Copyright © 2004 Sherif Kamel Enterprise Resource Planning (ERP) Sherif Kamel The American University in Cairo.

Copyright © 2004 Sherif Kamel

Enterprise Resource Planning (ERP)

Sherif Kamel

The American University in Cairo


Outline

Define enterprise resource planning Evolution of ERP Usefulness of ERP Advantages of ERP ERP feasibility

Copyright © 2004 Sherif Kamel Copyright © 2001 Prentice-Hall Inc

Copyright © 2001 McLeod and Schell

DefinitionEnterprise resource planning (ERP)

System purpose is to collect and disseminate data to all processes of the organization

Enables management of all the firm’s resources on an organization wide basis

Known as back office systems, traditionally focused on internal entities


Executive Information SystemExecutive Information System

Enterprise Resource PlanningEnterprise Resource Planning

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ERP combines all business area information systems

Copyright © 2001 Prentice-Hall Inc



What can ERP do?

Forget about planning it does not do planning Forget about resource – it does not create any Focus is on the enterprise ERPs attempt to integrate all departments and functions

across a firm to create a single software program that runs off one databaseo Each of those departments (finance or human resources), has

its own computer system, each optimized for the particular department. Typically, when a customer places an order, the order begins a mostly paper-based journey (delays and lost orders)

Copyright © 2001 Koch


What can ERP do? ERP automates the tasks necessary to perform a business process

—such as order fulfillment, which involves taking an order from a customer, shipping it and billing for it

With ERP, everyone in the organization can view the same information and has access to the single database that holds the order. When one department finishes with the order, it is automatically routed via the ERP system to the next department

ERP requires changing the way companies do businesso Software applicationso Changing processeso Teaching userso Data warehouse integration


Facts of the past

In 1943, Thomas Watson (founder of IBM) thought that the worldwide market for computers would be about five

In 1977, Ken Olson (founder of DEC) believed that there was no reason for anyone to want a computer in their home


Evolution of ERP



First information systems in 1960’s were transaction processing systems (TPS)o Recording and accounting of the paperwork in the organization

Management information systems (MIS)o Control the operation and plan for the futureo Accounting data to generate the required information

Management reporting Mathematical models

Manufacturing requirements planning (MRP)o Developed to deal with complex issues of inventory control

Scheduling Locating materials in a warehouse (easy in small operations)


Evolution of ERP

MRP IIo Information systems that encompass the flow of

material from vendors, through manufacturing, and to the firm’s customers

o It was tied to business functions, not necessarily more sophisticated computer applications

o Need to tie all processes and integrate them into one system

Then came ERP (the next logical step where all information processes within the boundaries of the firm are consolidated)




Evolution of ERP

Enterprise resource planningo Requiring a number of important elements

Large computer hardware resources Sophisticated software Database management systems Well trained users Continuous management support




ERP growth

An expected increase in information technology spending over the next five years (2004-2005) should help the enterprise resource planning applications market to grow

The ERP applications industry will generate revenues of US$26.7 billion in 2004 which is about $1.7 billion more than 2003, this figure should reach $36 billion by the end of 2008

Copyright © 2004 Lopez


Customer satisfaction Business development Increasing competition More efficient processes Other software applications do not meet business needs Complete information infrastructure integration Better project management support

ERP drivers


Issues tackled by ERP

Resources shortages Productivity enhancement Customer service Inventory problems Quality and efficiency problems


ERP core systems

Sales and marketing Materials requirement planning Capacity requirement planning Purchasing Logistics Accounts payable/receivable


ERP integration

Manufacturing

Location purchasing

Invoice verification

Inventory management

Internal sales, shipping and billing

Profit/loss

Capacity utilization

Headquarters

Information Systems

Project management

Inventory

Purchasing

Sales

Budget

Cash collection

Marketing and Sales

Sales, shipping and billing

Purchasing of trading goods

Inventory management

Customer service


Only limited number of vendors Largest vendor is SAP (www.sap.com) Training and consulting is a booming market

ERP players


ERP is a large investment and must be treated as such Investment entails more than cash outlays

o Commitment to focus on interacting business processes Benefits are not always economic (intangibles) Feasibility includes

o Economico Technicalo Organizational

ERP feasibility


Economic feasibility

Concerned with justifying an expenditure by considering both costs and benefits in monetary terms

Investment costs for ERPo Very high: 10 million US dollars for a moderate sized

applicationo High likelihood of negative ROI

Tangible and intangible benefits must be considered Opportunity costs of NOT implementing ERP


Technical feasibility

ERP are technically complex systems reflecting organizational database management systems

ERP could be centralized or distributed Usually requires latest technology particularly in larger

organizations Staff preparations and capacity building is a must


Organizational feasibility

Persons in the organization must be willing and able to achieve the change from current IS to ERP

Is business process standardization desirable?o Loss of personalization of customer datao Cultural changes

Management support is essentialo Person or group who serves as driving forceo Lead the organization to a fundamental revamping of core

business processes


ERP advantages ERP is a commercial software package that integrates the

information flow within a firm including…o Financial, accounting, human resources, supply chain and

customer information Online/real-time information throughout all functional areas Data standardization and accuracy across the enterprise (ease of

use and multi-purpose) Increased efficiency enforced by enterprise-wide information sharing Analysis and reporting can be used for long term planning Allows customization and tools for ad-hoc inquiries Provides a competitive advantage for the business Enables business re-engineering Suppliers and customers could be digitally connected Knowledge transfer between industries contributes to innovation


Minimizing ERP failures

Understand the organization’s span of complexity Recognize processes where value cannot be maintained

if standardization is imposed Achieve a consensus in the organization before deciding

to implement an enterprise information system ERP failure is frequently caused by lack of support by

management especially in not taking the time to structure the organization to take advantage from it


Important ERP Qs What business problems need to be solved? Do you know and understand the priorities? Do you comprehend the current as-is condition versus

the could-be/should be processes in place? What tasks will be accomplished and when? What are the missing links in the organizational

processes? What are the real costs, benefits and timetable? Do you have an executive-level champion to provide

necessary management support? Who will implement ERP once in place?


Case of Nestle In 2000, Nestlé SA signed a 280 million US dollars contract with

SAP to install an ERP system for its global enterprise The Switzerland-based consumer goods giant intends to use the

SAP system to help centralize a conglomerate that owns 200 operating companies and subsidiaries in 80 countries

Speculation focused on how the process will affect the corporate culture, which is decentralized, and tries to centralize it which was risky (how to manage change?)

Nestlé learned the hard way that an enterprise wide resource planning involves much more than simply installing software, it is more changing the way people work (planning and implementation)


Case of Nestle Initially, Nestlé was a collection of independently operating brands,

however in 1991, the brands were unified and reorganized into Nestlé

SAP Proposal - One Nestlé, Under SAP (1997) One Nestlé was to reflect the goal of transforming the separate brands into one highly integrated company with a set of best practices that would become common work procedures for every Nestlé division (all divisions would give up their old approaches and accept the new One Nestlé way)

Data was an important factor to be complied from each division in order to implement a common structure across the company. SAP system would be customized around uniform business processes


Case of Nestle Initial SAP would include 5 modules: purchasing, financial, sales

and distribution, accounts payable and accounts receivable and the supply chain. Each would be deployed across every Nestlé division

It is important to note that the process installation was faced with resistance at all levels and chaos was diffused across the company. The problem was the lack of involvement of direct supervisory levels

Workers did not understand the new system, could not use it and did not even understand the new processes. The case also applied to divisional executive. No one was interested anymore to know how the new processes will function (turnover among employees reached 77%)

Upon ERP implementation technical problems start to emerge (integration not complete among divisions)o Example: A salesperson giving a valuable customer a

discount rate and entering into the new system will not be identified by the accounts receivable department.


Case of Nestle Change of project management in 2000 Working on integration points and improving system based on initial

feedback and internal testing (employees feedback) Decision made was to start all over and re-visit all new processes

starting with the business requirements rather than trying to fit the project into the desired shape; this time supervisory levels and management involvement was key

Employees involvement and feedback was also a determining factor in processes development

To date, SAP system has allowed Nestlé to reduce inventory and save on supply chain cost; time and money saved was an advantage


Case of Nestle Nestlé has already achieved significant ROI with the largest chunk

of savings from better demand forecasting. "The old process involved a sales guy giving a number to the demand planner who turns the number over to factory, and the factory not convinced with the number would change it….

With SAP in place, common databases and business processes lead to more trustworthy demand forecasts for the various Nestlé products. Furthermore, because Nestlé is using the same data, it can forecast down to the distribution center level allowing the company to reduce inventory and the redistribution expenses that occur when too much of a product is sent to one place and not enough to another. Savings are estimated to be in the order of 325 million US Dollars per year through SAP

Lesson learnt: “there is a big difference between installing software and implementing a solution”


Success factors for ERP

Only 20% of current companies have these factors in placeo Down with decentralization

Establish and communicate a vision among business units ERP only improves a business competitive position if it allows

the business to use standardized processes to deal with customers, suppliers and materials

Companies that are highly decentralized and base business-unit performance on profit-and-loss measurements are only 50% likely to get a better-than-expected return on their ERP software investments than their more centralized counterparts

Copyright © 2004 Hill


Success factors for ERP

o Send in specialists Enterprises must establish a team whose job is to document,

study and improve business processes (40% success factor) Management support is key (60% believe that a chief process

improvement officer is a must)

o Monitor the progress Companies must give the task of evaluating and measuring

the benefits of technology expenditures to a financial analyst Establish the ERP business case with concerned managers

and setting the terms for proper implementation and assessment

Copyright © 2004 Hill


Integrates all organizational units ERP enables the management of an organization’s

resources to be used more effectively and more efficiently

ERP enables both internal and external processes in today’s internetworked and extended enterprise

Conclusion

Copyright © 2004 Sherif Kamel Enterprise Resource Planning (ERP) Sherif Kamel The American University in Cairo.

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