Enterprise Resource Planning Judi Prajetno Sugiono [email protected] © 2008.

Enterprise Resource Planning

Judi Prajetno [email protected]© 2008

Information System Challenges

Hardware SoftwareData

StorageNetwork People

Operational level

Knowledge level

Management level

Strategic level

Coordination

Sales and marketing

Manufacturing Finance Accounting Human Resource

TPS

KWS, OAS

MIS, DSS

ESS

Operational Manager

Knowledge and data worker

Middle Manager

Senior Manager

Hardware SoftwareData

StorageNetwork PeopleHardware Software

Data Storage

Network PeopleHardware SoftwareData

StorageNetwork People

Operational level

Knowledge level

Management level

Strategic level

Coordination

Sales and marketing

Manufacturing Finance Accounting Human Resource

TPS

KWS, OAS

MIS, DSS

ESS

Operational Manager

Knowledge and data worker

Middle Manager

Senior Manager

Operational level

Knowledge level

Management level

Strategic level

Coordination

Operational level

Knowledge level

Management level

Strategic level

Operational level

Knowledge level

Management level

Strategic level

Coordination

Sales and marketing

Manufacturing Finance Accounting Human Resource

Sales and marketing

Manufacturing Finance Accounting Human Resource

TPS

KWS, OAS

MIS, DSS

ESS

TPS

KWS, OAS

MIS, DSS

ESS

Operational Manager

Knowledge and data worker

Middle Manager

Senior Manager

INTEGRATION

ERPERP (Enterprise Resource Planning) is an integrated information system that serves all departments within an enterprise

Before – After ERP

Before – After ERP

Before and after ERP Stand point

Before ERP After ERP

Information Systems

Stand alone systems Integrated Systems

Coordination

Lack of coordination among business functions (e.g. manufacturing and sales)

Support coordination across business function

Database Non integrated data; data have different meanings (e.g. customers); inconsistent data definition

Integrated data; data have the same meaning across multiple functions

Maintenance

Systems are maintained on a piecemeal basis; inconsistencies result; it is costly to maintain separate legacy systems

Uniform maintenance; changes affect multiple systems

Interfaces Difficult to manage interfaces between systems

Common interface across systems

Information Redundant; inconsistent information Consistent; real time information (e.g. about customers, vendors)

Systems Architecture

May not be state of the art Relies on client server model

Processes Incompatible processes Consistent business process which are based upon an information model

Application Disparate applications (e.g. many different purchasing systems)

Single applications (e.g. common purchasing systems)

Business Benefit to ERPERP Performance

outcomesExample

Quickened Information Response time

• Response to customer billing inquiries occurred in real time as opposed to 15-20 minutes response time at IBM storage product company (Jensen & Johnson 1999)

Increased interaction across the enterprise

• Simplification of process at Boeing (Jenson & Johnson 1999)

• Growth in interfacility coordination at Owens corning (Palaniswarmy and Frank, 2000)

• Real time access to data across the organization at Diebold (Palaniswarmy and Frank, 2000)

Improved order management / order cycle

• 90% reduction in cycle time for quotations from 20 to 2 days at Fujitsu (Jensen & Johnson 1999)

• Faster, more accurate order processing at Valenite (Palaniswarmy and Frank, 2000)

• Time for checking credit upon receiving an order was reduced from 15-20 minutes to instantaneous at IBM storage product company (Jensen & Johnson 1999)

Decrease financial close cycle

• 50% reduction in financial closing time from 10 days to 5 days at Fujitsu (Jensen & Johnson 1999)

Business Benefit to ERP (cont.)

ERP Performance outcomes

Example

Improved interaction with customers

• Lead time to customer was reduced form 6 weeks to 2 weeks at Par Industries (Bingi, Sharma and Godla, 1999)

Improved on-time delivers

• On time product delivery rate increased to 90% at Earthgrains (Bingi, Sharma and Godla, 1999)

• Delivery performance improve from 80% on time to more than 905 on time at Par Industries (Bingi, Sharma and Godla, 1999)

Reduced direct operating costs

• Operating margins improved from 2.4% to 3.9% at Earthgrains (Bingi, Sharma and Godla, 1999)

Lowered inventory level

• Inventory level were reduced significantly at Owens corning (Palaniswarmy and Frank, 2000)

• Lower level of inventory at Valenite (Palaniswarmy and Frank, 2000)

• Work in process inventory dropped almost 60% at Par Industries (Bingi, Sharma and Godla, 1999)

ERP Evolution

ERP Vendors

• SAP 25.0%• Oracle 14.2%• Multiple Packages 9.8%• Baan 8.8%• J.D. Edwards 7.4%• People Soft 2.5%• QAD 2.5%• SSA/BPCS 2.5%• Others 27.3%

ERP Basic Modules

Figure 12.1Figure 12.1

SAP Enterprise Solution

Client/ServerLayered

ArchitectureModular Design

& “Plug-In”Capability

Multi-companySupport

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

SAP R/3SAP R/3Client / ServerClient / Server

ABAP/4ABAP/4 WFWFWorkflowWorkflow

ISISIndustryIndustry

SolutionsSolutions

MMMMMaterialsMaterials

Mgmt.Mgmt.

HRHRHumanHuman

ResourcesResources

PPPPProductionProductionPlanningPlanning

MSMMSMMaintenanceMaintenance

& Service& ServiceMgmtMgmt

Integration & Interoperability

Scalable Open

Systems

Enterprise datamodel/databases

Comprehensivefunctionality

IS-T /IS-T /CCSCCS

IS-T /IS-T /RF&NFRF&NF

AM / FMAM / FMGISGIS

CADCAD

QMQMQualityQuality

Manage-Manage-mentment

RF / RF / Mobile Mobile

DispatchDispatch

IA IA Imaging & Imaging & ArchivingArchiving

EDIEDI

COCOControllingControlling

AMAMFixed AssetsFixed Assets

Mgmt.Mgmt.

IS-IS-RERE

AFUDCAFUDCPSPS

ProjectProjectSystemSystem

WorkforceWorkforceMgmtMgmt

NetworkNetworkMgmtMgmt

EH&SEH&S

IS-IS-RetailRetail

IS-PIS-P

IMIMInvestmentInvestment

MgmtMgmtCS-CS-

CableCable

EH&SEH&S FIFIFinancialFinancial

AccountingAccounting

BillingBilling

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

- Industry Solutions

LEGEND

HandHandHeldsHeldsBarBar

CodingCoding

- R/3 Technology

SDSDSales &Sales &

DistributionDistribution

SFASales Force Autom-

ation

“Configurable”PackagedSolution Process

Oriented

GUI & Internet Enabled

TelecomExtensions

SAP - Systems, Applications & Products in Data ProcessingR/3 - Runtime System Three

ERP System Architecture

3 layers

Database

Business logic

User Interface

Three-tierClient/Server

SAP R/3 System Architecture

PresentationPresentation

ApplicationApplication

DatabaseDatabase

Three-tierClient/Server

System Architecture

PresentationPresentation

ApplicationApplication

DatabaseDatabase

PresentationPresentation

ApplicationApplication

DatabaseDatabase

SAP R/3 + MySAP and PeopleSoft version 8.0Reflect Web-enabled technology

ERP Feasibility

• ERP is a large investment and must be treated as such investment entails more than cash outlays• Commitment to focus on interacting

business processes

• Benefits are not always economic• Many feasibility issues need

consideration

Economic Feasibility

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

• Investment costs for ERP• Very high: $10 million for a moderate sized

application• High likelihood of negative ROI

• Tangible and intangible benefits must be considered

• Opportunity costs of NOT implementing ERP

Costs of ERP

• The costs and risks of failure in implementing a new ERP system are substantial.

Hidden Costs of ERP

• Integration and Testing• Data Analysis• Consultants and infinitum• Implementation teams turn over• Waiting for ROI• Post-ERP depression

ERP Total Cost of Ownership (million $)

Example of NPV of ERP Project

Technical Feasibility

• ERP must be viewed as technically complex systems resting organizational database management systems

• ERP may reside on single computer or be distributed• May strain computing resources• May strain communications resources

• Usually requires latest technology particularly in larger organizations

Operational Feasibility

• Is business process standardization desirable?• Loss of personalization of customer data• Cultural changes

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

• Need for ERP Champion

Business Process Reengineering

• Reengineering (or re-engineering) is the radical redesign of an organization's processes, especially its business processes. Rather than organizing a firm into functional specialties (like production, accounting, marketing, etc.) and looking at the tasks that each function performs, we should be looking at complete processes from materials acquisition, to production, to marketing and distribution. The firm should be re-engineered into a series of processes.

Business Process Reengineering

• Implementing ERP system involves reengineering the existing business process to the “best business process standard”. ERP systems are built on best practices that are followed industry, and to successfully install ERP, all the processes in a company has to conform to the ERP model

• Company choice:• Follow or adopt ERP software built in procedure• Customize the product to specific needs of company

• Fact from research:• Even the best ERP software only meet 70% of the

company need• The other 30% must be achieved with customization the

software or changed the process itself (reengineer)

Change Management

• Crucial to ERP• People resistant to change• Examine cause of change• May require organizational culture shift

Lewin-Schein change theory steps

Unfreezing(i) Create

awareness of need for change

(ii) People support what

they help create

Moving(i) Develop new

methods and behaviors

(ii) Create and maintain

momentum

Refreezing(i) Reinforce desired changes(ii) Establish stable environment

Cease old habit Learning New Culture

Prepare for Change Retrain Reinforce Change

Employees

Management

A Model for ERP Adoption

ERP Champion

• Person or group who serves as driving force behind the organization’s change to ERP

• Variety of people can be ERP champion• Lead the organization to a

fundamental revamping of core business processes

Possible ERP Champions

1. Chief executive officer

2. Teams of senior management

a) Chief information officer

b) Vice president of manufacturing

c) Chief financial officer

d) Other senior managers

3. Collection of well-respected middle managers from a wide spectrum of organization operations

ERP Implementation

• Particular attention must be paid to software vendors, training, and cutover

• Takes months• Average is about two years• Due to complexity and legacy systems

developed years earlier

• Variety of approaches can be taken

ERP Vendor Selection

• Choice of vendor is important• Underlying business concepts in vendor’s

system should be major criteria• After major ERP pieces are in place, firm may

want to consider bolt-on systems• Software that takes advantage of ERP features

• Customer relations management• Demand forecasting• Logistics

User Training

• Cannot be an afterthought• Must be part of the initial design• Requires users to understand business

processes beyond their normal jobs• ERP vendors provide training services• SAP is a leader in Training

Training Related to ERP Software

Type of Training

Learning ERP Vendor Software

Training by ERP Vendor (or company specializing in ERP training)

Peer-to-peer training such as conferences

When Training Should Occur

Before the ERP is planned and designed

As the is being designed and implemented; also after the system is implemented

Especially helpful after the implementation of ERP projects

Example of ERP Implementation Time Line

Example of ERP Implementation Time Line (Texas Instrument)

Program Management Communication and Quality Management

RealizationBusinessblueprint

Go live &support

Finalpreparation

Projectpreparation

Change Enablement

Initial Project PlanningProject ProceduresProject Kick-offOrg. Team TrainingTechn. Req. PlanningQuality Check

Team TrainingDevelop System Env.Business Org. Struct.Business Process Def.Project ReestimateQuality Check

Baseline ConfigurationSet-up of PrototypeFinal ConfigurationIntegration TestsUser ProfilesUser DocumentationTraining MaterialsKey User TrainingQuality Check

End User TrainingSystem ManagementOld Data Take-overCut OverQuality Check

Production SupportProject ConclusionQuality Check

Implementation Methodology

Cutover Approach

Old system

PilotSystem

Immediate cutoverPhased cutoverParallel cutover

Old system New System

Old system New System

Old system

New system

cutover

Immediateapproach

Phasedapproach

Parallelapproach

Causes of ERP failures

• Underestimating the complexity of the planning, development, and training required

• Failure to involve affected employees in the planning & development phases and change management programs

• Trying to do too much, too fast• Insufficient training• Believing everything the software vendors

and/or consultants say

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 Critical Success Factor

IT Infrastructure

Business Process

Reengineering

Top Management Commitment

Change Management