09a - S4

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IS5600 - 4

Global ERP Cases: Integration and Planning for the

Extended Enterprise

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Background• IT has the potential to integrate

information• IT can enable distributed people to

communicate with ease– Indeed, it is hard to imagine life without IT

• IT can extend the enterprise beyond its traditional borders– Li & Fung, Amazon, HSBC, etc.– These organisations are truly IT-dependent.– They also leverage IT to ensure their

competitive advantage

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However,…

• IT-based change is not without problems

• Indeed, the changes associated with implementing major systems is a bit like ‘open heart surgery’, without the anaesthetic!– You are cutting away at the very core

(culture) of the organisation, implementing new systems and processes – while the organisation is still functioning.

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ERP: Enterprise Resource Planning

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.

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For Example• CityU has an ERP called AIMS (v.7.2)

– Staff, Student, Alumni– Payroll, leave, benefits– Course management, contacting students– Various tools, reports, documents, etc.

• The data in this ERP is integrated – there is a single set of databases, which all programmes access.

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ERP…• Is common in manufacturing and production• It is also increasingly frequently encountered

in finance, banking, trade, services• It tends to be expensive and large• Information integration is often a ‘good thing’,

but ERP is about much more than integration– Despite popular wisdom, ERP may not be a good

idea – it might destroy your organisation

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Does your organisation (try to) integrate information?

How?

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Integration?

• Integration should take place in real-time – now!

• This means that databases must be updated continuously.

• ERP can be extended to support EC, CRM & SCM functions.

• ERP systems typically do not provide management reports – unless you customise.

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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

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ERP systems are only part of a complex systems solution

Middlew

are

Analytical Programs

Reports &

Analyses

ERP Systems

CRM & SCM

Legacy Systems

OperationalData Stores

Data Marts &

Warehouses

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ERP Illustration

Order 2,000 MBs, CPUs, RAMs, …

Update Order Book

Track order completion

Ship Order Bill Customer

Update A/R

Issue Payment to Suppliers

Re-order miscellaneous supplies

Send Shipping date estimate to customer

ERP System Managed Process FlowCustomer Order: 2,000 PCs

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ERP Vendors 1• SAP – the market leader

– 40,000+ customers, 120+ countries, 106,000+ installations

• SAP R/3 released from 1992-2005• SAP ERP 6.0 (Business Suite), 2005-

– Also CRM, SRM, SCM and PLM applications

• Oracle – the market contender.– Has bought up many smaller firms including

Peoplesoft (2004: $10.3B), Siebel (2005: $5.8B), Hyperion Solutions (2007: $3.3B) and BEA Systems (2008: $7.2B).

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ERP Vendors 2

• Baan – Smaller, European player, sold in 2000.

• Microsoft – ERP is not a major area.• Kingdee – Major Chinese player

– 500k customers, mostly Asia-Pacific– Strong focus on SME sector– Global alliance with IBM

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SAP ERP

• 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 organisation’s processes onto software.

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Client/Server

LayeredArchitecture

Modular Design& “Plug-In”Capability

- Partner Solutions C/WCertified Interfaces (Existing, Developing, Planned)

Integration & Interoperability

Scalable Open

Systems

Enterprise datamodel/databases

Comprehensivefunctionality

EH&SEH&S

- R/3 Core Financials - R/3 Core Logistics - R/3 Core HR

- Industry Solutions

LEGEND

- R/3 Technology

SFASales Force Autom-

ation

“Configurable”PackagedSolution

ProcessOriented

GUI & Internet Enabled

TelecomExtensions

Source: SAP

FI Financial

Accounting

IM Investment

Mgt

IS P

IS Retail

COControlling

RF / Mobile Dispatch

AFUDC

AMFixed Assets

Mgt

WF Workflow

IS REIS

Industry Solutions

IS-T CCS

IS-T / RF & NF

CAD AM/FM GIS

Workforce Mgt

EDI

PS ProjectsSystem

QM Quality Mgt

Network Mgt

PP Production Planning

MM Materials

Mgt

MSM Maintenance and Service

Mgt

HR Human Resources

BillingEH&S

SDSales &

DistributionCS Cable

Bar Coding

IA Imaging and

Archiving

Multi-companySupport

SAP Enterprise Solution

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Industry Overview

• Software vendors sell a vision of an integrated package.

• Systems integrators & consultants are big and have ample resources

• Development of SME market segment.– This is recognised as an area of huge

potential, so the major developers are trying to ‘downsize’ their products

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Why ERP Systems are interesting (and potentially useful)

• Many businesses lack integrated systems (especially global businesses)

• Language and currency support are valuable

• Contemporary businesses are often decentralised

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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?)

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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”

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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!

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Furthermore

• ERP packages may be cultural “misfits”

• Multiple sites make implementations challenges

worse• The “extended enterprise”

must also be integrated

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SAP in Singaporean hospitals,…

• Company-specific misfits– System’s 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

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Multi-Site Implementations Are Worse

G lo b a l B u sin e ss, In c.

P ro d uc t D ivis io n A

P lan t A P lan t B

G e rm a ny U K F ra n ce

P ro d uc t D ivis io n B P ro d u c t D iv is io n C

C E O

SAP BaanConsolidated InformationOne Face to the Customer

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

??

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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

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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?

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Hub-and-Spoke Integration

Source: www.elemica.com

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How to Succeed in Implementation

• This project is a business initiative, not IT!• Put the company’s best people on the project!• Have a strong project leader (VP).• Continued commitment of senior

management.• Get all affected parties to “buy in”. • Communication about expected change is

essential; prepare the organization for change.

• Smart contracts with vendors, consultants.• Provide the necessary resources.

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The Future of ERP

• ERP’s are getting easier: – to use– to implement– to adapt to individual user needs.

• ERP’s are moving away from being a product towards being a service– ASP style

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•Hosted E-business platform solution (on SAP’s computers)–Link organization to supply chain–Link organization to consumers–Exchange (B2B Hub)

•Expands ERP use to medium sized companies.

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Nestlé (source: cio.com - 15-5-02)• June 2000 – Nestlé signed a US$200M

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. … That’s risky”.

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Primary Lessons

• “No major software implementation project is really about software. It’s about Change Management. … Just to install the software might take 18-24 months.”

• And the changes can be very detailed.• Pre-integration (1997), Nestlé’s various independent

companies were buying the same vanilla flavouring from the same vendor at 29 different prices!

• No one knew – because each company used a different order code to order the same item.

• In 1997, the changes started…

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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?– Software, BPR and a 3-5 year project

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Strategic Plans…• 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…

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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 wouldn’t know about it.

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Changes to Processes?• 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 $325M savings (by 2002) comes from Supply Chain improvements.

• Next time?– First fix the business processes, then achieve

employee buy-in, then think about installing the solution.

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SinoForce• A local (HK) HQ-ed home entertainment

product manufacturer• Annual revenues – HK$5Billion +• Late 1990s – boom in DVD players helped

push the market share up.• Business processes still 1970s style

– Patched up, unintegrated, manual– The business was changing - fast

• New features in each product cycle• Retail costs down 80%

• Top Mgt realised that change was needed

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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. HK$15M spent.• Many causes of the failure.

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Critical Failure Factors– Business practices grossly misaligned with

Oracle’s software– 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.

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The IT Manager was a Dinosaur

• He 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

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More Problems

• 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

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And…

• 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! It’s better!”

– There was no appreciation for the benefits of the new system at all.

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ERP in China

• Some common lessons from a survey of eight firms – (4 Joint Venture; 4 State Owned

Enterprise)

• Lenovo’s Positive Experience• Olmec’s Positive Experience• Farina’s Negative Experience

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Common Characteristics I• Seldom completed on time• Seldom exceed the planned budget• Lots of information resource allocation –

even though this is inconsistent with the usual ERP mantra of a core team

• Projects seldom improved cycle times or customer satisfaction

• Most benefits are reduced labour costs and inventory levels

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Common Characteristics II

• Projects initiated by the CIO/CTO usually fail.

• Projects initiated by top management usually succeed.

• CIOs/CTOs seldom have the political clout and business knowledge to resolve disputes between functional managers

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Private Venture vs SOE?Primary Project Aims

Improving Competitiveness through process streamlining & integration in PVs. Cutting costs and automating processes in SOEs.

Role of Top ManagementHands-on leadership to demonstrate commitment in PVs.

Tendency to delegate ERP responsibilities in SOEs.

Role of Steering CommitteeMore frequent meetings and sharper focus on

problem resolution in PVs

Role of ConsultantsGreater reliance on outside help and more

emphasis on ERP-specific expertise by PVs.

Scope of ImplementationBroader and more cross-functional ERP

application in PVs.

Pace of ImplementationFaster implementation with more

simultaneous modules in PVs.

Implementation ProblemsLess frequent, less serious problems in PVs, due to differences in employee reward systems

& data maintenance. SOEs characterised by Acc-Fin & Pur-Mfg squabbles

Evaluation & OutcomesPVs undertake more systematic evaluation and control,

achieving more substantial quality and SC improvements

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Lenovo’s SAP R/3 Experience 1

– Recognise that we need • a clear Information Strategy• to understand that an ERP may conflict with

our established procedures.

– Use the ERP project as a way of • re-engineering the business and improving

internal management– Many PRC organisations have poor information

management

• creating both internal and external value chains

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Lenovo’s SAP R/3 Experience 2• Extensive knowledge transfer is essential

– From consultants to local champions– From local champions to all end users– It has to be done right – or errors will

perpetuate for ever

• But Knowledge Transfer is not easy!• And many end-users are rather “passive”,

showing little interest in either information or the ERP.

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Lenovo – User Perspectives

• 联想刚开始上 ERP 时，大家都认为这只是一个软件系统，把 ERP 当做一个 IT 项目来做，

• When Lenovo began their upgrade to ERP, many people thought that it was only a software system. They classified ERP as an IT project and assigned the technical department to lead the project.

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Lenovo - Leadership

• … 企业信息总管 CIO 的领导艺术对信息化的推进非常重要，他（她）不必是信息技术专家，但他（她）一定要懂业务，懂管理。

• … the art of leadership of the CIO was critical to the informatisation process.

• S/he did not need to be a technical specialist but s/he had to have a good understanding of the business and its management.  

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Lenovo – Generalise, then Optimise

• … 牵涉到业务流程的时候，实际业务流程与 ERP业务流程还是有一些矛盾，创造性地解决这些矛盾非常重要。有些时候只能先按照 ERP流程去做，再逐步优化，也就是所谓的‘先僵化后优化’”。联想在实施在整个 ERP项目中，成功清理、规范和优化了 77个业务流程。

• … when dealing with business processes, the actual business processes conflicted with ERP workflows. Without creative solutions, we would not be able to solve these problems. Sometimes, we had to follow the ERP processes at the beginning, and then optimize them. This was what ‘first generalize and then optimize’ means. Lenovo finally successfully cleared, standardized and optimized 77 business processes in the whole ERP project.

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Olmec – Nationwide Shoe Manufacturer

• Old IT infrastructure cannot cope with increased data and new processes caused by rapid expansion.– 2000 products (shoes) in over 10

sizes

• Need for org. change recognised by top management

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Olmec

• One year planning in advance– Strong top mgt support– Clarification of individual team

member responsibilities– Alignment of business processes via

BPR with IT and software

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Farina – Luxury Fashions

• Nationwide luxury goods retailer (not manufacturer)

• IT project– IT manager is the champion– Poor communication with other parts

of the firm– Many unresolved internal conflicts,

which top mgt failed to contain/resolve– IT Mgr resigned; Vice-IT mgr promoted

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Farina• No attempt to align software with internal

processes– Top mgt refused to change business

processes

• No customisation initially– Later, many modifications to software needed

• Systems failed during use and no back-up, so reinstallation is necessary

• Eventually, the project was abandoned.

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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 holistic too.

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ERP Lessons Learned

• ERP system implementations are not just technical projects

• They’re strategic business decisions and major organizational changes, involving– International and business culture– Corporate governance– Extended enterprise issues

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Lessons for IT Based Org Change

• Top Management must be the change architects• IT cannot transform an organisation – IT enables

transformation• Enterprise-wide business-IT Partnerships are needed • The pace of change must match the rate of

acceptance• Individual transformation is as important as

organisational transformation• Change champions must be diverse, yet work

together• Offshoring IT development sounds attractive, but it is

not just an IT project.

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Consequences of Transformation

• Organisational culture and identity– There will be pressure for change here too– People who support ‘the old way’ will feel

left out, marginalised or discriminated against

• A new, more flexible set of cultural norms may be necessary– Guided by new principles, new values, …

and perhaps new managers?– A Culture of Blogging? The CEO’s blog-desk?

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Technology Changes Business...