FB5003 3 Extending the Enterprise

1
FB5003 3Extending the Enterprise

• Enterprise Resource Planning
• Implementing Major Systems is like Open Heart
  Surgery with very little anaesthetic!

Some slides adapted from material originally
developed by Chris Wagner
2
Table of Contents

• 1. The Concept 1- 22
• 2. How to Implement 23-45
• 3. Key Lessons 46-51
• 4. ASP-style ERP in HK 52-55
• 6. Cases 56-75
• (Lenovo, Nestle, HP)

3
ERP systems are

• Potentially integrated systems that
• allow information to enter at a single point in
  the process (e.g., at the materials receiving
  stage of a manufacturing process), and
• update a single, shared database in real time for
  all functions that directly or indirectly depend
  on this information.
• Part of a larger systems environment

4
Integration?

• This integration should take place in real-time,
  not through interfaces or programs that transfer
  information to one or more modules only after the
  information has already been processed and
  updated in the module through which it entered
  the system.
• ERP can be extended to support B2B EC CRM, SCM,
  but typically do not provide management reports
  or decision support.
• ERP need external data warehouses, and data
  mining expert system tools.

5
Why ERP?

• To improve control over data from distant
  locations
• To improve control over the organisation
• And reduce factionalism
• To reduce chaos and data redundancy

6
ERP systems are only part of a complex systems
solution
Middleware
ERP Systems
Operational Data Stores
CRM SCM
Data Marts Warehouses
Reports Analyses
Legacy Systems
Analysis Programs
7
ERP Illustration
Re-order miscellaneous supplies
Issue Payment to Suppliers
Send Shipping date estimate to customer
Update A/R
Customer Order 2,000 PCs
Order 2,000 MBs, CPUs, RAMs,
Update Order Book
Track order completion
Ship Order
Bill Customer
8
26,150 customers, 120 countries, 88,000
installations
Siebel is strong on CRM
9
SAP R/3

• A set of business applications designed for a
  client/server environment.
• Runs on many different hardware platforms.
• Consists of 80 highly integrated modules.
• Supports major business functions such as HR,
  F/A, Manufacturing, Logistics, Sales
  Distribution on a real-time basis.
• Can be configured to map the organisations
  processes onto software.

10
SAP Enterprise Solution
Integration Interoperability
IM Investment Mgmt
Multi-company Support
Hand Helds Bar Coding
EHS
Billing
EHS
FI Financial Accounting
SD Sales Distribution
Configurable Packaged Solution
Comprehensive functionality
IS- Retail
CS- Cable
CO Controlling
MM Materials Mgmt.
IA Imaging Archiving
Process Oriented
IS-P
AM Fixed Assets Mgmt.
R/3
PP Production Planning
Client/ Server Layered Architecture
Modular Design Plug-In Capability
Client / Server ABAP/4
AFUDC
EDI
QM Quality Manage-ment
PS Project System
SFA Sales Force Autom- ation
Telecom Extensions
MSM Maintenance Service Mgmt
WF Workflow
RF / Mobile Dispatch
IS- RE
IS Industry Solutions
HR Human Resources
LEGEND
Scalable Open Systems
IS-T / RFNF
Network Mgmt
- R/3 Core Financials
- R/3 Core Logistics
- R/3 Core HR
- R/3 Technology
IS-T / CCS
AM / FM GIS
CAD
Workforce Mgmt
- Industry Solutions
GUI Internet Enabled
- Partner Solutions C/W Certified Interfaces
(Existing, Developing, Planned)
Enterprise data model/databases
Source SAP
11
Industry Overview

• Trends
• Software vendors sell a vision of an integrated
  package.
• Systems integrators consultants are big and
  have ample resources
• Development of SME market segment.
• Increasing compatibility of individual ERP
  systems. (e.g., through building of bridges
  between rival ERPs e.g., Baan - SAP R/3)

12
Why ERP Systems are interesting (and potentially
useful)

• Many (global) businesses lack integrated systems
• Global businesses need language and currency
  support provided by ERP systems
• Global businesses are often decentralised

13
What did it look like pre-ERP?

• Redundant systems (e.g., 24 different general
  ledgers)
• Huge software maintenance expenses
• Lack of common data structures (e.g., 140
  different definitions of full-time equivalent
  employee or 225 different job titles)
• Difficulty consolidating information (e.g.,
  exactly how many business locations do we have -
  175 or 250?)

14
The Potential Solution?

• Common systems
• Decision-support capabilities
• Cheaper and faster than in-house development
• Lower maintenance costs
• Automatic currency conversions and consolidations
• Multiple language interfaces
• Built-in international best practices

15
Potential Drawbacks

• Individual modules often not best of breed.
• Limited flexibility.
• Loss of internal strength and agility.
• Cultural clash 'open systems' ERP and 'closed
  systems' organisation.
• Risk of implementation failure.
• Software lock-in.
• Not cheap!

16
Furthermore

• ERP packages may be cultural misfits
• Multiple sites make implementations challenges
  worse
• The extended enterprise must also be integrated

17
Example of a Cultural Problem

• SAP in Singaporean hospitals,
• Company-specific misfits
• Systems patient management module does not allow
  for billing individual patients on an installment
  plan
• Public sector-specific misfits
• System uses internally generated patient ID,
  instead of government issued ID number
• Country-specific misfits
• Package did not provide reports needed for
  government reports
• System requires names entered in Western name
  format (first, middle, last) operators had
  trouble parsing Indian, Malay and Chinese names

18
ERP Implementation is Always Challenging!

• Technical problems
• ERP software configuration
• ERP software modifications
• Integrating ERP software with hardware,
  telecommunications, and database software
• Need for periodic upgrades
• Human, social and political problems
• Inappropriate expectations for software
• Failure to specify strategic objectives
• Inadequate project championship or project
  management
• Lack of cross-functional approach to
  implementation
• Need to adopt built-in business processes
• Resistance to change
• Inadequate resources for training

19
Multi-Site Implementations Are Worse

• Local autonomy
• Legitimate country differences?
• Or an obstacle to progress?
• Cultural values.

??
Consolidated Information One Face to the Customer
SAP
Baan
20
Organizational Implications of ERP Implementations

• Individual departments begin to recognise they
  are all part of larger business processes
  (visibility)
• Dissolves boundaries between previously
  independent units.
• Blurs job definitions (job broadening)
• Changes power structures
• Standardises processes

21
Organizational Implications of ERP Implementations

• Creates demand for
• team work,
• process expertise,
• business knowledge.
• Devolves authority/responsibility to front line
  employees.
• Hub, or multi-point?
• How much chaos would you like?

22
Hub-and-Spoke Integration
Source www.elemica.com
23
Anatomy of ERP Projects

• Decisions to be made/issues to be resolved prior
  to implementation.
• Costs!
• Roles to play by the parties involved.
• How does a typical ERP project look?
• After going live - what remains to be done?

24
Decisions to be Made Prior to Implementation

• Major ones
• What software package(s)?
• What consulting company?
• What hardware?
• What approach?
• Re-engineering before or during the ERP project?

25
Decisions - Software Modules?

• Best-of-breed
• high level of detail/depth -gt better
  functionality
• -gt potentially higher competitive value
• integration and maintenance of many
  best-of-breed systems is highly complex very
  difficult to do well.

26
Decisions - Software Modules?

• All-in-one? (e.g., SAP, Oracle, Baan)
• integration - information flows easily without
  interruption across modules.
• functionality compromised
• best practice assumed to be provided
• Hybrid Solution
• Use standard ERP system as backbone and link
  to best-of-breed software.
• Customisation?
• Expensive, troublesome, time-taking,
• Upgrades are very problematic

27
What Software Package?

• Each ERP package has its history, business
  vision/strategy
• PeopleSoft started with HR strength
• Baan originally focused on mid-sized market
• SAP started out with a mainframe-centric,
  manufacturing focused system, reputation of being
  dictatorial
• Oracle strong in manufacturing, offers big
  picture rather than more granular, traceable
  data

28
What Software Package?

• Important decision criteria
• package functionality meets needs of company?
• ample base installed?
• quality of documentation?
• cost of software acceptable?
• local support provided by vendor?
• quality of customization tools?
• reputation/size of vendor?
• one size fits all system?

29
What Software Package?

• Comparing packages - actions
• Specify product requirements, request for
  proposal.
• Invite package vendors for presentations
  demos, score packages according to suitability,
  dont rush it!
• Conduct site visits to call companies having
  implemented a particular software.
• Maybe enlist help of consultants to select
  package.

30
Which Consulting Company?

• ERP involvement/knowledge base Has the firm made
  ERP consulting its focal point for generating
  revenue and profit?
• Methodology
• Does the consulting firm have a sound
  methodology?
• Are the consultants trained in the methodology?
• Implementation/industry experience Have they
  worked on similar projects?

31
Which Consulting Company?

• Product knowledge/potential to add value Do
  consultants understand the particular product to
  be implemented?
• Do they understand the way we do business?
• Who manages the consultants?
• Do they have any known communication
  deficiencies?
• Are they typically over-optimistic about what
  they can achieve?

32
Decisions What Hardware?

• What kind of equipment is needed?
• Server/s, fibre optics, communication
  infrastructure, satellite communication,
  desktops, etc.
• Integration of equipment possible? May become a
  complex undertaking!
• Scalability? Customer support? Costs?
• Compatibility with software?
• When is it needed?
• From the start (minimum for training, simulation
  and testing)

33
Decisions What Approach?

• Big Bang implementing all modules at the same
  time, one cutover date for the entire new system.
• very risky
• cheaper (in total - if everything goes well)
• faster

34
Decisions What Approach?

• Phased approach implement modules in different
  phases.
• more expensive (development of temporary
  interfaces)
• takes longer (danger of losing speed)
• Series of Small Bangs implement subgroups of
  modules in parallel. Best of both worlds?

35
Decisions Re-engineering Prior to or During
the ERP Project?
Advantages of 'prior to'

• Opportunity to challenge extant business
  assumptions and streamline processes prior to
  automation.
• Avoids the risk of under-utilizing the potential
  of the package.

36
Decisions Re-engineering Prior to or During
the ERP Project?
Advantages of during

• Take advantage of industry best practices built
  into package.
• No official announcement of re-engineering
  effort necessary (company morale!)
• Re-engineering projects require time the company
  may (choose) not (to) have.

37
Decisions Customisation?

• Dont!
• Expensive, messy and new releases need
  customisation afresh.
• Customisation can have a cascading effect
• You solve one problem, but create 10 more
• Dont!

38
Costs!

• Difficult to estimate - size of investment can
  vary substantially depending on
• scope of project
• type of system chosen
• technology involved
• level of internal resources (staff!) available
• level of reuse of existing equipment
• outsourcing.

39
Costs!

• In general ERP investments are significant!
• But there is no "correct" cost.
• Cost break-up (rule of thumb)
• Software 10
• Hardware 10
• Change management/training 15
• BPR 15
• Severance/re-educating/reskilling 20
• Consulting 30

40
Cost problems

• Consulting fees run out of control
• Training costs usually underestimated
• Cost of live runs with live data to check system
  interfaces
• Cost of data conversion for 'dirty' data
• ERP may not cover all functionality e.g. data
  warehousing

41
Roles to Play

• Vendor delivery of software, initial training
  for key users, project support, quality control,
  conduct modifications.
• Consultants bring/transfer know-how about
  package (beyond vendor training), development of
  detailed work-plans, optimize fit between
  processes and software, analysis of customization
  issues.
• Company learn/assimilate information about
  software (independence!), make people
  sufficiently available (reallocation of
  responsibilities), keep up motivation (monitoring
  progress), responsibility for conversion (data
  extraction, interfaces) programs.

42
How Does a Typical ERP Project Look? 5 phases

• 1 Understand the problem
• Understand business and how package fits,
  determine characteristics of current system,
  arrange for training, delineate peculiarities of
  company, determine how stored data will be
  migrated.
• 2 Define the solutions (most critical!)
• Define all concepts associated with software
  implementation, run simulations of app.
  processing, make definitions for master files,
  tables, parameters, establish degree to which
  company needs to adapt package.

43
How Does a Typical ERP Project Look? 5 phases

• 3 Put hands to the task (most difficult!)
• Load initial data, develop, test, place
  customization into operations develop, test
  interfaces put them into operation document new
  procedures, test new work environment.
• 4 Make it happen
• Run software in parallel w/ old system, support
  users, make final adjustments, release system for
  final use.
• 5 Keep on going live is just a milestone!

44
After Going Live - What Remains to be Done?

• Post implementation review
• Clear diagnosis about use of system.
• To be performed regularly. (evaluation of
  software, helps maintain integrity of package)
• Remove remaining bugs.
• Establish maintenance organisation,
  responsibilities.
• Simplify structure and processes.
• Turn nice to have into the real thing.

45
After Going Live - What Remains to be Done?

• Join the club
• Establish/maintain contact with other user
  companies, help out if necessary.
• Continue user training.
• Maintain knowledge networks and repositories.
• Upgrade when needed
• But not too frequently/not every version.
• Bring in a consultant to provide external
  evaluation of progress.

46
How to Succeed in Implementation

• Position the project as a business initiative,
  not IT.
• Put the companys best people on the project!
• Have a strong project leader (VP).
• Continued commitment of senior management.
• Get all affected parties to buy in.
• Communication within organization about expected
  change is essential prepare organization for
  change.
• Smart contracts with vendors, consultants.
• Provide the necessary resources.

47
Common Pitfalls

• Key users, end users do not receive enough
  training.
• Lack of top management commitment.
• Selection of the wrong product.
• Project creep.
• High consultant turnover.
• Loss of qualified company staff. (e.g. Cisco,
  UAF)
• Prominent implementation failures Dell (SAP
  R/3), Aerogroup (SAP R/3), Boeing (Baan), Kellogg
  (Oracle).

48
The Future of ERP

• Continuous growth of global market?
• Originally forecast to grow fast from late 90s
• But a 9 drop in 2002
• Actual figures very hard to obtain
• But likely to be USxxB
• ERPs are getting more comprehensive
  newest/planned features include
• Supply chain management
• Sales-force automation
• Customer relationship management
• Data mining

49
The Future of ERP

• ERPs are getting easier
• to use
• to implement
• to adapt to individual user needs.
• ERPs are moving away from being a product
  towards being a service
• ASP style

50

• Hosted E-business platform solution (on SAPs
  computers)
• Link organization to supply chain
• Link organization to consumers
• Exchange (B2B Hub)
• Expands ERP use to medium sized
  companies.

51
ASP Application Service Provider

• The principle of an ASP is that the customer
  leases services rather than builds them.
• Services may include a variety of functions,
  including SCM, ERP, etc.
• Good for SMEs which don't have the resources
  (people, time, money) to build or buy their own
  systems

52
ASPs

• Clients save money,
• But, the ASP may only offer a 5-year contract
  to tie in customers
• Also, ASPs tend to offer a "one size fits all"
  solution there may not be a good match between
  your needs and their service.

53
ASPs

• Also, consider from the perspective of the ASP
• How to make money here, when ERP establishment
  costs are high?
• How to persuade people that ASPs are reliable,
  safe, low risk
• That their precious data will not be lost or
  stolen

54
ERP-ASP in Hong Kong

• Are HK companies ready for ERP?
• Are they mature enough to plan medium-long term?
• Do they have the knowledge to obtain favourable
  contract terms with ASPs?
• What kind of barriers exist cultural, economic,
  social?
• Are there any drivers to push HK firms to ASPs?

55
ERP in the Chinese Context Local Vendors

• Hong Kong, Taiwan and China have all seen the
  emergence of local ERP developers/vendors
  (Kingdee, Eastop, ISL)
• Costs are substantially lower (reliability may
  also be lower)
• Likely that the funcionality is locally relevant
• Chinese interfaces available
• Unlike the European/US vendors

56
ERP Cases

• Nestlé - SAP
• HP SAP
• Nike
• SinoForce - Oracle
• Signal Intl (Pseudonym)
• For class discussion.

57
Nestlé (source cio.com - 15-5-02)

• June 2000 Nestlé signed a US200M contract with
  SAP (80M consulting/maintenance fees)
• To centralise an empire with 200 operating
  companies in 80 countries
• HSBC Securities should have long term benefits,
  but what will happen along the way?
• It touches the corporate culture, which is
  decentralised, and tries to centralise it.
  Thats risky
• A similar project in Nestlé-USA cost over 200M,
  as well as taking 6 years as well as saving
  Nestlé (so far) 325M.

58
Nestlé

• Primary Lessons?
• No major software implementation project is
  really about software. Its about Change
  Management. Just to install the software might
  take 18-24 months. A month later youd lose your
  job
• And the changes can be very detailed.
• Pre-integration (1997), Nestlés various
  independent companies were buying the same
  vanilla flavouring from the same vendor at 29
  different prices!
• No one knew because each company gave a
  different order code to the same item.
• In 1997, the changes started

59
Nestlé

• Integration was seen as essential because top
  management finally realised how ugly the
  situation was
• Nine general ledgers
• 28 points of customer entry
• Multiple purchasing systems
• No basis of comparison or control
• Each company was a law unto itself
• The Solution?
• SAP BPR process change and a 3-5 year project

60
Nestlé

• 50 top business executives and 10 top IT people
  focused on best practices to be standardised
  Nestlé-wide
• A smaller team spent 18 months looking at every
  piece of data in the system
• So as to be in a position to implement a common
  set of standards
• By March 98, they agreed to buy five SAP modules
  purchasing, financials, sales/distribution,
  accounts payable, and accounts receivable
• In 1999, they were ready to install, but not all
  was well

61
Nestlé

• Resistance!
• None of those who would be affected by the new
  processes had been involved in the design process
• No one knew what they were doing or why
• Demand forecasters had turnover of 77
• Planners did not want to abandon their old
  spreadsheets
• The modules were not integrated properly
• If a sales person offered a discount rate to a
  customer, the accounts receivable dept wouldnt
  know about it

62
Nestlé

• By April 2001, things were getting clearer the
  end was in sight
• A new Director for Process Change
• Regular meetings between users and the project
  team
• Finally running, the system is proving its value.
  Much of the 325 savings comes from Supply Chain
  improvements.
• Next time?
• First fix the business processes, then achieve
  employee buy-in, then think about installing the
  solution.

63
HP (source cio.com, 21-12-4)

• HPs Industry Standard Servers (ISS), a US7.6B
  division of HP, planned a 30M move to SAP.
• Plenty of contingency planning (pessimism) given
  known risks about ERP.
• But more problems occurred than anyone expected.

64
HP

• As soon as the new SAP system went live, up to
  20 of customer orders were stopped between the
  old (legacy) system and SAP.
• The problems were fixed in 4-5 weeks.
• But the orders back-logged quickly, and HP ran
  out of capacity to process orders manually.
• 6 months later, the backlog was 120 million and
  a 40 million loss in sales (to IBM Dell)
• A small technical hitch had snowballed into a
  huge business problem

65
Nike

• Nike had similar problems in 2001 when its
  ability to process orders failed, the orders got
  back-logged, and in the end it lost US100M in
  revenue.
• Why?
• Nike didnt have a good enough contingency plan
• What was the contingency at HP?
• Customisation customised orders couldnt be
  processes automatically, requiring manual
  processing.
• Order staff couldnt cope. Orders were 35 above
  average in June not predicted.

66
SinoForce

• A local (HK) HQ-ed home entertainment product
  manufacturer
• Annual revenues HK5Billion
• Late 1990s boom in DVD players helped push the
  market share up.
• Business processes still 1970s style
• Patched up, unintegrated, manual
• The business is changing
• New features in each product cycle
• Retail costs down from 1600 to 320
• Top Mgt realised that change is needed

67
SinoForce

• Oracle selected as an ERP provider
• because it is famous
• because the software is available
• because the consultants recommend it
• Then the consulting firm died, so they employed
  the lead consultant directly
• No customisation to reduce costs
• After two years, the project was stopped. HK15M
  spent.
• Many causes of the failure.

68
SinoForce

• Critical Failure Factors
• SFs business practices grossly misaligned with
  Oracles
• Considerable employee resistance
• No attempt to re-engineer old business processes
• And so no real understanding of what they wanted
  to change to
• No one person at SF actually understood all the
  business processes
• Most unit managers spent all their time fighting
  fires
• Oracle was not just a process shift. It was a
  cultural shift as well centralisation and
  control.

69
SinoForce

• The IT manager chose to focus only on IT issues
• Ignoring the rest of the business issues
• He made no attempt to secure buy-in from
  functional managers
• Later on all the functional managers refused to
  do anything that was requested
• The IT manager was powerless

70
SinoForce

• Data conversion
• A very messy process
• Useful data scattered all over the place
• Much of it offline in old paper documents
• Lots of errors, questionable integrity
• Skills
• All staff needed to learn new skills
• But many lacked the education or willingness to
  do so

71
SinoForce

• All this time, the old legacy system was kept
  running
• So the staff could just point at the old system
  and say Look! It works! Its better!
• There was no appreciation for the benefits of the
  new system at all.

72
Plan for the Worst and then Expect Worse
Still!!!

• It is impossible to predict all the variables,
  all the contingencies.
• But one can be better prepared
• One can have spare supply at hand
• Whether in order processing or manufacturing
• CIOs tend to rely on excellent project management
  skills to get the job done.
• Perhaps a more flexible approach is needed.
• Contingency is not only an IT issue, but a
  whole-of-business issue as well. The contingency
  plan must be hoslistic too.

73
Signal International

• Please read the case and prepare to discuss now
  and answer some questions.

74
ERP Lessons Learned

• ERP system implementations are not just technical
  projects
• Theyre strategic business decisions and major
  organizational changes, involving
• International and business culture
• Corporate governance
• Extended enterprise issues

75
Technology changes Business...