Capstone: Enterprise Applications 57C99904, fall 2015 (6 cr)

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1 Capstone: Enterprise Applications 57C99904, fall 2015 (6 cr) Introduction to Enterprise Resource Planning (ERP) Systems

2 Learning Objectives Understand the key terms related to Enterprise Resource Planning (ERP) systems Learn the history and evolution of ERP systems Understand the basic structure of ERP systems Understand how ERP systems can improve the effectiveness of business functions and information systems in organizations Recognize the potential benefits and challenges of ERP systems 2

3 Outline What is ERP? Benefits Challenges Summary 3

4 Terminology Enterprise Resource Planning (ERP) (toiminnanohjausjärjestelmä) is the oldest and a general term, newer terms Enterprise (Information) Systems (ES, EIS) and Enterprise Applications (EA). ERP systems are the specific kind of enterprise systems to integrate data across and be comprehensive in supporting all the major functions of the organization. (Motiwalla & Thompson, 2012, p. 28) - value chain ERP is the core system of an ES software. An ES is a modular software package for integrating data, processes, and information technology, in real-time, across internal and external value chains. (Shang&Sheddon, 2002) supply chain 4

5 Evolution of ERP Systems 1960s: Inventory management and control systems Efficiency of raw materials inventory; mainframe automatic data processing 1970s: MRP (Material Requirements Planning) systems Time-based order processing; schedules for production planning, operations control, and inventory management; more automation 1980s: MRPII (Manufacturing Requirements Planning) systems Production supply chain processes from product planning to distribution, including accounting; relational database, mini computers 1990s: ERP systems Integration of business processes across the internal value chain (internal application integration, both front- and back-office); client-server architecture 2000s: Extended ERP/ERPII systems (ERP, ES, EIS, EA) Inter-organizational integration across the whole value chain (customers & suppliers), new modules; e-business, Web platform, cloud SaaS, thin client-server 2010s: ERPIII (Entire Resource Planning)/Post-Modern ERP Increased integrated functionality; In-memory technology, mobility, BI and analytics, RFID, internet of things, open source ERP systems; better IT tools (HW&SW) (Motiwalla&Thompson, 2012, Xu, 2011) 5

6 The Integrated Systems Approach Centralization A common set of applications (modules) to support end-to-end business processes A single database, only one version of truth for all business processes and functions Standardization Best practice processes re-engineering of existing processes to keep the alignment with ERP Limited customization through configuration (and extensions, addons, aka. bolt-ons) Interfaces and technology for integrating other information systems and ERP 6

7 From Functions to Integrated Processes (Skok & Legge, 2002) 7

8 From Point-to-Point to Mediated Integration Enterprise Application Integration (EAI) ERP, middleware fits existing applications with new ones and devises ways to efficiently reuse what already exists while adding new applications and data Point-to-Point Integration Mediated Integration IS IS IS IS IS IS IS EAI IS IS IS IS IS (Lee, Siau, and Hong, 2003) 8

9 Three-Tier Client-Server Architecture Presentation logic tier (user/client tier) User interface Client application or Web browser on PC, mobile devices etc. (fat vs. thin client) Proxy server(s) (välityspalvelin) Business logic tier (application tier) Applications on application server(s) Data tier Databases, e.g. ERP database, DW on database server(s) Provides scalability, flexibility, reliability (Motiwalla&Thompson, 2012) 9

10 Before and After ERP: Systems Standpoint Prentice Hall, 2005: Enterprise Resource Planning, 1 st Edition by Mary Sumner 10

11 ERP Market Tiers Tier 1: Largest systems for largest companies Tier 2: Systems for midsize companies Tier 3: Systems for small companies (Tier 4: Accounting systems for micro companies) -> One size does not fit all! Leading global ERP vendors: SAP, Oracle, Microsoft General ERP and industry-specific (vertical) solutions More vendors and systems in e.g. es%20for%20europe%20west%20and%20north%20including%20the%20united%20k ingdom (Motiwalla&Thompson, 2012) 11

12 ERP Modules Different vendors offer very similar functionality, divided into modules a bit differently Modularity realized at multiple levels Key modules - Core ERP modules provide the basic functionality for e.g. sales, materials management, accounting, and production Specialized modules for additional functionality or specific needs, e.g. - Customer Relationship Management (CRM) - Financial Management (Note: Financials = taloushallinto, Financial Accounting = ulkoinen laskentatoimi, Managerial Accounting = sisäinen/johdon laskentatoimi) - Human Capital Management (HCM) - Product Lifecycle Management (PLM) - Supplier Relationship Management (SRM) - Supply Chain Management (SCM) - Business Intelligence (BI) (Vendor web sites, 2012, Sumner 2005, Motiwalla&Thompson, 2012) 12

13 Example: Core ERP Modules and Functions Master data=perustiedot Transaction data=tapahtumatiedot Modified from Shebab & al. (2004) 13

14 SAP and NAV Core Modules SAP ECC Tier 1 MS Dynamics NAV Tier 2 Copyright SAP, Microsoft 14

15 SAP ECC modules and submodules Tier 1 Copyright SAP AG 15

16 Microsoft Dynamics NAV Modules and Submodules Tier 2 Copyright Microsoft 16

17 Outline Learning Objectives What is ERP? Benefits Challenges Summary 17

18 Reasons for ERP Adoption Technology Standardization of IT-infrastructure, aged legacy systems, new technologies, scalability, outsourcing, IT costs Competition Rapid market demand changes, shortened product lifecycles, diversified markets, increased global competition Strategy Growth, mergers, acquisitions, globalization, new business models Business Agility and flexibility, business process redesign, quick decisions based on accurate, correct, and real time data on the whole organization, integration within the value network, rules and regulations Huge benefits expected Performance, communications Immediate - post-implementation, tangible-intangible, direct-indirect, quantifiable-unquantifiable, internal-external 18

19 ERP Benefits Dimensions IT-Infrastructure Benefits Operational Benefits Managerial Benefits Organizational Benefits Strategic Benefits (Shang and Seddon, 2002) 19

20 ERP Benefits Dimensions: IT-Infrastructure Benefits Increased business flexibility Meeting current and future changes quickly Lower IT costs Business unit level (organizational level?) Increased IT-infrastructure capability Prompt and economic new implementations (Shang and Seddon, 2002) 20

21 ERP Benefits Dimensions: Operational Benefits Lower costs labor costs, inventory costs, administrative expenses Shorter cycle-times Customer support, e.g. order fulfillment, billing Employee support, e.g. reporting, month-end closing Supplier support, e.g. fast payments, quantity discounts Increased productivity Products produced/labor costs; Customers served/labor costs Better quality Improved accuracy and reliability rate Improved customer service Better access to customer data and improved response to customer inquiries (Shang and Seddon, 2002) 21

22 ERP Benefits Dimensions: Managerial Benefits Improved resource management Inventory and production optimization Workforce resource allocation & utilization of skills and experiences Improved decision making and planning Strategic market responsiveness, profit and cost control Operational flexibility and agility Responsiveness to customer demands, quick service adjustments Improved performance control Manufacturing Financial, by business lines, products, customers, geographies or their combinations (Shang and Seddon, 2002) 22

23 ERP Benefits Dimensions: Organizational Benefits Changed work patterns Integrated processes, standardized common way of working Facilitating organizational learning Employees from resources to core capabilities Empowerment of workers Employees organizational influence Creating a shared vision and culture Mutual understanding at different organizational levels and functions (Shang and Seddon, 2002) 23

24 ERP Benefits Dimensions: Strategic Benefits Support for business growth Transaction volume, processing capacity, organizational capability New products or services, new divisions or functions, new regions, new markets, e- business Increased number of employees, new policies and procedures Support for business alliance Mergers, acquisitions, partnerships Creating business innovations New market strategy; new business products, services, markets Establishing cost leadership Production at a lower cost Enabling competitive product differentiation Customization to different customer segments at a lower cost Establishing external connections Long-term relations with suppliers, customers, partners (Shang and Seddon, 2002) 24

25 Reported Business Benefits of ERP Prentice Hall, 2005: Enterprise Resource Planning, 1 st Edition by Mary Sumner 25

26 Outline What is ERP? Benefits Challenges Summary 26

27 Realization of Benefits When? How? Why? When? First benefits during the last phases of the implementation More benefits in the post-implementation phase after the drop down during the first year of use, increasing over time, and by implementing additional modules Differences between the benefit dimensions, and within each dimension, some benefits easier and quicker to gain than others How? Uncertain, difficult to measure, especially intangible, indirect, and external benefits Varying outcomes from ERP-implementations Why? Crucial decisions are made in the beginning, pre-implementation Depends on e.g. the context, the level of exploration (organization, (sub)unit, location), the benefit dimension, and the ERP lifecycle phase (Staehr, Shanks & Sheddon, 2012) 27

28 ERP Benefits Achievement Framework (Staehr, Shanks & Sheddon, 2012) 28

29 Design and Implementation Alternatives Vanilla Complete single vendor package, configuration only Total integration across all functional areas and data Best practice business processes (BPR) Huge change, may replace existing strategic IS Selected ERP modules Maintain strategic processes and IS Lacks total integration, limited use of ERP functionality Build in-house Meets all needs, competitors will not have a similar system Time, staff, cost, risky, may not provide competitive advantage Maintain parallel legacy systems Familiarity, meets needs, supports the way of working May be inefficient and a competitive disadvantage Hybrid solutions most common Implementation Big bang, mini big bang, small big bang, phased by module/site/country 29

30 Challenges Realization of the expected benefits On-time, on-budget implementation Complexity and high integration of functionality and data Long adoption time, uncertainty of the outcome Total cost of ownership (TCO) High implementation and use costs - Capital (licenses, hardware), staff, management time Hidden costs - Scope creep, training, customization, data conversion, developing interfaces between ERP and other systems - Continuous ERP evolution, waiting for Return of Investment (ROI) - Post-implementation depression on efficiency, user resistance, loosing customers or expert employees ERP system misfits (ERP vs. requirements) Data misfits, functional misfits, output misfits Promiseware BPR, master data management, data migration, customization Loosing competitive advantage through best practice processes and standardization (Shehab et al., 2004, Bradford, 2010) 30

31 Maintaining Competitive Advantage Implement ERP system better than competitors Project management, change management, organizational culture Migrate to new versions faster Adopt best practice processes (standard processes and functionality) where competitive advantage cannot be gained Use vanilla ERP for core systems (industry standard) Modify (customize) standard modules, invest in own modules or adopt niche applications for other needs and functions to complement core ERP Increase the quality, comprehensiveness, and availability of operational data Improve the use of stored data for analysis, enabling better decision making and strategic planning 31

32 Outline What is ERP? Benefits Challenges Summary 32

33 Information Systems within an Organization Role of ERP Rainer&al. (2013) Copyright 2013 John Wiley & Sons, Inc. 33

34 Enterprise System Reality Hybrid solutions In reality, an ERP implementation is usually just one part of a more complex environment, including bolt-ons, legacy applications retained, possible data warehouse(s), enterprise application integration (EAI) solutions and connections to external business partners. (Bradford, 2010) 34

35 Summary ERP key characteristics Centralized data and integrated best practice (standardized) processes Immediate and future, concrete and hidden benefits expected, e.g. Performance: ERP systems can improve the effectiveness of organizations through streamlining, automation, and integration of business processes and uniform, consistent data Communication: ERP systems allow data and information sharing across the organization and external stakeholders, thus increasing organizational agility Departmental: ERP systems can enable increased efficiency, faster design and production, and accuracy (quality) of data and processes Competitive: Implementing an ERP system can help the organization obtain and maintain competitive advantage ERP investment is a huge, complex, and risky endeavor for any organization, but it also provides huge possibilities for business ERP is a must in many industries and for big organizations What benefits will be achieved and when depends on the ability to align business understanding with ERP system s possibilities 35

36 References Bradford, M. (2015) Modern ERP Select, Implement & Use Today's Advantaged Business Systems, (3 rd ed.), Lulu Press, Inc. Bradford, M. (2010) Modern ERP Select, Implement & Use Today's Advantaged Business Systems, (2 nd ed.), Lulu Press, Inc. Lee, J., K. Siau, and S. Hong (2003) "Enterprise Integration with ERP and EAI", Communications of the ACM, 46 (2), pp Motiwalla, L., and J. Thompson (2012) Enterprise Systems for Management, (2 ed.), Prentice Hall. Rainer, R.K. B. Prince, and H.J. Watson (2013) Management Information Systems: Moving business forward, (2 ed.), John Wiley & Sons, Inc. Shang, S., and P.B. Seddon (2002) "Assessing and Managing the Benefits of Enterprise Systems: The Business Manager s Perspective", Information Systems Journal, 12 (4), pp Shehab, E.M., M.W. Sharp, L. Supramaniam, and T.A. Spedding (2004) "Enterprise resource planning: : An integrative review", Business Process Management Journal, 10 (4), pp Skok, W., and M. Legge (2002) "Evaluating Enterprise Resource Planning (ERP) Systems using an interpretive approach", Knowledge and Process Management, 9 (2), pp Staehr, L., G. Shanks, and P.B. Seddon (2012) "An Exploratory Framework for Achieving Business Benefits from ERP Systems", Journal of the Association for Information Systems, 13 (6), pp Sumner, M. (2005) Enterprise Resource Planning, (1 ed.), Prentice Hall. Xu, L.D. (2011) "Enterprise Systems: State-of-the-Art and Future Trends", IEEE Transactions on Industrial Informatics, 7 (4), pp

37 Questions? Comments! Thoughts. What did you learn? What was most important? Other thoughts, comments? Your feedback? Thank you! Course website: https://mycourses.aalto.fi/course/view.php?id=

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