Hour 1: ERP Systems Overview
Introduction to ERP
System Options
ERP Claims
• Create value through integrating activities
across organization
• Implementation of best practices
• Standardization of processes
• One-source data
• On-line access to information
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
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
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
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%
Why ERP?
• Technical:
– Integration of computer systems foster
consistency, efficiency
• Financial:
– Integrating applications saves money
• Organizational:
– All members of organization use same system
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
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”
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
CPU Support
• Originally mainframe
– SAP R/2 – 1974
• Client/Server architecture early 1990s
– More flexible
– SAP R/3
• Something new?
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
ERP System Options & Selection
Methods
Alternative ERP project forms
Budgeting methods
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 (+)
Alternative ERP Options
Method
Advantages
Disadvantages
In-house
Fit organization
Most difficult, expensive, slowest
Inhouse+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
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
IT Selection Practice
• Hinton & Kaye [1996]:
– IT tends to be viewed as capital budgeting
– Implication is that clear financial return is
expected
• Sound thinking, but benefits often intangible (yet
real)
• Some strategic investments require bold judgment
• Conversely, companies have gone broke buying IT
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
Bacon [1992] survey of IT
project selection methods
• Financial Criteria
– NPV, IRR, payback
– profitability index
– budgetary constraint
• Management Criteria
– Requirements, respond to competition, etc.
• Development Criteria
– Technical/ learning new technology, probability
Bacon findings
• More formal methods often not used
– Why waste effort if know you will do it?
– Many numbers used inaccurate anyway
– More formal methods reserved for larger
project (like ERP)
• Management criteria focus on intangible
• Technical a matter of maintaining state-ofthe-art systems
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%
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%
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
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%
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%
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%
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
Points
• A variety of evaluation techniques available
• Pure monetary analysis hard, expensive,
inaccurate
– Payback a commonly used shortcut
• Other methods exist
– Value analysis
– Multicriteria analysis
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