Hour 5: ERP System Installation

1. Hour 5: ERP System Installation Special IS Project In-house: massive IS project, heavy system design features

2. ERP Implementation Project • If vendor system • Much less system design than otherwise • Vendor software already programmed • Only need interfaces • Have help from vendor, consultants • Opportunities to outsource

3. ERP as an IS Project • At least 7 optional ways to implement ERP • Outsourcing (ASP) the easiest • But risky • Next easiest is single vendor source without modifications • Not necessarily least expensive, nor greatest benefits • All others involve significant IS project

4. Relative Use of ERP Implementation StrategiesMabert et al. [2000]

5. Implementation Strategy Use • Dominant strategy in manufacturing: • Single vendor • Over half added internal modifications • Very few best-of-breed • Almost none developed totally in-house

6. IS/IT Project Management Results • Conventional IS/IT projects have trouble with time, budget, functionality • ERP projects have slightly more structure, but still face problems • Underestimation of required time common • Vendors have made easier & faster • Enhancement of systems another trend • Reintroduces time problem

7. Systems Failure Method • systematic method for analysis of failure • successfully applied - wide variety of situations • by reviewing past failures, avoid future failure • as organizations rely more on computers, there is a corresponding increase in significant business interruptions • yet of 300,000 large & mid-sized computer system installations, <3% had disaster recovery plans

8. Failures in Planning • negative disasters: decision culminating in physical result, later substantially modified, reversed or abandoned after heavy resource commitment • power generation facility on campus • positive disasters: decision culminating in physical results implemented despite heavy criticism, subsequently felt by many informed people to have been a mistake • Anglo-French SST; BART in San Francisco

9. Failures of Projects • information technology • 1992 - London Ambulance Service • 1.5 million pound system on line 26 Oct 1992 • immediately lost ambulances • <20% of dispatched ambulances reached destinations within 15 minutes of summons • (before system, 65% met 15 minute standard)

10. Failures of Projects • Some never work • others over budget, very late, or both • others perform less than design • others meet design specifications, but maintenance & enhancement nightmares

11. System Failure Method • failureis regarded as an output of transformation processed from system • place trial system boundaries around situation • experiment with various configurations • reach conclusion about system • need to model system in some detail • at different levels • be careful not to make too fine, lose important inter-relationships

12. common results failure commonly a result of • organizational structure deficiencies • lack of performance-measuring, control • no clear statements of purpose • subsystem deficiencies • lack of effective communication between subsystems • inadequate design • insufficient consideration of environment; insufficient resources • imbalance of resources production quantity; test quality

13. FoxMeyer Drug Large drug distributor Wanted to implement ERP

14. FoxMeyer Corp • Holding company in health care services • wholesale distribution of drugs & beauty aids • served drug stores, chains, hospitals, care facilities • US: 23 distribution centers • Sought market niches, such as home health care

15. FoxMeyer • Due to aging population & growth in health care, expected high growth • Market had extreme price competition, threatening margins • Long-term strategies: • efficiently manage inventory • lower operating expenses • strengthen sales & marketing • expand services

16. Prior FoxMeyer IS • 3 data processing centers, linked • included electronic order entry, invoice preparation, inventory tracking • 1992 began migration of core systems • Benefits not realized until system fully integrated

17. FoxMeyer Process • Customer fills out electronic order • Order sent to 1 of the 3 data processing centers • Orders sent to the appropriate distribution center (within 24 hours) • Orders filled manually and packaged • Had just completed national distribution center with multiple carousels & automated picking • Could track inventory to secondary locations

18. New System • Needed new distribution processes & IS to capitalize on growth • Wanted to be able to undercut competitors • Replacing aging IS key • PROJECT: 1994 - hoped to save $40 million annually (estimated cost $65 million) • complete ERP installation & warehouse automation system (another $18 million)

19. FoxMeyer Project • Select ERP • hundreds of thousands of transactions • meet DEA & FDA regulations • benchmarked & tested for months • picked SAP R/3 • hired Andersen Consulting to integrate • hired Pinnacle Automation for warehouse automation system

20. Operations • FoxMeyer expected the new systems to improve operational efficiency • Signed several giant contracts • counted on savings, underbid competitors • Counted on being up and running in 18 months

21. Problems • SAP & warehouse automation system integration • two sources, two installers - coordination problems • New contracts forced change in system requirements after testing & development underway • Late, Over budget • SAP successfully implemented

22. Outcomes • Lost key customer - 15% of sales • To recoup, signed new customer, expected $40 million benefit from ERP immediately - pushed ERP project deadline ahead 90 days, no time to reengineer • Warehouse system consistently failed • late orders, incorrect shipment, lost shipments • losses of over $15 million • August 1996 filed for Chapter 11 • McKesson bought

23. McKesson Followup • Mid-1990s started implementation of SAP R/3 • Cancelled project in 1996 after spending $15 million • 1997 acquired FoxMeyer • Carefully designed new R/3 implementation • Dropped a number of modules • Implemented modules one at a time • Cautious rollout schedule, rigorously followed • Separate testing group formed • At last report $50 million system on time, in budget

24. McKesson • Massive changes in 3,000 end user jobs • Careful analysis of changes • Surveys • Focus groups • Demonstrations • Computer-based training

25. Lesson • Implementing ERP a major undertaking • Can easily bankrupt a company • However, it can also be done • Opportunity for great benefits

26. System Architecture & ERP • System architecture displays computer systems used to support organization • Open systems architecture allows greater integration possibilities • Important in supply chains, e-business • ERP systems initially quite closed

27. Open Architecture • Many external systems being added to ERP • CRM • Supply chain • Internet for e-business • Need to integrate independent ERPs across organizations • Messaging services used

28. Analysis & Design Control Frameworks • Traditional standards for application development • ERP implementation usually involves installation of vendor software • Still need for treatment as installation project • Early in project, extensive customization needed • The more system flexibility, the more difficulties in implementation • Object-oriented framework benefits extension, tailorability, customizability

29. Application Service Providers • Outsource ERP • Popular • Unocal pared IT staff 40% in two years • Focus on core competencies, shed cost centers • Many specific functions can be outsourced • Outsourcing benefits • Speed • Organization lacks IT skills • ASP the most popular way to outsource

30. ASP Risks • Your applications and data are controlled by others • Service failures out of your control • Confidentiality failure a possibility • Performance issues possible

31. Relative Implementation Effort

32. Implementation Effort • Implementing ERP places strain on in-house information systems groups • Consultants are expensive • Sometimes need special expertise • Tradeoff: control vs. time & cost

33. Summary • ERP driven by idea of quality software support • Software quality has long been important • Many ERP implementation strategies available • Tradeoff in control vs. time & cost