ERP Applications Edited by Arjan Raven, Georgia State University Based on the work of Dr.Jos van Hillegersberg Rotterdam School of Management, Erasmus.

ERP Applications

Edited by Arjan Raven, Georgia State University

Based on the work of Dr.Jos van Hillegersberg

Rotterdam School of Management, Erasmus University

Presentation created by:Dr. Jos van [email protected] School of Management/Faculteit Bedrijfskunde, Erasmus University Rotterdam

ERP and E-ERP

• Enterprise Resource Planning Systems:– … are configurable information systems packages

that integrate information and information-based processes within and across functional areas in an organization

– …the current generation of ERP systems also provides reference models or process templates that claim to embody the current best business practices.

Source: Enterprise resource planning: introduction, Kuldeep Kumar and Jos van HillegersbergApril 2000/Vol.43,No.COMMUNICATIONS OF THE ACM, Pages 22 - 26

Evolution of ERP

• “ERP is an outcome of 40 years of trial and error”,– Prior to 1960s,

– traditional ways of inventory management were used, e.g. EOQ (Economic Order Quantity). Each item in the stock was analysed for its ordering cost and the inventory carrying cost. A trade off is established on a phased out expected demand of one year, and this way the most economic ordering quantity can be decided. This technique in principle is a reactive way of managing inventory

– 1960s– a new technique of Material Requirements Planning, popularly known

as MRP, evolved. This was a proactive manner of inventory management. This technique fundamentally explodes the end product demand obtained from the Master Production Schedule (MPS) for a specified product structure (which is taken from Bill of Material) into a detailed schedule of purchase orders or production orders taking into account the inventory on hand. MRP is a simple logic but the magnitude of data involved in a realistic situation makes it computationally cumbersome. If undertaken manually, the entire process is highly time consuming. It therefore becomes essential to use a computer to carry out the exercise

Source, Akhilesh Tuteja, http://www.geocities.com/CollegePark/Library/6045/main.html

Evolution of ERP

• MRP successfully demonstrated its effectiveness in:– Reduction of inventory– Reduction in production and delivery lead times by improving

co-ordination and avoiding delays– Making commitments more realistic– Increased efficiency

• Closed Loop MRP• MRP proved to be a very good technique for managing inventory,

but it did not take into account other resources of an organisation. In 1970s, this gave birth to a modified MRP logic, popularly known as Closed Loop MRP. In this technique, the capacity of the organization to produce a particular product is also taken into account by incorporating a module called Capacity Requirements Planning (CRP). Hence, a feedback loop is provided from the CRP module to MPS if there is not enough capacity available to produce

Source, Akhilesh Tuteja, http://www.geocities.com/CollegePark/Library/6045/main.html

Evolution of ERP

• 1980s, • the need was felt to integrate the other resources of a

manufacturing organisation. An integrated manufacturing management system evolved called Manufacturing Resources Planning (MRPII). MRPII has been defined by APICS as:

• "A method for effective planning of all the resources of a manufacturing company. Ideally it addresses operational planning in units, financial planning in dollars and has a simulation capability to answer 'what-if' questions. It is made up of a variety of functions each linked together: Business Planning, Production Planning, Master Production Scheduling, Material Requirements Planning, Capacity Requirements Planning and the execution system for capacity and priority. Outputs from these systems would be integrated with financial reports, such as the business plan, the purchase commitment report, shipping, budget, inventory production, etc."

Source, Akhilesh Tuteja, http://www.geocities.com/CollegePark/Library/6045/main.html

Evolution of ERP

• ERP– The Manufacturing Resources Planning suffered from a few

drawbacks; it assumed the lead times to be fixed, the capacity to be infinite, etc. Over the years, other tools had evolved to automate the manufacturing management process like Computer Aided Design, Computer Aided Manufacturing, Computer Integrated Manufacturing, Customer Oriented Manufacturing Management System, etc.

– The shortcomings of MRPII and the need to integrate these new techniques, led to the development of a total integrated solution called Enterprise-wide Resource Planning (ERP). ERP atempts to integrate the suppliers and customers with the manufacturing environment of the organization

Source, Akhilesh Tuteja, http://www.geocities.com/CollegePark/Library/6045/main.html

ERP’s 1998 dip

• The big-five (SAP, Oracle, Baan, Peoplesoft, JD Edwards) sales and profits drop dramatically– ERP projects become too large, complex and

expensive. – Big-five lack customer focus– ERP vendors fail to see rise of e-commerce in time

“We know more of the customers’ Business than the customers

themselves”

ERP current size

• May 2001: AMR predicts 14% annual growth ERP companies revenues from $21 billion 2001 to $36 billion 2005

• “It is common for companies to spend over $100 million to implement an ERP”

Current ERP Characteristics

• One solution for all your problems– Monolithic applications– ERP system contains everything from database to

program code to user interface– Integrated Reference models of processes for various

industry sectors– Customization by

• Parameter settings (possibly model based)• Built-in programming language• 3rd party add-ons

– ERP systems have grown large and complex through new product development and intergration of newly acquired companies

ERP Characteristics

• ERP packages aim at supporting all major processes of a company and storing data needed in these processes.

• See the integrated retail H-model (right). ERP can be used in all areas within the (H) and more recently also includes the supporting base processes, and Management functionality (on top of the H)

Contracting

OrderManagement

GoodsReceipt

InvoiceAuditing

Accountspayable

Warehousing

Marketing

Selling

Goods issue

Billing

Accountsreceivable

function

data

process

controllingEIS

strat. plan

general accounting and asset management

cost accounting

human resources

ERP Success & ROI

• “Eighty-nine per cent of respondent companies claimed that their projects were successful, but only a quarter had actually obtained and quantified all the planned benefits”. (KPMG, 1998)

• “success can look very different when examined at different points in time, on different dimensions, or from different points of view” (Larsen &Myers,1997)

• “no one measure of enterprise system success is sufficient for all the concerns an organization’s executives might have about the enterprise system experience. Instead, enterprise systems–adopting organizations require a “balanced scorecard” of success metrics addressing different dimensions (financial, technical, human) at different points in time”

•Source (Markus&Tanis,2000)

ERP Success & ROI

• A minimum set of success metrics includes the following:– Project Metrics.

• Performance of the enterprise system project team against planned schedule, budget, and functional scope

– Early Operational Metrics. How business operations perform in the period after the system becomes operational until “normal operation” is achieved.

• labor costs, time required to fill an order, customer calls unanswered, partial orders filled, orders shipped with errors, inventory levels, …

– Longer-Term Business Results. How the organization performs at various times after normal business operation has been achieved.

• return on investment,achievement of qualitative goals such as “one face to the customer,”, better management decision making attributable to higher-quality data, continuous improvement of business metrics after operations return to normal, maintenance of internal enterprise system competence (among both IT specialists and end users), ease of upgrading to later versions of the enterprise system software, …

•Source (Markus&Tanis,2000)

ERP Implementation

• New skills required – (1) mapping organizational requirements to the processes

and terminology employed by the vendor– (2) making informed choices about the parameter setting

• Enter into long-term relationships with software vendors

• AMR May 2001 Study– Small company: 12 months– Midsize company: 12-14 monthes– Large company: up to three years

•Source (Markus&Tanis,2000)

ERP Implementation: “6 deadly sins”

• Not understanding the true significance• Not committing right resources• Not managing the change• Not managing the benefits• Not embracing integration• Not planning the end before you start

•Source (Manoeuvre,2000)

ERP Implementation

• Overcoming ERP “Knowledge Barriers”– Formal training and incremental pacing– Teach process orientation, integration rather than

software package functionality– Core teams promoting change– Keep core teams together and prevent brain drain– Consultants key role managed by client company– Incremental process, recover from stress and strain– “Concerted approach” (jointly implement processes

and new business processes) better chance on business benefits than “Piecemeal” (Technology first, then business processes)

ERP current status:Seven problems

Why does ERP have a bad reputation?Is ERP still needed for E-commerce?What changes to ERP systems are

needed?

ERP current status:Seven problems

• Traditional ERP problems1. Internal integration2. Customization3. Complexity4. Migration

• ERP and E-Business problems5. Multi-channeling6. External-integration7. Performance- and security

1. Internal-integration

• Internal integration is concerned with connecting the ERP system to other systems within the same company– Historical reasons– Mergers and acquisitions– Decentralized units with own IT-policy chose different systems– Not all departments participate in ERP implementation

• ERP systems need to be integrated to– Legacy systems– Other vendors’ ERP systems– Datawarehouse – Customer relationship management systems– Front office software (e.g. voice response system)– Office software (e.g. microsoft)– …etc.

1. Internal-integration

• ERP is designed to be an integral solution– Integration to existing systems can be solved by (a

combination of)…• Retyping data (manual)• Using the ERP programming language (e.g. SAP ABAP) to write

connections to other systems• Building a custom link using the ERP API and standard

programming language• Using commercially available “integration software”• “Wrapping” existing legacy systems to allow them to interface

to the ERP system• …

– This currently generates a lot of work for IT-businesses and a lot of costs for customers

2. Customization

• ERP reference models can be customized to some degree– This is also called parameterization– E.g. SAP R/3 contains over 5000 parameters that can

be set

• Some ERP packages offer modelling tools that help to perform this configuration, I.e. set the parameters– Baan Dynamic Enterprise Modeller– ARIS toolset for SAP

2. Customization

• Example SAP Event Process Chain (EPC)

• Figure shows the standard events and processes and an Add-on that requires customization

Source: Making ERP a success, Communications of the ACM, Volume 43 , No. 4 (Apr. 2000) , August-Wilhelm Scheer and Frank Habermann, Pages 57 - 61

2. Customization

• Configuring the ERP package may not be sufficient:– Misfits between ERP package and organizational model:

• Data Misfit– Incorrect formats, missing relationships

• Functional Misfit– Access – which user can access particular data?– Control – what data-entry validations can be set? – Operational – ERP package processes differ

• Output Misfit– Presentation – data fields for reports in wrong report– Content – fields are in ERP database but not available for

output reports

2. Customization Alternatives

ERPDatabase

VendorERP

Modules

ThirdParty

Add-On Modules

CustomMade

Add-On Modules

3. Complexity

• Increasing…– Depth of Functionality– Breath of Functionality (domains)– Platforms (database and middleware independent)

• Result– ERP projects often expensive and time consuming– Skilled and experienced ERP consultants scarce

• Vendor response– “Accelerated” implementation methods (e.g. ASAP)– But these methods neglect the importance of misfits

4. Migration

• ERP vendors offer new releases and versions of their systems on a regular basis– E.g. Sap R/2, R/3, R/3.1

• Customers face the choice of upgrading or continue using an “old” version

• The process of installing a new release is referred to as Migrating and includes– Installing the new version– Converting data to the new version– Converting specially built modifications – Customizing the new version– …

5. Multi-channeling

• E-business often requires multiple distribution channels– This is not compatible with ERP systems that have

integrated user-interfaces, open API’s are needed

ERPBackoffice

Web Voice ResponseCall Center WAP

Work FlowEngine

Other backoffice System

Services (XML)Services (XML)

Organization BOrganization A

6. External-integration

• E-business requires External Integration– Systems need to be integrated along the supply

chain

Work FlowEngine

Other backoffice System

Services (XML)

ERP Backoffice

Services (XML)

Work FlowEngine

Other backoffice System

Services (XML)

ERP Backoffice

Services (XML)

6. External-integration

• External integration requires– ERP systems with open API’s– Agreement on messaging standards

• Technical (component interfaces: CORBA, COM+, EJB)• Syntactical (XML)• Semantical

– Data (OFX, SWIFT, Biztalk,…)– Flow, dynamics (CommerceOne,…)

– No single standard is likely to emerge, so external integration will require translation services for messaging and workflow integration

7. Performance- and security

• E-business brings new challenges to performance and security

• Predicting performance– Internal ERP system has predictable performance– Hard to predict number of Web-users that use underlying

ERP. Requires high performance, also during peak loads– Cross-organizational systems (external integration) have

hard to predict performance as many systems are involved in a transaction

• Security– ERP system is opened-up to outside world. Security

measures are needed to prevent abuse– The E-business architecture is as strong as its weakest

component

The road from ERP to e-ERP

Do these issues with ERP mean that ERP should be buried and does not play a

role in the E-economy?

From ERP to E-ERP

• In the Internet age, ERP is the technology bricks behind the clicks

• ERP is now considered to be the price of entry for running a business for being connected to other enterprises in a network-economy

• Behind the flashy user interfaces most E-businesses require reliable transaction processing systems. ERP can continue to play this role in the future

• e-ERP systems should be designed to play this role and address the 7 problems outlined in this presentation

From ERP to E-ERP

• e-ERP – ERP back to its Core-business!• e-ERP properties:

– Not monolithic but component based– Open “service-based” interfaces (XML)– Backbone functionality that is customizable and

extendable– Customization on a model-level through interfaces to

popular modeling Case-tools– Vertical integration (middleware interfaces)– Horziontal integration (compatible to popular domain

standards)– Inter and intra-organizational integration through a link to

work flow engines

Recent ERP developments

• Example:• SAP new more open

architecture– Former BAPI interfaces are

now accessible using XML• You can view all SAP

interfaces on http://ifr.sap.com/

• To see a web-based ERP interface and do some hands-on ERP, register and try mysap at http://www.sap.com/ides/

Summary

• ERP rapid growth up until 1998– Late move to e-business

• Several problems with current ERP– Traditional problems

Internal integration Customization Complexity Migration

– E-business problems Multi-channeling External-integration Performance- and security

• ERP’s road to e-ERP– Back to basics, component based, customizable