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  1. 1. Hour 1: ERP Systems Overview Introduction to ERP System Options
  2. 2. ERP Claims <ul><li>Create value through integrating activities across organization </li></ul><ul><li>Implementation of best practices </li></ul><ul><li>Standardization of processes </li></ul><ul><li>One-source data </li></ul><ul><li>On-line access to information </li></ul>
  3. 3. Role in Business <ul><li>Accounting basis </li></ul><ul><li>US products – some extension of MRP </li></ul><ul><li>Combine business computing </li></ul><ul><ul><li>Unified system sharing one set of data </li></ul></ul><ul><ul><li>Advantages in efficiency, accuracy </li></ul></ul><ul><li>Best Practices </li></ul><ul><ul><li>Apply the best process for each function </li></ul></ul>
  4. 4. Historical Growth <ul><li>1970s & 1980s – more development than growth </li></ul><ul><li>1990s – became widely adopted by large firms </li></ul><ul><li>Late 1990s – growth exploded with fears of Y2K problems </li></ul><ul><li>Post-2000 – growth slowed </li></ul><ul><ul><li>Saturated market, economy dipped </li></ul></ul><ul><ul><li>Seeking to </li></ul></ul><ul><ul><ul><li>Fill in gaps with larger firms </li></ul></ul></ul><ul><ul><ul><li>Make products useful for smaller firms </li></ul></ul></ul><ul><ul><ul><li>Emphasize Internet </li></ul></ul></ul>
  5. 5. Benefits of ERP <ul><li>Davenport [1998]: </li></ul><ul><ul><li>Increases speed of information flows </li></ul></ul><ul><li>O’Leary [2000]: </li></ul><ul><ul><li>Create value through integration of activities </li></ul></ul><ul><ul><li>Best practices improve operations </li></ul></ul><ul><ul><li>Standardization increases efficiency </li></ul></ul><ul><ul><li>One-source data more accurate, easier to access </li></ul></ul>
  6. 6. Benefits of ERP <ul><li>Better organizational planning </li></ul><ul><li>Better communication </li></ul><ul><li>More collaboration </li></ul><ul><li>Weil [1999]: </li></ul><ul><ul><li>Applied Robotics increased on-time deliveries 40% through ERP </li></ul></ul><ul><ul><li>Delta Electronics reduced production control labor requirements 65% </li></ul></ul>
  7. 7. Why ERP? <ul><li>Technical : </li></ul><ul><ul><li>Integration of computer systems foster consistency, efficiency </li></ul></ul><ul><li>Financial : </li></ul><ul><ul><li>Integrating applications saves money </li></ul></ul><ul><li>Organizational : </li></ul><ul><ul><li>All members of organization use same system </li></ul></ul>
  8. 8. Conception vs. Reality <ul><li>Integrated System </li></ul><ul><li>In fact, vendors usually sell modules </li></ul><ul><ul><li>Would like to sell full system </li></ul></ul><ul><ul><li>Buyers reduce cost, risk, by starting smaller scale </li></ul></ul><ul><ul><ul><li>Risk of converting entire system </li></ul></ul></ul><ul><ul><ul><li>Complex cost impact </li></ul></ul></ul>
  9. 9. SAP: Best Practices <ul><li>A key to original product </li></ul><ul><li>Davenport [1998]: </li></ul><ul><ul><li>Firm’s vary in what is best for them </li></ul></ul><ul><ul><li>Business world dynamic </li></ul></ul><ul><ul><li>Rigid approach has dangers </li></ul></ul><ul><ul><li>If a firm develops a competitive advantage, they give it up by adopting “best practices” </li></ul></ul>
  10. 10. ERP Supported Functions Vendor eval Standard costing Shipping Profit analysis Quality Mgmt General ledger Purchasing Financial consol Project Mgmt Exec Info Sys Sales plan Prod planning Travel expense Cost accounting Sales Mgt Plant Mtce Personnel plan Cash forecast Pricing MRP Payroll Asset account Orders Inventory Time accounting Accts receivable Sales & M Ops & Log Hum Res Financial
  11. 11. CPU Support <ul><li>Originally mainframe </li></ul><ul><ul><li>SAP R/2 – 1974 </li></ul></ul><ul><li>Client/Server architecture early 1990s </li></ul><ul><ul><li>More flexible </li></ul></ul><ul><ul><li>SAP R/3 </li></ul></ul><ul><li>Something new? </li></ul>
  12. 12. Advantages & Disadvantages <ul><li>System Integration </li></ul><ul><ul><li>Improved understanding across users </li></ul></ul><ul><ul><li>Less flexibility </li></ul></ul><ul><li>Data Integration </li></ul><ul><ul><li>Greater accuracy </li></ul></ul><ul><ul><li>Harder to correct </li></ul></ul><ul><li>Better methods </li></ul><ul><ul><li>More efficiency </li></ul></ul><ul><ul><li>Less freedom & creativity </li></ul></ul><ul><li>Expected lower costs </li></ul><ul><ul><li>More efficient system planned </li></ul></ul><ul><ul><li>Dynamic needs, training typically underbudgeted, hidden implementation costs </li></ul></ul>
  13. 13. ERP System Options & Selection Methods Alternative ERP project forms Budgeting methods
  14. 14. IS/IT Projects <ul><li>Typically </li></ul><ul><ul><li>Late </li></ul></ul><ul><ul><li>Over budget </li></ul></ul><ul><ul><li>Fail to satisfy design specifications </li></ul></ul><ul><li>ERP projects </li></ul><ul><ul><li>Are larger than normal </li></ul></ul><ul><ul><li>Can be expedited (if you do it vendor’s way) </li></ul></ul><ul><ul><li>Cost range $5 million to over $100 million (+) </li></ul></ul>
  15. 15. Alternative ERP Options At mercy of ASP Least risk & cost, fastest ASP Inflexible Fast, inexpensive, efficient Full vendor system If expand, inefficient and higher total cost Less risk, fast, inexpensive Select vendor modules Slower, usually more expensive than pure vendor Proven features modified to fit organization Customize vendor system Hard to link, slow, potentially inefficient Theoretically ideal Best-of-breed Difficult to develop Expensive & slow Blend proven features with organizational fit In-house+vendor supp. Most difficult, expensive, slowest Fit organization In-house Disadvantages Advantages Method
  16. 16. Changing Nature of IT <ul><li>Technology is highly dynamic </li></ul><ul><li>ERP projects often take years to install </li></ul><ul><ul><li>Vendors are responding by expediting </li></ul></ul><ul><ul><ul><li>As long as you do it their way </li></ul></ul></ul><ul><li>Improved versions may be on market by the time you install your system </li></ul><ul><ul><li>This is one advantage of an ASP </li></ul></ul>
  17. 17. IT Selection Practice <ul><li>Hinton & Kaye [1996]: </li></ul><ul><ul><li>IT tends to be viewed as capital budgeting </li></ul></ul><ul><ul><li>Implication is that clear financial return is expected </li></ul></ul><ul><ul><ul><li>Sound thinking, but benefits often intangible (yet real) </li></ul></ul></ul><ul><ul><ul><li>Some strategic investments require bold judgment </li></ul></ul></ul><ul><ul><ul><li>Conversely, companies have gone broke buying IT </li></ul></ul></ul>
  18. 18. Financial techniques for Capital Budgeting <ul><li>Payback </li></ul><ul><li>Discounted cash flow </li></ul><ul><li>Cost-benefit analysis </li></ul><ul><li>These are the more formal mechanisms implied by Hinton & Kaye as capital budgeting </li></ul><ul><li>Anything with as great an impact as ERP needs to have some estimate of cost, benefits </li></ul><ul><ul><li>Need to recognize that precise numbers not worth obtaining </li></ul></ul>
  19. 19. Bacon [1992] survey of IT project selection methods <ul><li>Financial Criteria </li></ul><ul><ul><li>NPV, IRR, payback </li></ul></ul><ul><ul><li>profitability index </li></ul></ul><ul><ul><li>budgetary constraint </li></ul></ul><ul><li>Management Criteria </li></ul><ul><ul><li>Requirements, respond to competition, etc. </li></ul></ul><ul><li>Development Criteria </li></ul><ul><ul><li>Technical/ learning new technology, probability </li></ul></ul>
  20. 20. Bacon findings <ul><li>More formal methods often not used </li></ul><ul><ul><li>Why waste effort if know you will do it? </li></ul></ul><ul><ul><li>Many numbers used inaccurate anyway </li></ul></ul><ul><ul><li>More formal methods reserved for larger project ( like ERP ) </li></ul></ul><ul><li>Management criteria focus on intangible </li></ul><ul><li>Technical a matter of maintaining state-of-the-art systems </li></ul>
  21. 21. Survey of Manufacturers Mabert et al. (2000); Olhager & Selldin (2003) 20% 11% Other 12% 15% Expected NPV 67% 35% Payback 30% 53% ROI Use in Sweden Use in US FORMAL METHOD
  22. 22. Expected Installation Time Mabert et al. (2000); Olhager & Selldin (2003) 1% 2% > 48 months 4% 6% 37 to 48 months 8% 11% 25 to 36 months 49% 45% 13 to 24 months 38% 34%  12 months Sweden US Time to Install ERP
  23. 23. Estimated Installation Cost Mabert et al. (2000); Olhager & Selldin (2003) In prior 7% > $100 million 7% 7% $51 million to $100 million 18% 10% $26 million to $50 million 35% 33% $5 million to $25 million 40% 42% < $5 million Sweden US Installation Cost
  24. 24. Cost Proportions Mabert et al. (2000); Olhager & Selldin (2003) 1% 3% Other 14% 11% Training 12% 14% Implementation team 19% 18% Hardware 30% 24% Consulting 24% 30% Software Sweden US Where money spent
  25. 25. Mabert et al. [2000] Survey of 400+ manufacturers 13% > 50% 18% 26% to 50% 36% 16% to 25% 18% 5% to 15% 14% < 5% Reported Expected ROI
  26. 26. Expected ROI Mabert et al. (2000); Olhager & Selldin (2003) 4% 13% > 50% 11% 18% 26% to 50% 30% 36% 16% to 25% 38% 18% 5% to 15% 17% 14% < 5% Sweden US Expected ROI
  27. 27. Mabert et al. [2000] Survey of 400+ manufacturers <ul><li>Even for ERP systems, only 53% used formal methods </li></ul><ul><ul><li>For smaller IT projects, payback most popular </li></ul></ul><ul><li>Most systems expected to take years to install </li></ul><ul><ul><li>Trend is to make much faster </li></ul></ul><ul><li>Cost varies widely </li></ul><ul><ul><li>You have a choice as to where you spend </li></ul></ul><ul><ul><li>Training tends to be underbudgeted </li></ul></ul><ul><li>Not all expect big return </li></ul>
  28. 28. Points <ul><li>A variety of evaluation techniques available </li></ul><ul><li>Pure monetary analysis hard, expensive, inaccurate </li></ul><ul><ul><li>Payback a commonly used shortcut </li></ul></ul><ul><li>Other methods exist </li></ul><ul><ul><li>Value analysis </li></ul></ul><ul><ul><li>Multicriteria analysis </li></ul></ul>
  29. 29. Summary <ul><li>ERP software has had a major impact on organizational computing </li></ul><ul><li>Technological, financial, organizational benefits </li></ul><ul><li>Also expensive, massive, inflexible </li></ul><ul><li>Many hidden costs </li></ul><ul><li>Complex adoption decision </li></ul>