Enterprise Resource Enterprise Resource Planning (ERP) ModelsPlanning (ERP) Models

Dr. Merle MartinDr. Merle MartinDr. Yan XiongDr. Yan XiongCollege of BusinessCollege of BusinessCSU SacramentoCSU Sacramento 10/06/0310/06/03

AgendaAgenda What is ERP?What is ERP? ERP Advantages and DisadvantagesERP Advantages and Disadvantages Application Service Providers (ASP)Application Service Providers (ASP) FHC – a Case StudyFHC – a Case Study

What is an ERP System?What is an ERP System?““Packaged software designed Packaged software designed

to process an organization’s to process an organization’s transactions and facilitate transactions and facilitate integrated and real-time planning, integrated and real-time planning, production and consumer response.”production and consumer response.”

Daniel O’LearyDaniel O’Leary

ERP DefinitionERP Definition “ “ It attempts to integrate all It attempts to integrate all

departments and functions across a departments and functions across a company onto a single computer company onto a single computer system that can serve all those system that can serve all those different departments’ particular different departments’ particular needs”needs”

Koch, C 2002Koch, C 2002

ERP SuppliersERP Suppliers In order of $ salesIn order of $ sales SAPSAP People SoftPeople Soft OracleOracle BaanBaan J. D. EdwardsJ. D. Edwards

ERP MarketERP Market Info-Tech Consulting GroupInfo-Tech Consulting Group 70% of Fortune 500 firms70% of Fortune 500 firms 37% growth over next 5 years37% growth over next 5 years Global market projected Global market projected

to $15 billion in 5 years to $15 billion in 5 years

FunctionsFunctions Integrated suite of software Integrated suite of software

application modelsapplication models Real-time database updateReal-time database update Supports organizations with multiple Supports organizations with multiple

companies in multiple locationscompanies in multiple locations Supports any number of currenciesSupports any number of currencies

Functions (Cont.)Functions (Cont.) Supports multiple Supports multiple

languageslanguages Suitable to wide range of Suitable to wide range of

industries and organizationsindustries and organizations Industry specific templatesIndustry specific templates

SAP (R/3) FunctionsSAP (R/3) Functions FinancialFinancial

AM Asset ManagementAM Asset Management CO ControllingCO Controlling FI Financial AccountingFI Financial Accounting WF Work FlowWF Work Flow IS Industry SolutionsIS Industry Solutions

SAP (R/3) FunctionsSAP (R/3) Functions ManufacturingManufacturing

PM Plant ManagementPM Plant Management PP Production PlanningPP Production Planning QM Quality ManagementQM Quality Management MM Materials ManagementMM Materials Management

SAP (R/3) FunctionsSAP (R/3) Functions OtherOther

HR Human ResourcesHR Human Resources PS Project System PS Project System SD Sales and DistributionSD Sales and Distribution

SAPSAP Targets very large companiesTargets very large companies Industry templatesIndustry templates “ “ Best Practices”Best Practices”

most efficient methods for doing businessmost efficient methods for doing business Modular design – can choose Modular design – can choose

functionsfunctions SAP not just softwareSAP not just software

“ “way of doing business”way of doing business”

People SoftPeople Soft Pure Internet environmentPure Internet environment Entire CSU system converting over Entire CSU system converting over

next few years.next few years. Ease if useEase if use

OracleOracle Has leveraged database dominanceHas leveraged database dominance Emphasis on securityEmphasis on security Integration: linking applications, Integration: linking applications,

data. Web services, users and data. Web services, users and partnerspartners

BAANBAAN Unique vertical market capabilitiesUnique vertical market capabilities ChemicalsChemicals

Food& BeverageFood& BeveragePharmaceuticalsPharmaceuticalsCable & WireCable & WirePulp & PaperPulp & PaperPrimary MetalsPrimary Metals

JD EdwardsJD Edwards Focus on mid-sized companiesFocus on mid-sized companies Easy integration with current Easy integration with current

systemssystems Open, scalable, and flexibleOpen, scalable, and flexible

AgendaAgenda What is ERP?What is ERP? ERP Disadvantage and DisadvantageERP Disadvantage and Disadvantage Application Service Providers (ASP)Application Service Providers (ASP) FHC – a Case StudyFHC – a Case Study

Why ERP?Why ERP? Highly competitive marketsHighly competitive markets Continually changing business Continually changing business

environmentenvironment Need for integrationNeed for integration

Within companyWithin company Between dispersed operationsBetween dispersed operations Between alliance partnersBetween alliance partners

Why ERP?Why ERP? Reduce operating costsReduce operating costs Integrate operations Integrate operations

(more control)(more control) Increase organization’s time Increase organization’s time

efficiencyefficiency Encompass different types of Encompass different types of

softwaresoftware

ERP Advantages ERP Advantages Integrates firm’s activitiesIntegrates firm’s activities Uses “ Best Practices”Uses “ Best Practices” Enables organizational standardizationEnables organizational standardization Eliminates information asymmetriesEliminates information asymmetries Provides on-line/real-time informationProvides on-line/real-time information

ERP Advantages ERP Advantages Allows simultaneous access to Allows simultaneous access to

information for planning and controlinformation for planning and control Facilities intra-organization Facilities intra-organization

collaborationcollaboration

ERP Advantages ERP Advantages Eliminates redundant efforts Eliminates redundant efforts

and duplicated dataand duplicated data 33% of companies had sales 33% of companies had sales

order cost savingsorder cost savings 34% significantly reduced 34% significantly reduced

personnel needspersonnel needs Faster movement of goods, servicesFaster movement of goods, services

more sales generated per monthmore sales generated per month

ERP Intangible AdvantagesERP Intangible Advantages Keeping up with competitorsKeeping up with competitors Save vendor, customer frustrationSave vendor, customer frustration Savings occur over several yearsSavings occur over several years Implementation takes yearsImplementation takes years Some companies don’t make ROI Some companies don’t make ROI

calculationscalculations too many intangiblestoo many intangibles cultural change (e.g., FHC)cultural change (e.g., FHC)

ERP DisadvantagesERP Disadvantages High cost (particularly for High cost (particularly for

small business)small business) Privacy and securityPrivacy and security Long implementation timeLong implementation time Displaces clerical employeesDisplaces clerical employees May have to change business to fit May have to change business to fit

softwaresoftware

ERP CostsERP Costs Total Costs:Total Costs:

LicenseLicense TrainingTraining ImplementationImplementation MaintenanceMaintenance CustomizationCustomization Hardware required Hardware required

ERP Cost PercentagesERP Cost Percentages Norris et al. 2000Norris et al. 2000

Software 15%Software 15% Hardware 12%Hardware 12% Training 15%Training 15% Data Conversion 15%Data Conversion 15% Reengineering 43%Reengineering 43%

tailor to fit softwaretailor to fit software

ERP Critical Success ERP Critical Success FactorsFactors Top management commitmentTop management commitment Management of changeManagement of change Resistance to “over-customization”Resistance to “over-customization”

Heavy infrastructure difficult to Heavy infrastructure difficult to changechange

Similar to battleship changing Similar to battleship changing coursecourse

Evaluating ERP SoftwareEvaluating ERP Software Functional fit into company’s Functional fit into company’s

businessbusiness Flexibility and scalabilityFlexibility and scalability Complexity (Usability)Complexity (Usability) Shortened ROI periodsShortened ROI periods Ability to support multi-site planning Ability to support multi-site planning

and controland control

Evaluating ERP SoftwareEvaluating ERP Software Technology:Technology:

Client / server capabilitiesClient / server capabilities Database independenceDatabase independence

Availability of regular upgradesAvailability of regular upgrades Local support infrastructureLocal support infrastructure Availability of reference siteAvailability of reference site

AgendaAgenda What is ERP?What is ERP? ERP Advantages and DisadvantagesERP Advantages and Disadvantages Application Service Providers (ASP)Application Service Providers (ASP) FHC – a Case StudyFHC – a Case Study

Outsourcing ERPOutsourcing ERP High costs ERP maintenanceHigh costs ERP maintenance ERP outsourcing?ERP outsourcing?

install upgradesinstall upgrades maintain modulesmaintain modules trouble-shoot problemstrouble-shoot problems police platformspolice platforms

Why Outsource ERP?Why Outsource ERP? Lack of specialized ERP Lack of specialized ERP

staff skillsstaff skills ERP specialists expensiveERP specialists expensive

cheaper to use ERP outsourcer if cheaper to use ERP outsourcer if don’t use skills on full-time basisdon’t use skills on full-time basis

ERP upgrade releases very frequentERP upgrade releases very frequent Firms want IT to focus on activities Firms want IT to focus on activities

that “add value to core processes”that “add value to core processes”

Application Service ProvidersApplication Service Providers ASPASP Lease expensive software packages Lease expensive software packages

such as SAPsuch as SAP Allow multiple users over internetAllow multiple users over internet Charge users by the transactionCharge users by the transaction Provide startup services Provide startup services

tailoring and trainingtailoring and training

ApplicationsApplications Deloitte & Touche Deloitte & Touche SAPSAP ““Hyper Deploy” over WebHyper Deploy” over Web One change rather than manyOne change rather than many Prospective customers can Prospective customers can

“play” with application“play” with application

ASP ProblemASP Problem Confusing array of Confusing array of

emerging ASPs:emerging ASPs: ““Pure Play”: founded explicitly for Pure Play”: founded explicitly for

new ASP marketnew ASP market Application Vendor (e.g., SAP)Application Vendor (e.g., SAP) Telecommunications Carriers and Telecommunications Carriers and

ISPs;ISPs; add ASPs to existing networksadd ASPs to existing networks e.g., AT&T, US Weste.g., AT&T, US West

ASP ProblemASP Problem Info-Tech Research predicts Info-Tech Research predicts

that, by year-end 2001, 60% of that, by year-end 2001, 60% of today’s ASPs will fail due to:today’s ASPs will fail due to: poor business modelspoor business models choice of partnerschoice of partners failure to execute / consolidate failure to execute / consolidate

their offeringstheir offerings KEY DECISION: KEY DECISION: Gamble early or wait Gamble early or wait

for market to “shake out”?for market to “shake out”?

AgendaAgenda What is ERP?What is ERP? ERP DownsidesERP Downsides Application Service ProvidersApplication Service Providers FHC – a Case StudyFHC – a Case Study

FHSFHS Foundation Health SystemsFoundation Health Systems Fortune 500 firmFortune 500 firm Was FHC (Corporation) before Was FHC (Corporation) before

merger with Health Netmerger with Health Net Created by merger of diverse heath Created by merger of diverse heath

provider companies throughout provider companies throughout countrycountry

FHSFHS Needed to standardize Needed to standardize

language, culture, and language, culture, and “business rules”“business rules”

IT Department proposed complete IT Department proposed complete centralization of IT operationscentralization of IT operations

IT centralization attempted, IT centralization attempted, but met with severe resistance but met with severe resistance from local unitsfrom local units

Abandoned shortly after mergerAbandoned shortly after merger

FHC ERP GoalsFHC ERP Goals Main objective: to standardize “back Main objective: to standardize “back

office” business rulesoffice” business rules WantedWanted to change organization to change organization

culture by means of softwareculture by means of software Back-end centralized using SAPBack-end centralized using SAP Front-end decentralized by business Front-end decentralized by business

unitunit e.g., Dental Care in Texase.g., Dental Care in Texas

FHC ERP Model

FactoryFactory WarehouseWarehouse AccountingAccounting HQHQ

SalesOffices SalesOffices

Foundation Network Foundation Network OrganizationOrganization

Front-line SpecialistsFront-line Specialists

Front-line SupportFront-line Support

Back-lineSpecialistsBack-lineSpecialists

ManagementManagement

Field sales and serviceField sales and service

Local OfficesLocal Offices

Centralized (SAP)

Decentralized

FHC SAP ImplementationFHC SAP Implementation Implementation took 4 years 1996-Implementation took 4 years 1996-

20002000 Hired specialized expensive, full-time Hired specialized expensive, full-time

SAP analysts and programmersSAP analysts and programmers Ran into problems and had to Ran into problems and had to

reimplement portions of systemsreimplement portions of systems

FHC ERP ProblemsFHC ERP Problems Problems integrating with existing Problems integrating with existing

legacy applicationslegacy applications Extensive upgradesExtensive upgrades

FHC ERP IssuesFHC ERP Issues Why did they choose “ best practice” Why did they choose “ best practice”

approach?approach? When didn’t they outsource ERP or When didn’t they outsource ERP or

ASP?ASP? Why did they hire expensive SAP Why did they hire expensive SAP

specialists who would not be needed specialists who would not be needed in future?in future?

Should ERP be used for Should ERP be used for organizational redesign?organizational redesign?

IssueIssueCompare what is happening Compare what is happening

in the E-Business arena and the in the E-Business arena and the features of ERP. Is ERP compatible features of ERP. Is ERP compatible with the future of business?with the future of business?

Why or why not?Why or why not?

Topics DiscussedTopics Discussed What is ERP?What is ERP? ERP Advantages and DisadvantagesERP Advantages and Disadvantages Application Service ProvidersApplication Service Providers FHC – a Case StudyFHC – a Case Study