Enterprise Resource Planning Software - A Case-Based Study. Peter Murray

Transcription

1 Enterprise Resource Planning Software - A Case-Based Study Peter Murray 1

2 Abstract The purpose of this report is to provide a comprehensive examination of Enterprise Resource Planning (ERP) software and to explain the evolution of ERP software referencing specific companies that have installed or implemented the technology. The report is a meta-analysis and contains primary research. The report is further limited by time constraints and the author s inability to obtain copies of Enterprise Resource Planning software or have access to and Enterprise Resource Planning system. However with these limitations the reports still contains valuable information on Enterprise Resource Planning software. The report will first discuss Pre-Enterprise Resource Planning software and the early origins of Enterprise Resource Planning software. Secondly the report will seek to define Enterprise Resource Planning and take a close look at model of the Closed-Loop Manufacturing Process. Explaining the three levels involved and the subsystems under each level. Thirdly the report will discuss some of the shortcomings of Enterprise Resource Planning. Finally the report will present detailed steps into how to implement a successful Enterprise Resource Planning system. Pre-Enterprise Resource Planning Software Basically before Enterprise Resource Planning Software (ERP) the only type of processing was batch processing. In this type of processing the data is accumulated or stored until it is ready to be periodically processed. Some of the steps of batch processing include: Gathering source documents originated by business transactions, such as sales orders and invoices, into groups called batches. Recording transaction data on some type of input medium, such as magnetic disks or magnetic tape. Sorting the transaction in a transaction file in the same sequence as the records in a sequential master file. Processing transaction data and creating an updated master file and a variety of documents (such as customer invoices and paychecks) and reports. Capturing and sorting batches of transaction data at remote sites, and then transmitting them periodically to a central computer for processing. This is known as remote job entry (RJE). (O Brien, 1999) The idea around batch processing is that the data could be grouped then periodically processed. This made a lot of since in the earlier years of computer technology when mainframe computers were extensively used. However there were some real disadvantages with this type of processing. The master files were frequently out of date between scheduled processing, as were the periodic scheduled reports that were produced causing employees to wait for the batches to finish running. Then the employees had to so manually update the financial data. This process was very inefficient since the information was not available on an immediate basis. These inefficiencies lead to the earliest development of ERP software, real-time processing. Real-Time Processing One of the earliest inventors of real-time processing was Systems, Applications, and Products in Data Processing (SAP). SAP was a young German software firm at the time they first developed the RF Financial Accounting software for its first client ICI Synthetic Fiber Works. The RF Financial Accounting software was a real-time processing application that first ran on IBM 360 mainframe computers. The RF Financial Accounting software was the very first application that SAP developed, it was designed to be a technically superior alternative to batch processing. Instead of having to wait for sequential processes of inputting data, storing it, and processing it, the real-time software made it possible to communicate directly with the computer. Thus the for example, financial accounting data could be checked for plausibility at the time of entry and the data was available immediately to the users. (Meissner, 1997) Some of the main benefits of real-time processing are: Transaction data is processed and verified as it is generated. Databases are updated as the transactions are being processed. Data is available only a few seconds after each transaction is captured. 2

3 These new benefits in real-time processing lead to sweeping changes in the business industry. SAP was one of the original inventors of real-time processing with their RF Financial Accounting software. Many other software developers as well saw the potential in these advancements and developed their own products to compete with SAP. These competitions lead to other processing enhancements in better business processes, which is the whole idea behind ERP software. The software pioneers at SAP believed that important data should be collected only once, at the source, and they sought to improve on this business processes by automating the process of data collection within their first software package, RF Financial Accounting. (Meissner, 1997) In the next section we will take a closer look at the business advancements and the business process pertaining to ERP software. ERP Software Enterprise Resource Planning is a software solution that addresses the enterprise needs. ERP taking the process view of an organization and meeting the organizational goals, while tightly integrating all functions in an enterprise. ( 2001) ERP software allows companies to achieve a seamless, accurate flow of data among functions. ERP software facilitates company wide integration of Information Systems covering all the functional areas within the company. ERP software performs the core corporate activities such as purchasing, supplier and inventory management, engineering and production usually on client/server networks and consists of different software modules that all link together. ERP software seeks to increases customer service while augmenting the corporate image. These systems are particularly useful to manufacturers with geographically dispersed operations because they tie operations together with a common data source. (3.5 Prepare for Production) Enterprise Resource Planning software seeks to integrate: Databases Applications Interfaces Tools Business Process Reengineering (BPR) This total integration of the enterprises systems improves project management and facilitates business process reengineering. ERP software allows corporations to provide better customer service, while focusing on the supply chain processes instead of the information processing requirements of business functions. ERP systems also serve as expert systems capturing the knowledge of an expert group. This allows corporations to significantly improve the efficiency of its business processes. These improvements help produce new knowledge-based products or services. Some import reasons that drive businesses to switch to ERP are increased customer satisfaction and the development of new products and services or the corporations desire to enter new product areas. To be competitive in today s global environment, businesses are turning to high technology solutions like ERP to push the company to the next level. This allows them to have a competitive advantage over competitors. The competitors are often using older legacy systems that are difficult to maintain and contain obsolete hardware and software. ( 2001) Businesses find by implementing ERP systems they can gain a competitive business advantage by leveraging the strength of the high technology software. ERP users gain advantages from the way that they new systems implement and exploit data. Users often say that the ERP systems make them more efficient in the marketplace than business still utilizing the older legacy systems. ERP is a boon to the production process because it eliminates the need for paper blueprints and other manual means of sharing information. Instead users simply use PC s to call up product and assembly information. (3.5 Prepare for Production) ERP software seeks to improve on the business processes and helps companies tackle problems with: Material Shortages Productivity Enhancements Customer Service Cash Management Inventory Problems Quality Issues ( 2001) Another big benefits of ERP systems are that they come in prepackaged applications. These applications force companies to use a proven set of business processes, so that they are not reinventing the wheel each time they introduce a new product or service. The users can concentrate on the business needs 3

4 at hand, while the ERP software vendors keep the users updated with the latest technology and software. Most ERP systems allow users to turn on and off functionalities, as they are needed; this allows companies to adapt to changes in their business. These features save valuable time by preventing companies from developing their own custom built applications. (O Brien, 1999) ERP also makes it easy to alter product designs or assembly instructions as well as update those changes immediately and universally, thereby increasing production accuracy because everyone will have access to the updated and correct information. ERP systems allows for the free flow of information, while helping companies reduce the costs of sharing information among pertinent parties such as engineers, production people, and suppliers. The systems also track all production stages, allowing production managers or other senior management to pinpoint where bottlenecks and breakdowns occur. (3.5 Prepare for Production) This free flow of information is very hot in manufacturing and information technology circles right now, and all indications point to it getting hotter. In modern manufacturing operations information starts at the top and the bottom simultaneously. Data originates at the machines, the process and the workers. Sensors, controls and operators collect it. It indicates what is being made, how and where, when it will be done, and why it won t be on time. Applications such as the closed-loop MRPII system take the data and create the information, passing it up the chain to the planners, product developers, and senior management. (Blanchard, 1998) Some of the primary features of a close-loop manufacturing or product-based business include: Level 1: Strategic/ High-Level Planning 1.1 Business planning The documents contained in the system reflect the company vision and strategy. It also articulates and quantifies products, markets, customers and associated revenue, cost, profit objectives, and other financial projections and resource requirements and plans at a high level. The company s business risk management process and resulting strategies are designed to fully support the execution of the business plans and strategies of the company. 1.2 Sales & operation planning/ forecasting The sales planning and forecasting documents feed into the sales & operation planning system and back into the business planning system. The sales & operation planning system is a more detailed set of time-phased plans or statements of anticipated orders for products or services stated in terms of dollars and in the terms of level of detail required by the company to support the business plan. This system is formally reviewed and updated monthly. The plans and forecasts feed directly from the sales & operation planning system into the master production scheduling system as changes occur to those forecast. 1.3 Sales and operation planning This system is guided by the business planning systems objectives with a great reliance on the sales plans and forecasts. The sales and operation planning system creates an integrated supply game plan. The plan includes product families, production groups or product levels to support the company s services, costs, and inventories, operations and risk management goals and strategies. Also resource requirement planning (RRP) is carried out as part of the sales and operation planning activity and capacity planning for the product families is used to ensure the plan is obtainable. Once the sales and operations plan becomes approved or accepted it is used to help reconcile various plans or major functions such as sales and marketing, engineering, finance, supply chain management, manufacturing, and human resources to leverage opportunities and mitigate risks. The plan is continually reviewed and updated on a monthly basis. The approved plans related policies direct and controls the master production schedule as well as other planning and execution process. Level 2: Plant/Operations Planning 2.1 Master Production Schedule (MPS) The master production schedule is the anticipated build or buy schedule for the company s end products or services. The MPS is typically the top-level plan entered into an ERP system, and it directly reflects the plan established by the senior management in the sales and operation planning system. The MPS integrates the customer s actual orders and provides detailed product/item forecasts, inventories, management policies and goals helping to manage risk as the schedule is produced. Senior management also uses the MPS to establish order promising using the available to promise (ATP) technique and roughcut capacity planning (RCCP) The rough-cut capacity planning process is carried out during the developing and maintaining of the MPS. If the schedule is not viable for any reason the information is immediately 4

5 updated and sent to the sales and operation planning system. The sales plan/forecast or possibly even the business plan may need to be adjusted accordingly. The MPS generally employs what-if scenarios and analysis techniques to simulate scheduling choices and impacts. The MPS is approved, reviewed, and maintained on a weekly basis and it drives the material requirements and capacity requirements in an ERP system. 2.2 Materials Requirements Planning (MRP) Materials requirements planning is a set of techniques using data from bills of materials, inventory records and the MPS to calculate time phased material requirements. The MRP recommends the release of orders, the reschedule of orders and the cancellation for orders when needs and dates are not in phase with the MPS. The data quality and integrity are critical to the MRP. If the materials requirements plan cannot be met or is not in line with the agreed plan or policies, the master scheduler will be informed. A review of the higher level plans and schedules will be conducted until the MRP can be synchronized with the MPS, which helps mitigate risks. 2.3 Capacity requirements planning (CRP) Capacity requirements planning is a more detailed look than the rough-cut capacity planning. CRP looks at capacity requirements to achieve the master production schedule. Open and In-process work orders in the MRP system are input in the CRP system. These orders use parts routings and time standards to translate the orders into work hours by work center, by people, or by machines. The work hours are defined by the required time periods and data integrity is important for the CRP to function properly. Even if the RCCP was carried out when the master production schedule was developed the CRP may reflect sufficient capacity s in work centers in unavailable for a specific time period and the MPS will require adjustment. Level 3: Operations execution and control (plant and supplier scheduling, execution, and reporting) 3.1 Purchasing activity control Purchasing activity control refers to the day-to-day execution of materials requirements plan for items sourced from the suppliers. The MRP system considers suppliers for parts, purchase lead times, order quantities, and calculates the timing and quantities for order releases and the need for rescheduling or cancelled orders. In many of the more advanced and disciplined companies the Just in time (JST) and the Total quality management (TQM) techniques are employed to execute the requirements from the MPS. Additionally with the arrival of e-commerce and business to business (B2B) transactions significant increases in the speed of transactions, supplier scheduling\ordering and forecasting between supply chain partners has increased. Now whenever suppliers are unable to deliver on schedule the corporations plans and schedules can be adjusted more efficiently. The corporation can review and adjust the MPS for impact of the suppliers schedule and if required changes must be made to the MPS in order to maintain validity in the planning and scheduling system. 3.2 Production activity control The production activity control refers to the day-to-day execution of the material requirements plan for items manufactured within the company/plant. The MRP system recognizes the routing, work centers, standard hours required and lead times for the production of items or assemblies. Production activity control includes priority planning and scheduling of work and input\output control. As with the purchasing activity control, if serious capacity or other constraints cannot be remedied the planning and scheduling system must be adjusted in order to maintain the integrity of the system. If the corporation employs the JIT and TQM techniques the company/plant schedule will have to be adjusted to meet these requirements. 3.3 Financial Activity Control Financial activity control generally refers to the set of reports that are generated from the planning and scheduling system. This information from the reports is invaluable to the management. The reports provide information on activities such as budgeting, planning, cost accounting, and risk measurement and control. The system also creates a critical interface to the general ledger, fixed assets, accounts payable, accounts receivable, and payroll. Reports cover projected and actual inventory balances, projected and actual production costs, projection and actual purchase order commitments, variances, and so on. Product profitability analysis, margin contribution analysis, and comparisons from product line to product line, and by product and by customer, are among the many applications or uses of the financial activity control system. The data/quality and integrity of the information is very dependent on the validity of the plans and schedules from the other systems. This data must be keep up to date to help mitigate risk and insure that the financial goals of the corporation are met.. (1.0 Manufacturing Resource Planning) 5

6 As seen from the closed-loop manufacturing process modern ERP systems enhance business processes and allow corporations the ability to accurately schedule production time, fully utilise capacity, reduce inventory, and meet promised shipping dates. All of these benefits are good but there are some shortcomings to ERP software. What are some of the shortcoming to ERP Software? ERP systems handle day-to-day, normal running, but their support for crisis situations is usually cumbersome. In the real world, machines break down, suppliers fail to deliver and customers change their minds. Under these type of crisis scenarios ERP software is lacking. Most often the results of these shortcomings are disappointing. The expected modern technology fails to deliver or provide support to the users. To prevent these shortcomings users still need remember special instructions, or need parallel or backup paper systems to tell them what is actually happening to work around the limitations in the ERP systems. (Roberts, 2001) Also there is a problem with ERP implementation. Because ERP vendors try to provide a pre-packaged product with the software designed for all of companies. This pre-packaged or generic software doesn t always meet the needs of every company. This leads to customisation problems, usually the companies in house IT personnel or outside consultants have to design or redesign the software to meet the company s needs. These implementation and customisation problems have actually become a business of their own. AMR research estimates that 75% of the ERP market size relates to programming and consulting services. (Aderet, 2001) Another shortcoming is the actual cost of implementing an ERP system. ERP systems are not cheap and companies should look at the return on investment when deciding to implement a new ERP system. It is suggested that if the return on investment is not at least 30 to 50% implementing an ERP systems is not advisable. With this in mind the top 5 underestimated costs of an ERP implementation are: 1. User Training 2. Integration and Testing 3. Data Conversion 4. Data Analysis 5. Getting Rid of Consultants too early (Stenbeck, 1998) So under estimating the cost of ERP implementation is very critical for a company s success and if not closely watched or planned in the beginning; can lead to a major shortcoming in the success of the implementation. What is needed to succeed? Making dramatic changes to company s business processes are risky ventures, but if done successfully they can increase efficiency and effectiveness. Companies can gain a valuable competitive advantage in the marketplace, but if precautions are not taken or an effective plan developed then failure is possible. The company should first conduct an in-depth business process re-engineering study. This study will bring out any deficiencies in the existing systems and attempt to maximize productivity through the restructuring and reorganizing all the divisions within the company. ( 2001) The senior management should also know why the effort is being undertaken. This is the most important part of the effort; if the management isn t sold on the idea of change then the implementation will not be a success. The senior management should develop a plan and set the company s core business objectives. The management must determine if the change is going to be a good return on investment and the necessary funds are available. A detailed cost-benefit analysis should be conducted to determine financial benefit of the implementation. Once the company decides that change is needed then a more detailed implementation plan should be created. (Stenbeck, 1998) The company will then need to identify a core project team and establish a project manager. The project manager will take ownership of the entire project and ensure that the team meets all its milestones. The project manager will also need to designate a cross-functional team that includes both IT staff and business users and external consultants to work fulltime on the implementation. Successful companies recognize the importance of having both IT staff and business users on the implementation team and find a way to release them from their day-to-day responsibilities so that they can devote all their time to 6

7 implementation. The Business users are critical to the success of the project, because a number of business decisions have to be made along the way. A real world example can be taken from the Richmond-based utility company Virginia Power Co., a team of 75 employees, split equally between the business and technology sides of the fence, made up the implementation team for an ERP application. The team made close to 3,000 business decisions during the five-month period. (9.2.2 Acquire. Develop, Deploy, and Support Technology Solutions) Once the team has been established it will next need to evaluate and select an ERP package and implementation partner, usually the vendor or a consulting firm specializing in ERP deployment. Professors Robert Austin and Richard Nolan, who conducted a study on the breadth of change brought about by an ERP implementation recommend that companies can overcome many implementation problems by looking at an implementation like a new business venture. They suggest aligning the in-house staff and consultants so that the decisions that are made are in line with the company s own interest and shareholders interest. Many outside consultants may get carried away during the implementations and often a voice of reason is needed by a senior executive to focus on problem solving and a desirable outcome for the company. (Cliffe, 1999) The choosing of a product should be carefully done because implementation is often a difficult task. The team should choose a proven product; few vendors seem able to release a bug free version. Implementation is difficult, and will slow if you cannot differentiate between a bug and a feature. Also the team should fully understand the ERP vendor s approach to implementation and the vendor s ability to meet deadlines for software releases. The team should also consider the customer support provided in the contract by the vendor. (Roberts, 2001) The Team and partners will work together to create an implementation plan and once the plan has been established the team can present it to the management committee for approval, they may also involve employee focus groups for feedback as well. ( 2001) Once the team has a final commitment from the senior managers then implementation steps should begin. First they will need to determine the hardware and technical requirements of the new system. Since ERP software will be linking all the company s business operations together in one system; it is very critical to determine the company s hardware needs. One problem with the hardware or software could bring operations to a halt. Since software as comprehensive as ERP makes extensive use of system resources, the potential for problems is great. (7.2.1 Provide Post-Sales Service) Typical systems incorporate leading edge technologies such as: MPP systems, cluster, mirrored disks and fault tolerant database systems. ( 2001) With this in mind the team should review the companies current system and see what upgrades are needed to the system to provide a technical environment that is stable and has room for growth. The next step would be the installation and configuration of the software. It is suggested that the implementation team should treat the software implementation as a phased project. Treating it as a single project often leads to disaster. Few companies today use what is known as the big bang approachimplementing all at once. Instead, leading companies divide the implementation into measurable chunks to chart the progress and deal with problems as they occur. This phased implementation allows the team to make informed decisions about the benefits, costs, and risks during the course of the project. A real world example can be taken from the furniture maker Herman Miller. They implemented an ERP application in phases at six different company locations. Each site implemented the first phase in six months and completed the entire implementation within a year. (7.2.1 Provide Post-Sales Service) Once the product has been installed and configured the team will have to make modifications and perform data conversion. Often the data must be overhauled to match the process modifications necessary by the ERP system. Leading companies cleanse the data to insure data integrity; this process is called scrubbing. The old records are updated making sure the information is in place and is accurate. Many times a company may have multiple records for the same customer based on different versions of that customer s name in the company s files. (10.11) Once the data has been cleaned it is entered into the new system and it has been suggested that even clean data may need some modifications during the conversion process. (Stenbeck, 1998) The best way to check the data is through testing. Progressive companies simulate testing by using an actual sale or purchase complete with the employees involved, to put the system through real world test senario. The companies will look to see if the data and reports came through the system properly and further testing might involve if- then and crisis situations to determine if modifications are needed or recommended. (Unleashing the Power of Technology) As will as testing, training of the employees that will be using the system is important. Leading companies take time to train their employees. While most companies underestimate the time and cost involved in training; experts 7

8 suggest that extensive training is needed if the system is going to be a success. (Unleashing the Power of Technology) The employees will be learning a new software interface and employees at all levels will have to accept new and different responsibilities. This means change, and change management should appear on the budget training line. Expect a minimum of 10 percent, and possibly 15 percent of the entire project budget to go toward training. (Stenbeck, 1998) The result of inadequate training could lead to serious repercussions. A receiving clerk, for example, keys new inventory information directly into a live system, so any mistake could immediately affect the company s financial information. (Unleashing the Power of Technology) Once the employees have been trained the team should run a conference room pilot for the management committee to get their final approval. If everything has been approved and the project manager has kept a close eye on the budget and ensured that the project is on time then the final steps of the implementation should begin. This is a very important key to remember, if the project manager cannot keep within budget and time constraints the benefits from ERP are lost. It is critical to enforce responsibility through rewards and discipline throughout the entire plan. The implementation team must know that time is critical for success. (Stenbeck, 1998) As mentioned earlier with the Herman Miller case, a recommended final implementation should be introduced in phases, with post implementation audit and review for each phase. This will insure that no major problems will occur in the go live phase or production runs. With these steps in mind many company s risk implementing an ERP system, the reason being is that if completed correctly and on course they can expect to gain a return on investment of 30 to 50 percent. Summary and Conclusions In summary before ERP systems companies relied on batch processing, which is a system where data is stored for a period of time until it is ready to be processed. This made a lot of since in the earlier years of computer technology but as technology advanced newer methods were needed. Software developers at SAP created one of the earliest improvements to batch processing. They created the RF Financial Accounting Software. This software was based on real-time processing, meaning that users now didn t have to wait for batches to run but could instead update information immediately after entry. The technological advancement led to modern ERP systems. Basically modern ERP systems seek to integrate all functional areas of a company within one database. The software performs core corporate activities such as purchasing, supplier and inventory management, engineering and production usually on a client/server network and consists of different software modules that all link together. Benefits of ERP software include increased customer service, more efficient business processes, and increased competitive advantages. However it is worth noting that there are disadvantages to implementing ERP software, the first being the actual cost of the system. Companies should do a detailed cost-analysis to see if implementing a new system will provide an acceptable return on investment. If a gain of 30 to 50 percent isn t expected experts suggest not going through with the implementation because there is too much risk involved with the implementation. If a company does decide to proceed with the implementation of an ERP system they should precede cautiously developing a detailed and well thought out plan to help mitigate risk. If everything is planned out and monitored closely during the implementation phase significant gains and improvements can be achieved by implementing an ERP system. 8

9 References O Brien, J.A., (1999). Management Information Systems Managing Information Technology in the Internetworked Enterprise (pp. 434,554). Irwin McGraw-Hill (4 th Ed.) Meissner, G., (1997). SAP Inside the Secret Software Power (pp ) Irwin McGraw-Hill Enterprise Resource Planning (ERP) Retrieved from the Internet on January 8, World Wide Web, URL Prepare for Production (pp. 1-5) Retrieved from Arthur Andersen s internal intranet database on Global Best Practices on December 22, Blanchard, D., (1998) ERP the Great Equalizer retrieved from the Internet on January 8, World Wide Web, URL Manufacturing Resource Planning (MRP II) (pp. 1-3) Retrieved from Arthur Andersen s internal intranet database on Global Best Practices on December 22, Roberts, D., White Paper ERP for Manufacturers Retrieved from the Internet on January 10, 2001 World Wide Web, URL Aderet, A., A New Approach to ERP Customization Retrieved from the Internet on January 8, World Wide Web, URL Stenbeck, J., (1998) Quantum Leap Forward. Evolving Enterprise 1, 2, Summer (pp. 1-12) Acquire. Develop, Deploy, and Support Technology Solutions (pp. 1-5) Retrieved from Arthur Andersen s internal intranet database on Global Best Practices on December 22, Cliffe, S. How to Avoid $100 Million Write-Offs, Harvard Business Review, January/February 1999 Provide Post-Sales Service (pp.1-3) Retrieved from Arthur Andersen s internal intranet database on Global Best Practices on December 22, Unleashing the Power of Technology (December 12, 2000) Retrieved from Arthur Andersen s internal intranet database on Kspace/content on December 22,