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

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)

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

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

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)

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

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

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

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

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

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

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

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)

Human Resources Finance & Accounting Central Database Sales & Distribution Inventory & Manufacturing CustomersSuppliers Bolt-on Architecture Industry Solution Ecommerce Systems Ecommerce Systems

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

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

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

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)

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

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

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

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

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

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.

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

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 Think about the IT support requirements

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

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

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

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

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?)

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?

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

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

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

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

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

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

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

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)

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

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?

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

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

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?

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……..

Enterprise-Wide Systems (True or False and Why?) 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…