Enterprise Resource Planning

1. Enterprise Resource Planning OEMBA Spring 03

2. What is ERP? • Software that links applications across enterprise with shared data • Most notable characteristics? • Expensive, complex, difficult to implement

3. Major Players? • SAP: Systems, Applications and Products (30%) • R/2 – Mainframe integration of financial and operational applications (1979) • R/3 – Unix-based client-server (1994) • Oracle (10%): Financials • Peoplesoft (7%): HR • JD Edwards (10%) • Baan (6%)

4. Why move to ERP? • Stabilize and improve business processes • Standardize manufacturing (21%) • Reduce inventory • Improve level of systems integration • Financial (36%), customer orders • Improve IT responsiveness & information quality • Y2K

5. Key Issues/Risk? • Implementation and Cost • Standardization of business processes • Diminish competitive advantage? • End-user acceptance of process change? • Typically requires new technologies • Especially if migrating from legacy system • History of budget/schedule overruns • High “not successful” rate – 50-70%

6. What drives cost? • Implementation: 3-10 times software cost • Shortage of experienced people • Only needed for “implementation” • Must upgrade underlying infrastructure • Need “middleware” • Change business processes • Existing processes are not “enterprise-wide”

7. Other “Hidden” Costs • Training – most underestimated budget item • Integration and testing • Customization • Easy to change business process to match software • Data conversion • Using best and brightest on project • Continual implementation

8. Cisco Case • Who is Cisco? • Are they an “Information age” company? • Industrial Age: Profit from design, production and sale of tangible products • Information Age: Creating value with technology

9. Cisco Case • What was their corporate strategy? • Core competencies” • “Customer intimacy” • One stop Shopping - broad product line • Working toward uniform industry standards • Maintain key alliances • Growth through acquisition • Outsource manufacturing (not a core competency)

10. Cisco • What “triggered” Cisco to move to ERP? • Traditional IT organization did not align with business strategy • Cost Center • Internally focused • Current systems lack flexibility • System capacity will not accommodate growth • Legacy environment failed causing the need for immediate action • Research possibility of an integrated systems application approach • Design the entire IT system then adapt organization structure to support this

11. Cisco • Resulting ERP System – standardized • 100% UNIX at the server level • 100% Windows NT at the LAN level • 100% ‘Wintel” at the client level • 100% Oracle at the database level • 100% TCP/IP for worldwide network • Standardized software • Web as standard user interface

12. Cisco • Stated Cost • ERP Investment: $15 m • Web-enablement investment” $100 m

13. What were the “real” ERP costs? • $15 million, 9 months • Only 20 people on “core” team • Additional people (total of 100) • 80 people * 160 h/mon * 8 mon * $50/h = $5.12m • IT “decommitted” other projects • 100 IT people * 80% committed * 4.5 months * 160 h/m * $50/m = $2.9m • Hardware contract: avoided undersize costs • $15m * 32% hw expenditure * 50% avoided = $2.4m

14. Key Components of Strategic I-Net? • Real-time messaging • Data warehouse • All workers had client • Browser interface • Web site (18 million pages) • Self-service • Information transparency • Extended enterprise • Minimal knowledge management

15. “Best people” “Can-do” attitude Mgt Commitment High priority Rapid Implementation Big Bang (not phased) Prototyping Minimal modification strategy Focus on standards Vendor alliances Financially strong Hungry Included on teams Experienced consultants Capability-based hardware contract Cisco: Considers ERP successful.What were key characteristics of implementation?

16. What were key obstacles? • Poor Testing Strategy • Immature software • Undersized technical architecture

17. What were the benefits? • After 2 years, identified $550 m in benefits • B2B Sales: 0 in 1996, $18 billion (92%) in 2000 • Reduced Cisco’s cost by 60%, customers by 20% • 80% of customer service requests handled electronically • 65% direct ship (from manufacturer to customer) • Internal EIS • Desktop training

18. Tektronix • Who is Tektronix? • Information Age vs Industrial Age • What was their corporate strategy?

19. Tektronix • Analyze the Tektronix infrastructure before ERP • Lack of integration between systems • Problems • Lack of global standards • Relics from when company had 26 divisions • Business Implications • Could not ship immediately – no inventory visibility beyond Beaverton, manual expediting • Multiple entries for each order – errors • Takes weeks to close books

20. Tektronix Infrastructure (cont’d) • Old Technology • Problem: 1970’s proprietary technologies • Implications: Expensive and difficult to integrate • Non-Standard Business Processes • Problem: Different all over the world • Implications: lost efficiencies • Is Tektronix’s situation typical?

21. Managing Implementation Risk • What concrete steps did Tektronix take to manage the risks involved in such a large and difficult project?

22. Risk Management (Cont’d) • Coherent guiding vision • Separability of business • Three divisions are very different • Requirements of one should not drive another • Leverage Shared Services • Consolidate common functions • Need comparable performance measures • Plain vanilla • Minimize changes to ERP software • Change business processes, not the software

23. Adaptive Implementation • Contrast Cisco and Tektronix implementation approaches. • What are the pluses and minuses of the staging approach? • Was the staged approach a better idea than the big-bang approach for Tektronix?

24. Characteristics of Adaptive Implementation • Iterative • Outcomes and interactions tested as they occur • Fast cycles that deliver value • Deliver functionality to end-users early in project • Incorporate feedback • Highly skilled project personnel • Must be capable of making mid-course adjustments • Resist ROI

25. Resist ROI • Allen’s statement • “There was hardly any desire on Carl Nenn’s part to do some big return on investment analysis…” pg 3 • “There are a lot of operational improvement initiatives going on around here. How much cost savings is directly related to the system? I don’t know, and we don’t really care. We know ERP is an enabler, and [these improvements]] wouldn’t have happened without it.” pg 12

26. Standardization and Customization • How do you manage the perceived need to customize the system? • “We’re special” vs resistance to change? • Local optimization vs company-wide efficiencies? • Issues with customization • Complex and expensive • Generally wiped out when upgrade

27. How did Tektronix deal with customization? • Used “wrappers” • Layers of code outside the system code • Basically used hooks into the system code • When upgrades, had to account for changes in these hooks, but majority of logic was intact • Today, would use XML • More lines of code in the wrappers than in the ERP product

28. Was ERP a success at Tektronix? • Relative to Cisco? • What about lack of ROI?

29. Lessons Learned • Clear definition with a short term goal can drive a multi-divisional solution • adequate expert resources needed • one driver with corporate & divisional sponsorship • IT must be tied to corporate strategy otherwise it will be viewed as ineffective • Partnerships are critical for long term success • Clear sense of vision and strategic fit narrows choices and guides platform development