ERP Systems Overview

Introduction to ERP System Options

Korea Telecom 2007

Olson: 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 2007 Olson: 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 2007 Olson: 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 2007 Olson: ERP 2

Benefits of ERP
Davenport [1998]:
Increases speed of information flows

OLeary [2000]:
Create value through integration of activities Best practices improve operations Standardization increases efficiency One-source data more accurate, easier to access
Olson: ERP 2

Korea Telecom 2007

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 2007 Olson: 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 2007 Olson: 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 2007

Olson: ERP 2

SAP: Best Practices

A key to original product Davenport [1998]:
Firms 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
Olson: ERP 2

Korea Telecom 2007

ERP Supported Functions

Financial
Asset account

Hum Res
Payroll

Ops & Log Sales & M

Orders Pricing MRP

Accts receivable Time accounting Inventory

Cash forecast
Cost accounting Exec Info Sys Financial consol

Personnel plan
Travel expense

Plant Mtce
Prod planning Project Mgmt Purchasing

Sales Mgt
Sales plan

General ledger
Profit analysis Standard costing
Korea Telecom 2007

Quality Mgmt
Shipping Vendor eval
Olson: 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 2007 Olson: 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 2007 Olson: ERP 2

ERP System Options & Selection Methods

Alternative ERP project forms Budgeting methods

Korea Telecom 2007

Olson: 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 vendors way) Cost range $5 million to over $100 million (+)
Korea Telecom 2007 Olson: ERP 2

Alternative ERP Options

Form In-house In-House + vendor supp. Best-of-breed Customize vendor system Select vendor modules Full vendor system ASP
Korea Telecom 2007

Advantages Fit organization Blend proven features with organizational fit Theoretically ideal

Disadvantages Most difficult, expensive, slowest Difficult to develop Expensive & slow Hard to link, slow, potentially inefficient

Proven features modified to Slower, usually more expensive fit organization than pure vendor Less risk, fast, inexpensive Fast, inexpensive, efficient Least risk & cost, fastest
Olson: ERP 2

If expand, inefficient and higher total cost Inflexible At 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
Korea Telecom 2007 Olson: 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
Olson: ERP 2

Korea Telecom 2007

Survey of Manufacturers
Mabert et al. (2000); Olhager & Selldin (2003)

FORMAL METHOD ROI

Payback Expected NPV Other
Korea Telecom 2007

Use in US
53% 35% 15% 11%
Olson: ERP 2

Use in Sweden
30% 67% 12% 20%

Expected Installation Time

Mabert et al. (2000); Olhager & Selldin (2003)

Time to Install ERP

12 months

US
34%

Sweden
38%

13 to 24 months
25 to 36 months

45%
11%

49%
8%

37 to 48 months
> 48 months
Korea Telecom 2007 Olson: ERP 2

6%
2%

4%
1%

Estimated Installation Cost

Mabert et al. (2000); Olhager & Selldin (2003)

Installation Cost
< $5 million

US
42%

Sweden
40%

$5 million to $25 million

$26 million to $50 million

33%
10%

35%
18%

$51 million to $100 million

> $100 million
Korea Telecom 2007 Olson: ERP 2

7%
7%

7%
In prior

Cost Proportions
Mabert et al. (2000); Olhager & Selldin (2003)

Where money spent

Software Consulting Hardware Implementation team Training Other
Korea Telecom 2007 Olson: ERP 2

US
30% 24% 18% 14% 11% 3%

Sweden
24% 30% 19% 12% 14% 1%

Mabert et al. [2000]

Survey of 400+ manufacturers
Expected ROI
< 5%

Reported
14%

5% to 15%
16% to 25%

18%
36%

26% to 50%
> 50%
Korea Telecom 2007 Olson: ERP 2

18%
13%

Expected ROI
Mabert et al. (2000); Olhager & Selldin (2003)

Expected ROI
< 5%

US
14%

Sweden
17%

5% to 15%
16% to 25%

18%
36%

38%
30%

26% to 50%
> 50%
Korea Telecom 2007

18%
13%
Olson: ERP 2

11%
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

Korea Telecom 2007 Olson: ERP 2

Taiwan ERP
C.-T. Yeh, M. Miozzo, T. Vurdubakis, Journal of Enterprise Information Management 19:1, 2006, 30-49

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 2007

Olson: ERP 2

Taiwans industrial success

Flexible, decentralized network of SMEs
Focus on export trade in consumer goods Agility & adaptability important

Vendor ERPs dont support that

BPR forces clients of ERP to do it their way
They (SAP) think they know better

Problems
First, middle, last name doesnt fit Indian, Chinese Egypt pricing determined after receipt of goods Oracle didnt do it that way
Korea Telecom 2007 Olson: 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, Hersheys

Korea Telecom 2007

Olson: 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 2007 Olson: ERP 2

Vendor efforts
Make systems less rigid End-user organizations often modify
Between standardization & customization

Complications
Implementation Upgrades

Korea Telecom 2007

Olson: 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 2007 Olson: 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 2007 Olson: 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
Olson: ERP 2

Korea Telecom 2007

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 2007 Olson: 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
Korea Telecom 2007 Olson: ERP 2