementationPhased (Roll Out) ImplementationParallel ImplementationStaff/ResourcesOutsourcingIn-houseCustomization Level3 Pillars of ERP Technology, Process and PeopleStrategic ERP Implementation Choices

ERP Implementation Strategies The big bang The big bang install a single ERP system across the entire organizationAll modules happen across the entire organization at onceMove from existing system to new ERP system on a specific date.Careful preparation and planning is requiredDominated early ERP implementations

AdvantagesReduce the Integration cost Reduce cost of implementation as no interface programs are required to communicate between legacy system and new ERP systemEliminates all of sequencing and decision making of implementing one module at a timeReduce project implementation time Avoid complex integration issues

DisadvantagesToo many resources to support at a particular time Amount of time and cost for careful planning and preparation is required for go liveRecovery process if something goes wrong is more difficult.Consequence of failed implementation can cause huge financial loss Contributed to higher rate of failure of ERP

ERP Implementation StrategiesPhased implementationPhased implementation install one or several ERP modules for phased implementation of key business processes.One functional module at a time in sequential order.Scope of implementation usually to one functional departmentIntegration of ERP modules takes place at a later dateCommonly used methodology of ERP implementation

AdvantagesModular implementation reduces risk of installation , customization and operation of ERPSuccess of one module can benefit overall success of ERPLess resources to support at a particular time Recovery process is simple if something goes wrong.Scheduling of experienced people gives additional flexibility

DisadvantagesIncrease the Integration cost Increase cost of implementation as interface programs are required to communicate between legacy system and new ERP system and between ERP systemsRequires sequencing and decision making of implementing one module at a timeIncrease overall cost and time to implementHigher turnover rate can be expected among key ERP members because of long implementation phase

ERP Implementation StrategiesParallel implementationKeeps legacy system and new ERP system active simultaneously for a length of timeTime ranges from one day to several weeksSame functional business areas including sw are operating at same time for both legacy system and new ERP system No interruption in business process even if new ERP system malfunctions.Parallel approach provides most realistic number to number comparison to validate new ERP Considerably more resources are required

Ideally suited for mission critical applications that cannot survive major malfunction of an ERP system.It works well for business environments that requires utmost stability in ERP such as financial(Banking & Insurance) Pharmaceuticals or medical companies

AdvantagesGood recovery optionNo interruption in business process even if new ERP system malfunctions.Validation of new ERP system can be done in business process flowAvoids complex integration issues

DisadvantagesToo many resources to support for the duration of parallel runAt functional interactions , duplicacy of dataConfusion erupts when people dont interact with both systems in same way.

Choosing a StrategyFactors that causes a company to choose one ERP strategy over the otherTechnical resources availableNumber of usersConsultant availabilityStructure of ERP teamDeadlinesERPReliabilityHW resources

Major Challenges to ERP ImplementationLimitations of ERP technical capabilitiesInconsistency with existing business processesCosts - implementation (hardware, software, training, consulting) and maintenanceImpact on organizational structure (front office vs. back office, product lines, etc.)Changes in employee responsibilities

Major Challenges to ERP ImplementationFlexibility of software system upgradesImplementation timelinesAvailability of internal technical knowledge and resourcesEducation and trainingImplementation strategy and executionResistance to change

Failure of ERP ImplementationsLack of Top management commitment & support Change of procedures, reassignment of manpowerJob security & benefits of ERPImproper planning and BudgetingUse of wrong ERP toolLack of TrainingWork culture of Organization

Hersheys A Brief Overview One of the leading chocolate manufacturer across world. Large chunk of sales from Valentines Day, Easter, back to school, Halloween and Christmas 40% of profit. Need of an efficient and reliable logistics system to cater to these large no. of seasonal requirements . Reliable product availability is critical.

Old System A network of 19 manufacturing plants, 8 contract manufacturers and more than 20 co-packers. The company was running on legacy systems, and with the impending Y2K problems, it chose to replace those systems and shift to client/server environment. To tackle Y2K problem Hershey decided to replace existing legacy systems.

New System- IT Partners A $112 million worth of combination of softwares for CRM, ERP and forecasting. Replace existing mainframe based legacy systems by SAP R3 Accenture. Production forecasting, scheduling and transportation management Manugistics Group Inc. Managing customer relations and tracking effectiveness of marketing activities Siebel CRM.

Implementation Plan for Enterprise48 monthsStart Date 21 Jan 1996-Roll out of the plan Tackle Y2K issue by Replace Mainframe Advanced final date to Jan 2000 with SAP R/3 April 1999 Jan 1997 - Installed new TCP/IP network Replaced 5000 desktop computers hardware April 1999 Enterprise 21 went live using BIG BANG

Expected Benefits Fine-tune deliveries to suppliers. Upgrade and standardize companies business processes. Efficient customer driven processes capable of managing changing customer needs. Reduce order cycle times and boost inventory accuracy. Reduce inventory costs. Better execution of business strategy of emphasizing core mass market candy business.

Actual Scenario Unable to deliver $100 million worth of Kisses and Jolly Ranchers for Halloween in 1999. Stock price down 35% Earnings drop 18% Order fulfillment time doubled to 12 days! Lost prominent shelf space for the season!!! Several consignments were shipped behind schedule, and even among those, several deliveries were incomplete.

Enterprise software isnt just software.It requires changing the way you do business.

What went wrong? Squeezed deadlines: Project originally scheduled for 4 years Company forced the implementation to 30 months Wrong timing: The company went live at their busiest time Released the solution just before the Halloween

Big-Bang Approach: To quicken the implementation process, Hershey opted for Big Bang implementation. Simultaneously implemented a customer-relations package and a logistics package even without testing some of the modules Increased the overall complexity and employee learning curve

Un-entered data: Surge Storage capacity not recorded as storage points in the ERP Orders from many retailers and distributors could not be fulfilled, even though Hershey had the finished product stocked in its warehouses.

TOP reasons for failureFailed Strategic Decisions Unrealistic ExpectationsWrong Timings The Big Bang Implementation Implementation of Systems from 3 different Companies No CIO to look after IT before implementation

A New Challenge

The TurnaroundHershey made sure to take the time and resources to thoroughly test the computer systems. Testing included putting bar codes on empty pallets and going through the motions of loading them onto trucks so that any kinks would be worked out before the distribution center opened for business.

Began work on the upgrade to mySAP in July 2001. Hershey Foods said it had completed an upgrade to mySAP.com completed in 11 months, 20% under budget. Hershey now has an inventory location accuracy of 99.96 % and can turn orders within 24 to 48 hours of receiving an order as opposed to the previous 10-plus days that it took.

Eastern Distribution Center, EDC III Opened in 2000, to help custom pack some products at its distribution centers, removing co-packers from the chain. To strengthen the overloaded physical logistics infrastructure. To help with errors in forecasting. Enabled by WMS from Mc Hugh DM In its few short months of operations, EDC III nearly has halved the companys order-cycle times of a year ago while dramatically boosting inventory accuracy.

Hersheys Today Revenues of nearly $5 billion and almost 13,000 employees worldwide. In 2005 & 2006, Hershey acquired the Berkeley, California-based boutique chocolate-maker Scharffen Berger, Joseph Schmidt Confections, the San Francisco-based chocolatier and Dagoba Organic Chocolate, a boutique chocolate maker in Oregon. Markets Hersheys, Reeses, Hersheys Kisses, Kit Kat, Twizzlers, and Ice Breakers.

General Solutions Justify Enterprise-wide Projects. Both the Software & Business Processes should FIT together. Identify And Implement Strategies For Reskilling The Existing It Workforce And Acquire External Expertise Through Vendors And Consultants When Needed. Project management team should have both Business Knowledge And Technology Knowledge. Make A Commitment To Training. Manage Change Through Leadership, Effective Communications And The Role Of A Champion.

Project Management Issuesin Implementing ERP

page 329-333

Introduction ERP Projects are large and Important projectsCritical in terms of their potential and actual impactThe track record is far from excellentBenefit realisation is questionablePreparedness is critical but badly understoodThis leads to problems during the implementation phase that are not solved properly => dysfunctional ERPVery low levels of end-user satisfaction are reported

Essentially diffrent from tradition al IS projects => need for a diffrent approach in terms of project management

Project Management & MonitoringProject management identifies 9 knowledge areas on which project management is basedProject Integration ManagementProject Scope ManagementProject time ManagementProject Cost ManagementProject Quality ManagementHuman Resource ManagementCommunications ManagementRisk ManagementProcurement Management

Case Study organisations

Key FeaturesFirm AFirm BType of firmMultinationalPublic sectorIndustryPharmaceuticalEducationSize (emp.)100,0002000Turnover$21 billion Euro 200 million (approx.)Scope of projectComprehensiveFinancials / Procurement / projectsType of implement.Worldwide roll out in 4 wavesSingle site in 2 phasesDuration5 years9 months (expected)Project leadershipSteering committeeSteering committeeProject managersLocal top managers in sitesFinance officerProject teamsApprox. 70 at each site + 45 in core team15 full and part timeKey issues in ERP implementationRationale for projectSeeking FDA complianceOld system crumblingKey problemsManaging differences between sitesSetting up the template and sticking to it Managing difference versions of SAPSaving local gains whilst implementing single instanceDeadlines imposed worldwideCommunicating with staff / negotiating changes to work practicesLack of awareness of magnitude of change neededManaging expectationsTrade off between doing the right thing and doing it rightTight budgetary constraints and lack of top management supportDifficulties in getting every one to agree on specificationManaging different cultures internallyDeserve special mentionNo attempts to justify investment beyond compliance Comprehensive ITT process to select package

Project Integration Management General preparednessAwareness of what projects entails volume of effort required, effect on staff assigned to ERP team, budget, trainingSetting up of full time teamSpecial Training Workshop

Firm A: excellent on average but very uneven between sitesFirm B: no understanding of project / far too much expected of inexperienced team

Project Scope Management Critical for ERP:number of modules, number of areas, extent of customisation, number of interfaces with legacy system, size of user populationSurveys indicate most firms would change scope during implementationChange in scope mid way through project responsible for most cost /time slippagesCompanies are unable to reconcile the technological necessities of the system with their own business needsConflict in logic of system vs Business

Firm A: well defined (template) but imposed by HQ without consideration of local practices (time wasted)Firm B: little thought given to scope / entire modules added without considering impact

Project Time Management ERP projects are amongst the longest Multi-wave global roll out up to 5 yearsInitial sites sometimes are software versions behind last onesMultiple sites, lines of Business and countriesFirm A: all deadlines externally decided + no choiceSome sites failed to keep paceFirm B: core functionality on time, but difficult areas (e.g.: research contracts) left behind

Project Cost Management ERP projects are costlyERP cost includes license , training, implementation, maintenance, customisation and HWMuch of the costs are hidden to a certain extent e.g.: training , consultants fee etcFirm A: externally decided, but large enough for all sites (pharmaceutical firm)Firm B: mean budget throughout

Case Study organisations

Key FeaturesFirm AFirm BType of firmMultinationalPublic sectorIndustryPharmaceuticalEducationSize (emp.)100,0002000Turnover$21 billion (2002)Euro 200 million (approx.)Scope of projectComprehensiveFinancials / Procurement / projectsType of implement.Worldwide roll out in 4 wavesSingle site in 2 phasesDuration5 years9 months (expected)Project leadershipSteering committeeSteering committeeProject managersLocal top managers in sitesFinance officerProject teamsApprox. 70 at each site + 45 in core team15 full and part timeKey issues in ERP implementationRationale for projectSeeking FDA complianceOld system crumblingKey problemsManaging differences between sitesSetting up the template and sticking to it Managing difference versions of SAPSaving local gains whilst implementing single instanceDeadlines imposed worldwideCommunicating with staff / negotiating changes to work practicesLack of awareness of magnitude of change neededManaging expectationsTrade off between doing the right thing and doing it rightTight budgetary constraints and lack of top management supportDifficulties in getting every one to agree on specificationManaging different cultures internallyDeserve special mentionNo attempts to justify investment beyond compliance Comprehensive ITT process to select package

Project Quality Management ERP projects require a serious transformation process that must be validated e.g. invoicing, payrollSystem is implemented in efficient way and objectives are metMany aspects require hard-to-get expertiseApplication / organisational knowledge dilemma (eg: use of consultants)Firm A: COMPLIANCEFirm B: old system couldnt sustain Business processes

Project HR Management Project team (full time) + business as usual dilemmaSupport for project at local levelAssemble best team to plan, execute and control projectTop management commitmentMulti disciplinary , dedicated , IT specialist, Key users and operations personnelTeam MoraleFirm A: very organised opportunities for promotion after project no casualtiesFirm B: the right people are not there + top management think they can be on team and pursue their normal duties

Project Communication Management Other side of coin: selling the project internally and externally Internal communication each department viewing its information as its own and reluctant to share itImplementation team sometimes find it easier to learn and share with people from outside than within intra organisation teamConsultants facilitate open & productive communicationHigher level of communication leads to better project mgmt

Firm A: full time consultant hired + monthly newsletter + many meetings behind closed doorsFirm B: fragmentation of certain functions makes consultation process very tricky too many to please (on-going)

Project Risk Management ERP projects can radically change in business processes of organisations.Radical change leads to risk. Risk means more time & moneyERP systems are complex and that requires reliance on different types of expertise.They also disturb everyday work over long periodsThey can lead to unworkable situations (in 1999 Hershey after working for 3 years on SAP and 2 other vendors lost to Mars and Nestle as sales dropped by 12.4% and earnings by 18.6% - FAILED ERPFirm A: much to lose (can-do attitude)Firm B: odds stacked against success => actively preparing for failure by refusing proper budget allocation

Project Procurement Management Which one is the one?Different packages have different strengthsHow are vendors really selected?

Firm A: SAP logical choice (FDA)Firm B: thorough process of ITT + comparative analysisBut other cases were not so neat (political or unethical decisions non-decision making)

Conclusions ERP Projects are specialERP Project Management is tricky and differentERP projects Do it right the first time failure is not an optionClear simple corporate visionGroup dedicated for business process improvementsExperienced project managers

Set realistic and achievable dates and milestonesDesignate single leaderWhen choosing a vendor, put premium on vertical expertisePrepare detailed vendor contractMake business objectives the primary driver of the projectProper training of end userAvoid too much customization

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