Chapter 1: ERP Systems

Korea Telecom 2007Olson: ERP 2ERP Systems OverviewIntroduction to ERPSystem OptionsKorea Telecom 2007Olson: ERP 2ERP ClaimsCreate value through integrating activities across organizationImplementation of best practicesStandardization of processesOne-source dataOn-line access to information

Korea Telecom 2007Olson: ERP 2Role in BusinessAccounting basisUS products some extension of MRPCombine business computingUnified system sharing one set of dataAdvantages in efficiency, accuracyBest PracticesApply the best process for each functionKorea Telecom 2007Olson: ERP 2Historical Growth1970s & 1980s more development than growth1990s became widely adopted by large firmsLate 1990s growth exploded with fears of Y2K problemsPost-2000 growth slowedSaturated market, economy dippedSeeking to Fill in gaps with larger firmsMake products useful for smaller firmsEmphasize InternetKorea Telecom 2007Olson: ERP 2Benefits of ERPDavenport [1998]:Increases speed of information flowsOLeary [2000]:Create value through integration of activitiesBest practices improve operationsStandardization increases efficiencyOne-source data more accurate, easier to accessKorea Telecom 2007Olson: ERP 2Benefits of ERPBetter organizational planningBetter communicationMore collaborationWeil [1999]:Applied Robotics increased on-time deliveries 40% through ERPDelta Electronics reduced production control labor requirements 65%Korea Telecom 2007Olson: ERP 2Why ERP?Technical:Integration of computer systems foster consistency, efficiencyFinancial:Integrating applications saves moneyOrganizational:All members of organization use same systemKorea Telecom 2007Olson: ERP 2Conception vs. RealityIntegrated SystemIn fact, vendors usually sell modulesWould like to sell full systemBuyers reduce cost, risk, by starting smaller scaleRisk of converting entire systemComplex cost impactKorea Telecom 2007Olson: ERP 2SAP: Best PracticesA key to original productDavenport [1998]: Firms vary in what is best for themBusiness world dynamicRigid approach has dangersIf a firm develops a competitive advantage, they give it up by adopting best practicesKorea Telecom 2007Olson: ERP 2ERP Supported FunctionsFinancialHum ResOps & LogSales & MAccts receivableTime accountingInventoryOrdersAsset accountPayrollMRPPricingCash forecastPersonnel planPlant MtceSales MgtCost accountingTravel expenseProd planningSales planExec Info SysProject MgmtFinancial consolPurchasingGeneral ledgerQuality MgmtProfit analysisShippingStandard costingVendor evalKorea Telecom 2007Olson: ERP 2CPU SupportOriginally mainframeSAP R/2 1974Client/Server architecture early 1990sMore flexibleSAP R/3Something new?Portal systems (MySAP.com)

Korea Telecom 2007Olson: ERP 2Advantages & DisadvantagesSystem IntegrationImproved understanding across usersLess flexibilityData IntegrationGreater accuracyHarder to correctBetter methodsMore efficiencyLess freedom & creativityExpected lower costsMore efficient system plannedDynamic needs, training typically underbudgeted, hidden implementation costs

Korea Telecom 2007Olson: ERP 2ERP System Options & Selection MethodsAlternative ERP project formsBudgeting methodsKorea Telecom 2007Olson: ERP 2IS/IT ProjectsTypically LateOver budgetFail to satisfy design specificationsERP projectsAre larger than normalCan be expedited (if you do it vendors way)Cost range $5 million to over $100 million (+)

Korea Telecom 2007Olson: ERP 2Alternative ERP OptionsFormAdvantagesDisadvantagesIn-houseFit organizationMost difficult, expensive, slowestIn-House + vendor supp.Blend proven features with organizational fitDifficult to developExpensive & slowBest-of-breedTheoretically idealHard to link, slow, potentially inefficientCustomize vendor systemProven features modified to fit organizationSlower, usually more expensive than pure vendorSelect vendor modulesLess risk, fast, inexpensiveIf expand, inefficient and higher total costFull vendor systemFast, inexpensive, efficientInflexibleASPLeast risk & cost, fastestAt mercy of ASPKorea Telecom 2007Olson: ERP 2Changing Nature of ITTechnology is highly dynamicERP projects often take years to installVendors are responding by expeditingAs long as you do it their wayImproved versions may be on market by the time you install your systemThis is one advantage of an ASPKorea Telecom 2007Olson: ERP 2Financial techniques for Capital BudgetingPaybackDiscounted cash flowCost-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, benefitsNeed to recognize that precise numbers not worth obtaining

Korea Telecom 2007Olson: ERP 2Survey of ManufacturersMabert et al. (2000); Olhager & Selldin (2003)FORMAL METHODUse in USUse in SwedenROI53%30%Payback35%67%Expected NPV15%12%Other11%20%Korea Telecom 2007Olson: ERP 2Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)Time to Install ERPUSSweden 12 months34%38%13 to 24 months45%49%25 to 36 months11%8%37 to 48 months6%4%> 48 months2%1%Korea Telecom 2007Olson: ERP 2Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)Installation CostUSSweden< $5 million42%40%$5 million to $25 million33%35%$26 million to $50 million10%18%$51 million to $100 million7%7%> $100 million7%In priorKorea Telecom 2007Olson: ERP 2Cost ProportionsMabert et al. (2000); Olhager & Selldin (2003)Where money spentUSSwedenSoftware30%24%Consulting24%30%Hardware18%19%Implementation team14%12%Training11%14%Other3%1%Korea Telecom 2007Olson: ERP 2Mabert et al. [2000]Survey of 400+ manufacturersExpected ROIReported< 5%14%5% to 15%18%16% to 25%36%26% to 50%18%> 50%13%Korea Telecom 2007Olson: ERP 2Expected ROIMabert et al. (2000); Olhager & Selldin (2003)Expected ROIUSSweden< 5%14%17%5% to 15%18%38%16% to 25%36%30%26% to 50%18%11%> 50%13%4%Korea Telecom 2007Olson: ERP 2Mabert et al. [2000]Survey of 400+ manufacturersEven for ERP systems, only 53% used formal methodsFor smaller IT projects, payback most popularMost systems expected to take years to installTrend is to make much fasterCost varies widelyYou have a choice as to where you spendTraining tends to be underbudgetedNot all expect big returnKorea Telecom 2007Olson: ERP 2Taiwan ERPC.-T. Yeh, M. Miozzo, T. Vurdubakis, Journal of Enterprise Information Management 19:1, 2006, 30-49International vendors (like SAP)BPR based on Western practiceThe rest of the world not necessarily the sameHas created many misfitsEspecially in small-to-medium sized enterprisesBusiness opportunity for small domestic vendorsKorea Telecom 2007Olson: ERP 2Taiwans industrial successFlexible, decentralized network of SMEsFocus on export trade in consumer goodsAgility & adaptability importantVendor ERPs dont support thatBPR forces clients of ERP to do it their wayThey (SAP) think they know betterProblemsFirst, middle, last name doesnt fit Indian, ChineseEgypt pricing determined after receipt of goods Oracle didnt do it that wayKorea Telecom 2007Olson: ERP 2ERP RevolutionSAP claims organization can create its own solutionBy selection of modulesIn reality, organizations required to re-engineer their business processes to conform to ERPStandish Group 90% of ERP implementations have cost, schedule overrunsMany failures FoxMeyer, HersheysKorea Telecom 2007Olson: ERP 2Vendor Response to Market1990s market (large organizations) saturatedVendors built products for new end-usersNon-profitSMEsNew types of ERPWeb-enablesCRM, SCM productsNew marketsChina, IndiaLess system rigidityFaster implementationIndustry-focused systems

Korea Telecom 2007Olson: ERP 2Vendor effortsMake systems less rigidEnd-user organizations often modifyBetween standardization & customizationComplicationsImplementationUpgradesKorea Telecom 2007Olson: ERP 2Taiwan ERP marketCase studies 14 organizations in TaiwanSAP 38%Oracle 16%Domestic get restPrices$600,000 to $1,400,000Much lower than USKorea Telecom 2007Olson: ERP 2Implementation OptionsDIRECTVendor implements system for customersDomestic vendorsINDIRECTVendor trains consultants who implement ERPInternational vendorsIn Taiwan, Direct option usually usedFew reliable consultants availableConsultants prefer large vendors (more experience with)Competitive domestic marketLower pricesKorea Telecom 2007Olson: ERP 2Taiwan ERP trendsMore Wide Enterprise SystemsFrom hi-tech to traditional manufacturingFrom Large to SMEFrom growth stage to maturityFrom internal information integration to external information communicationKorea Telecom 2007Olson: ERP 2China ERP MarketGrowing rapidlyGovernment supportAccession to WTONeed for competitivenessInternational vendors play the major roleDomestic vendors have software more akin to accounting packagesTaiwan ERP vendor collaborationR&D, distribution, joint ventures, investmentKorea Telecom 2007Olson: ERP 2SummaryERP software has had a major impact on organizational computingTechnological, financial, organizational benefitsAlso expensive, massive, inflexibleMany hidden costsComplex adoption decision