Ch.2 The development of enterpriseresource planning systemsIntroduction:

• In today’s competitive businessenvironment, companies try to providecustomers with goods and services fasterand cheaper than their competitor. The keyis to have efficient integrated informationsystems. Increasing the efficiency ofinformation systems result in moreefficient management of businessprocesses.

• Until recently most companies hadnonintegrated information systems thatsupported only the activities of individualbusiness functional areas. Thus a companywould have a marketing informationsystem, a production information systemand so on, each with its own hardware,software and methods of processing dataand information.

• Such nonintegrated systems might workwell within individual functional area butto achieve a company’s goals, data must

be shared among all the functional areas.When a company’s information systemsare not integrated, costly inefficiencies canresult.

• An Enterprise Resource Planning systemcan integrate a company’s operations byacting as a company-wide computingenvironment that includes a database thatis shared by all functional areas. Suchsoftware can deliver consistent data acrossall functional areas in real time.

2.1 The evolution of information systems:• The current ERP system evolved as a result

of three things:◦ The advancement of hardware and

software technology◦ The development of a vision of

integrated information systems◦ Reengineering of companies to shift

from a functional focus to businessprocess focus.

1. Computer hardware andsoftware development:

• The rapid development of computerhardware capabilities has been accuratelydescribed by Moore’s low- The numberof transistors that could be built into acomputer chip doubled every 18 months.That means that the capabilities ofcomputer hardware were doubled every 18months.

• During this time, computer software wasalso advancing to take advantage of theincreasing capabilities of computerhardware. RDBMS was developed,providing businesses with the capability tostore, retrieve and analyze large volumesof data. With spreadsheets, managerscould perform complex business analyseswithout having to rely on a computerprogrammer to develop custom programs.

• By the mid 1980s, telecommunicationsdevelopments allowed users to share dataand peripherals on local network.

• By the end of 1980s, much of the hardwareneeded to support the development of ERPsoftware was in place: fast computers,networked access and advanced databasetechnology.

2.2.2 Reengineering of companies to shiftfrom functional focus to business processfocus:

• In a process-oriented company, the flowpromotes flexibility and rapid decision-making.

2.4 ERP software emerges: SAP and R/3

• In 1972 former IBM systems analysts(hasso plattner,Klaus tschira and hans-werner hector ) formed S-A-P(system analysis and program development).

• SAP founders developed their first software packagecalled system R system RF or R/1.

• In 1978 SAP began developing a more integrated versionof its software product called the R/2 system.

• By 1988 SAP had established subsidiaries in numerousforeign countries, established a joint venture withconsulting company Arthur Anderson and sold its 1000the system. SAP also became SAP AG, a publicly tradedcompany.

• 1n 1988 sap realized the potential of client-serverhardware architecture and began development of R/3system. First version of SAP R/3 was released in 1972.SAP R/3 system was designed using an open architectureapproach.

• SAP R/3 target very large companies. Acquiring thissystem is very expensive. Full implementation of allmodules can take years.

• The modular design of SAP R/3 is based on businessprocess such as sales order handling, materialrequirement handling and employee recruiting. Whendata are entered into the system, data in all related files inthe central database are automatically updated.

2.5 New directions in ERP:• In late 1990s, Y2K problem motivated many companies

to move to ERP system.

2.6 Other ERP vendor:

• People Soft: powerful H/R and Payroll Accountingmodule.

• Oracle: SAP’s biggest competitor.2.7 ERP for midsize companies:

• Midsize means fewer than 1000 employees. For midsizecompanies SAP has developed industry solutions, whichare specific, preconfigured versions of R/3 tailored forparticular industries such as automotive, banking,chemicals etc. because they are smaller and morespecific, they cost less than R/3 and can be installed morequickly than R/3.

• Best of breed approaches: ERP software vendorsemphasize different strengths within their productofferings. So some companies have opted to integratemodules from different ERP vendors, a design approachcalled “Best of breed” approach. Because the modulesoriginate from different vendors, companies must havemiddleware written to connect the disparate software.

• Choosing consultants and vendors: because ERPsoftware packages are so large and complex, one personcan’t fully understand a single ERP system. It is alsoimpossible for an individual to compare various systems.So before choosing a software vendor, most companiesstudy their needs and then hire an external team ofconsultants to help choose the right software vendor andthe best approach to implement ERP. After selecting avendor, the consultants recommend the modules that arebest suited to the company’s operations and theconfigurations within those modules that are mostappropriate.

8. Advantages of ERP system:• Business integration: conventional

company information system were aimedat the optimization of independentbusiness functions in business units,almost all were weak in terms of thecommunication and integration ofinformation that transcended the differentbusiness functions.

• Flexibility: Different languages,currencies, accounting standards etc. canbe covered in one system, and functionsthat comprehensively manage multiplelocations of a company can be packagedand implemented automatically.

• Better analysis and planningcapabilities: ERP allows management tomanage operations not just monitor them.The ERP systems already has all the data,allowing the manager to focus onimproving processes.

• Use of latest technology: utilization of thelatest developments in information

technology. e.g. open architecture, client/server technology, internet, e-commerceetc.

9. How much does an ERP systemcost?:

• Cost of ERP system includes severalfactors:

◦ The size of ERP software, whichcorresponds to the size of the companyit serves.

◦ New hardware that is capable ofrunning complex ERP software.

◦ Consultants and Analysts fees◦ Time for implementation◦ Training

• A large company, one with well over 1,000employees , will likely spend $50 millionto $500 million for an ERP system with

operations multiple countries, currencies,languages and tax laws. Fullimplementation might take four to sixyears.

• A midsize company might spend $10million to $20 million in totalimplementation costs and have its ERPsystem up and running in about 2 years.

10. Should every business buy an ERPpackage?:

• ERP packages imply, by their design away of doing business, and they requireusers to follow that way of doing business.Some of a business’s operation and somesegments of its operations might not be agood match with the constraints inherentin ERP. Therefore it is imperative for abusiness to analyze its own businessstrategy, organization, culture andoperation before choosing an ERPapproach.

• Sometimes a company is not ready forERP. In many cases ERP implementation

difficulties result when management doesnot fully understand its current businessprocesses and cannot makeimplementation decisions in a timelymanner.

2.11 Is ERP software inflexible? :• Once an ERP system is in place, trying to

reconfigure it while retaining data integrityis expensive and time consuming. That iswhy thorough pre-implementationplanning is so important. It is much easierto customize an ERP program duringsystem configuration and before any datahave been stored.

• ERP sometimes does not work well forcompanies that experience rapid growthand change.

2.12 What return can a company expectfrom its ERP investment?

• The financial benefits provided by an ERPsystem can be difficult to calculatebecause sometimes ERP increases revenueand decreases expenses in intangible waysthat are difficult to measure. Also some

changes take place over such a long periodof time that they are difficult to track. Stillthe return on an ERP can be measured inmany ways

◦ Because ERP eliminates redundanteffort and duplicated data, it cangenerate savings in operationsexpense.

◦ Because an ERP system can helpproduce goods and service morequickly, more sales can be generatedevery month.

◦ In some instances, a company thatdoesn’t implement an ERP systemmight be forced out of business bycompetitors that have an ERP system.

◦ A smoothly running ERP system cansave company’s personnel, suppliers,distr0ibutors and customers muchfrustration.

◦ Because ERP implementation taketime, there may be other businessfactors affecting the company’s costsand profitability, making it difficult to

isolate the impact of the ERP systemalone.

◦ Because ERP system provide real-timedata, companies can improve externalcustomer communications. Bettercommunication can improve thecustomer relationship and increasesales.

2.13 How long does it take to see a return onan ERP investment? :

• ROI (Return on investment) is anassessment of an investment project’svalue that is calculated by dividing thevalue of the project’s benefit by the valueof the project’s cost.

• Some companies claim that an acceptableROI begins to accrue almost immediatelyfollowing the ERP system implementation.

2.14 Why do some companies have moresuccess with ERP than do others? :

• Usually a bumpy rollout and low ROI arecaused by people problems and misguidedexpectations not computer malfunctions.

• Some executives blindly hope that newsoftware will cure fundamental businessproblems that are not curable by anysoftware.

• Some executives and IT managers don’ttake enough time for a proper analysisduring the planning and implementationphase.

• Some executives and IT managers skimpon employee education and training.

• Some companies do not place theownership or accountability for theimplementation project on the personnelwho will operate the system, which leadto situation where implementation becomean IT project rather than accompany-wideproject.

• The top executives must be behind theproject 100 percent for it to be successful.

• ERP implementation brings a tremendousamount of change for the users. Managersneed to manage that change well so that theimplementation goes smoothly.

• Some companies willingly part with fundfor software and new hardware, but don’tproperly budget for employee training.

2.15 Additional capabilities within ERP:• ERP vendors and other software

companies are continuing to develop CRMapplications that increase the efficiency ofthe sale force. ERP developers are tryingto make their existing systems smarter byextending ERP’s capabilities into moreareas of decision support, managementreporting and data mining.

• ERP vendors continue to improve softwareand Internet connections that integrate abusiness’s internal operations while alsointegrating the business with its dealers,vendors and customers.

• Netweaver is an application that letscompanies add components to their ERPsystem and also lets external partnersaccess certain parts of the company’s ERPsystem.

• The internet has become an important wayto sell goods and services and willprobably become more important in future.Companies will have a continuing need totake orders electronically and to pass themseamlessly to the company’s database. TheERP system can manage the transactionas if it had come in through a traditionalmethod.

• Trading hubs on the web integratecompanies ERP system for exchange ofgoods and services.