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
Korea Telecom 2007

Olson: 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 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
Korea Telecom 2007

Olson: ERP 2

ERP Supported Functions

Financial

Hum Res

Ops & Log Sales & M

Accts receivable

Time accounting Inventory

Orders

Asset account

Payroll

MRP

Pricing

Cash forecast

Personnel plan

Plant Mtce

Sales Mgt

Cost accounting

Travel expense

Prod planning

Sales plan

Exec Info Sys

Project Mgmt

Financial consol

Purchasing

General ledger

Quality Mgmt

Profit analysis

Shipping

Standard costing

Vendor eval

Korea Telecom 2007

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

Advantages

Disadvantages

In-house

Fit organization

Most difficult, expensive,

slowest

In-House +
vendor supp.

Blend proven features with

organizational fit

Difficult to develop
Expensive & slow

Best-of-breed

Theoretically ideal

Hard to link, slow, potentially

inefficient

Customize
vendor system

Proven features modified to Slower, usually more expensive

fit organization
than pure vendor

Select vendor
modules

Less risk, fast, inexpensive

If expand, inefficient and higher

total cost

Full vendor
system

Fast, inexpensive, efficient

Inflexible

ASP

Least risk & cost, fastest

At mercy of ASP

Korea Telecom 2007

Olson: 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 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

Korea Telecom 2007

Olson: ERP 2

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

Use in US

Use in Sweden

53%

30%

Payback

35%

67%

Expected NPV

15%

12%

Other

11%

20%

Korea Telecom 2007

Olson: ERP 2

Expected Installation Time

Mabert et al. (2000); Olhager & Selldin (2003)
Time to Install ERP

US

Sweden

12 months

34%

38%

13 to 24 months

45%

49%

25 to 36 months

11%

8%

37 to 48 months

6%

4%

> 48 months

2%

1%

Korea Telecom 2007

Olson: ERP 2

Estimated Installation Cost

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

US

Sweden

< $5 million

42%

40%

$5 million to $25 million

33%

35%

$26 million to $50 million

10%

18%

$51 million to $100 million

7%

7%

> $100 million

7%

In prior

Korea Telecom 2007

Olson: ERP 2

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

US

Sweden

Software

30%

24%

Consulting

24%

30%

Hardware

18%

19%

Implementation team

14%

12%

Training

11%

14%

Other

3%

1%

Korea Telecom 2007

Olson: ERP 2

Mabert et al. [2000]

Survey of 400+ manufacturers
Expected ROI

Reported

< 5%

14%

5% to 15%

18%

16% to 25%

36%

26% to 50%

18%

> 50%

13%

Korea Telecom 2007

Olson: ERP 2

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

US

Sweden

< 5%

14%

17%

5% to 15%

18%

38%

16% to 25%

36%

30%

26% to 50%

18%

11%

> 50%

13%

4%

Korea Telecom 2007

Olson: 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 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

Korea Telecom 2007

Olson: 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 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