Hour 1: ERP Systems Overview

Introduction to ERP

System Options

ERP Claims

• Create value through integrating activities across organization

• Implementation of best practices

• Standardization of processes

• One-source data

• On-line access to information

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

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

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

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%

Why ERP?

• Technical:– Integration of computer systems foster

consistency, efficiency

• Financial:– Integrating applications saves money

• Organizational:– All members of organization use same system

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

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”

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

CPU Support

• Originally mainframe– SAP R/2 – 1974

• Client/Server architecture early 1990s– More flexible– SAP R/3

• Something new?

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

ERP System Options & Selection Methods

Alternative ERP project forms

Budgeting methods

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 (+)

Alternative ERP OptionsMethod 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

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

IT Selection Practice

• Hinton & Kaye [1996]:– IT tends to be viewed as capital budgeting– Implication is that clear financial return is

expected• Sound thinking, but benefits often intangible (yet

real)

• Some strategic investments require bold judgment

• Conversely, companies have gone broke buying IT

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

Bacon [1992] survey of IT project selection methods

• Financial Criteria– NPV, IRR, payback – profitability index– budgetary constraint

• Management Criteria– Requirements, respond to competition, etc.

• Development Criteria– Technical/ learning new technology, probability

Bacon findings

• More formal methods often not used– Why waste effort if know you will do it?– Many numbers used inaccurate anyway– More formal methods reserved for larger

project (like ERP)

• Management criteria focus on intangible• Technical a matter of maintaining state-of-

the-art systems

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%

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%

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

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%

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%

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%

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

Points

• A variety of evaluation techniques available

• Pure monetary analysis hard, expensive, inaccurate– Payback a commonly used shortcut

• Other methods exist– Value analysis– Multicriteria analysis

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