Hour 1: ERP Systems Overview

1
Hour 1 ERP Systems Overview

• Introduction to ERP
• System Options

2
ERP Claims

• Create value through integrating activities
  across organization
• Implementation of best practices
• Standardization of processes
• One-source data
• On-line access to information

3
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

4
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

5
Benefits of ERP

• Davenport 1998
• Increases speed of information flows
• OLeary 2000
• Create value through integration of activities
• Best practices improve operations
• Standardization increases efficiency
• One-source data more accurate, easier to access

6
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

7
Why ERP?

• Technical
• Integration of computer systems foster
  consistency, efficiency
• Financial
• Integrating applications saves money
• Organizational
• All members of organization use same system

8
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

9
SAP Best Practices

• A key to original product
• Davenport 1998
• Firms 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

10
ERP Supported Functions
11
CPU Support

• Originally mainframe
• SAP R/2 1974
• Client/Server architecture early 1990s
• More flexible
• SAP R/3
• Something new?

12
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

13
ERP System Options Selection Methods

• Alternative ERP project forms
• Budgeting methods

14
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 vendors way)
• Cost range 5 million to over 100 million ()

15
Alternative ERP Options
16
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

17
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

18
Financial techniques for Capital Budgeting

• Payback
• Discounted cash flow
• 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

19
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

20
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-of-the-art systems

21
Survey of ManufacturersMabert et al. (2000)
Olhager Selldin (2003)
22
Expected Installation TimeMabert et al. (2000)
Olhager Selldin (2003)
23
Estimated Installation CostMabert et al. (2000)
Olhager Selldin (2003)
24
Cost ProportionsMabert et al. (2000) Olhager
Selldin (2003)
25
Mabert et al. 2000Survey of 400 manufacturers
26
Expected ROIMabert et al. (2000) Olhager
Selldin (2003)
27
Mabert et al. 2000Survey 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

28
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

29
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