A Foundation for Understanding Enterprise Resource Planning Systems

Transcription

1 A Foundation for Understanding Enterprise Resource Planning Systems Develop an understanding of how ERP systems can improve the effectiveness of information systems in organizations Understand the business benefits of enterprise resource planning (ERP) systems Understand the history and evolution of ERP Page 1

2 The Emergence of Enterprise Resource Planning Systems E.g. of ERP systems: SAP, Peoplesoft, Oracle. ERP market One of the fastest growing markets in the software industry. In 2003, 34.5% of companies with revenues over $1 billion planned to purchase/upgrade an ERP system. By 2002, sales of ERP software reached $180 billion. By 2010, sales will reach $1 trillion. Page 2

3 The Emergence of Enterprise Resource Planning Systems Companies invested in ERP software Between $50,000 & hundreds of millions of dollars. To: Replace legacy system Reduce cycle times from order to delivery Reduce operating costs Enable managers to make better decisions Improve responsiveness to customer needs Page 3

4 The Emergence of Enterprise Resource Planning Systems What is ERP? Software tools: To manage enterprise data. Helps organizations deal with Supply chain, receiving, inventory management, customer order management, production planning, shipping, accounting, human resource management, etc.. Allows a company to automate & integrate the majority of its business processes. Shares common data & practices across the enterprise. Produces & accesses information in a real-time environment. Introduces best practices to the companies suppliers, distributors, customers. Page 4

5 The Emergence of Enterprise Resource Planning Systems Organizations use ERP to Integrates enterprise-wide information supporting financial, human resources, manufacturing, logistics, sales & marketing functions. ERP system provides An enterprise database where All business transactions are entered, processed, monitored, reported. Challenging issues: Whether to make modifications or not when implementing ERP. Page 5

6 Historical evolution of ERP systems Types of Systems Time Purpose Systems Reorder point systems (inventory control capability) Materials requirement planning (MRP) systems (master production schedule + bill of materials file with materials needed to produce each item) Manufacturing resource planning (MRP-II) systems (financial accounting system) MRP-II with manufacturing execution (MES) systems ERP (enterprise resource planning) systems 1960s 1970s 1980s 1990s Late 1990s & onward Used historical data to forecast future inventory demand; when an item falls below a predetermined level order additional inventory Offered a demand-based approach for planning manufacture of products & ordering inventory Added capacity planning; schedule & monitor the execution of production plans Provide ability to adapt production schedules to meet customer needs; provide additional feedback with respect to shop floor activities Integrate manufacturing with supply chain processes across the firm; integrate the firm s business processes to create a seamless information flow from suppliers, through manufacturing, to distribution to the customer Manage high-volume production of a few products, with constant demand; focus on cost Focus on marketing; emphasis on greater production integration & planning Focus on quality; manufacturing strategy focused on process control, reduced overhead costs, detailed cost reporting Focus on the ability to create & adapt new products & services on a timely basis to meet customers specific needs Integrates supplier, manufacturing, customer data throughout the supply chain Page 6

7 The Emergence of Enterprise Resource Planning Systems The Integrated systems approach To integrate ERP system successfully, Requires re-engineering business process to better align with the ERP software Limited customization Easier to upgrade (new versions & add-ons) ERP systems Overcome the inefficiencies of independent systems Provide integrated data to support multiple business functions Page 7

8 Before ERP After ERP Information systems Stand-alone systems Integrated systems Coordination Databases Maintenance Interfaces Lack of coordination among business functions (e.g. manufacturing & sales) Non-integrated data; data have different meanings (e.g. customer); inconsistent data definitions Systems are maintained on a piecemeal basis; inconsistencies result; it is costly to maintain separate legacy systems Difficult to manage interfaces between systems Support coordination across business functions Integrated data; data have the same meaning across multiple functions Uniform maintenance; changes affect multiple systems Common interfaces across systems Information Redundant, inconsistent information Consistent real-time information (e.g. about customers, vendors) System architecture May not be state of the art Relies on a client-server model Processes Incompatible processes Consistent business processes which are based upon an information model Applications Before & After ERP: Systems Standpoint Disparate applications (e.g. many different purchasing systems) Single applications (e.g. a common purchasing system) Page 8

9 Before & After ERP: Business Standpoint Before ERP After ERP Cycle time Costly bottlenecks Time & cost reduction of business processes Transactions processing Financial management Business processes Productivity Supply chain management ebusiness Information Communications Multiple transactions use multiple data files Increased cost of excess inventory, cost of overdue accounts receivable Proliferation of fragmented processes with duplication of effort Lack of responsiveness to customers & suppliers Lack of integration Web-based interfaces support isolated systems & their components Lack of tactical information for effective monitoring & control of organizational resources Lack of effective communications with customers & suppliers Faster transactions, using common data. Reduces the time & cost of multiple updates Improves operational performance (e.g. less excess inventory, reduction in accounts receivable) Re-engineering around a business model that conforms with best practices Improvements in financial management & customer service Linkages with suppliers & customers Web-based interfaces are front-end integrated systems Allows cross-functional access to the same data for planning & control. Provides widely available information Facilitates organizational communications with customers & suppliers Page 9

10 Business Benefits of ERP Sales: Increased efficiency Lower quotes + Reduced lead times + Improve responsiveness to customers needs Manufacturing: Concurrent engineering Faster product design & production Field service: Accurate customer service histories & warranty information Accounts payable: Suppliers paid rapidly & accurately Overall: Optimize the level of operational excellence throughout the business, from customer order through distribution & service Page 10

11 Business Benefits of ERP ERP performance outcomes Quickened information response time Increased interaction across the enterprise Improved order management/order cycle Decreased financial close cycle Improved interaction with customers Improved on-time delivery Reduced direct operating costs Lowered inventory levels Page 11

12 Systems benefits Business Benefits of ERP Eliminate legacy systems that maintain incompatible data & cause fragmentation Provide shared information across the organization & monitor business performance Provide back-office functions that enable customers to place & to track orders via the Web Foundation of ebusiness Additional applications, e.g. Customer Relationship Management (CRM) rely on the foundation of ERP Page 12

13 Business Benefits of ERP Company s motivation to implement ERP Replace legacy systems Simplify & standardize systems Gain strategic advantage Improve interactions with suppliers, customers Ease of upgrading systems Link to global activities Restructure company organization Solve the Y2K problem Pressure to keep up with competitors Page 13

14 ERP Modules Supported by Vendors Function SAP Oracle PeopleSoft Sales Order Processing Purchasing Production Planning Financial Accounting Management Accounting Human Resources Sales and Distribution (SD) Materials Management (MM) Production Planning (PP) Financial Accounting (FA) Controlling (CO) Human Resources (HR) Marketing Sales Supply Chain Procurement Manufacturing Financials Human Resources Supply Chain Management Supplier Relationship Management Financial Management Systems Human Capital Management Page 14

15 ERP Design Alternatives 1. Vanilla ERP implementation Complete implementation of a vendor ERP system Disadv: Costly + Time-consuming Adv: Total integration across all functional areas Re-engineering of all business processes 2.Selected ERP modules implementation Adv: Less costly + Less time-consuming Disadv: Lacks total integration of data across functional areas Limited applicability & use Page 15

16 ERP Design Alternatives 3.Building an in-house ERP system Disadv: Most time-consuming, most resource-consuming Most expensive Risky + May not provide competitive advantage Adv: Can build a system based on its own unique processes Competitors will not have access to similar system 4.Maintain current legacy systems Disadv: Could be competitive disadvantage Adv: Familiarity Page 16

17 Menu of ERP Alternatives Option Cost & Time Advantages Disadvantages Vanilla ERP implementation Partial ERP implementation In-house development Status quo $150 million over 5 years $108 million over 2-3 years $240 million over 7-10 years No cost but no gain Complete standardization of business processes based upon vendor s best practices Partial changes in business processes Custom-designed ERP system Unique from competitors No business process change Little disruption of operations Competitors have access to the same system Disruption of operations over 3-5 years Disruption of operations over 2-3 years Long-term analysis & design process High expense May provide a competitive disadvantage because competitors have an ERP system Page 17

18 The Business Case For ERP To justify the acquisition of an ERP system Have to assess the tangible (e.g. harddollar) & intangible benefits Tangible Benefits % of Companies Inventory reduction 32 Personnel reduction 27 Productivity improvement 26 Order management improvement Financial close cycle reduction IT cost reduction 14 Procurement cost reduction 12 Cash management improvement 11 Revenue/profit increase 11 Transportation/logistics cost reduction Maintenance reduction 7 On-line delivery improvement 9 6 Page 18

19 The Business Case For ERP Intangible Benefits % of Companies Information/visibility 55 New/improved processes 24 Customer responsiveness 22 Integration 13 Standardization 12 Flexibility 9 Globalization 9 Y2K 8 Business performance 7 Supply/demand chain 5 Page 19

20 The Business Case For ERP Cost-benefit analysis for ERP Costs of implementing an ERP include Hardware, software, technical support, project management, internal team commitment, external consultants, training. Use net present value to conduct a cost-benefit analysis: E.g. If you invested $1,000,000, assuming an interest rate at 10%, you would expect to receive a return of $1,610,510 in 5 years. Page 20

21 Software 2,420,000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Software Licenses 220, , , , ,000 Hardware 1,850,000 Consulting 3,000,400 Training 1,280,000 Initial training time Project management time + Internal team time + Project Implementation Team 400, , , ,000 steering committee time Total Costs 8,950, , , , , ,000 Savings 0 Reduced Inventory Costs 2,750,000 2,750,000 2,750,000 2,750,000 2,750,000 Reduced Administrative 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 Costs Improved employee morale, improved customer satisfaction, Intangible Benefits less duplication of effort in maintaining multiple databases Total Savings 0 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 Net Balance -8,950,400 3,380,000 3,380,000 3,380,000 3,780,000 3,780,000 Discounted DCF Factor Cash Flow Discounted Bal. -8,950,400 3,072,420 2,791,880 2,538,380 2,581,740 2,347,380 Cumulative Discounted Bal. Start-up costs Net Present Value of an ERP Project Servers + Networking capability in a client server environment Installing + Configuring the software -8,950,400-5,877,980-3,086, ,720 2,034,020 4,381,400 Non-recurring costs Recurring costs Page 21

22 The Business Case For ERP To maintain competitive advantages Implement ERP system better than the competitors Migrate to new software versions more quickly than competitors do Use vanilla ERP modules to support core operations + Build customized modules to support unique processes which provide a competitive edge Increase availability of operational data Use data for analysis Page 22

23 The Challenge of Implementing an ERP System May take some time to realize ERP s benefits On-time, on-budget implementations 90% of ERP projects are late / over budget Requires a multi-stage approach 1.Planning 2.Re-engineering 3.Designing 4.Configuration & testing Page 23

24 Summary ERP systems can improve the effectiveness of organizations through automation & integration of business processes ERP systems allow data & information sharing across the organization Departmental benefits include increased efficiency, faster design & production, and accuracy Implementing an ERP system helps the organization obtain & maintain a competitive advantage Page 24