ERP Implementation

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Transcript ERP Implementation

1A. Enterprise Resource Planning (ERP)

Reading: Chen, I.J., “Planning for ERP Systems: Analysis and Future Trend,"

Business Process Management Journal,

Vol. 7, No. 5, 2001, pp. 374-386.

Homework problems: 1,3,4,5,6,9,10.

Enterprise Resource Planning (ERP)

JD Edwards Assignment: Access the websites of these leading ERP software vendors and learn their product offerings.


ERP Systems

(by Chen, 2001)

Business Process Management Journal

1. Introduction 2. ERP Evolution 3. The Planning Issues 4. Future Trend and Challenges 5. Conclusion


1. Introduction

ERP represents a comprehensive information technology approach that brings all of an organization’s information, including all data related to sales and order management, manufacturing operations, financial systems, human resources, and marketing and distributions into a central repository. See Figure 2.

When implemented successfully

, an ERP can link all areas of an enterprise with external suppliers, alliances, and customers into a tightly integrated system with shared data and visibility.


ERP Attributes

Essential attributes of ERP systems include: (1)


in scope, (2)


in that when a transaction or piece of data representing an activity of the business is entered by one of the functions, data regarding the other related functions are changed as well, (3) the software is


in structure and all modules of the system use a common database that is updated in real time, and (4) the software facilitates manufacturing planning and control ( MPC ) activities including forecasting, sales and operations planning, inventory management, etc.


Benefits and Markets

ERP markets: $15 billion in 1997; $20 billion in 2001; $29 billion in 2006; $44 billion in 2010.

Potential benefits: Drastic decline in inventory ($146 billion/year).

Breakthrough reduction in working capital.

Abundant information about customer wants and needs.

Ability to view and manage extended enterprise.

Reduced capacity-related costs ($240 billion/year).


Implementation Success/Failure

ERP success/failure: 40% achieved partial implementation 60-90% do not achieve return on investment 20% total failure/abandoned 50+% failure rate 90% late or over-budget 7

2. ERP Evolution


: techniques designed for independent demand items were used to handle subassembly and components (dependent demand) which resulted in excessive inventory and/or stock-out.


(Orlicky, 1975) Limitation: unlimited capacity assumption Resolution: MRP + CRP = closed-loop MRP Variation: DRP (when similar principles applied to distribution and warehouse operations) 8

Figure 1 9

2. ERP Evolution



(manufacturing resources planning), coined by Wight 1982,1984. See Figure 1.


(1990s) coined by Gartner group of Stanford, Connecticut.

ERP systems started to soar in 1994 when SAP released its next-generation software known as R/3. It also marked a shift in technology platforms from the mainframe to the UNIX-based client server architecture (market-pull and technology push). 10

Figure 2 Suppliers


Receivable and payable Cash management General ledger Product-cost accounting Profitability analysis Executive information system

Operations & Logistics

Production planning Materials planning (MRP) Inventory management Quality management Project management Vendor evaluation Purchasing Shipping

ERP Human Resources

Payroll Personal planning H/R time accounting Travel expenses Training

Sales and Marketing

Order management Sales management Sales planning Pricing After-sales services Customers 11

2. ERP Evolution

(Continued) Just as MRP was a new philosophical approach to manufacturing at the time of its introduction, a key underlying principle of ERP is the recognition that the whole supply chain, and not solely the manufacturing firm, is the basis for today’s competition.

While MRPII has traditionally focused on the planning and scheduling of


resources, ERP strives to plan and schedule


resource as well, based on dynamic


demands and schedule.


3. ERP Planning Issues

Assessing needs & choosing a “right” ERP system Matching business process with ERP Organizational requirements Economic/strategic justification


Planning--Needs Assessment

Needs include specific ERP modules, subsystems, hardware, personnel, etc.

Convincing reasons: Use of multiple points of input with duplicated effort Extensive resources for maintenance and support Incompatibility of several information systems Legacy incapable to support organizational needs Unable to respond easily to questions and information requested by key customers/suppliers. Consideration to reengineer its business process 14

Planning--Choosing the right ERP

Top management must first examine firm’s current competitive position in relation to its desired position in competitive priority, market segments, customer requirements, characteristics of manufacturing process, supply chain strategy, etc.

Define “should-be-state” and envision life after to allow for the identifications of all benefits, which become the yardstick of performance 15

Matching Business Process with ERP

ERP designed for solving the fragmentation of information over many legacy in large organization. Information system development in the past vs. ERP While customization of ERP installation is allowed, major modifications are complex, impractical, and costly. It can also jeopardize the key benefits of integration as well.

Most successful companies reengineered their business before ERP installation. e.g. HP/Compaq and IBM. 16

Organizational Requirements

Common problems: Dept. work toward their own sets of objectives (“functional silo”), performance measurement and rewards are functional not global. E.g., purchasing, manufacturing, sales, distribution, etc.

Top management commitment: funding, identify brightest people, organize interdisciplinary team, serve on steering committee, support education program, job changes/elimination, etc.

Endorse the formal system will be used to manage and evaluate (reward) the extended enterprise. 17

Supply Chain Performance Metrics

The Supply Chain Operations Reference model (SCOR) is a process reference model that has been developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply-chain management. SCOR enables users to address, improve, and communicate supply-chain management practices within and between all interested parties. The SCOR metrics include performance measures such as on-time delivery, order fill rate, order lead time, days of supply, quality/warranty cost, cash-to cash cycle time, etc. (see Figure 1A.3) 18

Supply Chain Metrics


Delivery performance Fill rate by line item Perfect order fulfillment Order fulfillment lead time Warranty cost Inventory Cash-to-cash cycle time Asset turns


Percentage of orders shipped according to schedule Percentage of actual line items filled Complete orders shipped on time

Best-in Class

93% 97% 92.4% Time from when an order is placed until it is received by the customer Warranty expenses as a % of revenue Days of supply held in inventory 135 days 1.2% 55 days Time required to turn cash used to purchase raw materials into cash received from customers 35.6 days Measure of how many times per year assets are used to generate revenue 4.7 turns


69% 88% 65.7% 225 days 2.4% 84 days 99.4 days 1.7 turns

Cash-to-Cash Cycle Time

• Integrates the finance function with purchasing, manufacturing, and sales/distribution Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding – Avg. payment period for material Procurement cycle • Purchase cost of material • Accounts payable Manufacturing cycle • Raw materials inventory • Work-in-process • Finished goods inventory Sales and distribution cycle • Distribution inventory • Accounts receivable

ERP View of Cash-to-Cash Time

Purchasing Manufacturing Sales and distribution ERP database

Accounts payable Inventory Cost of sales Sales Accounts receivable

Cash-to-cash cycle time

Calculating Cash-to-Cash Time

Average daily sales (

S d

) Accounts receivable days (

AR d

) Average daily cost of sales (

C d

) Average days of inventory (

I d

) Accounts payable cycle time (

AP d


S d

S d AR d

AR d C d

S d CS I d

I C d AP d

AP C d Cash


cash cycle time

AR d

I d

AP d

Cash-to-Cash Example

Sales over last 30 days = $1,020,000 Accounts receivable = $200,000 Cost of sales = 60% of total sales Inventory value = $400,000 Accounts payable = $160,000

S d

S d

 1 , 020 , 000 30  34 , 000

AR d



200 , 000  5 .




C d

S d CS

 34 , 000 ( 0 .

6 )  20 , 400

I d

I C d

 400 , 000  19 .



20 , 400

AP d

AP C d

 160 , 000 20 , 400  7 .


days Cash


cash cycle time

AR d

I d

AP d

 5 .

88  19 .

6  7 .

84  17 .



Economic/Strategic Justification

Justification is needed not just because of the enormous investment ($2 to $4 million for small and over $1 billion for large firms), it helps identify all the potential profits. Economic AND strategic benefits such as improved response to customer demands, strengthened supplier relationships, streamlined communication and real-time access to operating and financial data.


4. Future Trend and Challenges

Advanced Planning and Scheduling (APS) in SCM Employ advanced math model and algorithms to develop optimal or nearly optimal plans. Draw upon the massive transactional data from an ERP (e.g., Wal Mart’s store-by-store sales data are available to suppliers/vendors by 4 a.m. the following day) Benefits: Improved fill rate and on-time delivery (30%) Reduced order cycle time (50%) Reduced inventory (50%) Payback in one year and as much as 300% 25

4. Future Trend and Challenges

Customer Relationship Management (CRM) in SCM Keeping a customer is more profitable than acquiring a new one Those improve customer loyalty are 60% more profitable CRM (one-to-one marketing) is a customer-centric business model that utilizes data mining capabilities of ERP to uncover customer profiles, profitability, purchasing patterns. (e.g. Customer-centric approach: finding products to fit customer needs, instead of findings customers to fit the products.

Estimated market of $9 billion in 2008.


Figure. 3


Supply Chain Management

SCM Enterprise (ERP)

Customer Relationship Management

CRM Customers


4. Future Trend and Challenges

Continuous Improvement with ERP-enabled processes “unanticipated” benefits go beyond inventory reduction, improved customer services, etc.

“Synergy” created and manifested by new technology and processes can bring unprecedented capabilities.

“learning organizations” are better positioned to develop unprecedented competencies provided by ERP.

Behavior changes and employee resistance. 28

Additional Company Experience with ERP

Muscatello, J., Small, M., and Chen, I.J. “ Implementing Enterprise Resource Planning (ERP) Systems in Small and Midsize Manufacturing Firms,”

International Journal of Operations and Production Management

, Vol. 23, No. 8, 2003, pp. 850-871.