BSAD 281.66: Technology Management - Enterprise Resource Planning Systems (ERP)

Objectives

• Understand the essentials of ERP systems.
• Recognize when a company would need an ERP system.
• Know the advantages and disadvantages of ERP systems.
• Distinguish among the three ERP vendor tiers.

What is ERP?

• An ERP system is an integrated suite of information technology applications that support the operations of an enterprise from a process perspective.
• Cross-Functional – serves many functions.
• Process-Centered – organized around processes.
• Built upon relational database systems.
• There is one data store, one source of the truth.
• Sold in modules:
  • Don’t need to purchase/implement all modules.
  • More modules implemented leads to more integration and ROI.
  • Can cost millions of dollars and take years to implement (for larger companies – less for smaller – cloud makes it faster).

Modules in a Typical ERP System for a Manufacturing Company

• Core ERP includes module suites for financials, human capital management, and operations (logistics).
• Extended ERP includes modules for customer relationship management, supply chain management, and product life cycle management.
• Operations and Supply Chain
  • Plant Maintenance
  • Purchasing
  • Quality Management
  • Sales and Distribution
  • Shop Floor Management
  • Transportation Management
  • Manufacturing
  • Warehouse Management
  • Advanced Planning
• Financial Accounting
  • General Ledger
  • Cash Management
  • Accounts Payable
  • Accounts Receivable
  • Fixed Assets
  • Financial Consolidation
• Management Accounting
  • Cost Center Accounting
  • Product Costing
  • Budgeting
  • Profit Center Accounting
  • Activity-Based Costing
  • Profitability Analysis
• Human Capital Management
  • Personnel Management
  • Payroll
  • Learning Management
  • Time and Attendance
  • Benefits
  • Recruitment Management

Who Needs Knowledge of ERP Systems?

• End User
  • Employee in an organization (controller, manufacturing supervisor, purchasing clerk, warehouse employee, payroll clerk etc.).
• IT Auditor
  • Verify there is proper security in the data center.
  • Verify that reports generated by the ERP system are accurate and timely.
• Integration partner
  • Help clients select the best ERP system out of the possible choices.
  • Provide project management, training, and testing expertise during implementation.
• Software developers and programmers
  • Design customizations and program ERP system if necessary.

Role of Information Systems in the Enterprise

• Business organizations have become more complex and specialized … many functions.
• Each functional area has different information needs.
• Management is generally categorized into three levels- Strategic, Middle, and Operational.
• Each management level has different information requirements.
• No single information system can support all the business needs of an organization.
• ….Not even ERP.

Information Silos

• Historically, organizations developed systems to support individual functions.
• Over time, this created a hodgepodge of independent nonintegrated systems:
  • Redundant data entry and data
  • Lots of handoff
  • Slow
  • Poor customer service

Problems with Siloed Systems

• Data integrity.
• Data redundancy and confusion.
• Lack of data sharing and availability.
• Inability to deploy best practices.
• Lots of handoffs. Paper, phone calls…interfaces.

Factors in the Development of ERP

• Speed and power of computing.
  • Hardware (servers and disk) now cheap and fast – makes ERP feasible.
  • Happened in the 90s.
• Increasingly complex business environment.
  • Organizational complexity.
  • Increasingly demanding customers.
  • Globalization.
  • Increased competition.
• Increasingly sophisticated software needs.
• ‘Legacy’ systems break under the strain of….all of the above.

Enterprise Resource Planning (ERP) Systems

• Enterprise Resource Planning Systems are enterprise systems meant to integrate data and support many of the major functions of organizations.
• ERP systems integrate various functions inside the organizations AND with external partners like customers and suppliers.
• The goal of an ERP system is to integrate data and to make the information flow dynamic and immediate.
• Clients, employees and vendors all use the same system.
• Major functions are integrated in a single software system.
• Data flows seamlessly.

Before and After ERP

• Legacy systems (islands of automation) may be connected with enterprise application integration (EAI) - the process of linking such applications within a single organization together in order to simplify and automate business processes to the greatest extent possible, while at the same time avoiding having to make sweeping changes to the existing applications or data structures.
  • Not as optimal as having an integrated system, common database, and common technical infrastructure.

How an ERP System Works

• Step 1 : Brazilian retailer orders, via the Internet, 1,000 shoes from International Shoe Co. A sales rep takes the order, routes it to ERP’s ordering module, ERP checks the retailer credit, price, etc. The order is approved.
• Step 2 : Simultaneously ERP’s inventory module checks the stocks and notifies the rep that half the order can be filled immediately from stock. The other half will be manufactured and delivered in 5 days directly from the factory in Taiwan.
• Step 3 : ERP’s manufacturing module schedules the production in Taiwan and instructs the warehouse (in Chinese) to ship the shoes to Brazil and print up an invoice (in Portuguese).
• Step 4 : ERP’s human resources module calculates labor requirements. Due to a shortage, the personnel manager in Taiwan is instructed to get temporary workers.
• Step 5 : ERP’s material planning module notifies the purchasing manager about a shortage of purple dye. A purchase order is automatically issued.
• Step 6 : The customer logs on via the extranet to the company’s sneakers division. They can see that 500 shoes were shipped from the regional warehouse. This is done with ERP tracing capabilities.
• Step 7 : Based on data from ERP’s forecasting and financial modules, the CEO can determine both demand and profitability per product. The financial module also converts all foreign moneys to $U.S., whenever needed

ERP Market

• ERP vendors can be organized by tier, or vendor groupings based on certain characteristics:

Tier 1 ERP Vendors

• Tier I ERP vendors sell ERP solutions to multinational corporations with greater than 1000 employees and revenues over $1 billion.
• Known as the enterprise space
• Three players: SAP, Oracle, Microsoft.
• Highest cost and longest implementation time.
• More industry solutions.
• Pushing down-market to compete with Tier 2.

Tier 2 ERP Vendors

• Tier 2 ERP vendors design ERP systems for the mid-market company, which usually range in size from $50 million up to $1 billion in annual revenues and have between 250 and 1000 employees.
• Compared to Tier 1:
  • Applications are less complex.
  • Lower cost of ownership.
  • Easier to implement and support.
• Focus on fewer industries.

Tier 3 ERP Vendors

• Tier 3 ERP vendors design ERP solutions for smaller companies that range in annual revenues from $10 million to $50 million and have fewer than 250 employees.
• Few locations and less complexity.
• Designed with an industry focus.
• Limited breadth in applications, offer depth needed in a particular industry.
• Lowest cost of ownership.
• Collectively, Tier 2 and 3 target small-to-medium sized enterprises (SME).

Advantages of ERP Systems

• Data integration reduces data duplication and reconciliations among systems.
• Real-time access to information improves communication and operations and reduces risk.
• Common processes and data model.
• Based on industry best practices.
• Modules from same vendor look and act same (standardization).
• Can reduce operational costs and increase revenue.

Disadvantages of ERP Systems

• ERP implementations can be long, tedious, and very expensive.
• Constant care and feeding of ERP system.
• People issues (“soft stuff”) can make or break the implementation; need change agents skilled in change management techniques.
• Best practices can level the playing field between a company and its competitors; must still be good at core competency.
• The standardization of business processes can be problem if runs counter to the firm’s culture or expectations.