Korea Telecom 2007Olson: ERP 2 ERP Systems Overview Introduction to ERP System Options

Korea Telecom 2007Olson: ERP 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

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 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%

Korea Telecom 2007Olson: ERP 2 Why ERP? Technical: –Integration of computer systems foster consistency, efficiency Financial: –Integrating applications saves money Organizational: –All members of organization use same system

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 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”

Korea Telecom 2007Olson: ERP 2 ERP Supported Functions FinancialHum ResOps & LogSales & M Accts receivableTime accountingInventoryOrders Asset accountPayrollMRPPricing Cash forecastPersonnel planPlant MtceSales Mgt Cost accountingTravel expenseProd planningSales plan Exec Info SysProject Mgmt Financial consolPurchasing General ledgerQuality Mgmt Profit analysisShipping Standard costingVendor eval

Korea Telecom 2007Olson: ERP 2 CPU Support Originally mainframe –SAP R/2 – 1974 Client/Server architecture early 1990s –More flexible –SAP R/3 Something new? –Portal systems (MySAP.com)

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 ERP System Options & Selection Methods Alternative ERP project forms Budgeting methods

Korea Telecom 2007Olson: ERP 2 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 (+)

Korea Telecom 2007Olson: ERP 2 Alternative ERP Options FormAdvantagesDisadvantages In-houseFit organizationMost difficult, expensive, slowest In-House + vendor supp. Blend proven features with organizational fit Difficult to develop Expensive & slow Best-of-breedTheoretically idealHard to link, slow, potentially inefficient Customize vendor system Proven features modified to fit organization Slower, usually more expensive than pure vendor Select vendor modules Less risk, fast, inexpensiveIf expand, inefficient and higher total cost Full vendor system Fast, inexpensive, efficientInflexible ASPLeast risk & cost, fastestAt mercy of ASP

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 Financial techniques for Capital Budgeting 1.Payback 2.Discounted cash flow 3.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

Korea Telecom 2007Olson: ERP 2 Survey of Manufacturers Mabert et al. (2000); Olhager & Selldin (2003) FORMAL METHOD Use in USUse in Sweden ROI53%30% Payback35%67% Expected NPV15%12% Other11%20%

Korea Telecom 2007Olson: ERP 2 Expected Installation Time Mabert et al. (2000); Olhager & Selldin (2003) Time to Install ERPUSSweden  12 months 34%38% 13 to 24 months45%49% 25 to 36 months11%8% 37 to 48 months6%4% > 48 months2%1%

Korea Telecom 2007Olson: ERP 2 Estimated Installation Cost Mabert et al. (2000); Olhager & Selldin (2003) Installation CostUSSweden < $5 million42%40% $5 million to $25 million33%35% $26 million to $50 million10%18% $51 million to $100 million7% > $100 million7%In prior

Korea Telecom 2007Olson: ERP 2 Cost Proportions Mabert et al. (2000); Olhager & Selldin (2003) Where money spentUSSweden Software30%24% Consulting24%30% Hardware18%19% Implementation team14%12% Training11%14% Other3%1%

Korea Telecom 2007Olson: ERP 2 Mabert et al. [2000] Survey of 400+ manufacturers Expected ROIReported < 5%14% 5% to 15%18% 16% to 25%36% 26% to 50%18% > 50%13%

Korea Telecom 2007Olson: ERP 2 Expected ROI Mabert et al. (2000); Olhager & Selldin (2003) Expected ROIUSSweden < 5%14%17% 5% to 15%18%38% 16% to 25%36%30% 26% to 50%18%11% > 50%13%4%

Korea Telecom 2007Olson: ERP 2 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

Korea Telecom 2007Olson: ERP 2 Taiwan ERP C.-T. Yeh, M. Miozzo, T. Vurdubakis, Journal of Enterprise Information Management 19:1, 2006, International vendors (like SAP) –BPR based on Western practice –The rest of the world not necessarily the same –Has created many misfits Especially in small-to-medium sized enterprises –Business opportunity for small domestic vendors

Korea Telecom 2007Olson: ERP 2 Taiwan’s industrial success Flexible, decentralized network of SMEs –Focus on export trade in consumer goods –Agility & adaptability important Vendor ERPs don’t support that –BPR forces clients of ERP to “do it their way” They (SAP) think they know better –Problems First, middle, last name doesn’t fit Indian, Chinese Egypt – pricing determined after receipt of goods – Oracle didn’t do it that way

Korea Telecom 2007Olson: ERP 2 ERP Revolution SAP claims organization can create its own solution –By selection of modules In reality, organizations required to re-engineer their business processes to conform to ERP –Standish Group – 90% of ERP implementations have cost, schedule overruns –Many failures – FoxMeyer, Hershey’s

Korea Telecom 2007Olson: ERP 2 Vendor Response to Market 1990s market (large organizations) saturated Vendors built –products for new end-users Non-profit SMEs –New types of ERP Web-enables CRM, SCM products –New markets China, India –Less system rigidity Faster implementation Industry-focused systems

Korea Telecom 2007Olson: ERP 2 Vendor efforts Make systems less rigid End-user organizations often modify –Between standardization & customization Complications –Implementation –Upgrades

Korea Telecom 2007Olson: ERP 2 Taiwan ERP market Case studies – 14 organizations in Taiwan SAP – 38% Oracle – 16% Domestic get rest Prices –$600,000 to $1,400,000 –Much lower than US

Korea Telecom 2007Olson: ERP 2 Implementation Options DIRECT –Vendor implements system for customers –Domestic vendors INDIRECT –Vendor trains consultants who implement ERP –International vendors In Taiwan, Direct option usually used –Few reliable consultants available –Consultants prefer large vendors (more experience with) –Competitive domestic market Lower prices

Korea Telecom 2007Olson: ERP 2 Taiwan ERP trends More Wide Enterprise Systems From hi-tech to traditional manufacturing From Large to SME From growth stage to maturity From internal information integration to external information communication

Korea Telecom 2007Olson: ERP 2 China ERP Market Growing rapidly –Government support –Accession to WTO –Need for competitiveness International vendors play the major role Domestic vendors have software more akin to accounting packages Taiwan ERP vendor collaboration –R&D, distribution, joint ventures, investment

Korea Telecom 2007Olson: ERP 2 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