Hour 1: ERP Systems Overview Introduction to ERP System Options

ERP Claims Create value through integrating activities across organization Implementation of best practices Standardization of processes One-source data On-line access to information

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

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

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

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%

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

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

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”

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

CPU Support Originally mainframe –SAP R/2 – 1974 Client/Server architecture early 1990s –More flexible –SAP R/3 Something new?

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

ERP System Options & Selection Methods Alternative ERP project forms Budgeting methods

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 (+)

Alternative ERP Options MethodAdvantagesDisadvantages 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

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

IT Selection Practice Hinton & Kaye [1996]: –IT tends to be viewed as capital budgeting –Implication is that clear financial return is expected Sound thinking, but benefits often intangible (yet real) Some strategic investments require bold judgment Conversely, companies have gone broke buying IT

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

Bacon [1992] survey of IT project selection methods Financial Criteria –NPV, IRR, payback –profitability index –budgetary constraint Management Criteria –Requirements, respond to competition, etc. Development Criteria –Technical/ learning new technology, probability

Bacon findings More formal methods often not used –Why waste effort if know you will do it? –Many numbers used inaccurate anyway –More formal methods reserved for larger project (like ERP) Management criteria focus on intangible Technical a matter of maintaining state-of- the-art systems

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%

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%

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

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%

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%

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%

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

Points A variety of evaluation techniques available Pure monetary analysis hard, expensive, inaccurate –Payback a commonly used shortcut Other methods exist –Value analysis –Multicriteria analysis

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