Hour 1: ERP Systems Overview

1. Hour 1: ERP Systems Overview Introduction to ERP System Options

2. ERP Claims • Create value through integrating activities across organization • Implementation of best practices • Standardization of processes • One-source data • On-line access to information

3. Role in Business • Accounting basis • US products – some extension of MRP • Combine business computing • Unified system sharing one set of data • Advantages in efficiency, accuracy • Best Practices • Apply the best process for each function

4. Historical Growth • 1970s & 1980s – more development than growth • 1990s – became widely adopted by large firms • Late 1990s – growth exploded with fears of Y2K problems • Post-2000 – growth slowed • Saturated market, economy dipped • Seeking to • Fill in gaps with larger firms • Make products useful for smaller firms • Emphasize Internet

5. Benefits of ERP • Davenport [1998]: • Increases speed of information flows • O’Leary [2000]: • Create value through integration of activities • Best practices improve operations • Standardization increases efficiency • One-source data more accurate, easier to access

6. Benefits of ERP • Better organizational planning • Better communication • More collaboration • Weil [1999]: • Applied Robotics increased on-time deliveries 40% through ERP • Delta Electronics reduced production control labor requirements 65%

7. Why ERP? • Technical: • Integration of computer systems foster consistency, efficiency • Financial: • Integrating applications saves money • Organizational: • All members of organization use same system

8. Conception vs. Reality • Integrated System • In fact, vendors usually sell modules • Would like to sell full system • Buyers reduce cost, risk, by starting smaller scale • Risk of converting entire system • Complex cost impact

9. SAP: Best Practices • A key to original product • Davenport [1998]: • Firm’s vary in what is best for them • Business world dynamic • Rigid approach has dangers • If a firm develops a competitive advantage, they give it up by adopting “best practices”

10. ERP Supported Functions

11. CPU Support • Originally mainframe • SAP R/2 – 1974 • Client/Server architecture early 1990s • More flexible • SAP R/3 • Something new?

12. Advantages & Disadvantages • System Integration • Improved understanding across users • Less flexibility • Data Integration • Greater accuracy • Harder to correct • Better methods • More efficiency • Less freedom & creativity • Expected lower costs • More efficient system planned • Dynamic needs, training typically underbudgeted, hidden implementation costs

13. ERP System Options & Selection Methods Alternative ERP project forms Budgeting methods

14. IS/IT Projects • Typically • Late • Over budget • Fail to satisfy design specifications • ERP projects • Are larger than normal • Can be expedited (if you do it vendor’s way) • Cost range $5 million to over $100 million (+)

15. Alternative ERP Options

16. Changing Nature of IT • Technology is highly dynamic • ERP projects often take years to install • Vendors are responding by expediting • As long as you do it their way • Improved versions may be on market by the time you install your system • This is one advantage of an ASP

17. IT Selection Practice • Hinton & Kaye [1996]: • IT tends to be viewed as capital budgeting • Implication is that clear financial return is expected • Sound thinking, but benefits often intangible (yet real) • Some strategic investments require bold judgment • Conversely, companies have gone broke buying IT

18. Financial techniques for Capital Budgeting • Payback • Discounted cash flow • Cost-benefit analysis These are the more formal mechanisms implied by Hinton & Kaye as capital budgeting Anything with as great an impact as ERP needs to have some estimate of cost, benefits • Need to recognize that precise numbers not worth obtaining

19. Bacon [1992] survey of IT project selection methods • Financial Criteria • NPV, IRR, payback • profitability index • budgetary constraint • Management Criteria • Requirements, respond to competition, etc. • Development Criteria • Technical/ learning new technology, probability

20. Bacon findings • More formal methods often not used • Why waste effort if know you will do it? • Many numbers used inaccurate anyway • More formal methods reserved for larger project (like ERP) • Management criteria focus on intangible • Technical a matter of maintaining state-of-the-art systems

21. Survey of ManufacturersMabert et al. (2000); Olhager & Selldin (2003)

22. Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)

23. Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)

24. Cost ProportionsMabert et al. (2000); Olhager & Selldin (2003)

25. Mabert et al. [2000]Survey of 400+ manufacturers

26. Expected ROIMabert et al. (2000); Olhager & Selldin (2003)

27. Mabert et al. [2000]Survey of 400+ manufacturers • Even for ERP systems, only 53% used formal methods • For smaller IT projects, payback most popular • Most systems expected to take years to install • Trend is to make much faster • Cost varies widely • You have a choice as to where you spend • Training tends to be underbudgeted • Not all expect big return

28. Points • A variety of evaluation techniques available • Pure monetary analysis hard, expensive, inaccurate • Payback a commonly used shortcut • Other methods exist • Value analysis • Multicriteria analysis

29. Summary • ERP software has had a major impact on organizational computing • Technological, financial, organizational benefits • Also expensive, massive, inflexible • Many hidden costs • Complex adoption decision