Enterprise Resource Planning
Judi Prajetno Sugiono
jpsugiono@gmail.com
© 2008
Information System Challenges
INTEGRATION
Coordination
Strategic
level
Senior
Manager
Middle
Manager
Knowledge and
data worker
Operational
Manager
Management level
ERP
MIS, DSS
Knowledge level
KWS, OAS
Operational level
TPS
Sales and Manufacturing
marketing
Hardware
ESS
Software
Finance
Data
Storage
Accounting
Human
Resource
Network
People
ERP (Enterprise
Resource
Planning) is an
integrated
information
system that
serves all
departments
within an
enterprise
Before – After ERP
Before – After ERP
Before and after ERP Stand point
Before ERP
After ERP
Information
Systems
Stand alone systems
Integrated Systems
Coordination
Lack of coordination among business
functions (e.g. manufacturing and sales)
Support coordination across business
function
Database
Non integrated data; data have different
meanings (e.g. customers); inconsistent data
definition
Integrated data; data have the same
meaning across multiple functions
Maintenance
Systems are maintained on a piecemeal
basis; inconsistencies result; it is costly to
maintain separate legacy systems
Uniform maintenance; changes affect
multiple systems
Interfaces
Difficult to manage interfaces between
systems
Common interface across systems
Information
Redundant; inconsistent information
Consistent; real time information (e.g. about
customers, vendors)
Systems
Architecture
May not be state of the art
Relies on client server model
Processes
Incompatible processes
Consistent business process which are based
upon an information model
Application
Disparate applications (e.g. many different
purchasing systems)
Single applications (e.g. common purchasing
systems)
Business Benefit to ERP
ERP Performance
outcomes
Example
Quickened
Information
Response time
• Response to customer billing inquiries occurred in real time as
opposed to 15-20 minutes response time at IBM storage product
company (Jensen & Johnson 1999)
Increased
interaction across
the enterprise
• Simplification of process at Boeing (Jenson & Johnson 1999)
• Growth in interfacility coordination at Owens corning
(Palaniswarmy and Frank, 2000)
• Real time access to data across the organization at Diebold
(Palaniswarmy and Frank, 2000)
Improved order
management / order
cycle
• 90% reduction in cycle time for quotations from 20 to 2 days at
Fujitsu (Jensen & Johnson 1999)
• Faster, more accurate order processing at Valenite (Palaniswarmy
and Frank, 2000)
• Time for checking credit upon receiving an order was reduced
from 15-20 minutes to instantaneous at IBM storage product
company (Jensen & Johnson 1999)
Decrease financial
close cycle
• 50% reduction in financial closing time from 10 days to 5 days at
Fujitsu (Jensen & Johnson 1999)
Business Benefit to ERP (cont.)
ERP Performance
outcomes
Example
Improved interaction
with customers
• Lead time to customer was reduced form 6 weeks to 2 weeks at
Par Industries (Bingi, Sharma and Godla, 1999)
Improved on-time
delivers
• On time product delivery rate increased to 90% at Earthgrains
(Bingi, Sharma and Godla, 1999)
• Delivery performance improve from 80% on time to more than
905 on time at Par Industries (Bingi, Sharma and Godla, 1999)
Reduced direct
operating costs
• Operating margins improved from 2.4% to 3.9% at Earthgrains
(Bingi, Sharma and Godla, 1999)
Lowered inventory
level
• Inventory level were reduced significantly at Owens corning
(Palaniswarmy and Frank, 2000)
• Lower level of inventory at Valenite (Palaniswarmy and Frank,
2000)
• Work in process inventory dropped almost 60% at Par Industries
(Bingi, Sharma and Godla, 1999)
ERP Evolution
ERP Vendors
•
•
•
•
•
•
•
•
•
SAP
Oracle
Multiple Packages
Baan
J.D. Edwards
People Soft
QAD
SSA/BPCS
Others
25.0%
14.2%
9.8%
8.8%
7.4%
2.5%
2.5%
2.5%
27.3%
ERP Basic Modules
Figure 12.1
SAP Enterprise Solution
Integration &
Interoperability
Hand
Helds
EH&S
Bar
EH&S
SD
Coding
Sales &
Distribution
CS-
“Configurable”
Cable
Packaged
IA
Imaging
&
Solution
Scalable
Open
Systems
PP
Production
Planning
EDI
IS-P
Enterprise data
model/databases
AM
Fixed Assets
Mgmt.
SAP R/3
QM
SFA
Quality
Sales
ManageForce
ment MSM
AutomMaintenance
RF /
ation
& Service
Mobile
Mgmt HR
Dispatch
Human
Resources
Network
GUI & Internet
Enabled
Client / Server
ABAP/4
PS
Project
System
IS-T /
RF&NF
SAP - Systems, Applications & Products in Data Processing
R/3 - Runtime System Three
AM / FM
GIS
IS-T /
CCS
Process
Oriented
Modular Design
& “Plug-In”
Capability
Telecom
Extensions
ISRE
IS
Industry
Solutions
CAD
AFUDC
WF
Workflow
Mgmt
Workforce
Mgmt
functionality
CO
Controlling
MM
Materials
Mgmt.
Archiving
Client/Server
Layered
Architecture
Multi-company
IM
Support
Investment
FI
Mgmt
Financial
ISComprehensive
Accounting
Retail
Billing
LEGEND
- R/3 Core Financials
- R/3 Core Logistics
- R/3 Core HR
- R/3 Technology
- Industry Solutions
- Partner Solutions C/W
Certified Interfaces
(Existing, Developing,
Planned)
ERP System Architecture
SAP
System
R/3 System
Architecture
Architecture
3 layers
Three-tier
Client/Server
Database
Application
Presentation
SAP R/3 + MySAP and PeopleSoft version 8.0
Reflect Web-enabled technology
Database
Business logic
User Interface
ERP Feasibility
• ERP is a large investment and must be
treated as such investment entails more
than cash outlays
• Commitment to focus on interacting business
processes
• Benefits are not always economic
• Many feasibility issues need consideration
Economic Feasibility
• Concerned with justifying an expenditure by
considering both costs and benefits in monetary
terms
• Investment costs for ERP
• Very high: $10 million for a moderate sized application
• High likelihood of negative ROI
• Tangible and intangible benefits must be considered
• Opportunity costs of NOT implementing ERP
Costs of ERP
• The costs and risks of failure in implementing a new ERP
system are substantial.
Hidden Costs of ERP
•
•
•
•
•
•
Integration and Testing
Data Analysis
Consultants and infinitum
Implementation teams turn over
Waiting for ROI
Post-ERP depression
ERP Total Cost of Ownership (million $)
Example of
NPV of ERP
Project
Technical Feasibility
• ERP must be viewed as technically complex
systems resting organizational database
management systems
• ERP may reside on single computer or be
distributed
• May strain computing resources
• May strain communications resources
• Usually requires latest technology particularly in
larger organizations
Operational Feasibility
• Is business process standardization
desirable?
• Loss of personalization of customer data
• Cultural changes
• Persons in the organization must be willing
and able to achieve the change from current
IS to an ERP
• Need for ERP Champion
Business Process Reengineering
• Reengineering (or re-engineering) is the radical
redesign of an organization's processes, especially
its business processes. Rather than organizing a
firm into functional specialties (like production,
accounting, marketing, etc.) and looking at the
tasks that each function performs, we should be
looking at complete processes from materials
acquisition, to production, to marketing and
distribution. The firm should be re-engineered into
a series of processes.
Business Process Reengineering
• Implementing ERP system involves reengineering the existing
business process to the “best business process standard”. ERP
systems are built on best practices that are followed industry,
and to successfully install ERP, all the processes in a company
has to conform to the ERP model
• Company choice:
• Follow or adopt ERP software built in procedure
• Customize the product to specific needs of company
• Fact from research:
• Even the best ERP software only meet 70% of the company need
• The other 30% must be achieved with customization the
software or changed the process itself (reengineer)
Change Management
•
•
•
•
Crucial to ERP
People resistant to change
Examine cause of change
May require organizational culture shift
Lewin-Schein change theory steps
Management
Prepare for Change
Retrain
Reinforce Change
Unfreezing
Moving
Refreezing
(i) Create
awareness of
need for change
(ii) People
support what
they help create
(i) Develop new
methods and
behaviors
(ii) Create and
maintain
momentum
(i) Reinforce
desired
changes
(ii) Establish
stable
environment
Cease old habit
Learning
New Culture
Employees
A Model for ERP Adoption
ERP Champion
• Person or group who serves as driving force
behind the organization’s change to ERP
• Variety of people can be ERP champion
• Lead the organization to a fundamental
revamping of core business processes
Possible ERP Champions
1. Chief executive officer
2. Teams of senior management
a) Chief information officer
b) Vice president of manufacturing
c) Chief financial officer
d) Other senior managers
3. Collection of well-respected middle managers
from a wide spectrum of organization operations
ERP Implementation
• Particular attention must be paid to software
vendors, training, and cutover
• Takes months
• Average is about two years
• Due to complexity and legacy systems developed
years earlier
• Variety of approaches can be taken
ERP Vendor Selection
• Choice of vendor is important
• Underlying business concepts in vendor’s system
should be major criteria
• After major ERP pieces are in place, firm may want
to consider bolt-on systems
• Software that takes advantage of ERP features
• Customer relations management
• Demand forecasting
• Logistics
User Training
• Cannot be an afterthought
• Must be part of the initial design
• Requires users to understand business
processes beyond their normal jobs
• ERP vendors provide training services
• SAP is a leader in Training
Training Related to ERP Software
Type of Training
When Training Should Occur
Learning ERP Vendor
Software
Before the ERP is planned and
designed
Training by ERP Vendor
As the is being designed and
(or company specializing in implemented; also after the system is
ERP training)
implemented
Peer-to-peer training such
as conferences
Especially helpful after the
implementation of ERP projects
Example of ERP Implementation Time Line
Example of ERP Implementation Time Line
(Texas Instrument)
Implementation Methodology
Project
preparation
Business
blueprint
Realization
Final
preparation
Go live &
support
Program Management
Communication and Quality Management
Change Enablement
Initial Project Planning
Project Procedures
Project Kick-off
Org. Team Training
Techn. Req. Planning
Quality Check
Team Training
Develop System Env.
Business Org. Struct.
Business Process Def.
Project Reestimate
Quality Check
Baseline Configuration
Set-up of Prototype
Final Configuration
Integration Tests
User Profiles
User Documentation
Training Materials
Key User Training
Quality Check
End User Training
System Management
Old Data Take-over
Cut Over
Quality Check
Production Support
Project Conclusion
Quality Check
Cutover Approach
cutover
Old system
Pilot
System
Immediate cutover
Phased cutover
Parallel cutover
Immediate
approach
Old system
New System
Phased
approach
Old system
New System
Parallel
approach
Old system
New system
Causes of ERP failures
• Underestimating the complexity of the planning,
development, and training required
• Failure to involve affected employees in the
planning & development phases and change
management programs
• Trying to do too much, too fast
• Insufficient training
• Believing everything the software vendors and/or
consultants say
Minimizing ERP Failures
• Understand the organization’s span of
complexity
• Recognize processes where value cannot be
maintained if standardization is imposed
• Achieve a consensus in the organization
before deciding to implement an enterprise
information system
ERP Critical Success Factor
Top
Management
Commitment
Change
Management
IT
Infrastructure
Business
Process
Reengineering