Hour 5: ERP System Installation
Special IS Project
In-house: massive IS project, heavy
system design features
ERP Implementation Project
• If vendor system
– Much less system design than otherwise
– Vendor software already programmed
• Only need interfaces
– Have help from vendor, consultants
– Opportunities to outsource
ERP as an IS Project
• At least 7 optional ways to implement ERP
• Outsourcing (ASP) the easiest
– But risky
• Next easiest is single vendor source without
modifications
– Not necessarily least expensive, nor greatest
benefits
• All others involve significant IS project
Relative Use of ERP Implementation Strategies
Mabert et al. [2000]
Strategy
%
Single vendor package-internal modifications
50
Single vendor package
40
Vendor packages-internal modifications
5
Best-of-Breed
4
In-house plus special packages
1
Total in-house development
0.5
Implementation Strategy Use
• Dominant strategy in manufacturing:
– Single vendor
– Over half added internal modifications
• Very few best-of-breed
• Almost none developed totally in-house
IS/IT Project Management
Results
• Conventional IS/IT projects have trouble
with time, budget, functionality
• ERP projects have slightly more structure,
but still face problems
– Underestimation of required time common
– Vendors have made easier & faster
– Enhancement of systems another trend
• Reintroduces time problem
Systems Failure Method
• systematic method for analysis of failure
• successfully applied - wide variety of situations
• by reviewing past failures, avoid future failure
• as organizations rely more on computers, there
is a corresponding increase in significant
business interruptions
• yet of 300,000 large & mid-sized computer system
installations, <3% had disaster recovery plans
Failures in Planning
• negative disasters: decision culminating in physical
result, later substantially modified, reversed or
abandoned after heavy resource commitment
– power generation facility on campus
• positive disasters: decision culminating in physical
results implemented despite heavy criticism,
subsequently felt by many informed people to have
been a mistake
– Anglo-French SST; BART in San Francisco
Failures of Projects
• information technology
• 1992 - London Ambulance Service
– 1.5 million pound system on line 26 Oct 1992
– immediately lost ambulances
– <20% of dispatched ambulances reached
destinations within 15 minutes of summons
– (before system, 65% met 15 minute standard)
Failures of Projects
•
•
•
•
Some never work
others over budget, very late, or both
others perform less than design
others meet design specifications, but
maintenance & enhancement nightmares
System Failure Method
• failure is regarded as an output
of transformation processed from system
• place trial system boundaries around situation
– experiment with various configurations
– reach conclusion about system
– need to model system in some detail
• at different levels
• be careful not to make too fine, lose important interrelationships
common results
failure commonly a result of
• organizational structure deficiencies
– lack of performance-measuring, control
• no clear statements of purpose
• subsystem deficiencies
• lack of effective communication between subsystems
• inadequate design
• insufficient consideration of environment; insufficient resources
• imbalance of resources production quantity; test quality
FoxMeyer Drug
Large drug distributor
Wanted to implement ERP
FoxMeyer Corp
• Holding company in health care services
• wholesale distribution of drugs & beauty aids
• served drug stores, chains, hospitals, care
facilities
• US: 23 distribution centers
• Sought market niches, such as home health
care
FoxMeyer
• Due to aging population & growth in health care,
expected high growth
• Market had extreme price competition,
threatening margins
• Long-term strategies:
–
–
–
–
efficiently manage inventory
lower operating expenses
strengthen sales & marketing
expand services
Prior FoxMeyer IS
• 3 data processing centers, linked
• included electronic order entry, invoice
preparation, inventory tracking
• 1992 began migration of core systems
• Benefits not realized until system fully
integrated
FoxMeyer Process
• Customer fills out electronic order
• Order sent to 1 of the 3 data processing centers
• Orders sent to the appropriate distribution center
(within 24 hours)
• Orders filled manually and packaged
• Had just completed national distribution center
with multiple carousels & automated picking
• Could track inventory to secondary locations
New System
• Needed new distribution processes & IS to
capitalize on growth
• Wanted to be able to undercut competitors
• Replacing aging IS key
• PROJECT: 1994 - hoped to save $40 million
annually (estimated cost $65 million)
– complete ERP installation & warehouse
automation system (another $18 million)
FoxMeyer Project
• Select ERP
–
–
–
–
–
–
hundreds of thousands of transactions
meet DEA & FDA regulations
benchmarked & tested for months
picked SAP R/3
hired Andersen Consulting to integrate
hired Pinnacle Automation for warehouse
automation system
Operations
• FoxMeyer expected the new systems to
improve operational efficiency
• Signed several giant contracts
– counted on savings, underbid competitors
• Counted on being up and running in 18
months
Problems
• SAP & warehouse automation system
integration
– two sources, two installers - coordination
problems
• New contracts forced change in system
requirements after testing & development
underway
• Late, Over budget
– SAP successfully implemented
Outcomes
• Lost key customer - 15% of sales
• To recoup, signed new customer, expected $40
million benefit from ERP immediately - pushed
ERP project deadline ahead 90 days, no time to
reengineer
• Warehouse system consistently failed
– late orders, incorrect shipment, lost shipments
– losses of over $15 million
• August 1996 filed for Chapter 11
McKesson Followup
• Mid-1990s started implementation of SAP R/3
– Cancelled project in 1996 after spending $15 million
• 1997 acquired FoxMeyer
–
–
–
–
–
–
Carefully designed new R/3 implementation
Dropped a number of modules
Implemented modules one at a time
Cautious rollout schedule, rigorously followed
Separate testing group formed
At last report $50 million system on time, in budget
McKesson
• Massive changes in 3,000 end user jobs
• Careful analysis of changes
–
–
–
–
Surveys
Focus groups
Demonstrations
Computer-based training
Lesson
• Implementing ERP a major undertaking
• Can easily bankrupt a company
• However, it can also be done
– Opportunity for great benefits
System Architecture & ERP
• System architecture displays computer
systems used to support organization
• Open systems architecture allows greater
integration possibilities
– Important in supply chains, e-business
• ERP systems initially quite closed
Open Architecture
• Many external systems being added to ERP
– CRM
– Supply chain
– Internet for e-business
• Need to integrate independent ERPs across
organizations
– Messaging services used
Analysis & Design Control
Frameworks
• Traditional standards for application development
• ERP implementation usually involves installation
of vendor software
– Still need for treatment as installation project
• Early in project, extensive customization needed
– The more system flexibility, the more difficulties in
implementation
– Object-oriented framework benefits extension,
tailorability, customizability
Application Service Providers
• Outsource ERP
• Popular
– Unocal pared IT staff 40% in two years
– Focus on core competencies, shed cost centers
• Many specific functions can be outsourced
• Outsourcing benefits
– Speed
– Organization lacks IT skills
• ASP the most popular way to outsource
ASP Risks
• Your applications and data are controlled by
others
• Service failures out of your control
• Confidentiality failure a possibility
• Performance issues possible
Relative Implementation Effort
Method
In-House
Vendor
Consultant
Single vendor package-internal Significant
modifications
Heavy
Heavy
Single vendor package
Significant+
Heavy
Heavy +
Vendor packages-internal
modifications
Significant+
Moderate Heavy +
Best-of-Breed
Significant ++ Moderate Heavy +
In-house plus special packages Excruciating
None
Maybe
Total in-house development
Painful
Moderate Maybe
Application Service Provider
Light
None
To select
Implementation Effort
• Implementing ERP places strain on in-house
information systems groups
• Consultants are expensive
– Sometimes need special expertise
• Tradeoff: control vs. time & cost
Summary
• ERP driven by idea of quality software
support
• Software quality has long been important
• Many ERP implementation strategies
available
• Tradeoff in control vs. time & cost