Research Project by Chunhe Min
Get on the train to see my presentation 
Research Project by Chunhe Min
Get on the train to see my presentation
What is Enterprise Resource Planning?
History of ERP
What does it do?
The Benefits
Who are the main ERP vendors?
Related Vendor Information
Market Share Breakdown
Implementation of ERP
Costs of ERP
ERP Horror Stories
ERP Success Stories
The Future of ERP
For more information on ERP
What is Enterprise Resource Planning?
Enterprise Resource Planning or ERP is an enterprise
wide system that integrates all areas and levels of an organization.
ERP is a rather recent phenomenon. The expansion of
ERP software stems back to the 1980's. However, it has been within the last five
years that ERP has really taken off and seen record revenues by the software
companies. In the past, ERP software was used to number crunch and schedule
manufacturing processes. Management was not using ERP to its full potential.
Today, ERP is the foundation of businesses domestically and globally. It is used
as a management tool and gives organizations a great competitive advantage. ERP
has taken off so successfully because companies are using ERP to "kill two birds
with one stone". Those two birds being the Y2K compliance issue and the
necessity to foster a more productive and efficient work environment.
Enterprise Resource Planning is a software system that integrates core business areas such as manufacturing, distribution, financials and human resources. Integrating these business practices allows different areas of the company to communicate with each other by the click of the mouse. ERP also implements and automates business processes, putting them into a useful format that is standardized across the corporation. If ERP is utilized correctly, it can be an effective management tool. The system allows managers from all departments to look vertically and horizontally across the organization to see what others are accomplishing or not accomplishing. ERP systems capture data about historical activity, current operations and future plans and organize it into information people can use to help devise business strategies.
In the ERP industry, the systems are often referred to as the 4M's. Man, Money, Materials and Machines. This type of system brings all four aspects of business together, giving them a synergistic value. ERP is an enabling technology that can give corporations a strong competitive edge. In addition, this technology is as close to virtual enterprises as business today has ever seen.
Example of ERP integrating business processes globally…
If a warehouse in Singapore enters a customer
order, the data automatically flows to other areas of the company. It would flow
to the financial and accounting people in New York and automatically update
accounts receivable. It would also flow to the manufacturing operations in
Europe instructing them to make another component. Inventory levels would
automatically be reduced in the warehouse and an order would be placed to
replenish.
The benefits of implementing an ERP system are endless. First and most important, all ERP systems are focused on the customer and end results. This means better products and services produced and delivered quickly. ERP allows open communication among suppliers, vendors, customers and all other facets of the business. Second, ERP forces a company to put in place a standard set of business practices across the whole organization. This allows each division of corporations to operate the same way. Each division whether in Alaska, China or Russia will hire the same, order the same and run the same style reports according to business needs.
One of the main benefits of ERP at this point in time is that it allows a company to replace old, non-year 2000 compliant applications and hardware. It eliminates the need for in-house developed software that was originally designed to function independently and not communicate with other applications. When applications were developed in the past for areas such as manufacturing and financials, in order for them to communicate and transfer data back and forth, it was necessary to have complex, extensive links and architecture. ERP also can eliminate that expense because having one common system written in the same language is easier and costs less money to maintain. Having one common system and single data model will reduce the duplication of effort, therefore resulting in greater efficiency.
Another benefit of ERP is the reporting capabilities. Reporting has been made easier and more user friendly than in the past. Today, reporting with ERP is a given, not an imposition. ERP has measurable results. It measures productivity and justifies the cost of automation. ERP has been proven to reduce manufacturing cycle time and the time it takes to get a product or service to market. The strength of ERP lies truly in the manufacturing processes. ERP is used as a competitive tool to determine demand, track inventory, schedule production and speed up the ordering cycle.
A company can benefit from ERP in many ways. Although
the costs for ERP are high and can take up to 100% of a company's IT budget, the
long-term results are worth the initial investment. With ERP, as technology
changes and moves, modules can be updated to move with the industry. Companies
can add modules as they deem them necessary.
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| SAP |
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> 9000 customers, Chrysler, Honda, IBM, Bank of Canada, Proctor & Gamble, GM |
| BAAN |
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>3000 customers, Motorola, Russell Stover Candy, Mercedes Benz, Boeing, Nortel |
| Peoplesoft |
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>1300 customers, NBA, Adidas, Anderson Consulting, Hilton Hotels, Nynex |
| Oracle |
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U.S. Postal Services, CBS, Nike, Kodak, Toronto Dominion Bank |
| JD Edwards |
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>4500 |
| SSA |
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United Distillers, Glaxo Wellcome, Revlon, SmithKline Beecham, Ciba Geigy |
Each of the vendors listed in the above table has strengths and weaknesses that are worth noting. Peoplesoft for example, is an ERP system strong in the Human Resources area. Firms that choose Peoplesoft are often very employee oriented. It is not uncommon for a large company to choose a Peoplesoft Human Resource module and SAP for other functions such as manufacturing, financials and distribution. This may not be the proper approach since ERP was developed to integrate or align an organization. Businesses have to use what will make them most efficient, in some circumstances it may be best for a business to use two different ERP packages. Most ERP packages are designed so they can integrate. This would require significant configuration and programming, but it is possible.
One of the strong selling points of SAP is its ability to serve many markets. SAP has specific software that can meet the needs of many different types of organizations. That is why they have such significant market share and revenue. SAP not only serves the needs of manufacturing firms, but also the complete needs of banks, insurance organizations, service bureaus and retail establishments, to name a few. SAP, along with most other ERP packages can run on multiple hardware platforms including Mainframes, Unix and Windows NT. This decision is usually made depending on the preference of the organization that is doing the implementation. Some companies are still very leery of Client-Server Technology and prefer to stick with the older platforms. Though the majority of companies implementing SAP and others are doing so on Client-Server technology.
It is worth noting that not every company listed above
has all of its employees working on ERP projects. For example, Oracle with its
36,800 employees, only a fraction work on ERP projects and that is one
contributing factor to its 10% market share.
Implementation of ERP is a long and difficult process. A simple ERP project takes between 16 and 18 months. Larger projects may take years to complete. Since this is such a major commitment, a company should achieve the following objectives before they begin implementation:
Another decision that must be made when deciding on
ERP is what consulting or implementation firm to use. As with hardware, SAP also
has agreements with different implementers and consulting agencies around the
world. Some of the major ERP implementers include Anderson Consulting, Coopers
& Lybrand, EDS, Ernst & Young and Deloitte & Touche. Typically, a
firm does not do the ERP implementation and configuration with their own IT
staff. Most IT staffs do not have the experience and capabilities to do this.
That is where the consultants come in. The consultants or implementers work
along with hardware provider to ensure a timely and accurate installation. The
consulting and integration services not only set up the ERP system, but also
train employees to properly use these systems. The implementation can be the
most challenging IT project a firm may ever undertake.
There is no fixed cost for an ERP system. An R-3 solution from SAP will cost at least $4 million just to implement. Depending on the size of the company and the number of users, the software itself can cost millions of dollars per module, an ERP system is normally made up of many different modules. A firm also needs to consider the cost of the hardware, which is also several million dollars.
There are also many hidden costs to consider in the purchase and implementation of ERP software. Some companies that have already implemented ERP packages have listed some costs that are commonly overlooked. The first is training. Training costs usually were not overlooked, but were greatly underestimated. These training costs are very high since workers have to learn a new set of processes and not just a new software interface.
Integration and testing is another hidden cost. ERP is very complex and testing the links between ERP packages and other corporate software-links is done on a case by case basis. Add-on applications that must be integrated with the ERP system can take a great deal of time and money. As soon as any attempts are made to modify the software, costs will increase rapidly.
Data conversion seems to be another cost that is often missed. It can cost a great deal of money to move data from old systems to the new ERP system. Most firms underestimate the fact that the data from their old system will not be easily transferred into the new system. These costs can grow very rapidly and can destroy the original budget. Consultant fees can also increase rapidly. If any problems occur along the way, the company may be forced to pay high consulting fees to fix them.
The costs of ERP can build very quickly and extend way
beyond the budget for the project. To avoid these costs as much as possible,
cross-functional teams should be developed in an attempt to identify all of
these costs up front. If employees from all levels are used, it should help the
firm to get a better idea of what these costs will be. As you can see the cost
of ERP is very high. It takes a major commitment from a firm, in time and money,
to properly estimate costs and implement.
FoxMeyer Drug feels that their ERP system aided into driving the company into bankruptcy. Mobile Europe implemented an ERP system costing hundreds of millions of dollars, only to abandon the project when their merger partner rejected the implementation. Dell Computer realized that the ERP system they used would not fit their decentralized management system. Applied Materials abandoned their system when they found that they were overwhelmed by the organizational changes involved. Dow Chemical spent seven years and almost half a billion dollars implementing an ERP system that was mainframe-based, and now is starting over on a client-server version.
These cases are all examples of how ERP systems can damage firms instead of giving them the intended results. This is typically blamed on the tremendous technical challenges involved in the implementation of ERP systems. The main cause is usually business problems. Companies are failing to change their business practices to match the ERP system. A firm must fully understand the business implications of the ERP system before they decide on implementing ERP. Businesses need to consider that the risks involved with ERP systems are equal to the rewards that can be achieved through implementation.
The key disadvantage to ERP systems is indirect costs.
If a company's ordering system cannot communicate with its production-scheduling
systems, then its productivity and customer responsiveness will drastically
suffer. Management will be forced to make decisions based on instinct, as they
would have before the ERP system was implemented. Basically, if a company's
systems are separated then the entire business will be separated. A firm must
realize that they need to modify their business to fit the ERP system instead of
modifying the system to fit the business. The ERP system is basically a series
of assumptions about how firms operate. Vendors can try to adjust the system
that will be implemented but the company needs to adjust as well. This is the
most commonly overlooked problem with ERP. Firms are not realizing that they
need to adjust business practices to take full advantage of the ERP
system.
The benefits of Enterprise systems have led to many gains in productivity and speed of processes. A few examples of ERP working to a companys advantage are seen through IBM Storage Systems division, Autodesk and Fujitsu Microelectronics. IBM decreased the time it took to reprice all of its products from 5 days to 5 minutes, and the time to ship replacement parts from 22 days to 3 days. IBM can also now do a complete credit check in 3 seconds, down from the previous 20 minutes. Fujitsu was able to reduce cycle time for order fufillment from 18 days to a day and a half. Also, Autodesk a leading designer of CAD software now ships out orders with in 24 hours. Before they installed ERP it took them an average of two weeks to get the order out.
Case Study
Elf Atochem North America, a two billion-dollar chemical company, used enterprise systems as part of the corporate and organizational strategy. In the early 1990's Elf had multiple critical information systems throughout their 12 business units. Systems were not integrated. Each business unit tracked and reported data seperately. This resulted in a lack of information flowing through the organization. Top managers did not have the information necessary to make critical decisions.
The company decided to implement SAP R/3 product in a client server environment. This implementation was not labeled in the company as an Information Technology project, but it was looked at as a strategy initiative. The company looked at the organization as a whole and noticed that each business unit ran in different ways making it difficult for customers to understand and do business with.
Before the ERP system was put into place it took Elf Atochem four days to process an order. The company was also not able to coordinate manufacturing and inventory. As a result the company wrote off g reater than 60 million dollars a year in losses. Sales representatives were never able to guarantee order and delivery dates, resulting in lost customers.
The ultimate goal of the company was to turn from an industry slacker into a leader. To do this they needed to provide better customer service, an area they greatly lacked in. Elf Atochem decided they needed to focus their efforts on redesigning four key processes to improve their business. The processes they concentrated on were production planning, order management, financials and materials management. When implementing the R/3 product they chose to only purchase the modules that directly supported the four key areas. The company did not implement modules such as Human Resources or Plant Maintenance. Elf Atochem made many changes to the organizations fundamental structures in coordination with the ERP implementation.
The ERP system integrated all of the company's financial systems. It also enabled the company to integrate all orders and invoicing throughout all 12 business units. One of the most important things that ERP gave to the company was the real-time information that was necessary to connect sales and production.
Elf Atochem's implementation is now more than 75% complete. The rollout of SAP is ahead of schedule and under budget, a true rarity in this industry. This success is largely due to the management techniques of the implementation team. The team is comprised of over 60 employees with different areas of expertise. They are installing the system one business unit at a time which ensures that the project is under control and manageable.
So far, Elf Atochem's results have been great. They
have seen improvements in customer satisfaction levels and the time it takes to
process orders has greatly been reduced. The company is now operating more
efficiently and inventory, receivables and labor expenses has all been cut. The
company is estimating the ERP system, once complete will save them tens of
millions of dollars.
Originally, the predictions said that the enterprise
resource planning market would quickly end as soon as the year 2000 arrived.
This is now proving not to be the case. A recent survey of 50 information
technology executives by Forrester Research Inc. has shown that year 2000 fixes
did not even make the list of the top ERP incentives. New reports show that the
year 2000 impact on ERP sales was overstated and the prediction is that annual
compound growth rates for the next five years will be 37%. ERP solutions are now
being purchased by major firms all over the world to streamline their business
processes. The new ERP solutions are reaching beyond the traditional industry of
manufacturing and are now being tailored to adapt to industries such as retail,
healthcare, utilities, and telecommunications. The benefits of having everyone
in the organization working off of one common data, with the same pricing,
product information allows companies to be more responsive to customers. The ERP
industry is expected to grow from its current level of $11 billion to be a $52
billion market in the next five years.
For more information on ERP, visit the following sites:
http://www.manufacturingsystems.com/