Enterprise Resource Planning

Dr. David L. Olson

James & H.K. Stuart Professor of MIS
Dept. of Management, UNL

History of ERP
Extension of materials resource planning
Integrate a firms computing for reporting, planning, &
control common architecture
Multifunctional, Integrated, Modular

In 1990 industry about $1 billion

SAP, Baan, PeopleSoft, JDEdwards, Oracle, others

Rapid growth in late 1990s

Some relation to Y2K fears, but not the main reason

Mergers in early 2000s

Peoplesoft bought JDEdwards;
Oracle bought Peoplesoft

History of ERP
SAP: All-comprehensive in theory, apply bestpractices
Very intrusive, very expensive, require massive
changes in operations
If changes a core business competency, dont;

While theory centralized, many implementations

modular
PeopleSoft human resources
Finance & Accounting a common first module

New Market Shares 2004

Van Arnum, www.chemicalmarketreporter.com 24 Jan 2005 22-23

ERP

SCM

CRM HCM P&S

Total

36%

11%

14%

21%

15%

18%

PeopleSoft

8%

5%

5%

19%

8%

6%

Oracle

12%

6%

3%

7%

8%

6%

Combined

20%

11%

8%

26%

16%

12%

Sage-Best

5%

1%

2%

2%

Microsoft BS

3%

1%

2%

2%

2%

SAP

Geographic Sales 2004

Van Arnum, www.chemicalmarketreporter.com 24 Jan 2005 22-23

NAmer

Europe

Asia/P

Total

SAP

$3.008b

$4.211b

$0.945b

$8.594b

PeopleS

$2.160b

$0.518b

$0.115b

$2.880b

Oracle

$1.544b

$0.612b

$0.346b

$2.663b

Sage

$0.472b

$0.491b

$0.963b

Microsoft

$0.688b

$0.076b

$0.024b

$0.804b

ERP Project Failure

FoxMeyer Drug

Bankrupt

Hersheys

19% drop in profit

29% increase in inventory

City of Oakland

Erroneous paychecks

Miller Industries

Inefficient ERP operating loss

WW Grainger Inc

Earnings dropped $11 million

Comparative Modules
SAP

Oracle

PeopleSoft

JDEdwards

SD

Marketing, Sales

Supply chain

Order management

MM

Procurement

Supplier relationship

Inventory, procurement

PP

Manufacturing

QM

Manufacturing mgmt
Enterprise perform

Technical foundation

PM

Service

Enterprise service

HR

Human Resources

Human capital mgmt

Workforce management

FI

Financials

Financial mgmt sol.

Financial management

CO

Time & Expense mgmt

AM

Asset Management

Enterprise asset mgmt

PS

Projects

Project management

WF

Order Management
Contracts

Subcontract, real estate

Relative ERP Module Use

(Mabert et al. 2000; Olhager & Selldin, 2003)
Module

Use reported - US

Use reported Sweden

Financial & Accounting

91.5%

87.3%

Materials Management

89.2%

91.8%

Production Planning

88.5%

90.5%

Order Entry

87.7%

92.4%

Purchasing

86.9%

93.0%

Financial Control

81.5%

82.3%

Distribution/Logistics

75.4%

84.8%

Asset Management

57.7%

63.3%

Quality Management

44.6%

47.5%

Personnel/HR

44.6%

57.6%

Maintenance

40.8%

44.3%

R&D Management

30.8%

34.2%

BAAN Industry-Specific Variants

Discrete Manufacturing
Aerospace & Defense
Automobile
Industrial Machinery
Electronics
Telecommunications
Construction
Logistics

Process Manufacturing
Chemicals
Food & Beverage
Pharmaceuticals
Cable & Wire
Pulp & Paper
Metals

Microsoft Great Plains Business

Solutions
Accounting & Finance
Customer Relationship Management
E-Business
Human Resources & Payroll
Manufacturing
Project Accounting
Supply Chain Management

Reasons for Implementing ERP

measured on 1-5 scale (5 best)
Most important

Avg

Small Large Sig.

Replace legacy systems

4.06

87%

90%

Simplify & standardize

3.85

72%

95%

Improve interactions-suppliers 3.55

& customers

71%

76%

Gain strategic advantage

70%

92%

3.46

***

**

Reasons for Implementing ERP

measured on 1-5 scale (5 best)
Less important

Avg

Small

Large

Sig.

Link to global activities

3.17

36%

74%

***

Solve Y2K problems

3.08

62%

42%

**

Keep up with competitors

2.99

42%

60%

Ease of upgrading systems

2.91

35%

54%

Restructure company organization

2.58

33%

35%

***

Implementation Time Required

6 months or less
7 to 12 months
13 to 18 months
19 to 24 months
25 to 36 months
37 to 48 months
Over 48 months

9%
25%
24%
21%
11%
6%
2%

Rate of technology change makes 18 month IT

projects dubious
although ERP a major system, longer times appropriate

Estimated System Life

20th Century
Less than 3 years
3-5 years
5-7 years
7-10 years
over 10 years
Now less:

Due to technology change

Designed obsolescence

3.1%
12.2%
30.6%
26.5%
27.6%

Expected ROI
Mabert et al. (2000); Olhager & Selldin (2003)
Expected ROI

US

Sweden

< 5%

14%

17%

5% to 15%

18%

38%

16% to 25%

36%

30%

26% to 50%

18%

11%

> 50%

13%

4%

SAP: Best Practices

A key to original product
The most efficient way to perform a task

SAP devotes considerable research to best practices

800 to 1000 best practices reported in their R/3 system

Davenport [1998]:

Firms vary in what is best for them

Business world dynamic
Rigid approach has dangers
If a firm develops a competitive advantage, they give it
up by adopting best practices

Non-ERP Process
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Salesperson enters customer order

Salesperson notifies CRM of order
CRM employee records order
Salesperson notifies accounting
Accounting employee records sale
Salesperson notifies warehouse
Warehouse employee records order
Warehouse employee notifies packing & shipping
Shipping employee records order
Shipping employee notifies procurement
Procurement employee records order for raw materials replacement
Procurement employee notifies production to make more
Production employee records order

ERP System Process

Sales person enters customer order on sales order system (SOS)
SOS:

1.
2.
1.
2.
3.
4.
5.

Notifies CRM
Notifies Accounting
Records sale in Accounting System
Notifies Warehouse
Records order on Warehouse Management System (WMS)

WMS

3.
1.
2.

Notifies packing & shipping

Records order on Packing and Shipping System (PSS)

PSS

4.
1.
2.

Notifies procurement
Records order for raw materials with Procurement Management System (PMS)

PMS

5.
1.
2.

Notifies production to do work

Enters manufacturing order on Production Planning System (PSS)

Strategic Approach
Mabert et al. [2000]

Single ERP package

40%
Several ERP packages best-of-breed
Single ERP package supplemented
Multiple ERP packages supplemented
Totally in-house 0.5%
In-house supplemented
1%

4%
50%
5%

Over 50 vendors (130 providers on market at that

time)
SAP & PeopleSoft 25%

Implementation Strategies Used

months small large
Big bang

41.4% 14.9

47%

14%

Mini big bang

16.6% 16.8

24%

9%

Phased by module

17.3% 22.1

20%

20%

Phased by site

22.7% 30.0

8%

48%

Phased by module
& site

2.3%

24.8

System Cost
<$5 million

42.3%

6% annual revenue (less for

larger; up to 50% for smaller)
<$50 mill revenue

$5 to $25 mill

33.0%

$251 to $750 mill revenue

$26 to $50 mill

10.4%

Widespread

$51 to $100 mill 7.2%

$1.5 bill to $5 bill revenue

>$100 million

Over $5 billion revenue

7.1%

Cost Component
% of total implementation
Survey

Interviews

Range

Small Large

Software

30.2%

15%

10% to 20%

35%

23%

Consulting

24.1%

30%

20% to 60%

24%

25%

Hardware

17.8%

25%

0% to 50%

21%

14%

Impl. Team 13.6%

15%

5% to 20%

11%

23%

Training

15%

10% to 20%

10%

12%

10.9%

Cost Impact
Also affects operations
Intent was to lower operations cost
Initially, often the reverse

Often use data warehouse system

Very efficient data storage
Very expensive

ERP Maintenance
Nah et al. (2001)
Corrective
Incorporate vendor patches, fix problems

Adaptive
Implement new features, internal customization,
implement interfaces

Perfective
New versions

Preventive
Monitor response time, errors, track maintenance
activities

ERP System Migration

Over time, need to adopt changes
Minor modifications
Maybe system replacement
Vendors change products

WHY
The longer the time between upgrades, the harder
Easier to support a smaller number of software versions
Migrations can increase sales of seats, add-ons

BOLT-ON Software

Demand planning
Inventory management
E-Procurement
BtoB
Integrated suite systems (I2)
Order tracking
Factory planning & scheduling
On-line collaboration
Warehouse management
Data mining

Example Bolt-Ons
Mabert et al. [2000]
Bolt-On

Example

Vendor

Demand planning

Demand Planner

BAAN

E-procurement

Ariba Network

Ariba, Inc.

Business to business

MANAGE:Mfg

Cincom

Integrated suites

Manugistics 6

Manugistics

Order tracking

Intelliprise

American Software

Factory plan/schedule

Capacity Planning

JDEdwards

On-line collaboration

Aspen OnLine

Aspen Technology

Warehouse mgmt

CSW Warehouse
Management System

Cambar

Data mining

Enterprise Miner

SAS Institute

Middleware
ERP interfaces to external applications
difficult to program
Middleware is an enabling engine to allow
such external applications eto ERP
Data oriented products
Messaging-oriented

- shared data sources

- direct data sharing

Example of Middleware
D. Thomas, Computer Weekly 5/18/2004 p. 1

British American Tobacco PLC

Wanted to reduce the cost of moving data around Enterprise
Application Integration software
Hoped to save 75% of integration projects through
MIDDLEWARE Cast Iron Systems Inc.s Application
Router
Transfer data between

point-of-sale,
Oracle databases,
Siebel CRM,
SAP ERP

Data Storage Systems

Data Warehousing
Orderly & accessible repository of known facts &
related data
Subject-oriented, integrated, time-variant, non-volatile
Massive data storage
Efficient data retrieval

CRM one data mining application

Can use all of this data
Common ERP add-on

Database Product Comparison

Product

Use

Duration Granularity

Data
warehouse

Repository

Permanent Finest

Data mart

Specific
study

Temporary Aggregate

OLAP

Report &
Analysis

Repetitive

Summary

Supply Chains
Collections of organizations working
together

Raw materials products retail

Old manufacturing: vertical integration
Military logistics
Now appropriate for e-business

Supply Chain
Raw Materials Suppliers
Processing Plants
Assembly Plants
Service Centers (warehouses)
Retail outlets

ERP Tools in Supply Chains

Kelle & Akbulut, Int. J. Prod. Econ. 93-94 (2005) 41-52

Supply chain integration valuable

Buyers improve production plans & delivery
schedules
Suppliers use buyer inventory info to plan their
production & inventory control

Improve customer service quality

Speed payment cycle
Cost savings
Identify & overcome bottlenecks

ERP Tools
Kelle & Akbulut, Int. J. Prod. Econ. 93-94 (2005) 41-52

Real-time transaction tracking

Internal process integration
Decision Support Tools (through Add-ons)
Advanced Planning & Scheduling (APS)
Demand Planning & Revenue Management
(DPRM)
Customer Relationship Management (CRM)
Sales Force Automation (SFA)
Supply Chain Management (SCM)

Supply Chain Coordination Effects

Value
Logistic efficiencies
Coordinated advertising
Large scale service

Joint optimal policy will always save total system

cost
1-30% for supplier
25-60% for buyer
NEED TO NEGOTIATE

Obstacles to Supply Chain Tool Use

Real-time transaction tracking
Unwillingness to share information
Need to show monetary benefits & savings

Too much data, too many details

Data analysis (data mining)
Activity based costing to focus on value-added

Internal process integration

Doesnt support operational decisions
Cooperative models, share benefits

Advanced Planning Systems

Computer technology makes supply chain capable
of dealing with demand uncertainty
Forecasting
Inventory reduction
Optimized transportation costs

Advanced planning systems use operational data to

analyze material flows in supply chain
Use historical demand for forecasts
Easy to collect data
Dynamic nature makes long-range forecasting difficult

Advanced Planning System

Providers
i2
Manugistics
Numetrix
CAPS logistics
BAAN
J.D. Edwards
Oracle
PeopleSoft
SAP

SCM components
SCM components
11i
Enterprise Performance Management
SAP APO

Open System Linkage

B. Bacheldor, Informationweek.com, 19 Jan 2004, p. 30

Radio-frequency identification (RFID)

technology
Allows remote data input
Requires middleware to translate RFID data
into formats usable by applications
Oracle: RFID-ready version for supply-chain
applications soon
SAP: Auto-ID Infrastructure links RFID data to
other systems

RFID
R. Boucher Ferguson, eweek, 17 Jan 2005, p. 32

Wal-Mart
Top 100 suppliers expected to be RFID-enabled by
mid-January 2005
Electronic bar codes
Allows collaborators to access data quicker
Bayer Corp.
Acsis software integrates RFID into their SAP
Compare Wal-Mart data with their own

The Gillette Co.

OATSystems Inc. software links real warehouses to data
warehouses

Portals of Major ERP Vendors

Stein & Davis [1999]; Stein [1999]
Vendor

Portal

Function

BAAN

iBAAN

Application integration

J.D. Edwards

ActivEra Portal

Interface to ERP, e-mail,

spreadsheets, Internet

Oracle

11i

Connect to business intelligence

PeopleSoft

PeopleSoft Business
Network

Tie applications to online

communities

SAP

mySAP-Employee
workplace

Travel reservation, online

procurement

SAP

mySAP.com

Center for SAP users

Lawson

Insight II Seaport

Files, data warehouse, e-mail,

Internet

ERP Security Threats

Type of Security

Threat

Physical

Theft, damage, copying

Unauthorized access
Natural disasters or accident

Social

Tricks to gain information

Network

Telephone taps
Dial-up entry
Internet hacking
Viruses

CPU Support
Originally mainframe
SAP R/2 1974

Client/Server architecture early 1990s

More flexible
SAP R/3

SAP announced discontinuing R/3

Outcry by customers delayed to 2011

Expected Benefits from ERP

Mabert et al. (2000); Olhager & Selldin (2003)
1-not at all; 5-to a great extent
ERP Performance

US

Sweden

Quicker information response time

3.51

3.81

Increased interaction across enterprise

3.49

3.55

Improved order management

3.25

3.37

Decreased financial close cycle

3.17

3.36

Improved customer interaction

2.92

2.87

Improved on-time delivery

2.83

2.82

Improved supplier interaction

2.81

2.78

Lowered inventories

2.70

2.60

Improved cash management

2.64

2.57

Reduced operating costs

2.32

2.74

Benefits from ERP

Mabert et al. (2000); Olhager & Selldin (2003)
1-not at all; 5-to a great extent

Area Benefitting

US

Sweden

Information availability

3.77

3.74

Integration of operations/processes

3.61

3.42

Information quality

3.37

3.31

Inventory management

3.18

2.99

Financial management

3.11

2.98

Supplier management/procurement

2.99

2.94

Customer responsiveness/flexibility

2.67

2.95

Decreased IT cost

2.06

2.05

Personnel management

1.94

2.06

Lessons Learned

ERP implementation projects problematic

Variety of ways to implement
Benefit assessment problematic
Different ways to design ERP
Customization of vendors popular

Many enhancements available

Supply chain opportunities
Requires open systems

ERP Success Factors

Business Horizons 2000
1.
2.
3.
4.
5.

Senior management involvement

Cross-functional implementation team
Extra effort up-front defining detailed plan
Clear guidelines on performance measures
Clear guidelines on using outside
consultants
6. Detailed plans to train users

Apparent Future
Extensions to ERP

Implementing Planned Considering No plans

Data Warehouse

32.8%

16.6%

20.1%

30.6%

E-Business

19.9%

31.7%

30.2%

19.9%

Supply chain system

19.7%

24.5%

22.7%

32.2%

Adv plan & schedule

19.1%

19.1%

30.9%

19.1%

CRM

8.8%

12.3%

17.2%

61.8%

Business intelligence

6.1%

15.4%

23.4%

55.1%

Advantages & Disadvantages

System Integration
Improved understanding across users
Less flexibility

Data Integration
Greater accuracy
Harder to correct

Better methods
More efficiency
Less freedom & creativity

Expected lower costs

More efficient system planned
Dynamic needs, training typically underbudgeted, hidden implementation
costs

Summary
ERP software has had a major impact on
organizational computing
Technological, financial, organizational
benefits
Also expensive, massive, inflexible
Many hidden costs
Complex system meriting study