ERP: What Is It?


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ERP: What Is It?

  1. 1. ERP: What Is It? Enterprise Resources Planning “Enterprise resource planning software, or ERP, doesn't live up to its acronym. Forget about (ERP) and Integration planning—it doesn't do that—and forget about resource, a throwaway term. But remember the enterprise part. This is ERP's true ambition. It I303 attempts to integrate all departments and Session 7, Fall 2003 functions across a company onto a single Thomas Haigh computer system…” From the Darwin “Executive Guide” reading i303, Session 7, Thomas Haigh 1 i303, Session 7, Thomas Haigh 2 The Basic Idea Integration Is Huge Problem Key benefit is INTEGRATION See the 1996 Koch reading Trade off versus specialized applications for each “chewing gum and bailer wire approach to systems functional area architecture” Ad-hoc connections occupy ever greater amounts of But programmer time Home-grown development efforts have failed Begins to prevent changes inside individual See my MIS paper… systems “Best of Breed” packages are too hard to integrate Quotes Gartner estimate: So “35 to 40 percent of IT departments' programming Throw everything out efforts are devoted to reconciling duplicate data contained in various databases around the company” Buy one huge, pre-integrated package i303, Session 7, Thomas Haigh 3 i303, Session 7, Thomas Haigh 4 Old Dream of Total Integration Major Suppliers Unification of all key operational systems SAP Integration is Oracle Geographic (multiple sites in USA, Europe & J.D Edwards Asia for many large firms) PeopleSoft Functional, with modules for Logistics Siebel Systems Financial Human Resources And more specialized areas, such as real estate i303, Session 7, Thomas Haigh 5 i303, Session 7, Thomas Haigh 6
  2. 2. SAP Today Boom in 1990s Biggest ERP supplier IT budgets were flush & rapidly rising 55% global share, and rising fast One of world’s most successful software firms ERP installation became very fashionable Huge web of connections More than 1,000 “partners” Consulting firms Makers of add-on software, etc, More than 12,000 customers More than 10 million licensed users 22 versions tailored to specific industries Web offering called “” (1999) i303, Session 7, Thomas Haigh 7 i303, Session 7, Thomas Haigh 8 SAP History Implementation Firm founded in 1972 Complex process of configuration of fit business 5 former IBMers in Mannheim, Germany Entering rules and preferences Idea is mainframe software to Avoid needless duplication in inhouse efforts Loading and standardizing existing data Work interactively, in real time Hooking up to remaining applications 1979: SAP /R2 for mainframes Writing custom code where needed 1992: SAP /R3 (still current name) Also human parts Client server version Multiple hardware platforms (Unix, NT, Linux, etc) Retraining users Uses standard database platforms (Oracle, etc) Redesigning business processes 1996: First efforts at web version i303, Session 7, Thomas Haigh 9 i303, Session 7, Thomas Haigh 10 Specialized Field Benefit: Operational Efficiency Lower cost SAP implementations are big business for Data entered only once, used by all processes consulting firms and departments Single implementation might be 24 months, several Better customer service million dollars in fees Current data accessible to all participants At height of boom, many SAP experts go freelance E.g. customer service rep can see stock levels Tend to more from one SAP project to another in other divisions, progress on order, etc. (see E.g. SAP leader at Lilly had specialized in SAP installs Darwin reading) at Cap Gemini consultants Allows management of processes across organizational boundaries i303, Session 7, Thomas Haigh 11 i303, Session 7, Thomas Haigh 12
  3. 3. Benefit: Lower IT cost Benefit: Standard Process ERP is managerial means to force global ERP is very expensive standardization in processes But expect long term savings from Technological enforcement coded into software Local variation, workarounds eliminated Elimination of legacy systems Upgrades, maintenance and licensing costs Centralization of control over procedures May bring efficiency Future maintenance and upgrades cheaper Will sacrifice flexibility Spread costs over a large base Lilly example: Biggest saving in integration? No customization for local traditions or cultures Huge costs for ad-hoc integration of aging Only for legal or regulatory reasons applications i303, Session 7, Thomas Haigh 13 i303, Session 7, Thomas Haigh 14 Benefit: Managerial Data SAP at Lilly I Standardizing processes requires standardization Gradual global expansion of: Began in financial area in 1996 Product codes Want consistent data for EVA and compensation Accounting methods Roll out one region at a time Human Resources systems Today This allows comparisons between divisions $750 estimated million total project cost Especially using financial measures of effectiveness – 35,000 or more users, out of 43,000 employees eg. Economic Value Added (EVA) analysis $10 million a month “burn rate” On global basis i303, Session 7, Thomas Haigh 15 i303, Session 7, Thomas Haigh 16 SAP at Lilly II Claimed Lilly Benefits Main Funcational Areas Biggest area: Better supply chain management (40% of total) Valuation and Control Admitted only just getting started in this area Includes tax, accounting, financial forecasting Others (diminishing order) Project Management Processes Lower procurement costs Better research SAP has a module for this What-if analysis, porfolio management Human Resources Lowered taxes Personnel, pay, staffing, etc Savings on IT spending Dollar values and current accomplishments Supply Chain Management unclear Dealing with stuff (getting, making, moving, selling) i303, Session 7, Thomas Haigh 17 i303, Session 7, Thomas Haigh 18
  4. 4. Backlash Issue: Cost Davenport (1998) gives nice sense Meta Group survey shows Word of high-profile failures Total Cost of Ownership of ERP system over first two Huge overruns on consulting project years of use is $53,320 per “heads down” user Disappointing results when try to plug into unchanged (Darwin) business, or use in inappropriate ways 23 months work and $15 million dollars Problems when treat as IT issue Average benefits $1.5 million less than costs Need to reorganize business Project cost is 2 to 10 times software price Good if fits with management goals (e.g. High profile implementation failures standardization Darwin cites Hershey and Whirlpool E.g. centralization of control accounting, customer service, FoxMeyer Drug went bankrupt as result! order processing across 12 divisions at Elf Atochem Davenport mentions several others i303, Session 7, Thomas Haigh 19 i303, Session 7, Thomas Haigh 20 Issue: Complexity Issue: Inflexibility ERP standardizes business processes Inherent complexity of global project Will be running business the same way as Training costs for users easy to underestimate competitors Existing data often in worse shape than admit Wal-Mart, for example, has shunned Lilly: from 1 million supplier records to 80 thousand Sees its processes as core competence ERP team is permanent fixture Possible problems Rely on to keep business running Can’t find better ways to do things Will need further work on analysis to deliver promised Tied to capabilities of software benefits Limits scope for reengineering, etc except as software New system gives short-term efficiency slump requires and supports Like any major reorganization Loss of supports for distinctive culture But may afflict whole business at once E.g. Lilly has non-standard payroll practices i303, Session 7, Thomas Haigh 21 i303, Session 7, Thomas Haigh 22 Issue: Dependence Issue: Integration “SAP is not just a new program, it’s a new When doesn’t work well in one area way of doing business” Can try to patch the ERP software How to deal with things it won’t support? Can rely on external application and links Long-term commitment… Can alter business to fit the software Can users lobby for new features? Problems in integrating into other systems What if supplier is taken over? Create & maintain custom interfaces What if supplier raises prices? What if supplier shifts direction of product? Not well suited for data warehouses i303, Session 7, Thomas Haigh 23 i303, Session 7, Thomas Haigh 24
  5. 5. Issue: Upgrades Trends in ERP Like all software, frequent new releases 1. Increased modularization of suites Reduces scale of commitment Can be a year long project, cost 30% of Supposed to work better with other applications original installation price 2. Shift to web based front ends Can cause major disruption Initially lagged in this area All major vendors now offer Likely to break custom code & interfaces to Issues with training users for direct access other applications April 2001, Hasso Plattner, SAP CEO says Users resent having to upgrade just because mySAP is “suite of freestanding components” Users will not be locked in, can mix with other apps vendor is pulling support Broadening of focus to corporate portals, external links i303, Session 7, Thomas Haigh 25 i303, Session 7, Thomas Haigh 26 Consolidation of suppliers Most Big Firms Already Have PeopleSoft buys J.D. Edwards Succeeds, just in time SAP license revenues Q2 2003 down 13% Oracle tries to buy PeopleSoft From same quarter in 2002 Initially to prevent merger with J.D. Edwards Once exception: Levi’s Announces customers will have to migrate to Oracle applications Follows Adidas, Nike, Reebok, Wrangler/Lee Still trying to acquire merged firm Hopes to be finished by 2005 Baan (earlier leader) is acquired in 2003 Targeting smaller firms, so try to shrink SAP profits from chaos scale of project for smaller businesses Market share continues to rise SAP initiative ASAP, etc (See Darwin reading) Customers know will still be around in a decade Shrinking consulting bills crucial i303, Session 7, Thomas Haigh 27 i303, Session 7, Thomas Haigh 28 CRM Software Related Topics Customer Relationship Management Data warehousing Idea: centralize all processes and data IT Governance related to interaction with customers Role of the CIO Often offered by ERP suppliers Sold as “next big thing”, though problems set in fast Hit by slump in IT spending from 2001 i303, Session 7, Thomas Haigh 29 i303, Session 7, Thomas Haigh 30