Enterprise Resource Planning

Dr. David L. Olson

ERP Introduction,Business function,
process and data requirement

Pertemuan 1
 History of ERP
• Extension of materials resource planning
• Integrate a firm’s computing for reporting, planning,
& control – common architecture
– Multifunctional, Integrated, Modular
• In 1990 industry about $1 billion
– SAP, Baan, PeopleSoft, JDEdwards, Oracle, others
• Rapid growth in late 1990s
– Some relation to Y2K fears, but not the main reason
• Mergers in early 2000s
– Peoplesoft bought JDEdwards;
– Oracle bought Peoplesoft
 History of ERP
• SAP: All-comprehensive in theory, apply best-
practices
– Very intrusive, very expensive, require massive
changes in operations
– If changes a core business competency, don’t;
• While theory centralized, many implementations
modular
– PeopleSoft – human resources
– Finance & Accounting a common first module
 New Market Shares 2004
Van Arnum, www.chemicalmarketreporter.com 24 Jan
2005 22-23

ERP SCM CRM HCM P&S Tota

l
SAP 36% 11% 14% 21% 15% 18%

8% 5% 5% 19% 8% 6%
PeopleSoft
Oracle 12% 6% 3% 7% 8% 6%

Combined 20% 11% 8% 26% 16% 12%

Sage-Best 5% 0 1% 2% 0 2%

Microsoft 3% 1% 2% 2% 0 2%
BS
 Geographic Sales 2004
Van Arnum, www.chemicalmarketreporter.com 24 Jan
2005 22-23
NAmer Europe Asia/P Total
SAP $3.008 $4.211b $0.945 $8.594
b b b
PeopleS $2.160 $0.518b $0.115b $2.880
b b
Oracle $1.544 $0.612b $0.346 $2.663
b b b
Sage $0.472 $0.491b - $0.963
b b
Microsof $0.688 $0.076 $0.024 $0.804
t b b b b
 ERP Project Failure

FoxMeyer Drug Bankrupt

Hershey’s 19% drop in profit

29% increase in inventory
City of Oakland Erroneous paychecks

Miller Industries Inefficient ERP – operating

loss
WW Grainger Earnings dropped $11
Inc million
 Comparative Modules
SAP Oracle PeopleSoft JDEdwards
SD Marketing, Sales Supply chain Order management
MM Procurement Supplier relationship Inventory, procurement

PP Manufacturing Manufacturing mgmt

QM Enterprise perform Technical foundation
PM Service Enterprise service
HR Human Resources Human capital mgmt Workforce management

FI Financials Financial mgmt sol. Financial management

CO Time & Expense mgmt
AM Asset Management Enterprise asset mgmt

PS Projects Project management

WF Order Management
Contracts Subcontract, real estate
 Relative ERP Module Use
(Mabert et al. 2000; Olhager &
Selldin, 2003)
Module Use reported - US Use reported –
Sweden
Financial & Accounting 91.5% 87.3%
Materials 89.2% 91.8%
Management
Production Planning 88.5% 90.5%
Order Entry 87.7% 92.4%
Purchasing 86.9% 93.0%
Financial Control 81.5% 82.3%
Distribution/Logistics 75.4% 84.8%
Asset Management 57.7% 63.3%
Quality Management 44.6% 47.5%
Personnel/HR 44.6% 57.6%
Maintenance 40.8% 44.3%
BAAN Industry-Specific
Variants
Discrete Process
Manufacturing Manufacturing
Aerospace & Defense Chemicals
Automobile Food & Beverage
Industrial Machinery Pharmaceuticals
Electronics Cable & Wire
Telecommunications Pulp & Paper
Construction Metals
Logistics
 Microsoft Great Plains
Business Solutions
Accounting & Finance
Customer Relationship Management
E-Business
Human Resources & Payroll
Manufacturing
Project Accounting
Supply Chain Management
 Reasons for
Implementing ERP
measured on 1-5 scale (5 best)

Most important Avg Smal Large Sig.

l
Replace legacy systems 4.06 87% 90%

Simplify & standardize 3.85 72% 95% ***

Improve interactions- 3.55 71% 76%

suppliers & customers
Gain strategic advantage 3.46 70% 92% **
 Reasons for
Implementing ERP
measured on 1-5 scale (5 best)
Less important Avg Small Large Sig.

Link to global activities 3.17 36% 74% ***

Solve Y2K problems 3.08 62% 42% **

Keep up with competitors 2.99 42% 60%

Ease of upgrading systems 2.91 35% 54% ***

Restructure company 2.58 33% 35%

organization
 Implementation Time
Required
• 6 months or less 9%
• 7 to 12 months 25%
• 13 to 18 months 24%
• 19 to 24 months 21%
• 25 to 36 months 11%
• 37 to 48 months 6%
• Over 48 months 2%
Rate of technology change makes 18 month IT
projects dubious
although ERP a major system, longer times appropriate
 Estimated System Life
– 20th Century
Less than 3 years 3.1%
3-5 years 12.2%
5-7 years 30.6%
7-10 years 26.5%
over 10 years 27.6%
• Now less:
– Due to technology change
– Designed obsolescence
 Expected ROI
Mabert et al. (2000); Olhager & Selldin
(2003)
Expected US Sweden
ROI
< 5% 14% 17%
5% to 15% 18% 38%
16% to 25% 36% 30%
26% to 50% 18% 11%
> 50% 13% 4%
 SAP: Best Practices
• A key to original product
– The most efficient way to perform a task
• SAP devotes considerable research to best
practices
– 800 to 1000 best practices reported in their R/3 system
• 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”
 Non-ERP Process
1. Salesperson enters customer order
2. Salesperson notifies CRM of order
3. CRM employee records order
4. Salesperson notifies accounting
5. Accounting employee records sale
6. Salesperson notifies warehouse
7. Warehouse employee records order
8. Warehouse employee notifies packing & shipping
9. Shipping employee records order
10. Shipping employee notifies procurement
11. Procurement employee records order for raw materials replacement
12. Procurement employee notifies production to make more
13. Production employee records order
 ERP System Process
1. Sales person enters customer order on sales order system (SOS)
2. SOS:
1. Notifies CRM
2. Notifies Accounting
3. Records sale in Accounting System
4. Notifies Warehouse
5. Records order on Warehouse Management System (WMS)
3. WMS
1. Notifies packing & shipping
2. Records order on Packing and Shipping System (PSS)
4. PSS
1. Notifies procurement
2. Records order for raw materials with Procurement Management System (PMS)
5. PMS
1. Notifies production to do work
2. Enters manufacturing order on Production Planning System (PSS)
 Strategic Approach
Mabert et al. [2000]

• Single ERP package 40%

• Several ERP packages best-of-breed 4%
• Single ERP package supplemented 50%
• Multiple ERP packages supplemented 5%
• Totally in-house 0.5%
• In-house supplemented 1%
Over 50 vendors (130 providers on market at that
time)
SAP & PeopleSoft 25%
 Implementation
Strategies Used
month small large
s
Big bang 41.4% 14.9 47% 14%
Mini big bang 16.6% 16.8 24% 9%
Phased by module 17.3% 22.1 20% 20%
Phased by site 22.7% 30.0 8% 48%
Phased by module 2.3% 24.8
& site
 System Cost
 6% annual revenue (less
for larger; up to 50% for
smaller)
<$5 million 42.3% <$50 mill revenue
$5 to $25 mill 33.0% $251 to $750 mill
revenue
$26 to $50 10.4% Widespread
mill
$51 to $100 7.2% $1.5 bill to $5 bill
mill revenue

>$100 million 7.1% Over $5 billion revenue

 Cost Component
% of total implementation
Survey Intervie Range Smal Larg
ws l e
Software 30.2% 15% 10% to 35% 23%
20%
Consulting 24.1% 30% 20% to 24% 25%
60%
Hardware 17.8% 25% 0% to 50% 21% 14%
Impl. 13.6% 15% 5% to 20% 11% 23%
Team
Training 10.9% 15% 10% to 10% 12%
20%
 Cost Impact
• Also affects operations
– Intent was to lower operations cost
– Initially, often the reverse
• Often use data warehouse system
– Very efficient data storage
– Very expensive
 ERP Maintenance
Nah et al. (2001)
• Corrective
– Incorporate vendor patches, fix problems
• Adaptive
– Implement new features, internal customization,
implement interfaces
• Perfective
– New versions
• Preventive
– Monitor response time, errors, track maintenance
activities
 ERP System Migration
• Over time, need to adopt changes
– Minor modifications
– Maybe system replacement
– Vendors change products
• WHY
– The longer the time between upgrades, the harder
– Easier to support a smaller number of software
versions
– Migrations can increase sales of seats, add-ons
 BOLT-ON Software
• Demand planning
• Inventory management
• E-Procurement
• BtoB
• Integrated suite systems (I2)
• Order tracking
• Factory planning & scheduling
• On-line collaboration
• Warehouse management
• Data mining
 Example Bolt-Ons
Mabert et al. [2000]
Bolt-On Example Vendor
Demand planning Demand Planner BAAN
E-procurement Ariba Network Ariba, Inc.
Business to business MANAGE:Mfg Cincom

Integrated suites Manugistics 6 Manugistics

Order tracking Intelliprise American Software
Factory Capacity Planning JDEdwards
plan/schedule
On-line Aspen OnLine Aspen Technology
collaboration
Warehouse mgmt CSW Warehouse Cambar
Management
System
Data mining Enterprise Miner SAS Institute
 Middleware
• ERP interfaces to external applications
difficult to program
• Middleware is an enabling engine to allow
such external applications eto ERP
– Data oriented products - shared data
sources
– Messaging-oriented - direct data sharing
 Example of Middleware
D. Thomas, Computer Weekly 5/18/2004 p. 1

• British American Tobacco PLC

– Wanted to reduce the cost of moving data around
Enterprise Application Integration software
– Hoped to save 75% of integration projects through
MIDDLEWARE Cast Iron Systems Inc.’s Application
Router
– Transfer data between
• point-of-sale,
• Oracle databases,
• Siebel CRM,
• SAP ERP
 Data Storage Systems
• Data Warehousing
– Orderly & accessible repository of known facts &
related data
– Subject-oriented, integrated, time-variant, non-volatile
– Massive data storage
– Efficient data retrieval
• CRM one data mining application
– Can use all of this data
– Common ERP add-on
 Database Product
Comparison
Product Use Duration Granularit
y
Data Repositor Permanen Finest
warehous y t
e
Data Specific Temporar Aggregate
mart study y
OLAP Report & Repetitiv Summary
Analysis e
 Supply Chains
• Collections of organizations working
together
– Raw materials – products – retail
– Old manufacturing: vertical integration
– Military logistics
– Now appropriate for e-business
 Supply Chain
• Raw Materials Suppliers

• Processing Plants

• Assembly Plants

• Service Centers (warehouses)

• Retail outlets
 ERP Tools in Supply Chains
Kelle & Akbulut, Int. J. Prod. Econ. 93-94
(2005) 41-52

• Supply chain integration valuable

– Buyers improve production plans & delivery
schedules
– Suppliers use buyer inventory info to plan their
production & inventory control
• Improve customer service quality
• Speed payment cycle
• Cost savings
• Identify & overcome bottlenecks
 ERP Tools
Kelle & Akbulut, Int. J. Prod. Econ. 93-94
(2005) 41-52

• Real-time transaction tracking

• Internal process integration
• Decision Support Tools (through Add-ons)
– Advanced Planning & Scheduling (APS)
– Demand Planning & Revenue Management (DPRM)
– Customer Relationship Management (CRM)
– Sales Force Automation (SFA)
– Supply Chain Management (SCM)
 Supply Chain Coordination
Effects
• Value
– Logistic efficiencies
– Coordinated advertising
– Large scale service
• Joint optimal policy will always save total system
cost
– 1-30% for supplier
– 25-60% for buyer
– NEED TO NEGOTIATE
 Obstacles to Supply Chain
Tool Use
• Real-time transaction tracking
– Unwillingness to share information
• Need to show monetary benefits & savings
– Too much data, too many details
• Data analysis (data mining)
• Activity based costing to focus on value-added
• Internal process integration
– Doesn’t support operational decisions
• Cooperative models, share benefits
 Advanced Planning
Systems
• Computer technology makes supply chain capable
of dealing with demand uncertainty
– Forecasting
– Inventory reduction
– Optimized transportation costs
• Advanced planning systems use operational data
to analyze material flows in supply chain
– Use historical demand for forecasts
– Easy to collect data
– Dynamic nature makes long-range forecasting difficult
 Advanced Planning
System Providers
i2
Manugistics
Numetrix
CAPS logistics
BAAN SCM components
J.D. Edwards SCM components
Oracle 11i
PeopleSoft Enterprise Performance
Management
SAP SAP APO
 Open System Linkage
B. Bacheldor, Informationweek.com, 19 Jan
2004, p. 30

• Radio-frequency identification (RFID)

technology
– Allows remote data input
– Requires middleware to translate RFID data
into formats usable by applications
• Oracle: RFID-ready version for supply-chain
applications soon
• SAP: Auto-ID Infrastructure links RFID data to
other systems
 RFID
R. Boucher Ferguson, eweek, 17 Jan 2005, p.
32
• Wal-Mart
– Top 100 suppliers expected to be RFID-enabled
by mid-January 2005
– Electronic bar codes
– Allows collaborators to access data quicker
• Bayer Corp.
– Acsis software integrates RFID into their SAP
– Compare Wal-Mart data with their own
• The Gillette Co.
– OATSystems Inc. software links real warehouses to data
warehouses
 Portals of Major ERP
Vendors
Stein & Davis [1999]; Stein [1999]
Vendor Portal Function

BAAN iBAAN Application integration

J.D. ActivEra Portal Interface to ERP, e-mail,

Edwards spreadsheets, Internet
Oracle 11i Connect to business
intelligence
PeopleSoft PeopleSoft Tie applications to online
Business Network communities
SAP mySAP-Employee Travel reservation, online
workplace procurement
SAP mySAP.com Center for SAP users

Lawson Insight II Files, data warehouse, e-mail,

 ERP Security Threats
Type of Security Threat
Physical Theft, damage, copying
Unauthorized access
Natural disasters or
accident
Social Tricks to gain
information
Network Telephone taps
Dial-up entry
Internet hacking
Viruses
 CPU Support
• Originally mainframe
– SAP R/2 – 1974
• Client/Server architecture early 1990s
– More flexible
– SAP R/3
• SAP announced discontinuing R/3
– Outcry by customers – delayed to 2011
 Expected Benefits from
ERP
Mabert et al. (2000); Olhager & Selldin
(2003)
1-not at all; 5-to a great extent
ERP Performance US Sweden
Quicker information response time 3.51 3.81
Increased interaction across 3.49 3.55
enterprise
Improved order management 3.25 3.37
Decreased financial close cycle 3.17 3.36
Improved customer interaction 2.92 2.87
Improved on-time delivery 2.83 2.82
Improved supplier interaction 2.81 2.78
Lowered inventories 2.70 2.60
Improved cash management 2.64 2.57
Reduced operating costs 2.32 2.74
 Benefits from ERP
Mabert et al. (2000); Olhager & Selldin
(2003)
1-not at all; 5-to a great extent

Area Benefitting US Sweden

Information availability 3.77 3.74
Integration of 3.61 3.42
operations/processes
Information quality 3.37 3.31
Inventory management 3.18 2.99
Financial management 3.11 2.98
Supplier management/procurement 2.99 2.94
Customer 2.67 2.95
responsiveness/flexibility
Decreased IT cost 2.06 2.05
 Lessons Learned
• ERP implementation projects problematic
• Variety of ways to implement
• Benefit assessment problematic
• Different ways to design ERP
– Customization of vendors popular
• Many enhancements available
• Supply chain opportunities
– Requires open systems
 ERP Success Factors
Business Horizons 2000
1. Senior management involvement
2. Cross-functional implementation team
3. Extra effort up-front defining detailed plan
4. Clear guidelines on performance measures
5. Clear guidelines on using outside consultants
6. Detailed plans to train users
 Apparent Future
Extensions to ERP Implementin Planned Considerin No
g g plans
Data Warehouse 32.8% 16.6% 20.1% 30.6%

E-Business 19.9% 31.7% 30.2% 19.9%

Supply chain 19.7% 24.5% 22.7% 32.2%

system
Adv plan & 19.1% 19.1% 30.9% 19.1%
schedule
CRM 8.8% 12.3% 17.2% 61.8%

Business 6.1% 15.4% 23.4% 55.1%

intelligence
 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
 Summary
• ERP software has had a major impact on
organizational computing
• Technological, financial, organizational
benefits
• Also expensive, massive, inflexible
• Many hidden costs
• Complex system meriting study