Seminar 4

IS5600

Enterprise Resource Planning&

Supply Chain Management

ERP Implementation is like Open Heart Surgery – with very little

anaesthetic!

ERP ERP systems are: • 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 for all functions that directly or indirectly depend on this information.

• part of a larger systems environment

Integration? • This integration should take place in real-time,

not through interfaces or programs that transfer information to one or more modules only after the information has already been processed and updated in the module through which it entered the system… ...

• New-style ERP can be extended to support B2B EC – CRM, SCM, but typically does not provide management reports or decision support

• ERP need external data warehouses, and data mining tools

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

ERP systems are only part of a complex systems solution

Middlew

are

Analysis Programs

Reports &

Analyses

ERP Systems

CRM & SCM

Legacy Systems

OperationalData Stores

Data Marts &

Warehouses

ERP Process Flow

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

ERP Vendors• SAP – the market leader

– 26,150 customers, 120 countries, 88,000+ installations

• Oracle – Strong in Financials, & finally succeeded in buying out Peoplesoft in 2005.– (Peoplesoft – bought J.D. Edwards in 06/03)– (JDE – A smaller player with an old technology

base.)

• Baan – Smaller, European player.– Siebel – niche player in CRM (swallowed by Oracle

in September 2005).

SAP R/3 • 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.

• Is written in SAP’s proprietary language: ABAP.

Industry Overview

• Trends:– Software vendors sell a vision of an

integrated package – strong push.– Systems integrators/consultants are

big and have ample resources– Development of SME market segment.– Increasing compatibility of individual

ERP systems. (e.g., through building of “bridges” between rival ERPs; e.g., Baan - SAP R/3)

Why ERP Systems are interesting (and potentially useful)

• Many global businesses lack integrated systems

• Global businesses need language and currency support provided by ERP systems

• Global businesses are often decentralised & unintegrated

An SCM ExampleA skiwear designer and manufacturer produces its skiwear products mostly in Tsuen Wan and in Guangdong. The lead time is long: The order of the design for Winter of ‘07-’08 has to be placed by Jan ‘06. Thus the demand forecasting accuracy is very important since all unsold inventory has to be cleared at a loss. The demand forecast of a particular product is done by the Buying Committee in charge of the product line to which the product belongs. Historical data showed that the accuracy is highest for those products with the highest level of agreement among the members in the Committee. The Top Management thus recommended that the Buying Committees should reach some kind of consensus when they are forecasting the demand for each product. What is your recommendation for the process to achieve consensus on the design (not just technology)?

The ‘Bullwhip’ Effect

ConsumerDemand

ConsumerDemand

Retailer Orders toDistributor

Retailer Orders toDistributorDistributor Orders to

ManufacturerDistributor Orders to

Manufacturer

Production PlanProduction Plan

Manufacturer Forecastof Sales

Manufacturer Forecastof Sales

TimeSource: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Key SCM Problems• Large inventories• Efficiency losses (cost)• Non-responsiveness• Innovation lagCaused by

– Lack of automation– Ad-hoc management– Tier-to-tier management– Communication breaks

Manufacturer

Distributor

Wholesaler

Retailer

Customer

Raw Material Supplier

Reducing the Bullwhip Effect

• Information sharing about inventory– Locate where the product is.

• Reduce demand uncertainty– Use “everyday low price” (EDLP) strategy

(lead to more stable demand patterns), share customer demand information with suppliers

• Reduce lead time– Dell Computer, Li&Fung (Logistics

arrangements)

• Better forecasting– Within the Company– Early market testing with the large customers

Supply Chain Coordination• Strategic partnership

– Vendor managed inventory (VMI) or continuous replenishment process (CRP): TAL, Wal-Mart & P&G

– Co-location or JIT: Toyota, Dell Computer– Co-design of products: Dell Computer and its

suppliers– System integrations: Dell Computer, Cisco

Systems

• Retailer/supplier/manufacturer coordination– Logistical coordination of manufacturers to

consolidate and reduce lead time; Li & Fung

Supply Chain CoordinationDell’s PC monitors (From Sony in Mexico) are no longer shipped to Austin, Texas for integration and testing. Once Dell receives an order, the information will be relayed to Sony, and to the logistics provider UPS, via the Internet. Sony, Dell, and the shipping company coordinate the delivery schedule so that the PC unit and the monitor arrive at the customer at the same time, ready for installation. Dell saves about US$30 in shipping cost for each monitor. There is also no need for Dell to carry inventory for monitors.

(J. Magretta, “The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell.” Harvard Business Review, March-April 1998.)

What Supply Chain Planning Does

Buy Make Store Sell

Move

ObjectivesObjectives

FunctionFunction

Enhancement of customer services

Reduction of inventoryand increasing sales

Effective acquisition of raw material

Demand Planningand Fulfillment

DistributionPlanning

Manufacturing Planning

Material Planning

Effective management of product resources

Collaboration for cost reduction

Reducing VMI (Vendor managed inventory)

Production planning considering constraints

Optimizing production scheduling

Differentiated inventory management according to demands

Prevention of missing the sales opp.

Demand forecasting based on statistics

Prediction of sales point on excess demand

What did it look like pre-ERP/SCM?• 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., how many business locations do we have - 175 or 250? Do we even know what we mean by a business location?)

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”

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!

Furthermore

• ERP packages may be cultural “misfits”

• Multiple sites make implementations challenges

worse• The “extended enterprise”

must also be integrated

Example of a Cultural Problem• SAP in Singaporean hospitals,…• Types of misfits

– Company-specific misfits• System’s patient management module does not

allow for billing individual patients on 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 reporting• System requires names entered in Western name

format (first, middle, last); operators had trouble parsing Indian, Malay and Chinese names

ERP Implementation is Always Challenging!• Technical problems

– ERP software configuration– ERP software modifications– Integrating ERP software with hardware,

telecommunications, and database software– Need for periodic upgrades

• Human, social and political problems– Inappropriate expectations for software– Failure to specify strategic objectives– Inadequate project championship or project management– Lack of cross-functional approach to implementation– Need to adopt built-in business processes– Resistance to change– Inadequate resources for training

And Multi-Site Implementations Are Worse (open heart surgery anyone?)

G lob a l B u s in ess , In c .

P rod u c t D ivis ion A

P lan t A P lan t B

G erm an y U K F ran ce

P rod u c t D ivis ion B P rod u c t D ivis ion C

C E O

SAP BaanConsolidated InformationOne Face to the Customer

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

??

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

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?

Hub-and-Spoke External Integration Approaches

Source: www.elemica.com

Anatomy of ERP Projects

• Decisions to be made/issues to be resolved prior to implementation.

• Costs!• Roles to play by the parties involved.• How does a typical ERP project look?• After going “live” - what remains to

be done?

Decisions to be Made Prior to ImplementationMajor ones:• What software package(s)?• What consulting company?• What hardware?• What approach?• Re-engineering before or during

the ERP project?

Decisions - Software & Modules?• Best-of-breed

– high level of detail/depth -> better functionality

-> potentially higher competitive value

– integration and maintenance of many best-of-breed systems is highly complex & very difficult to do well.

Decisions - Software & Modules?

• All-in-one? (e.g., SAP, Oracle, Baan)– integration - information flows easily

without interruption across modules.– functionality “compromised”– best practice assumed to be provided

• “Hybrid Solution”– Use “standard” ERP system as “backbone”

and link to best-of-breed software.

• Customisation?– Expensive, troublesome, time-taking,– Upgrades are very problematic

What Software Package? • Each ERP package has its history,

business vision/strategy– PeopleSoft started with HR = strength– Baan: originally focused on mid-sized

market– SAP started out with a mainframe-centric,

manufacturing focused system, reputation of being “dictatorial”

– Oracle strong in manufacturing, offers big picture rather than more granular, traceable data

What Software Package? • Important decision criteria:

– package functionality meets needs of company?

– ample base installed?– quality of documentation?– cost of software acceptable?– local support provided by vendor?– quality of customization tools?– reputation/size of vendor?– one size fits all system?

What Software Package? • Comparing packages - actions:

– Specify product requirements, request for proposal.

– Invite package vendors for presentations & demos, score packages according to suitability, don’t rush it!

– Conduct site visits to & call companies having implemented a particular software.

– Maybe: enlist help of consultants to select package.

Which Consulting Company?

• ERP involvement/knowledge base: Has the firm made ERP consulting its focal point for generating revenue and profit?

• Methodology: – Does the consulting firm have a sound

methodology?– Are the consultants trained in the

methodology?

• Implementation/industry experience: Have they worked on similar projects?

Which Consulting Company?• Product knowledge/potential to add

value: Do consultants understand the particular product to be implemented?

• Do they understand the way we do business?

• Who manages the consultants?• Do they have any known

communication deficiencies?• Are they typically over-optimistic about

what they can achieve?

Decisions … What Hardware?• What kind of equipment is needed?

– Server/s, fiber optics communication infrastructure, satellite communication, desktops, etc.

– Integration of equipment possible? May become a complex undertaking!

– Scalability? Customer support? Costs?– Compatibility with software?

• When is it needed?– From the start (minimum: for training,

simulation and testing)

Decisions … What Approach?

• Big Bang = implementing all modules at the same time, one cutover date for the entire new system.– very risky– cheaper (in total - if everything goes

well)– faster

Decisions … What Approach?

• Phased approach = implement modules in different phases.– more expensive (development of

temporary interfaces)– takes longer (danger of losing speed)

• Series of “Small Bangs” = implement subgroups of modules in parallel. Best of both worlds?

Decisions … Re-engineering Prior to or During the ERP Project?

• Opportunity to challenge extant business assumptions and streamline processes prior to “automation”.

• Avoids the risk of under-utilizing the potential of the package.

Advantages of 'prior to' :

Decisions … Re-engineering Prior to or During the ERP Project?

• Take advantage of industry “best practices” built into package.

• No official “announcement” of re-engineering effort necessary (company morale!)

• Re-engineering projects require time the company may not have.

Advantages of during :

Decisions – Customisation?

• Don’t!• Expensive, messy and new releases

need customisation afresh.• Customisation can have a

cascading effect– You solve one problem, but create 10

more

• Don’t!

Costs!

• Difficult to estimate - size of investment can vary substantially depending on:– scope of project– type of system chosen– technology involved– level of internal resources (staff!)

available– level of “reuse” of existing equipment– outsourcing.

Costs!

• In general: ERP investments are significant!– But there is no "correct" cost.

• Cost break-up (rule of thumb):– Software – 10%– Hardware – 10%– Change management/training – 15%– BPR – 15%– Severance/re-educating/reskilling –

20%– Consulting – 30%

Cost problems…

• Consulting fees run out of control• Training costs usually underestimated• Cost of live runs with live data to

check system interfaces• Cost of data conversion for 'dirty' data• ERP may not cover all functionality –

e.g. data warehousing

Roles to Play …• Vendor: delivery of software, initial training for

key users, project support, quality control, conduct modifications.

• Consultants: bring/transfer know-how about package (beyond vendor training), development of detailed work-plans, optimize fit between processes and software, analysis of customization issues.

• Company: learn/assimilate information about software (independence!), make people sufficiently available (reallocation of responsibilities), keep up motivation (monitoring progress), responsibility for conversion (data extraction, interfaces) programs.

How Does a Typical ERP Project Look? 5 phases

• 1: Understand the problem– Understand business and how package fits,

determine characteristics of current system, arrange for training, delineate peculiarities of company, determine how stored data will be migrated.

• 2: Define the solutions (most critical!)– Define all concepts associated with software

implementation, run simulations of app. processing, make definitions for master files, tables, parameters, establish degree to which company needs to adapt package.

How Does a Typical ERP Project Look? 5 phases

• 3: Put hands to the task (most difficult!)– Load initial data, develop, test, place

customization into operations; develop, test interfaces put them into operation; document new procedures, test new work environment.

• 4: Make it happen– Run software in parallel w/ old system,

support users, make final adjustments, release system for final use.

• 5: Keep on – going live is just a milestone!

After Going “Live” - What Remains to be Done?

• Post implementation review:– Clear diagnosis about use of system.– To be performed regularly. (evaluation of

software, helps maintain integrity of package)

• Remove remaining “bugs”. • Establish “maintenance organisation”,

responsibilities.• Simplify structure and processes.

– Turn “nice to have” into the real thing.

After Going “Live” - What Remains to be Done?

• Join the club:– Establish/maintain contact with other

user companies, help out if necessary.• Continue user training.• Maintain knowledge networks and

repositories.• Upgrade when needed

– But not too frequently/not every version.

• Bring in a consultant to provide external evaluation of progress.

How to Succeed in Implementation

• Position project as business, not IT, initiative.• 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 within organization about

expected change is essential; prepare organization for change.

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

Common Pitfalls• Key users, end users do not receive

enough training.• Lack of top management commitment.• Selection of the wrong product. • Project creep.• High consultant turnover.• Loss of qualified company staff. (e.g. Cisco,

UAF)• Prominent implementation failures: Dell

(SAP R/3), Aerogroup (SAP R/3), Boeing (Baan), Kellogg (Oracle).

The Future of ERP

• Continuous growth of global market?– Originally forecast to grow fast from late ’90s– But a 9% drop in 2002– Actual figures very hard to obtain

• But likely to be US$xxB

• ERP’s are getting more comprehensive:– Supply chain management– Sales-force automation– Customer relationship management – Data mining

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

ASP – Application Service Provider

• The principle of an ASP is that the customer leases services rather than builds them.

• Services may include a variety of functions, including SCM, ERP, etc.

• Good for SMEs – which don't have the resources (people, time, money) to build or buy their own systems

ASPs

• Clients save money,…• But,… the ASP may only offer a 5-

year contract – to tie in customers• Also, ASPs tend to offer a "one size

fits all" solution – there may not be a good match between your needs and their service.

ASPs

• Also, consider from the perspective of the ASP…– How to make money here, when

ERP establishment costs are high?– How to persuade people that ASPs

are reliable, safe, low risk…– That their precious data will not be

lost or stolen

ERP in Hong Kong• Are HK companies ready for ERP?• Are they mature enough to plan

medium-long term?• Do they have the knowledge to

obtain favourable contract terms with ASPs?

• What kind of barriers exist – cultural, economic, social?

• Are there any drivers to push HK firms to ASPs?

ERP in China

• China is a huge market for ERP– 1000+ installations at the end of 2001– 30% with SAP R/3– $8B installed base of systems by 2002– Mix of local and foreign vendors

• UF Soft, Kingdee, SAP, Oracle

– WTO impact will be strong

This section is based on Martinsons, 2004.

Common Characteristics I• Seldom completed on time• Seldom exceeded 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

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

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

Lenovo’s SAP R/3 Experience I

• 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 – Is ERP just an IT project? Is ERP really ‘a

fashion’?

• 联想项目组的一个切身体会是： ERP 不应被片面地理解为 ERP 系统。它首先是一种现代企业的管理思想和管理哲理。业界现在经常会有这样的混淆，即将 ERP 思想同 ERP 软件划等号。实际上，无论什么企业想要实施 ERP 之前，都应对先进的管理思想进行消化、整理，认清它对业务的推进作用，然后根据自身实力的需要进行软件的选型、业务的重组等。上 ERP 决不是为了赶时髦。

Lenovo’s SAP R/3 Experience II• … 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。 – Yes, the ERP may conflict with our

established procedures.– Creative solutions may be needed.– Generalise, then optimise.

ERP Conclusions 1

• ERP is not just a software package!• ERP represents a particular way of

thinking, a mind-set. ERP implementation involves strategic decision making as well as major organizational changes :– International and business culture– Corporate governance– Extended enterprise issues

ERP Conclusions 2

• ERPs have typically been developed based on US/EU industry practices and mind-sets

• There is a fundamental incompatibility between China-SOE business practices/mind-set and ERP systems.

• ERP is likely to involve high levels of pain and stress

ERP Questions and Discussion

• Can Chinese SOEs adopt Western business practices?– Or

• Can an ERP be designed so as to be compatible with SOE practices?– And would this be a good idea?

• In general, what do you see as the CSFs and CFFs for ERP implementation in China?