Case Study Evidence On ERP Systems

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Case Study Evidence On ERP Systems

• Thomas Gattiker, Miami University of Ohio
• Dale Goodhue, University of Georgia
• Marc Haines, University of Wisconsin, Milwaukee
• presenting

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Agenda

• What is ERP, and why is it still an issue?
• Six lesson from Case Study Research

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The Problem ERP Systems Promise to Solve Silo
Application Systems Linked by Batch or Manual
Feeds, Incompatible Data
Production Scheduling Application Programs
Cost Accounting Application Programs
Sales Force Automation Application Programs
Order Entry Application Programs
Materials Management Application Programs
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ERP Supply Chain Management
Production Scheduling Application Programs
Cost Accounting Application Programs
Materials Management Application Programs
Order Entry Application Programs
Sales Force Automation Application Programs
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ERP
Single Database
Data Standards Process Standards Process
Restrictions
Packaged Software
Business Integration
What is ERP?
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ERP -- Why STILL so attractive? Single
integrated database supports greater coordination
between parts of the business. Single integrated
database solves the Data Integration Problem,
so firms can answer cross functional managerial
questions. A packaged solution -- no need to
reinvent a very complex wheel. Provides best
practice business processes. Moves much of IT
application programming out of the firm. Was an
attractive Y2K solution.
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ERP Problems

• Survey of IT managers (1998) named ERP systems
  most difficult to install
• 90 of installations wind up over budget or late
  (Standish Group, 1996)
• Some companies have started implementations and
  stopped
• Some famous failures Mars Candy, Foxmeyer Drug
• Precipitous Drop in Sales in 2000!

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Amount of Software Development to Upgrade Old
Systems
Why the slump in ERP sales Does not mean the end
of ERP
Without Y2K
2000
2002
2004
2006
1998
1996
1994
Time
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Amount of Software Development to Upgrade Old
Systems
With Y2K, Some Software Development that would
have occurred in 2000 through 2003 was done early
to make the Y2K fix for free
Without Y2K
2000
2002
2004
2006
1998
1996
1994
Time
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Amount of Software Development to Upgrade Old
Systems
The Y2K Bubble Extra Software Upgrade Sales
(primarily ERP) Due to Y2K
Y2K Bubble Pops Trough in Software Upgrade Sales
(including ERP) Due to Y2K
2000
2002
2004
2006
1998
1996
1994
Time
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ERP Is Not Going Away!

• The essential driving forces remain
• Need for global and cross functional integration
  of business processes
• Need for global and cross functional data for
  managerial decision making.
• Inability of IT departments to create such
  complex systems for a single company at
  reasonable costs.

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• ERP -- Why STILL So Difficult?
• Changes both technology and business processes.
• Extremely difficult organizational challenges
• Affects many key business processes
• Changes employee jobs and skills needed
• The devil is in the details, often not
  apparent until implemented.
• To a great extent, the organization must change
  to fit the system.
• ERPs are extremely complex technical systems
• Few IT groups can truly understand the whole
  system
• relatively few qualified consultants, who are
  very expensive
• Large in scale, long in time, high in cost

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Lessons From Case Studies

• 1 Dont expect competitive advantage from ERP.

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ERP And Competitive Advantage

• Resource Based View of the Firm For
  sustained competitive advantage, one needs a
  resource that is
• Valuable
• Rare
• Tough for competitors to imitate
• Does ERP qualify?!

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ERP And Competitive Advantage

• Resource Based View of the Firm For
  sustained competitive advantage, one needs a
  resource that is
• Valuable
• Rare
• Tough for competitors to imitate
• Does ERP qualify?!
• Not unless heavily customized!

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LightCo

• Makes lighting fixtures for commercial and
  residential use
• No particular competitive advantage from
  manufacturing
• Major competitive advantage from Order Entry/
  Distribution system.

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LightCo

• Explicit IT strategy
• Purchase systems for cost reduction
• Build custom systems for competitive advantage
• Bought ERP for manufacturing (Cost Savings --
  utility)
• Kept Custom Designed Distribution System
  (Competitive Advantage)

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Appropriate Customization Is Critical

• Too much customization
• costs too much for no competitive advantage
• leads to problems with maintenance, later
  versions
• Too little customization
• homogenizes your unique offerings
• allows competitors to copy you
• creates gaps between the business and the system,
  which must be bridged somehow.

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Lessons From Case Studies

• 1 Dont expect competitive advantage from ERP.
• 2 Expect Unexpected gaps between business
  processes needed and those supported.

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EquipmentCo

• 5 plants making heavy equipment related to
  transportation industry
• Historically EqCo has responded to last minute
  changes in customer specifications.
• Made the shift to ERP in late 1990s.
• The implemented ERP system would not allow
  changes to orders that had been released to
  manufacturing.
• When big customer asked for changes..?!

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Unexpected Gaps Are Common

• No one person understands all the business
  processes used in an organization!
• The devil is in the details
• Extensive conference room pilots can identify
  some GAPS early.
• Discrepancies at the detailed level are often not
  apparent until after implementation

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These GAPS Will Be Bridged!

• Often the required process must not be changed.
• Firms will bridge the gap one way or another
• Customize the ERP system (rewrite some of the
  code)
• Devise a separate system, in addition to ERP.
• Put a new interface system in between users and
  ERP.
• Manually correct for gap, taking more time from
  your people and/or performance degradation.
  (Default)

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Lessons From Case Studies

• 1 Dont expect competitive advantage from ERP.
• 2 Expect Unexpected gaps between business
  processes needed and those supported.
• 3 When one sub-unit is different, expect more
  gaps, more operational problems.

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Some Units are DifferentForest Products

• 20 plants manufacture Engineered Lumber such as
  composite wooden beams
• Process involves shaving trees, cutting into
  strips, gluing into large billets and cutting
  into final products.
• Decided in 1993 to implement ERP in all plants

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Some Units are Different

• The Augusta plant was different -- took most of
  the custom orders.
• Needed non-standard cuts to the billets and
  many odd sized pieces in recovery-reclaim.
• Key to productivity is to reuse material in
  recovery-reclaim.
• SAP had no good way of handling the infinite
  number of different sized (3 dimensional) pieces.
  
• The master scheduler kept that information
  manually, which added 2.5 hours to his week.
• Numerous other related accounting and performance
  reporting problems.
• Minimal problem for other plants

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Impact of ERP Interdependence and Differentiation
Interdependence Between Sub Units
Benefits from Better Coordination
Differentiation Between Sub Units
Operational Problems From Bus. Process Gaps
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Lessons From Case Studies

• 1 Dont expect competitive advantage from ERP.
• 2 Expect Unexpected gaps between business
  processes needed and those supported.
• 3 When one sub-unit is different, expect more
  gaps, more operational problems.
• 4 Without an explicit strategy for when to
  customize, costly decisions may be made.

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Customization Strategy

• Forest Products decided in 1993 to implement ERP
  in all 20 plants
• Piloted in 4 plants customized heavily in each
  exhausted entire budget halted project!
• 1997, restarted in all plants, plain vanilla, no
  customization.

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Factors Affecting The Degree of Customization

• There are many factors from the cases
• strategic context
• parent company and business partners
• standard solution maturity
• methodology and time line
• special request management
• user involvement and preparation
• resistance to change

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Lessons From Case Studies

• 1 Dont expect competitive advantage from ERP.
• 2 Expect Unexpected gaps between business
  processes needed and those supported.
• 3 When one sub-unit is different, expect more
  gaps, more operational problems.
• 4 Without an explicit strategy for when to
  customize, costly decisions may be made.
• 5 ERP can bring discipline, and loss of
  flexibility

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Discipline and Flexibility At Equipment Co

• Longtime plant employees, know how to correct
  for system errors (incorrect BOM, etc.) and get
  production out.
• When customers request last minute changes,
  employees xerox old part drawings, mark them up,
  and send them to manufacturing. There are
  thousands of these per print parts, which are
  never formalized, but can be used for years.
• The new ERP system does not allow either of these
  practices. This is good, or bad, depending.

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Lessons From Case Studies

• 1 Dont expect competitive advantage from ERP.
• 2 Expect Unexpected gaps between business
  processes needed and those supported.
• 3 When one sub-unit is different, expect more
  gaps, more operational problems.
• 4 Without an explicit strategy for when to
  customize, costly decisions may be made.
• 5 ERP can bring discipline, and loss of
  flexibility
• 6 ERP may shift locus of process innovation from
  local level to corporate or to ERP vendor.

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ERP and Innovation

• Incremental improvements to Planning and
  Control and other business processes has long
  been a way to improve operations.
• ERP systems are so complex that even experts do
  not understand the whole system
• Without understanding the interactions between
  different modules, experimenting is dangerous.
• Without the ability to try out changes,
  innovation will be less common.

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I dont think that there is one individual in
this organization that understands it. And, so I
think we need to be pretty disciplined in what we
do because when we do something here we dont
know what it is going to do somewhere else.
Plant Manager If you tinker with something,
youre tinkering with something that 19 other
plants are using, too, and you just cant do
that. Not all the plants are exactly the same,
so you dont know what youll screw up somewhere
else. Sr. Plant Accountant Until somebody
knows the whole picture, how can you make that
change readily or not be scared to. Sure, I'll
go out there and try something because I think
it'll make it easier, but then I'm going to get
browbeat because I can't pay or I can't get paid.
Manager
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ERP Systems may shift the Locus of Innovation for
business processes because experimenting is too
dangerous
ERP Vendor Level Innovation
Corporate Level Innovation
Local Level Innovation
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Conclusions

• Large, Packaged, Integrated Systems will bring
  many benefits coordination and access to info.
• Firms need to take advantage of these, without
  damaging unique or critical business processes.
• This is a tough challenge, especially when one
  sub-unit is different.
• Clear policies will help achieve the right amount
  of customization.
• The ultimate impact on flexibility and innovation
  is not yet clear.

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Hands-On ERP Exercise

• ERP products are quite powerful, but are also
  quite complex and are not famous for user
  friendly interfaces.
• SAP is installed at Terry, so you get to
  experience both its power, and its complexity.

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Hands-On ERP ExerciseThe Assemble to Order
Process

• Some products are kept in inventory, some are
  assembled to order.
• When an assemble to order product is ordered, it
  is necessary to create a production order based
  on the BOM and routings for that product, and
  schedule production.
• After production, the product must be shipped,
  billed for, and payment recorded.

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Parts Required for P-400-001, IDESNORM Pump,
Standard

• Spiral casing 1
• Fly wheel CI 1
• Shaft 1
• Pressure cover 1
• Bearing case 1
• Support base 1
• Sheet metal ST37 5

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You will do the following A. Display the bill
of material for the pump B. Display the routing
for production of the pump C. Create a sales
order for 10 pumps. (This will automatically
create a production order) D. The system will
advise you that one part is not available. E.
Check the requirements in MRP, then modify the
production order. F. Confirm the production
order has been carried out G. Ship the pumps to
the customer H. Display the complete set of
related documents for this sale I. If time
permits Bill the customer for the pumps J. If
time permits Record a payment from the customer