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This lecture will cover an introduction to ERP systems and the reasons
why companies have implemented these systems. This will be
illustrated by looking at some examples of companies who have
implemented SAP.

References :
1) Concepts in Enterprise Resource Planning (Monk & Wagner)
Chapter 2.

Readings :
1) Koch, The ABC‘s of ERP.
2) Davenport, Putting the Enterprise into the Enterprise System

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• Business software used by large companies.

• Expensive & complex.

• Need on-going support & administration and as such they support a

large base of employees.

• The software is integrated and multi-module i.e. it is used in many

departments within a large organisation however the data flows
automatically between these departments.

• Traditional ERP systems have replaced many standalone software

packages that companies used such as accounting, stock control,
payroll, sales & distribution, production planning. These systems may
involve many thousands (or even millions) of transactions being
processed each day.

• ERP is fast evolving and shifting to an e-business focus with recent

developments incorporating internet-enabling architecture, CRM, SCM
and DW

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Some businesses build their products from parts and raw materials.
These products can range from the assembly of a few standard parts
to products with thousands of parts requiring weeks of engineering.
Manufacturing (which is actually a group of sub-modules) controls the
process by which this is done. Not every ERP package has a
Manufacturing module although all the large ones do.
Manufacturing is divided into discrete and process manufacturing.
Discrete manufacturers make solid items such as flashlights or cars
using Bills of Material. Process manufacturers make liquids or
chemicals using formulas or recipes. Manufacturing can also be divided
into Make-To-Stock or Make/Engineer-To-Order.
Some of the sub-modules in manufacturing include:
Bill of Materials
Master Production Schedule
Shop Floor Control
Quality Management

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General Ledger produces the enterprise’s financial statements
including the Balance Sheet, which shows the enterprise’s assets,
liabilities and equity at a point in time, the Income Statement, which
shows the enterprise’s income, expenses and net profit over a period
of time, the Cash Flow Statement which shows sources and
applications of cash, and associated financial reports such as the Trial
Balance. The rest of the reports are there to track the numbers on the
financial statements back to individual transactions. Most businesses
prepare monthly statements. Every ERP package has a General Ledger
module.

Human Resources handles all aspects of managing employees except

for paying them, which is done by Payroll. It oversees recruitment and
hiring, records attendance, handles training, manages benefits,
handles compliance with government regulations and ensures
terminations are handled properly.
properly Like Payroll,
Payroll Human Resources is
often very country-specific. Only high-end ERP packages have a
Human Resources module.

CRM manages the enterprise's relationship with its customers. This

includes determining who the high-value customers are and
documenting what interactions the customers have had with the
enterprise
enterprise.

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ERP systems are the result of business process engineering.
They are information systems that facilitate the flow of information
between all functions within a business.
They organise and execute the millions of transactions that are
fundamental to many large businesses.
One huge database for storing transaction data.
y of the existing
Eliminate many g legacy
g y systems.
y

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Because of the problems inherent with legacy systems,
companies have become more focused on the business
processes.
A business process is a set of steps done in a particular
sequence in order to achieve some benefit for the organisation.
These processes are often linked together or relate to each
other.
Many companies have made the mistake of simply automating
an existing manual process instead of trying to improve the
process before automating it.
The idea of analysing, documenting and redesigning the
processes in an organisation is known as Business Process
(Re)engineering or BPE.

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An example of a large business system – Intel in 1995.
Extremely complex set of systems and processes.
It is estimated that more than 50% of IT budgets are used to maintain
interfaces between different systems.
Very difficult to support and maintain these systems.

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Organisations are usually organised in a hierarchical nature. This
is the typical organisational structure of a company.
The Operational staff are those responsible for the day-to-day
processes and transactions carried out by the business. E.g.
bank-tellers, clerical assistants, accounts clerks, check-out
operators, sales assistants.
The Operational Management supervise the Operational Staff.
They would make decisions about the daily operations.
operations E.g.
Eg
should we increase a customer’s credit limit ?
Middle Management (E.g. Department Manager, Sales Manager)
are responsible for short term decision making.
Top Level Management are responsible for long term strategic
planning.
People who work at all these levels need access to the corporate
information (data base) but require different levels of detail in
the reporting.

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A typical company also consists of many different departments,
each with different information needs. In the past this led to the
introduction of separate (disparate) systems, known as legacy
systems.
These separate systems often ran on different hardware and
used different operating systems, and data may have to be
duplicated on more than one system. There is also a need to
transfer data between these systems. This can be a complex
and expensive process.

TPS = Transaction Processing System

MIS = Management Information System
EIS = Executive Information System

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We can now see that our ERP system has the following
characteristics :

All of the data is stored in one central database.

The applications are fully integrated with no need for complex
interfaces.
p g of data is p
Extraction and reporting possible at all levels of
management.
The ERP system runs on a common hardware and operating
system platform.

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In 2003 there were 43 ERP vendors worldwide.
Sales were high and growing extremely quickly.
Initially the vendors concentrated on the large or mid-size
companies. The focus is now moving to the smaller companies
(SME’s)
SAP is a German company and is the market leader.
g y specialised
Oracle originally p in Financial software. They
y acquired
q
PeopleSoft (H/R) who had previously acquired JDE
(manufacturing).
Baan was a Dutch company who were acquired by SSA.
Microsoft adopted Great Plains and Navision and are focussing
on the SME’s.

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Many companies have adopted ERP systems for the following
reasons :
The potential for serious problems to occur in legacy systems
due to the “Year 2000 bug” caused many companies to purchase
new (ERP) systems instead of performing extensive
modifications to the affected systems.
Disparate (i.e. non integrated) systems have difficulties in the
transfer of data due to different technologies or incompatible
data definitions.
definitions
Existing systems may not provide required information or
provide the ability to expand as the company grows.
While there may be some reduction in personnel, in many cases
employees take on different job roles.
A reduction in IT support costs is possible due to a reduction in
the number of systems.
Due to improved and/or accelerated accounting processes the
accounting lead times may be reduced.
As new technologies and/or products are introduced they can be
adopted into the ERP systems.
Companies must be able to match the systems and services of
their competitors.

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This graph shows the results of a survey done by Deloitte
Consulting in response to the question “What are the reasons
for your company deciding to implement an ERP system”.
Note that many of the reasons given are probably partly caused
by the fact that they had disparate systems.

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Factors that determine the business success of a company
include:
Revenue generation
Customer satisfaction
Fulfillment of legal requirements
Employee satisfaction
A company may have several business processes,
processes but there are
usually five to eight core process that determine business
success.
In order to successfully carry out BPE it is important to identify
the most important (core) processes and identify what you are
trying to achieve.
You should also benchmark (compare) you processes to those of
other
th similar
i il companies
i and d tto th
those companies
i considered
id d to
t
be the leaders (“best-of-breed”).

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Here you can see a general evolution of ERP systems. They
started as customized and proprietary Inventory control systems
in the 1960’s. In the 1970’s the focus shifted to Material
Requirement Planning which provided raw materials and
component management and procurement. In the 1980’s the
model continued to grow by including distribution channel
functions.

In the 1990’s This model grew further into the fully defined
business suites that we have come to know as Enterprise
Resource Planning Systems. The development of these products
was perpetuated by the desire to move programs off of
customized mainframe programs, the development of new
technologies, the decentralization of businesses, and the desire
to implement BPR.
BPR

Today, the model grows and ERP companies are trying to fully
Internet Enable their products and redesign their products for
the new business models. What was once internally focused is
now externally focused.

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This slide shows the evolution of ERP systems over the last 30 or
40 years.

MRP = Material Requirements Planning

GL = General Ledger
AP = Accounts Payable
AR = Accounts Receivable
FMIS = Financial Management Information System
EDI = Electronic Data Interchange
SFA = Sales Force Automation
CRM = Customer Relationship Management
SCM = Supply Chain Management

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From a survey conducted by Accenture in 2004 we can see that
while the majority of ERP customers have implemented modules
such as Financials and HR, the largest growth is in the newer
product offerings e.g.
CRM = Customer Relationship Management
SRM = Supplier Relationship Management
PLM = Product Lifecycle Management

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In the previous lesson we saw a graph showing the results of a
survey conducted by Deloitte Consulting about the reasons why
companies purchased their ERP system. This survey also
examined the perceived benefits obtained from the
implementation.
The pale blue line shows the expected improvement, while the
dark blue line represents the actual improvement.
Note the three benefits where the actual improvement exceeded
the expected improvement. These all relate to an improvement
in the time taken to process the data.

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Here is an example of the benefits realized by the new system.
It shows the processing improvements obtained after implementing an ERP
system in a number of key areas.
For example, the time to enter pricing data into the system was between 5
and
d 80 days
d in the
h “old”
“ ld” system. With
h SAP implemented
l d this
h time was
reduced to 5 minutes !
These improvements in the time to process the corporate data result in large
cost savings to the company.

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Implementing an ERP system is not without its risks. They are
extremely complex and it may take many years to learn
everything about just one of the functional areas.
The software and the cost of implementing it is very expensive.
Eg. National Bank of Australia : $200 million.
There is a shortage of skilled ERP trained people – this makes it
hard to build a good project team.
Because off the
h changes
h involved
l d and d the
h inter-departmental
d l
cooperation required, conflict within the organisation may occur.

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There are many stories about ERP implementations that have
failed. One of the most publicised is Fox Meyer, a chemical
company in the US who went bankrupt after attempting to
implement SAP. These implementations do not fail because of
the software but usually because of bad project planning and
control. Introducing an ERP system into an organisation has a
massive effect on the organisation and the people who work in it
and if the changes are not managed properly then there is a
good chance of failure.
To assist in the complex and lengthy implementation process,
SAP have developed special methodologies (ASAP) to assist the
project team. There are also a number of pre-configured
“industry solutions” in which a lot of the implementation tasks
have already been done by SAP.

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Implementation of an ERP system is a major investment
and commitment for any organizations. The size and
complexity of the ERP projects are the major factors that
impact the cost of ERP implementations. Different
companies may implement the same ERP software in totally
different approaches and the same company may integrate
g the same
different ERP software applications by following
procedures. However, there are factors common to the
success of ERP implementation regardless the ERP systems
they implement and the methodologies they use. E.g.

Project Planning
Architectural Design
Data Requirements
Phased Approach
Data Conversion
Organization Commitments

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According to research done by Hammer (2000) the cost to
purchase the ERP software is only about 10% of the total cost of
implementation. (In 2006 the licence cost for SAP was about
$8000 per user).
The majority (70%) of the cost is related to managing people.
This includes training and change management and design and
implementation. Most companies will greatly underestimate the
costs involved with these parts of the project.
Data cleansing is also a very important step. Any data
transferred from the old, legacy systems must be free of errors
and inconsistencies before it is copied into the new ERP system.

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There are a number of different ways to implement an ERP
system, the method chosen will depend on many factors.
A pilot system involves running both the old and new in parallel
until the users are confident.
It may be trialled in one department or in all departments
simultaneously.

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The initial implementation of an ERP system is only the
beginning of an on-going process – the system is never fully
implemented because it is so large and complex it constantly
requires updates and enhancements. These may be due to

• Changes in Technology
• Mergers and Acquisitions
• New laws
l or standards
d d
etc. etc.

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This slide shows the result of a survey that asked when
companies thought that the implementation of their ERP system
was finished.
Nearly half of them said it was never finished !
Others thought it was when the system “went live” or when the
old system was discontinued. Some said it was when there was
no more money in the budget (?). Some of the companies
surveyed thought it was when they achieved the expected
capabilities or benefits.
The point as which “Stabilisation is achieved” is when the
system performance reaches the same level that it was
immediately before implementation. This is due to the fact that
performance usually drops immediately after implementation
before improvements are experienced.

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An example of a large SAP implementation : Coca Cola.
Note that there are still more than 50 interfaces between the
ERP system and other systems !

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