Agenda 10/24

1
Agenda 10/24

• Next weeks assignment
• Real world material
• PwC State of Information Security
• Kroll Global Fraud Report
• Readings
• Enterprise Resource Planning (ERP systems)
• History and evolution
• Business purposes/benefits
• What is it made of?
• What does it not do?
• Implementations
• Vendors
• Survey results
• Costs
• Configuration
• ERP myths conclusions
• Keys to success
• Reasons for failures

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Questions for everyone to prepare for next week
from the Cisco case

• HBS Case Cisco Systems Implementing ERP,
  Robert D Austin, Richard L Nolan and Mark J
  Cotteleer
• Handout - Questions (write up answers and
  turn-in)

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Readings

• We will cover all throughout class
• Key take aways and opinions
• Enterprise in ERP Davenport
• ERP Common Myth Versus Reality Mabert, Soni and
  Venkataramanan
• ABCs of ERP Koch
• ERP in Institutional Manufacturing Clinton,
  Lummus

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What is Enterprise Resource Planning (ERP)?

• Combines the various departments (sales,
  warehouse, finance and HR) into a single
  integrated software program running a single
  database so that information can more easily be
  shared

5
The evolution of modern corporate information
systems (ERP myths)

• Early applications of batch data processing
  focused in the areas of payroll and general
  ledger creations
• Late 1950s - the development of home grown
  planning systems for manufacturing
• Determined the what and when of material needs
• Material requirements planning MRP systems
• MRP II - incorporated more links to other
  functions
• Order processing
• Product costing
• Balanced the what ifs between workload and
  manufacturing capacity
• Little or no integration across systems (systems
  were in different languages)

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The main problem with non-integrated systems

• Data was different across groups in format and
  content (for a single transaction)
• One entry in the sales system (order)
• Another in the warehouse system (inventory)
• Another in the shipping system (shipping)
• Another in the AP system (material costs)
• Another in the HR system (labor costs)
• Several in the finance system (revenue, COGS,
  inventory and payroll)
• Redundant, inefficient, with no overall
  visibility into the order as it works its way
  through the business

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Traditional approach separate systems for each
cycleThe life of an order
Sales Department
Warehouse Management
Shipping Department
Accounts Payable (Materials)
Human Resources (Payroll Commissions)
Think about the IT support requirements
Accounting Finance
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Problems with multiple systems

• Coordination difficult because of lack of shared
  information
• Sales?inventory?production,
• Scheduling?budgeting?operations,
• Multiple versions of the truth
• What is salesper accounting, marketing,
  production??
• Redundancy ? higher costs, inefficient,
  inconsistency

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Enter Enterprise Resource Planning Systems (ERP)

• In the early 1990s Gartner coined ERP to
  described the systems that evolved after MRP II
• ERP had integrated modules for accounting,
  finance, sales and distribution
• Perform a range of activities
• Financial results
• Procurement
• Sales
• Manufacturing
• Human Resources
• The development of database technology was a key
  enabler

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Why companies implement ERP

• What most companies are hoping for
• Integrate Financial Information single version
  of the truth more on this next week
• Integrate Customer Order Information
• Standardize and speed up the manufacturing
  process
• Reduce inventory
• Standardize HR information

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Generic Scope of ERP Systems

• Financials
• AR AP
• Asset accounting
• Cash Management
• Cost accounting
• Consolidation
• GL
• Profitability analysis
• Profit center accounting

• Human Resources
• Time reporting
• Payroll
• Personnel planning
• Travel and Expenses

• Operations
• Logistics
• Inventory
• Materials planning
• Materials Management
• Plant maintenance
• Production planning
• Project management
• Purchasing
• QA
• Shipping

• Sales
• Marketing
• Order Management
• Pricing
• Sales Management
• Sales Planning

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Enterprise into ERP

• (Not the internet) but ERP may be the most
  important development in corporate information
  systems in the 1990s.
• Large scale failures
• FoxMeyer bankruptcy
• Mobile Europe (100Ms)
• Dell Computers (did not fit the business)
• Dow (500M) and scrapped it/started over
• The biggest problems are business problems
• Companies fail to reconcile the technology of the
  ERP with the business needs of the enterprise

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ERP

• These modules are integrated
• One entry in one module updates all others (think
  about the slide with multiple entries for a
  single transaction)
• Everything is updated at once (in theory)
• ERPs are modular in design so that they can be
  used in various combinations depending on the
  business
• Sales and Finance but no manufacturing for
  example
• Can be customized (to a degree) to meet business
  requirements through unique functionality
  development (worst case) and bolt-on systems
  for a specific purpose (planning)

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Human Resources
Finance Accounting
Bolt-on
Bolt-on
Central Database
Customers
Suppliers
Sales Distribution
Inventory Manufacturing
Ecommerce Systems
Ecommerce Systems
Architecture
Industry Solution
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Key Benefits

• Standardization and integration of processes
  across the enterprise
• Availability and quality of data
• No reduction in workforce or operational costs in
  the short term
• Lower inventories, shorter delivery cycles and
  shorter financial close cycles

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ERP Options

• Single vendor solution (see previous diagram)
• Best of Breed (modules from various vendors)

Think about the IT support requirements
Vendor A Sales Distribution
Vendor B Human Resources
Vendor B Finance Accounting
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Implementation Models

• Big Bang
• Most ambitious and difficult
• Eliminate all legacy systems and replace with a
  single ERP system across the company
• Most horror stories come from this approach
• Franchising
• Good for large and diverse companies (Federalist
  Model)
• Business units or regions have their own
  instance or system
• Most common way of implementing ERP systems

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Regional Differences the Federalist Model

• Markets are so different that multiple
  instances of the ERP system need to be
  implemented
• Each instance is tailored to the regional
  requirements
• Invoicing in Japan example
• The big questions what should be standardized?
  What can be customized by region?
• Monsato 85 standardized
• HP control in the regions/decentralized (very
  expensive)

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Slam dunk model

• Good for smaller companies
• Focus on a few key processes
• Get the system up and running
• Make the business run on the canned process
  that come with the system
• Used as foundation for a company expecting to
  grow into a full ERP system

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Modules

• The greater the number of modules selected, the
  greater the integration benefits
• The greater the number of modules selected, the
  greater the cost, risk and changes (to the
  business) involved

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GAPS in ERP Functions

• Decision support capabilities
• Demand planning (forecasting)
• Inventory management
• Factory planning and scheduling
• Data mining
• E-procurement
• Business to business
• Order tracking
• Online collaboration
• Warehouse management

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ERP and the value chain
Just part of the picture
SCM
Customers
Suppliers
ERP
Product Design
CRM
Others
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Survey of 15 different ERP Implementations

• Small and medium companies were the fastest
  growing segment (Revenues lt200M)
• Dominant reason for ERP was to simplify and
  standardize IT
• The second most popular reason to have access to
  more accurate information to improve interactions
  with customers
• The third reason was have data that could be used
  as a strategic advantage
• To improve the business process - not just an IT
  initiative

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ERP versus IT system implementations

• IT system implementations companies would
  decide how they wanted to do business and choose
  a software package that would support their
  processes
• With ERP the sequence is reversed the business
  is modified to fit the system.

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Configuration of ERP as a factor

• What does an ERP mean to a company
• Way of doing business
• configuringismaking compromises, of balancing
  the way you want to work with the way the system
  lets you work
• opportunity to look at the companys strategy and
  organization
• Can push a company toward generic processes when
  customized processes are a competitive advantage

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SAP Configuration
Think about the IT support requirements

• SAP R3 the most complex and comprehensive ERP
  has more than 3,000 configuration tables that
  need to be set in accordance with the business
  (or vice versa)
• Dell took over a year to go through them
• The more customized an ERP system becomes the
  less able it is to easily communicate with other
  systems (internal systems as well as customers
  and suppliers)
• To do this you need a deep understanding of the
  business

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Costs of Implementation

• Sample companies ranged from 1.5 and 6 of
  revenues
• Smaller companies 3 6
• Larger companies 1.5 -2
• ROI 5-20 range
• Drop off in productivity for the first year

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Total Cost of Ownership (Meta Group Survey of 63
Companies)

• Includes
• Hardware
• Software
• Professional Services
• Internal Staff Costs
• The average total cost of ownership was 15M
  (ranging from 400K to 300M)
• The total cost of ownership for a heads down
  user was 53K

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Hidden Costs

• Training
• Mostly on the details of your business process
• Outside training cant help
• Need your own gurus
• Integration and Testing
• Testing needs to be done from a process
  orientation/perspective
• Not dummy data
• Run a real purchase through the entire system
  walk through (order entry-shipping-payment
  receipt-cash) with the people who actual do the
  job

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Hidden costs

• Customizations
• Changes to the out of the box system
• Needed when the system does not match unique
  business problems
• Big trouble/to be avoided. Customizations can
  affect every module as the system is so tightly
  linked.

Think about the IT support requirements
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Hidden Costs

• Data conversion
• Move data from old legacy systems to the new
  environment/database
• Old data is usually pretty messy and will need to
  be cleaned up before you move it
• Can be expensive (remember this diagram?)

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Hidden Costs

• Data analysis
• Will you need a data warehouse to combine the ERP
  data with data from other systems?
• Warehouse management and Sales?
• Remember this diagram?

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Hidden Cost

• Consultants
• Need to manage and plan for disengagement
• My experiences (Next weeks speaker)
• Replacing key staff
• Key people will be consumed by the project
• Ongoing implementations
• Reports and upgrades
• Delayed ROI

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Pay back from Implementation (Meta Group Survey)

• It took 8 months after implementation to see any
  benefits (31 months total)
• Median annual savings were 1.6M

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Performance dip?

• Causes
• User unfamiliarity
• Technical problems
• Unforeseen configuration issues
• How to minimize
• Train
• Test
• Have resources available at cutover

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Post ERP Depression

• Delete survey
• 25 of companies suffered a drop in performance
  when their ERP systems went live
• Everything looks and feels different and it takes
  time for people to get comfortable with the new
  process
• Negatively impacts the business

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ERP Myths Conclusions

• ERP systems are being implemented by companies of
  all sizes
• IT is a business solution not an IT solution
• Very expensive both capital and expense
• ERP systems have only been out there for a short
  period
• Results on cost reductions for operations are
  mixed
• There is no one vendor that provided an end to
  end solution
• ERP standardizes processes and system making it
  easier to upgrade
• Improve data quality and availability (better
  decision making)
• Most companies are happy with their decision

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Keys to Success

• Senior Management involvement and sponsorship
• Cross functional implementation team with a more
  senior leader
• Time spent on detailed planning
• Clear metrics for performance measurement
  (technical and business)
• Clear guidelines on how to use outside
  consultants
• Detailed training plans for users w/ heavy
  users involved throughout the implementation

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Reasons for Failure

• People in different groups not agreeing that the
  processes embedded in the software are better
  than what they are currently using (resistance to
  change)
• Political battles powerful business barons
  versus IT and the project team customization
• Assuming that getting people to change how they
  do things is easier than implementing the
  software not true
• Resistance to change

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Business Strategy

• Does all this standardization impact the
  competitive differentiation of the business?
• How similar can our information flows and our
  processes be before we undermine our own sources
  of differentiation in the market?
• Compaq Computers built to order, needed
  proprietary systems for forecasting demand and
  processing orders
• If you are competing on cost the investment may
  not be worth it (short term versus long term)

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Competitive advantage?

• Competitive advantage in this industry
  (chemicals) might just come from doing the best
  and cheapest job at implementing SAP - CEO
  chemical company

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Organizational Impact

• Streamline management structures
• Centralization of control over information and
  processes
• Hierarchical command and control structures
• Creates more uniform cultures
• We plan to use SAP as a battering ram to make
  our culture less autonomous
• What are implications for international or
  multinational companies?

45
Ecommerce Considerations

• Companies need to build two access channels into
  their ERP system
• Customers (business to consumers (B to C)
• Suppliers and Partners (B to B)
• Lots of challenging integration between systems

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Making it work the need for middleware

• To get all the systems to work together
  companies have needed to implement another suite
  of tools or applications

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Key ERP questions for Management

• How would an ERP strengthen the companys
  competitive advantage?
• How would and ERP erode these advantages?
• What will the systems impact be on the
  organization and the culture?
• How many modules? Across the entire business or
  just select elements (finance, hr etc.)?
• Global roll out or regional roll-out (Centralized
  control or a Federalist model)
• Is there a better answer than ERP?

48
Control of the Implementation

• If the development of an enterprise systems is
  not carefully controlled by management,
  management may soon find itself under the control
  of the system.
• The software is the business process..

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Enterprise-Wide Systems (True or False and Why?)

• An ERP can create a flexible, more democratic
  organization
• An ERP can create a hierarchical, uniform
  organization
• An ERP can strengthen an organizations ability
  to execute effective business processes
• An ERP can threaten an organizations ability to
  execute an effective business strategy