Hour 5: ERP System Installation

Special IS Project In-house: massive IS project, heavy system design features

ERP Implementation Project

• If vendor system – Much less system design than otherwise – Vendor software already programmed • Only need interfaces – Have help from vendor, consultants – Opportunities to outsource

ERP as an IS Project

• At least 7 optional ways to implement ERP • Outsourcing (ASP) the easiest – But risky • Next easiest is single vendor source without modifications – Not necessarily least expensive, nor greatest benefits • All others involve significant IS project

Relative Use of ERP Implementation Strategies Mabert et al. [2000]

Strategy

Single vendor package-internal modifications Single vendor package Vendor packages-internal modifications Best-of-Breed In-house plus special packages Total in-house development

%

50 40 5 4 1 0.5

Implementation Strategy Use

• Dominant strategy in manufacturing: – Single vendor – Over half added internal modifications • Very few best-of-breed • Almost none developed totally in-house

IS/IT Project Management Results

• Conventional IS/IT projects have trouble with time, budget, functionality • ERP projects have slightly more structure, but still face problems – Underestimation of required time common – Vendors have made easier & faster – Enhancement of systems another trend • Reintroduces time problem

Systems Failure Method

• systematic method for analysis of failure • successfully applied - wide variety of situations • by reviewing past failures, avoid future failure • as organizations rely more on computers, there

is a corresponding increase in significant business interruptions

• yet of 300,000 large & mid-sized computer system installations, <3% had disaster recovery plans

Failures in Planning

• negative disasters : decision culminating in physical result, later substantially modified, reversed or abandoned after heavy resource commitment – power generation facility on campus • positive disasters been a mistake : decision culminating in physical results implemented despite heavy criticism, subsequently felt by many informed people to have – Anglo-French SST; BART in San Francisco

Failures of Projects

• information technology • 1992 London Ambulance Service – 1.5 million pound system on line 26 Oct 1992 – immediately lost ambulances – <20% of dispatched ambulances reached destinations within 15 minutes of summons – (before system, 65% met 15 minute standard)

Failures of Projects

• Some never work • others over budget, very late, or both • others perform less than design • others meet design specifications, but maintenance & enhancement nightmares

System Failure Method

• failure is regarded as an output of transformation processed from system • place trial system boundaries around situation – experiment with various configurations – reach conclusion about system – need to model system in some detail • at different levels • be careful not to make too fine, lose important inter relationships

common results

failure commonly a result of • organizational structure deficiencies – lack of performance-measuring, control • no clear statements of purpose • subsystem deficiencies • lack of effective communication between subsystems • inadequate design • insufficient consideration of environment; insufficient resources • imbalance of resources production quantity; test quality

FoxMeyer Drug

Large drug distributor Wanted to implement ERP

FoxMeyer Corp

• Holding company in health care services • wholesale distribution of drugs & beauty aids • served drug stores, chains, hospitals, care facilities • US: 23 distribution centers • Sought market niches, such as home health care

FoxMeyer

• Due to aging population & growth in health care, expected high growth • Market had extreme price competition, threatening margins • Long-term strategies: – efficiently manage inventory – lower operating expenses – strengthen sales & marketing – expand services

Prior FoxMeyer IS

• 3 data processing centers, linked • included electronic order entry, invoice preparation, inventory tracking • 1992 began migration of core systems • Benefits not realized until system fully integrated

FoxMeyer Process

• Customer fills out electronic order • Order sent to 1 of the 3 data processing centers • Orders sent to the appropriate distribution center (within 24 hours) • Orders filled manually and packaged • Had just completed national distribution center with multiple carousels & automated picking • Could track inventory to secondary locations

New System

• Needed new distribution processes & IS to capitalize on growth • Wanted to be able to undercut competitors • Replacing aging IS key • PROJECT : 1994 - hoped to save $40 million annually (estimated cost $65 million) – complete ERP installation & warehouse automation system (another $18 million)

FoxMeyer Project

• Select ERP – hundreds of thousands of transactions – meet DEA & FDA regulations – benchmarked & tested for months – picked SAP R/3 – hired Andersen Consulting to integrate – hired Pinnacle Automation for warehouse automation system

Operations

• FoxMeyer expected the new systems to improve operational efficiency • Signed several giant contracts – counted on savings, underbid competitors • Counted on being up and running in 18 months

Problems

• SAP & warehouse automation system integration – two sources, two installers - coordination problems • New contracts forced change in system requirements after testing & development underway • Late, Over budget – SAP successfully implemented

Outcomes

• Lost key customer - 15% of sales • To recoup, signed new customer, expected $40 million benefit from ERP immediately - pushed ERP project deadline ahead 90 days, no time to reengineer • Warehouse system consistently failed – late orders, incorrect shipment, lost shipments – losses of over $15 million • August 1996 filed for Chapter 11 – McKesson bought

McKesson Followup

• Mid-1990s started implementation of SAP R/3 – Cancelled project in 1996 after spending $15 million • 1997 acquired FoxMeyer – Carefully designed new R/3 implementation – Dropped a number of modules – Implemented modules one at a time – Cautious rollout schedule, rigorously followed – Separate testing group formed – At last report $50 million system on time, in budget

McKesson

• Massive changes in 3,000 end user jobs • Careful analysis of changes – Surveys – Focus groups – Demonstrations – Computer-based training

Lesson

• Implementing ERP a major undertaking • Can easily bankrupt a company • However, it can also be done – Opportunity for great benefits

System Architecture & ERP

• System architecture displays computer systems used to support organization • Open systems architecture allows greater integration possibilities – Important in supply chains, e-business • ERP systems initially quite closed

Open Architecture

• Many external systems being added to ERP – CRM – Supply chain – Internet for e-business • Need to integrate independent ERPs across organizations – Messaging services used

Analysis & Design Control Frameworks

• Traditional standards for application development • ERP implementation usually involves installation of vendor software – Still need for treatment as installation project • Early in project, extensive customization needed – The more system flexibility, the more difficulties in implementation – Object-oriented framework benefits extension, tailorability, customizability

Application Service Providers

• Outsource ERP • Popular – Unocal pared IT staff 40% in two years – Focus on core competencies, shed cost centers • Many specific functions can be outsourced • Outsourcing benefits – Speed – Organization lacks IT skills • ASP the most popular way to outsource

ASP Risks

• Your applications and data are controlled by others • Service failures out of your control • Confidentiality failure a possibility • Performance issues possible

Relative Implementation Effort

Method

Single vendor package-internal modifications Significant Single vendor package Significant+ Vendor packages-internal modifications Best-of-Breed

In-House

Significant+

Vendor

Heavy Heavy Moderate Significant ++ Moderate

Consultant

Heavy Heavy + Heavy + Heavy + In-house plus special packages Excruciating Total in-house development Application Service Provider Painful Light None None Maybe Moderate Maybe To select

Implementation Effort

• Implementing ERP places strain on in-house information systems groups • Consultants are expensive – Sometimes need special expertise • Tradeoff: control vs. time & cost

Summary

• ERP driven by idea of quality software support • Software quality has long been important • Many ERP implementation strategies available • Tradeoff in control vs. time & cost