Case Study Evidence On ERP Systems

1. Case Study Evidence On ERP Systems Thomas Gattiker, Miami University of Ohio *Dale Goodhue, University of Georgia Marc Haines, University of Wisconsin, Milwaukee *presenting

2. Agenda: • What is ERP, and why is it still an issue? • Six lesson from Case Study Research

3. Data Data Data Data Data The Problem ERP Systems Promise to Solve: “Silo” Application Systems Linked by Batch or Manual Feeds, Incompatible Data Cost Accounting Application Programs Production Scheduling Application Programs Sales Force Automation Application Programs Order Entry Application Programs Materials Management Application Programs

4. Data Customers/Prospects Orders/Quotes Product/Part Inventories Bill of Materials / Routings Machine capacities Production Schedules Vendors Economic Order Quants, Etc. ERP Supply Chain Management Production Scheduling Application Programs Cost Accounting Application Programs Materials Management Application Programs Order Entry Application Programs Sales Force Automation Application Programs

5. ERP Single Database Data Standards Process Standards Process Restrictions Packaged Software Business Integration What is ERP?

6. ERP -- Why [STILL] so attractive? Single integrated database supports greater coordination between parts of the business. Single integrated database solves the “Data Integration Problem”, so firms can answer cross functional managerial questions. A “packaged” solution -- no need to reinvent a very complex wheel. Provides “best practice” business processes. Moves much of IT application programming out of the firm. [Was] an attractive Y2K solution.

7. ERP Problems • Survey of IT managers (1998) named ERP systems most difficult to install • 90% of installations wind up over budget or late (Standish Group, 1996) • Some companies have started implementations and stopped • Some famous failures: Mars Candy, Foxmeyer Drug • Precipitous Drop in Sales in 2000!

8. Amount of Software Development to Upgrade Old Systems Why the slump in ERP sales Does not mean the end of ERP Without Y2K 1994 1996 1998 2000 2002 2004 2006 Time

9. Amount of Software Development to Upgrade Old Systems With Y2K, Some Software Development that would have occurred in 2000 through 2003 was done early to make the Y2K fix “for free” Without Y2K 1994 1996 1998 2000 2002 2004 2006 Time

10. Amount of Software Development to Upgrade Old Systems The Y2K Bubble Extra Software Upgrade Sales (primarily ERP) Due to Y2K Y2K Bubble Pops Trough in Software Upgrade Sales (including ERP) Due to Y2K 1994 1996 1998 2000 2002 2004 2006 Time

11. ERP Is Not Going Away! • The essential driving forces remain: • Need for global and cross functional integration of business processes • Need for global and cross functional data for managerial decision making. • Inability of IT departments to create such complex systems for a single company at reasonable costs.

12. ERP -- Why [STILL] So Difficult? • Changes both technology and business processes. • Extremely difficult organizational challenges • Affects many key business processes • Changes employee jobs and skills needed • The “devil is in the details”, often not apparent until implemented. • To a great extent, the organization must change to fit the system. • ERPs are extremely complex technical systems • Few IT groups can truly “understand” the whole system • relatively few qualified consultants, who are very expensive • Large in scale, long in time, high in cost

13. Lessons From Case Studies • 1 Don’t expect competitive advantage from ERP.

14. ERP And Competitive Advantage • Resource Based View of the Firm: “For sustained competitive advantage, one needs a resource that is: • Valuable • Rare • Tough for competitors to imitate” • Does ERP qualify?!

15. ERP And Competitive Advantage • Resource Based View of the Firm: “For sustained competitive advantage, one needs a resource that is: • Valuable • Rare • Tough for competitors to imitate” • Does ERP qualify?! • Not unless heavily customized!

16. LightCo • Makes lighting fixtures for commercial and residential use • No particular competitive advantage from manufacturing • Major competitive advantage from Order Entry/ Distribution system.

17. LightCo • Explicit IT strategy: • Purchase systems for cost reduction • Build custom systems for competitive advantage • Bought ERP for manufacturing (Cost Savings -- “utility”) • Kept Custom Designed Distribution System (Competitive Advantage)

18. Appropriate Customization Is Critical • Too much customization • costs too much for no competitive advantage • leads to problems with maintenance, later versions • Too little customization • homogenizes your unique offerings • allows competitors to copy you • creates gaps between the business and the system, which must be bridged somehow.

19. Lessons From Case Studies • 1 Don’t expect competitive advantage from ERP. • 2 Expect Unexpected “gaps” between business processes needed and those supported.

20. EquipmentCo • 5 plants making heavy equipment related to transportation industry • Historically EqCo has responded to last minute changes in customer specifications. • Made the shift to ERP in late 1990s. • The implemented ERP system would not allow changes to orders that had been released to manufacturing. • When big customer asked for changes…..?!

21. Unexpected “Gaps” Are Common • No one person understands all the business processes used in an organization! • “The devil is in the details” • Extensive “conference room pilots” can identify some GAPS early. • Discrepancies at the detailed level are often not apparent until after implementation

22. These “GAPS” Will Be Bridged! • Often the required process must not be changed. • Firms will bridge the gap one way or another: • Customize the ERP system (rewrite some of the code) • Devise a separate system, in addition to ERP. • Put a new interface system in between users and ERP. • Manually correct for gap, taking more time from your people and/or performance degradation. (Default)

23. Lessons From Case Studies • 1 Don’t expect competitive advantage from ERP. • 2 Expect Unexpected “gaps” between business processes needed and those supported. • 3 When one sub-unit is “different”, expect more “gaps”, more operational problems.

24. Some Units are Different:Forest Products • 20 plants manufacture “Engineered Lumber” such as composite wooden beams • Process involves “shaving” trees, cutting into strips, gluing into large “billets” and cutting into final products. • Decided in 1993 to implement ERP in all plants

25. Some Units are Different • The Augusta plant was different -- took most of the “custom” orders. • Needed non-standard “cuts” to the billets and many odd sized pieces in “recovery-reclaim”. • Key to productivity is to reuse material in recovery-reclaim. • SAP had no good way of handling the infinite number of different sized (3 dimensional) pieces. • The master scheduler kept that information manually, which added 2.5 hours to his week. • Numerous other related accounting and performance reporting problems. • Minimal problem for other plants

26. Impact of ERP: Interdependence and Differentiation Interdependence Between Sub Units Benefits from Better Coordination Differentiation Between Sub Units Operational Problems From Bus. Process Gaps

27. Lessons From Case Studies • 1 Don’t expect competitive advantage from ERP. • 2 Expect Unexpected “gaps” between business processes needed and those supported. • 3 When one sub-unit is “different”, expect more “gaps”, more operational problems. • 4 Without an explicit strategy for when to customize, costly decisions may be made.

28. Customization Strategy • Forest Products decided in 1993 to implement ERP in all 20 plants • Piloted in 4 plants; customized heavily in each; exhausted entire budget; halted project! • 1997, restarted in all plants, plain vanilla, no customization.

29. Factors Affecting The Degree of Customization • There are many factors from the cases: • strategic context • parent company and business partners • standard solution maturity • methodology and time line • special request management • user involvement and preparation • resistance to change

30. Lessons From Case Studies • 1 Don’t expect competitive advantage from ERP. • 2 Expect Unexpected “gaps” between business processes needed and those supported. • 3 When one sub-unit is “different”, expect more “gaps”, more operational problems. • 4 Without an explicit strategy for when to customize, costly decisions may be made. • 5 ERP can bring discipline, and loss of flexibility

31. Discipline and Flexibility At Equipment Co • Longtime plant employees, know how to “correct for” system errors (incorrect BOM, etc.) and get production out. • When customers request last minute changes, employees xerox old part drawings, mark them up, and send them to manufacturing. There are thousands of these “per print” parts, which are never formalized, but can be used for years. • The new ERP system does not allow either of these practices. This is good, or bad, depending.

32. Lessons From Case Studies • 1 Don’t expect competitive advantage from ERP. • 2 Expect Unexpected “gaps” between business processes needed and those supported. • 3 When one sub-unit is “different”, expect more “gaps”, more operational problems. • 4 Without an explicit strategy for when to customize, costly decisions may be made. • 5 ERP can bring discipline, and loss of flexibility • 6 ERP may shift locus of process innovation from local level to corporate or to ERP vendor.

33. ERP and Innovation • Incremental improvements to “Planning and Control” and other business processes has long been a way to improve operations. • ERP systems are so complex that even experts do not understand the whole system • Without understanding the interactions between different modules, experimenting is dangerous. • Without the ability to try out changes, innovation will be less common.

34. I don’t think that there is one individual in this organization that understands it. And, so I think we need to be pretty disciplined in what we do because when we do something here we don’t know what it is going to do somewhere else. • –Plant Manager • If you tinker with something, you’re tinkering with something that 19 other plants are using, too, and you just can’t do that. Not all the plants are exactly the same, so you don’t know what you’ll screw up somewhere else. • – Sr. Plant Accountant • Until somebody knows the whole picture, how can you make that change readily or not be scared to. Sure, I'll go out there and try something because I think it'll make it easier, but then I'm going to get browbeat because I can't pay or I can't get paid. • – Manager

35. ERP Systems may shift the Locus of Innovation for business processes because experimenting is too dangerous ERP Vendor Level Innovation Corporate Level Innovation Local Level Innovation

36. Conclusions • Large, Packaged, Integrated Systems will bring many benefits: coordination and access to info. • Firms need to take advantage of these, without damaging unique or critical business processes. • This is a tough challenge, especially when one sub-unit is “different”. • Clear policies will help achieve the right amount of customization. • The ultimate impact on flexibility and innovation is not yet clear.

37. Hands-On ERP Exercise • ERP products are quite powerful, but are also quite complex and are not famous for “user friendly” interfaces. • SAP is installed at Terry, so you get to experience both its power, and its complexity.

38. Hands-On ERP Exercise:The Assemble to Order Process • Some products are kept in inventory, some are assembled to order. • When an assemble to order product is ordered, it is necessary to create a production order based on the BOM and routings for that product, and schedule production. • After production, the product must be shipped, billed for, and payment recorded.

39. Parts Required for P-400-001, IDESNORM Pump, Standard • Spiral casing 1 • Fly wheel CI 1 • Shaft 1 • Pressure cover 1 • Bearing case 1 • Support base 1 • Sheet metal ST37 5

40. You will do the following: A. Display the bill of material for the pump B. Display the routing for production of the pump C. Create a sales order for 10 pumps. (This will automatically create a production order) D. The system will advise you that one part is not available. E. Check the requirements in MRP, then modify the production order. F. Confirm the production order has been carried out G. Ship the pumps to the customer H. Display the complete set of related documents for this sale I. If time permits: Bill the customer for the pumps J. If time permits: Record a payment from the customer