Agenda 10/24

1. Agenda 10/24 • Next week’s assignment • Real world material: • PwC State of Information Security • Kroll Global Fraud Report • Readings • Enterprise Resource Planning (ERP systems) • History and evolution • Business purposes/benefits • What is it made of? • What does it not do? • Implementations: • Vendors • Survey results • Costs • Configuration • ERP myths conclusions • Keys to success • Reasons for failures • Strategic Implications • Organizational Implications • Ecommerce and Middleware • Intro to Databases and Data Warehouses (Time dependent) • Speaker next week – on ERP/Reading HBS Cisco Case on ERP

2. Questions for everyone to prepare for next week from the Cisco case • HBS Case – Cisco Systems: Implementing ERP, Robert D Austin, Richard L Nolan and Mark J Cotteleer • Handout - Questions (write up answers and turn-in)

3. Readings • We will cover all throughout class • Key take aways and opinions: • Enterprise in ERP – Davenport • ERP Common Myth Versus Reality – Mabert, Soni and Venkataramanan • ABCs of ERP – Koch • ERP in Institutional Manufacturing – Clinton, Lummus

4. What is Enterprise Resource Planning (ERP)? • Combines the various departments (sales, warehouse, finance and HR) into a single integrated software program running a single database so that information can more easily be shared

5. The evolution of modern corporate information systems (ERP myths) • Early applications of “batch data” processing focused in the areas of payroll and general ledger creations • Late 1950’s - the development of “home grown” planning systems for manufacturing : • Determined the what and when of material needs • Material requirements planning “MRP” systems • “MRP II” - incorporated more links to other functions: • Order processing • Product costing • Balanced the “what ifs” between workload and manufacturing capacity • Little or no integration across systems (systems were in different languages)

6. The main problem with “non-integrated” systems • Data was different across groups in format and content (for a single transaction): • One entry in the sales system (order) • Another in the warehouse system (inventory) • Another in the shipping system (shipping) • Another in the AP system (material costs) • Another in the HR system (labor costs) • Several in the finance system (revenue, COGS, inventory and payroll) • Redundant, inefficient, with no overall visibility into the order as it works its way through the business

7. Traditional approach: separate systems for each cycleThe life of an order Sales Department Warehouse Management Shipping Department Accounts Payable (Materials) Human Resources (Payroll & Commissions) Think about the IT support requirements Accounting & Finance

8. Problems with multiple systems • Coordination difficult because of lack of shared information • Salesinventoryproduction,… • Schedulingbudgetingoperations,… • Multiple versions of the “truth” • What is sales—per accounting, marketing, production?? • Redundancy  higher costs, inefficient, inconsistency

9. Enter Enterprise Resource Planning Systems (ERP) • In the early 1990’s Gartner coined “ERP” to described the systems that evolved after ‘MRP II” • ERP had integrated modules for accounting, finance, sales and distribution • Perform a range of activities: • Financial results • Procurement • Sales • Manufacturing • Human Resources • The development of database technology was a key enabler

10. Why companies implement ERP • What most companies are hoping for: • Integrate Financial Information – “single version of the truth” more on this next week… • Integrate Customer Order Information • Standardize and speed up the manufacturing process • Reduce inventory • Standardize HR information

11. Generic Scope of ERP Systems • Sales & • Marketing: • Order Management • Pricing • Sales Management • Sales Planning • Operations & • Logistics: • Inventory • Materials planning • Materials Management • Plant maintenance • Production planning • Project management • Purchasing • QA • Shipping • Human Resources: • Time reporting • Payroll • Personnel planning • Travel and Expenses • Financials: • AR & AP • Asset accounting • Cash Management • Cost accounting • Consolidation • GL • Profitability analysis • Profit center accounting

12. Enterprise into ERP • (Not the internet) but ERP may be the most important development in corporate information systems in the 1990s. • Large scale failures: • FoxMeyer bankruptcy • Mobile Europe ($100Ms) • Dell Computers (did not fit the business) • Dow ($500M) and scrapped it/started over • The biggest problems are business problems: • Companies fail to reconcile the technology of the ERP with the business needs of the enterprise

13. ERP • These modules are integrated: • One entry in one module updates all others (think about the slide with multiple entries for a single transaction) • Everything is updated at once (in theory) • ERPs are modular in design so that they can be used in various combinations depending on the business: • Sales and Finance but no manufacturing for example • Can be customized (to a degree) to meet business requirements through unique functionality development (worst case) and “bolt-on” systems for a specific purpose (planning)

14. Human Resources Finance & Accounting Bolt-on Bolt-on Central Database Customers Suppliers Sales & Distribution Inventory & Manufacturing Ecommerce Systems Ecommerce Systems Architecture Industry Solution

15. Key Benefits • Standardization and integration of processes across the enterprise • Availability and quality of data • No reduction in workforce or operational costs in the short term • Lower inventories, shorter delivery cycles and shorter financial close cycles

16. ERP Options • Single vendor solution (see previous diagram) • “Best of Breed” (modules from various vendors) Think about the IT support requirements Vendor A: Sales & Distribution Vendor B: Human Resources Vendor B: Finance & Accounting

17. Implementation Models • “Big Bang”: • Most ambitious and difficult • Eliminate all legacy systems and replace with a single ERP system across the company • Most “horror stories” come from this approach • Franchising: • Good for large and diverse companies (Federalist Model): • Business units or regions have their own “instance” or system • Most common way of implementing ERP systems

18. Regional Differences – the Federalist Model • Markets are so different that multiple “instances” of the ERP system need to be implemented • Each instance is “tailored” to the regional requirements • Invoicing in Japan example • The big questions – what should be standardized? What can be customized by region? • Monsato – 85% standardized • HP – control in the regions/decentralized (very expensive)

19. Slam dunk model • Good for smaller companies • Focus on a few key processes • Get the system up and running: • Make the business run on the “canned” process that come with the system • Used as foundation for a company expecting to grow into a full ERP system

20. Modules • The greater the number of modules selected, the greater the integration benefits • The greater the number of modules selected, the greater the cost, risk and changes (to the business) involved

21. GAPS in ERP Functions • Decision support capabilities: • Demand planning (forecasting) • Inventory management • Factory planning and scheduling • Data mining • E-procurement • Business to business • Order tracking • Online collaboration • Warehouse management

22. ERP and the value chain Just part of the picture SCM Customers Suppliers ERP Product Design CRM Others

24. Survey of 15 different ERP Implementations • Small and medium companies were the fastest growing segment (Revenues <$200M) • Dominant reason for ERP was to “simplify and standardize IT” • The second most popular reason: to have access to more accurate information to improve interactions with customers • The third reason was have data that could be used as a strategic advantage • To improve the business process - not just an IT initiative

25. ERP versus “IT” system implementations • IT system implementations – companies would decide how they wanted to do business and choose a software package that would support their processes • With ERP the sequence is reversed – the business is modified to fit the system.

26. Configuration of ERP as a factor • What does an ERP mean to a company • Way of doing business • “configuring…is…making compromises, of balancing the way you want to work with the way the system lets you work” • opportunity to look at the company’s strategy and organization • Can push a company toward generic processes when customized processes are a competitive advantage

27. Think about the IT support requirements SAP Configuration • SAP R3 – the most complex and comprehensive ERP has more than 3,000 configuration tables that need to be set in accordance with the business (or vice versa) • Dell took over a year to go through them • The more customized an ERP system becomes the less able it is to easily communicate with other systems (internal systems as well as customers and suppliers) • To do this you need a deep understanding of the business

28. Costs of Implementation • Sample companies ranged from 1.5% and 6% of revenues • Smaller companies: 3 – 6% • Larger companies: 1.5 -2% • ROI – 5-20% range: • Drop off in productivity for the first year

30. Total Cost of Ownership (Meta Group Survey of 63 Companies) • Includes: • Hardware • Software • Professional Services • Internal Staff Costs • The average total cost of ownership was $15M (ranging from $400K to $300M) • The total cost of ownership for a “heads down” user was $53K

31. Hidden Costs • Training: • Mostly on the details of your business process • Outside training can’t help • Need your own gurus • Integration and Testing: • Testing needs to be done from a process orientation/perspective • Not “dummy data” • Run a real purchase through the entire system “walk through” (order entry-shipping-payment receipt-cash) with the people who actual do the job

32. Hidden costs • Customizations: • Changes to the “out of the box” system • Needed when the system does not match unique business problems • Big trouble/to be avoided. Customizations can affect every module as the system is so tightly linked. Think about the IT support requirements

33. Hidden Costs • Data conversion: • Move data from old legacy systems to the new environment/database • Old data is usually pretty messy and will need to be “cleaned up” before you move it • Can be expensive (remember this diagram?)

34. Hidden Costs • Data analysis: • Will you need a data warehouse to combine the ERP data with data from other systems? • Warehouse management and Sales? • Remember this diagram?

35. Hidden Cost • Consultants; • Need to manage and plan for disengagement • My experiences (Next week’s speaker) • Replacing key staff: • Key people will be consumed by the project • Ongoing implementations: • Reports and upgrades • Delayed ROI

36. Pay back from Implementation (Meta Group Survey) • It took 8 months after implementation to see any benefits (31 months total) • Median annual savings were $1.6M

37. Performance dip? • Causes: • User unfamiliarity • Technical problems • Unforeseen configuration issues • How to minimize • Train • Test • Have resources available at cutover

38. Post ERP Depression • Delete survey: • 25% of companies suffered a drop in performance when their ERP systems went live • Everything looks and feels different and it takes time for people to get comfortable with the new process • Negatively impacts the business

39. ERP Myths Conclusions • ERP systems are being implemented by companies of all sizes • IT is a business solution not an “IT” solution • Very expensive both capital and expense • ERP systems have only been out there for a short period • Results on cost reductions for operations are mixed • There is no one vendor that provided an “end to end” solution • ERP standardizes processes and system making it easier to upgrade • Improve data quality and availability (better decision making) • Most companies are happy with their decision

40. Keys to Success • Senior Management involvement and sponsorship • Cross functional implementation team with a more senior leader • Time spent on detailed planning • Clear metrics for performance measurement (technical and business) • Clear guidelines on how to use outside consultants • Detailed training plans for users w/ “heavy users” involved throughout the implementation

41. Reasons for Failure • People in different groups not agreeing that the processes embedded in the software are better than what they are currently using (resistance to change) • Political battles – powerful business “barons” versus IT and the project team = customization • Assuming that getting people to change how they do things is easier than implementing the software – not true • Resistance to change

42. Business Strategy • Does all this “standardization” impact the competitive differentiation of the business? • “How similar can our information flows and our processes be before we undermine our own sources of differentiation in the market?” • Compaq Computers – “built to order”, needed proprietary systems for forecasting demand and processing orders • If you are competing on cost – the investment may not be worth it (short term versus long term)

43. Competitive advantage? • “Competitive advantage in this industry (chemicals) might just come from doing the best and cheapest job at implementing SAP” - CEO chemical company

44. Organizational Impact • Streamline management structures • Centralization of control over information and processes • Hierarchical command and control structures • Creates more uniform cultures • “We plan to use SAP as a battering ram to make our culture less autonomous” • What are implications for international or multinational companies?

45. Ecommerce Considerations • Companies need to build two access channels into their ERP system: • Customers (business to consumers (B to C) • Suppliers and Partners (B to B) • Lots of challenging integration between systems

46. Making it work – the need for middleware • To get all the systems to work together – companies have needed to implement another suite of tools or applications

47. Key ERP questions for Management • How would an ERP strengthen the company’s competitive advantage? • How would and ERP erode these advantages? • What will the system’s impact be on the organization and the culture? • How many modules? Across the entire business or just select elements (finance, hr etc.)? • Global roll out or regional roll-out (Centralized control or a Federalist model) • Is there a better answer than ERP?

48. Control of the Implementation • “If the development of an enterprise systems is not carefully controlled by management, management may soon find itself under the control of the system. • The software is the business process……..

49. An ERP can create a flexible, more democratic organization … An ERP can create a hierarchical, uniform organization… An ERP can strengthen an organization’s ability to execute effective business processes… An ERP can threaten an organization’s ability to execute an effective business strategy… Enterprise-Wide Systems (True or False and Why?)