Enterprise Resource Planning Systems (ERP)

Prof. Dale L. Goodhue

MIS @ Terry

Terry College of Business

September 13, 2000

What is ERP?

“A packaged business software system that lets a company automate and integrate the majority of its business processes; share common data and practices across the enterprise; [and] produce and access information in a real-time environment.”– Deloitte Consulting

Data Customers/Prospects Orders/Quotes Product/Part Inventories Bill of Materials / Routings Machine capacities Production Schedules Vendors Economic Order Quants, Etc.

Sales Force Automation

Order Entry

Materials Management

Production Scheduling Cost Accounting Accounts Payable

If the whole organization used a single integrated database

for all its data.

Data Forecast Demand Machine capacities Bill of Materials Routings

Data Bill of Materials Product/Part Inventories Vendors Economic Order Quants

Data Prospects Quotes Sales Forecasts

Data Customers Products/Configurations Employee Data

Data Bill of Materials Machine Usage Labor Charges Cost Allocations

Supply Chain Management Application Systems and Data

Sales Force Automation

Order Entry Materials Management

Production SchedulingCost Accounting

Data Customers Orders Payments

Accounts Payable

Production Sched. Data Forecast Demand Machine capacities Bill of Materials Routings

Materials Mgmt Data Bill of Materials Product/Part Inventories Vendors Economic Order Quants

Sales Force Automation Data Prospects Quotes Sales Forecasts

Order Entry Data

Customers Products/Configurations Employee Data

Cost Accounting Data Bill of Materials Machine Usage Labor Charges Cost Allocations

Answering Managerial Questions about Supply Chain Operations

Accounts Payable Data

Customers Orders Payments

How quickly will a new order show up in production scheduling?

How much trouble will it be to answer a CEO’s question: “Which category of customer is most profitable to us?” when the data maintained in the different divisions is not organized or defined the same way.

Application Program Payroll Data Employee Data Time Clock Data

Application Program Order Entry Data Order Data Customer Data Employee Data

Application Program ESOP Tracking

Data Employee ESOP Data Employee History

Application Program Cost Accounting

Data Bill of Materials Machine Costs Employee Costs

Application Program Production Scheduling

Data Bill of Materials Machine Capacities Employee Data Order Data

Data Order Data Customer Data Employee Data Product Data

Extract Translate and Clean

Data Access ToolsData Warehouse

A data warehouse solves the data access problem by copying all data to a single database. [The operational problems are not solved.]

Data Customers/Prospects Orders/Quotes Product/Part Inventories Bill of Materials / Routings Machine capacities Production Schedules Vendors Economic Order Quants, Etc.

Sales Force Automation

Order Entry

Materials Management

Production Scheduling Cost Accounting Accounts Payable

ERP systems provide for operational coordination, in addition to the {potential} query capability of a Data Warehouse

Packaged Software

Single Database

ERPData standards: data defined the same way across all business functions / applications

Process standards: Uniform “best practice” business processes

Process restrictions: some legitimate processes cannot be supported

Business Integration

What is ERP?

ERP -- Why it is so attractive?

Solves the Data Integration Problem. The “Silo Problem” where incompatible silos of data make it nearly impossible to answer cross functional managerial questions.

Provides much tighter integration between functions. Actions at one end of the chain immediately visible at the other end. Allows global coordination.

Provides a selection of carefully researched “best practice” business processes at every level. A catalyst for re-engineering.

Provides a “packaged” solution so each individual IT shop does not have to reinvent a very complex wheel.

Moves much of IT application programming out of the firm, reduces cost.

Solves the Y2K problem.

What is ERP?

A technological solution to a technical problem of

“dis-integrated” information systems.

ERP Problems

• Survey of IT managers (1998) named ERP systems most difficult to install

• 90% of installations wind up over budget or late (Standish Group, 1996)

• Some companies have started implementations and stopped.

• As much as 70% Failure Rate cited. Few are managing through to success and major benefits. Some spectacular failures!

ERP -- How Risky is it and why?

Change in business processes and technology

Affects many key business processes and employees profoundly.

Extremely difficult organizational challenges

Extremely complex system with relatively few high qualified consultants = high cost consulting

Large in scale, long in time, high in cost ($10 or $100 of millions)

Principal Agent

Relationship:Cooperative behaviorGoal alignment, Goal conflictInformation asymmetry and transferInformation System

GoalsRisk AttitudeAgent Behavior: moral hazard adverse selection

GoalsRisk Attitude

What is ERP?

An information technology implementation that invariably requires significant consultant assistance, with the necessity of managing the consultants to get full value.

Organizational Structure and the Corporate Culture

Management Processes

Individuals and Roles

TechnologyOrganizational Strategy

External Socio-Economic

Environment:

External Technological Environment:

Conceptual Model of Technology Impact Rockart and Scott Morton, 1984

What is ERP?

A technological solution that must be combined with at least some level of organizational transformation to achieve business benefits

ERP may be better in some organizations than in others

• Standardization– Best practice to the software vendor may not be

best practice to you– Tough to accommodate differences within the

company– Tough to get competitive advantage when your

competitors can buy the same system

• Inhibiting change?– Innovations must originate with the software

vendor

Interdependence among sub-units

Global EffectsImproved coordination. Better corporate-wide mgmt. info. IS development & maintenance savings.

Differentiation among sub-units

Compromise costs: Misfits between system and local information needs of some units

Fit between system and global information needs

Local level effects:Diminished data quality & relevance.Decreased ability to adapt to locally changing conditions

In the presence of these characteristics:

ERP leads to: Which yields these outcomes:

Model of ERP and Data Integration Costs and Benefits

Higher Design costs: More Resources dedicated to ERP implementation

Global Effect:More funds spend on implementation

Either or

Rapid Environmental Change For Some Sub-units

Strategic Importance

Degree of Customization

Fit

IS SuccessOther SuccessFactors

drives

System Component

What is ERP?

A technological solution that works very well in some organizational situations, and not very well in other organizational situations.

Major PlayersSAP 16%Peoplesoft 5%Oracle 5%Baan 3%J.D.Edwards 3%

Consulting/System Integration Revenues about twice that!

SAP Revenues in millions of EURO Q1, 2000 1999 1998 1997

(US Only)Total Revenue 5,110.2 4,315.6 3,021.8Revenue Growth neg. 18% 43% 50%+

2000 2002 2004 2006199819961994

Time

Amount of Software Development to Upgrade Old Systems

Without Y2K

2000 2002 2004 2006199819961994

Time

Amount of Software Development to Upgrade Old Systems

Without Y2K

With Y2K, Some Software Development that would have occurred in 2000 through 2004 was done early to make the Y2K fix free

2000 2002 2004 2006199819961994

Time

Amount of Software Development to Upgrade Old Systems

The Y2K Bubble

Extra Software Upgrade Sales (primarily ERP) Due to Y2K

Y2K Bubble Pops

Trough in Software Upgrade Sales (including ERP) Due to Y2K

ERP is (still) huge• $10 Billion worldwide, net of consulting

• Moving into midsize and non-profit sectors

• Moving into E-Commerce and CRM

ERP’s Future?• In the 90s, seriously over-hyped, a major FAD.

• In the very late 90s difficulties surfaced in trade press with a vengeance

• In 2000, the FAD is over

• Is there a need for integration across regions and functions in current competitive environment???

• Is there a need for packaged as opposed to in house development for very complex systems???

• Now ERP is under-hyped