ERP: What Is It?

Enterprise Resources Planning “Enterprise resource planning software, or ERP,

doesn't live up to its acronym. Forget about
(ERP) and Integration planning—it doesn't do that—and forget about
resource, a throwaway term. But remember the
enterprise part. This is ERP's true ambition. It
I303 attempts to integrate all departments and
Session 7, Fall 2003 functions across a company onto a single
Thomas Haigh computer system…”
From the Darwin “Executive Guide” reading

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The Basic Idea Integration Is Huge Problem

„ Key benefit is INTEGRATION „ See the 1996 Koch reading
„ Trade off versus specialized applications for each „ “chewing gum and bailer wire approach to systems
functional area architecture”
„ Ad-hoc connections occupy ever greater amounts of
„ But programmer time
„ Home-grown development efforts have failed „ Begins to prevent changes inside individual
„ See my MIS paper… systems
„ “Best of Breed” packages are too hard to integrate „ Quotes Gartner estimate:
„ So „ “35 to 40 percent of IT departments' programming
„ Throw everything out efforts are devoted to reconciling duplicate data
contained in various databases around the company”
„ Buy one huge, pre-integrated package

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Old Dream of Total Integration Major Suppliers

„ Unification of all key operational systems „ SAP

„ Integration is „ Oracle
„ Geographic (multiple sites in USA, Europe & „ J.D Edwards
Asia for many large firms)
„ PeopleSoft
„ Functional, with modules for
„ Logistics
„ Siebel Systems
„ Financial

„ Human Resources

„ And more specialized areas, such as real estate

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 SAP Today
„ Biggest ERP supplier
„ 55% global share, and rising fast
„ One of world’s most successful software firms
„ Huge web of connections
„ More than 1,000 “partners”
„ Consulting firms
„ Makers of add-on software, etc,
„ More than 12,000 customers
„ More than 10 million licensed users
„ 22 versions tailored to specific industries
„ Web offering called “mySAP.com” (1999)
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SAP History
„ Firm founded in 1972
„ 5 former IBMers in Mannheim, Germany
„ Idea is mainframe software to
„ Avoid needless duplication in inhouse efforts
„ Work interactively, in real time
„ 1979: SAP /R2 for mainframes
„ 1992: SAP /R3 (still current name)
„ Client server version
„ Multiple hardware platforms (Unix, NT, Linux, etc)
„ Uses standard database platforms (Oracle, etc)
„ 1996: First efforts at web version
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Specialized Field
„ SAP implementations are big business for
consulting firms
„ Single implementation might be 24 months, several
million dollars in fees
„ At height of boom, many SAP experts go freelance
„ Tend to more from one SAP project to another
„ E.g. SAP leader at Lilly had specialized in SAP installs
at Cap Gemini consultants
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Boom in 1990s
„ IT budgets were flush & rapidly rising
„ ERP installation became very fashionable
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Implementation
„ Complex process of configuration of fit business
„ Entering rules and preferences
„ Loading and standardizing existing data
„ Hooking up to remaining applications
„ Writing custom code where needed
„ Also human parts
„ Retraining users
„ Redesigning business processes
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Benefit: Operational Efficiency
„ Lower cost
„ Data entered only once, used by all processes
and departments
„ Better customer service
„ Current data accessible to all participants
„ E.g. customer service rep can see stock levels
in other divisions, progress on order, etc. (see
Darwin reading)
„ Allows management of processes across
organizational boundaries
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 Benefit: Lower IT cost
„ ERP is very expensive
„ But expect long term savings from
„ Elimination of legacy systems
„ Upgrades, maintenance and licensing costs
„ Future maintenance and upgrades cheaper
„ Spread costs over a large base
„ Biggest saving in integration?
„ Huge costs for ad-hoc integration of aging
applications
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Benefit: Standard Process
„ ERP is managerial means to force global
standardization in processes
„ Technological enforcement coded into software
„ Local variation, workarounds eliminated
„ Centralization of control over procedures
„ May bring efficiency
„ Will sacrifice flexibility
„ Lilly example:
„ No customization for local traditions or cultures
„ Only for legal or regulatory reasons
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Benefit: Managerial Data SAP at Lilly I

„ Standardizing processes requires standardization „ Gradual global expansion
of: „ Began in financial area in 1996
„ Product codes „ Want consistent data for EVA and compensation
„ Accounting methods „ Roll out one region at a time
„ Human Resources systems „ Today
„ This allows comparisons between divisions „ $750 estimated million total project cost
„ Especially using financial measures of effectiveness – „ 35,000 or more users, out of 43,000 employees
eg. Economic Value Added (EVA) analysis „ $10 million a month “burn rate”
„ On global basis

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SAP at Lilly II Claimed Lilly Benefits

„ Main Funcational Areas „ Biggest area:

„ Valuation and Control
„ Includes tax, accounting, financial forecasting
„ Project Management Processes
„ SAP has a module for this
„ Human Resources
„ Personnel, pay, staffing, etc
„ Supply Chain Management
„ Dealing with stuff (getting, making, moving,
selling) i303, Session 7, Thomas Haigh
„ Better supply chain management (40% of total)
„ Admitted only just getting started in this area
„ Others (diminishing order)
„ Lower procurement costs
„ Better research
„ What-if analysis, porfolio management
„ Lowered taxes
„ Savings on IT spending
„ Dollar values and current accomplishments
unclear
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 Backlash
„ Davenport (1998) gives nice sense
„ Word of high-profile failures
„ Huge overruns on consulting project
„ Disappointing results when try to plug into unchanged
business, or use in inappropriate ways
„ Problems when treat as IT issue
„ Need to reorganize business
„ Good if fits with management goals (e.g.
standardization
„ E.g. centralization of control accounting, customer service,
order processing across 12 divisions at Elf Atochem
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Issue: Complexity
„ Inherent complexity of global project
„ Training costs for users easy to underestimate
„ Existing data often in worse shape than admit
„ Lilly: from 1 million supplier records to 80 thousand
„ ERP team is permanent fixture
„ Rely on to keep business running
„ Will need further work on analysis to deliver promised
benefits
„ New system gives short-term efficiency slump
„ Like any major reorganization
„ But may afflict whole business at once
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Issue: Dependence
„ “SAP is not just a new program, it’s a new
way of doing business”
„ How to deal with things it won’t support?
„ Long-term commitment…
„ Can users lobby for new features?
„ What if supplier is taken over?
„ What if supplier raises prices?
„ What if supplier shifts direction of product?
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Issue: Cost
„ Meta Group survey shows
„ Total Cost of Ownership of ERP system over first two
years of use is $53,320 per “heads down” user
(Darwin)
„ 23 months work and $15 million dollars
„ Average benefits $1.5 million less than costs
„ Project cost is 2 to 10 times software price
„ High profile implementation failures
„ Darwin cites Hershey and Whirlpool
„ FoxMeyer Drug went bankrupt as result!
„ Davenport mentions several others
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Issue: Inflexibility
„ ERP standardizes business processes
„ Will be running business the same way as
competitors
„ Wal-Mart, for example, has shunned
„ Sees its processes as core competence
„ Possible problems
„ Can’t find better ways to do things
„ Tied to capabilities of software
„ Limits scope for reengineering, etc except as software
requires and supports
„ Loss of supports for distinctive culture
„ E.g. Lilly has non-standard payroll practices
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Issue: Integration
„ When doesn’t work well in one area
„ Can try to patch the ERP software
„ Can rely on external application and links
„ Can alter business to fit the software
„ Problems in integrating into other systems
„ Create & maintain custom interfaces
„ Not well suited for data warehouses
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 Issue: Upgrades
„ Like all software, frequent new releases
„ Can be a year long project, cost 30% of
original installation price
„ Can cause major disruption
„ Likely to break custom code & interfaces to
other applications
„ Users resent having to upgrade just because
vendor is pulling support
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Consolidation of suppliers
„ PeopleSoft buys J.D. Edwards
„ Succeeds, just in time
„ Oracle tries to buy PeopleSoft
„ Initially to prevent merger with J.D. Edwards
„ Announces customers will have to migrate to
Oracle applications
„ Still trying to acquire merged firm
„ Baan (earlier leader) is acquired in 2003
„ SAP profits from chaos
„ Market share continues to rise
„ Customers know will still be around in a decade
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CRM Software
„ Customer Relationship Management
„ Idea: centralize all processes and data
related to interaction with customers
„ Often offered by ERP suppliers
„ Sold as “next big thing”, though problems set
in fast
„ Hit by slump in IT spending from 2001
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Trends in ERP
1. Increased modularization of suites
„ Reduces scale of commitment
„ Supposed to work better with other applications
2. Shift to web based front ends
„ Initially lagged in this area
„ All major vendors now offer
„ Issues with training users for direct access
April 2001, Hasso Plattner, SAP CEO says
„ mySAP is “suite of freestanding components”
„ Users will not be locked in, can mix with other apps
„ Broadening of focus to corporate portals, external
links
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Most Big Firms Already Have
„ SAP license revenues Q2 2003 down 13%
„ From same quarter in 2002
„ Once exception: Levi’s
„ Follows Adidas, Nike, Reebok, Wrangler/Lee
„ Hopes to be finished by 2005
„ Targeting smaller firms, so try to shrink
scale of project for smaller businesses
„ SAP initiative ASAP, etc (See Darwin reading)
„ Shrinking consulting bills crucial
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Related Topics
„ Data warehousing
„ IT Governance
„ Role of the CIO
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