ERP Systems Overview
Introduction to ERP
System Options
Korea Telecom 2007
Olson: ERP 2
ERP Claims
• Create value through integrating activities
across organization
• Implementation of best practices
• Standardization of processes
• One-source data
• On-line access to information
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2
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%
Korea Telecom 2007
Olson: ERP 2
Why ERP?
• Technical:
– Integration of computer systems foster
consistency, efficiency
• Financial:
– Integrating applications saves money
• Organizational:
– All members of organization use same system
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2
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”
Korea Telecom 2007
Olson: ERP 2
ERP Supported Functions
Financial
Hum Res
Ops & Log Sales & M
Accts 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
Korea Telecom 2007
Olson: ERP 2
CPU Support
• Originally mainframe
– SAP R/2 – 1974
• Client/Server architecture early 1990s
– More flexible
– SAP R/3
• Something new?
– Portal systems (MySAP.com)
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom
2007
Olson: ERP 2
ERP System Options & Selection
Methods
Alternative ERP project forms
Budgeting methods
Korea Telecom 2007
Olson: ERP 2
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 (+)
Korea Telecom 2007
Olson: ERP 2
Alternative ERP Options
Form
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 Slower, usually more expensive
fit organization
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
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2
Financial techniques for
Capital Budgeting
1. Payback
2. Discounted cash flow
3. Cost-benefit analysis
These are the more formal mechanisms implied by
Hinton & Kaye as capital budgeting
Anything with as great an impact as ERP needs to
have some estimate of cost, benefits
–
Need to recognize that precise numbers not worth
obtaining
Korea Telecom 2007
Olson: ERP 2
Survey of Manufacturers
Mabert et al. (2000); Olhager & Selldin (2003)
FORMAL
METHOD
ROI
Use in US
Use in Sweden
53%
30%
Payback
35%
67%
Expected NPV
15%
12%
Other
11%
20%
Korea Telecom 2007
Olson: ERP 2
Expected Installation Time
Mabert 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%
Korea Telecom 2007
Olson: ERP 2
Estimated Installation Cost
Mabert 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
Korea Telecom 2007
Olson: ERP 2
Cost Proportions
Mabert 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%
Korea Telecom 2007
Olson: ERP 2
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%
Korea Telecom 2007
Olson: ERP 2
Expected ROI
Mabert 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%
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2
Taiwan ERP
C.-T. Yeh, M. Miozzo, T. Vurdubakis, Journal of Enterprise Information
Management 19:1, 2006, 30-49
• International vendors (like SAP)
– BPR based on Western practice
– The rest of the world not necessarily the same
– Has created many misfits
• Especially in small-to-medium sized enterprises
– Business opportunity for small domestic
vendors
Korea Telecom 2007
Olson: ERP 2
Taiwan’s industrial success
• Flexible, decentralized network of SMEs
– Focus on export trade in consumer goods
– Agility & adaptability important
• Vendor ERPs don’t support that
– BPR forces clients of ERP to “do it their way”
• They (SAP) think they know better
– Problems
• First, middle, last name doesn’t fit Indian, Chinese
• Egypt – pricing determined after receipt of goods – Oracle
didn’t do it that way
Korea Telecom 2007
Olson: ERP 2
ERP Revolution
• SAP claims organization can create its own
solution
– By selection of modules
• In reality, organizations required to re-engineer
their business processes to conform to ERP
– Standish Group – 90% of ERP implementations have
cost, schedule overruns
– Many failures – FoxMeyer, Hershey’s
Korea Telecom 2007
Olson: ERP 2
Vendor Response to Market
• 1990s market (large organizations) saturated
• Vendors built
– products for new end-users
• Non-profit
• SMEs
– New types of ERP
• Web-enables
• CRM, SCM products
– New markets
• China, India
– Less system rigidity
• Faster implementation
• Industry-focused systems
Korea Telecom 2007
Olson: ERP 2
Vendor efforts
• Make systems less rigid
• End-user organizations often modify
– Between standardization & customization
• Complications
– Implementation
– Upgrades
Korea Telecom 2007
Olson: ERP 2
Taiwan ERP market
Case studies – 14 organizations in Taiwan
• SAP – 38%
• Oracle – 16%
• Domestic get rest
• Prices
– $600,000 to $1,400,000
– Much lower than US
Korea Telecom 2007
Olson: ERP 2
Implementation Options
• DIRECT
– Vendor implements system for customers
– Domestic vendors
• INDIRECT
– Vendor trains consultants who implement ERP
– International vendors
• In Taiwan, Direct option usually used
– Few reliable consultants available
– Consultants prefer large vendors (more experience with)
– Competitive domestic market
• Lower prices
Korea Telecom 2007
Olson: ERP 2
Taiwan ERP trends
•
•
•
•
•
More Wide Enterprise Systems
From hi-tech to traditional manufacturing
From Large to SME
From growth stage to maturity
From internal information integration to
external information communication
Korea Telecom 2007
Olson: ERP 2
China ERP Market
• Growing rapidly
– Government support
– Accession to WTO
– Need for competitiveness
• International vendors play the major role
• Domestic vendors have software more akin to
accounting packages
• Taiwan ERP vendor collaboration
– R&D, distribution, joint ventures, investment
Korea Telecom 2007
Olson: ERP 2
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
Korea Telecom 2007
Olson: ERP 2