Lecture notes on Enterprise Resource Planning

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BA 7301 ENTERPRISE RESOURCE PLANNING A Course Material on ENTERPRISE RESOURCE PLANNING By Mr.S.ARUNKUMAR ASSISTANT PROFESSOR DEPARTMENT OF MANAGEMENT SCIENCE SASURIE COLLEGE OF ENGINEERING VIJAYAMANGALAM – 638 056 1 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING QUALITY CERTIFICATE This is to certify that the e-course material Subject Code : BA7301 Subject : ENTERPRISE RESOURCE PLANNING Class : II MBA being prepared by me and it meets the knowledge requirement of the university curriculum. Signature of the Author Name : S.Arunkumar Designation: Assistant Professor This is to certify that the course material being prepared by Mr.S.ARUNKUMAR is of adequate quality. se has referred more than five books amount them minimum one is from abroad author. Signature of HD Name : S.ARUNKUMAR SEAL : 2 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING CONTENTS CHAPTER TOPICS PAGE NO INTRODUCTION 1.1 Overview of enterprise systems 1.1.1 Introduction 1.1.2 What is ERP 1.1.3 Why ERP 1.1.4 Need for Enterprise Resource Planning 1.1.5 Definition of ERP 6-25 I 1.2 Evolution of Enterprise Resource Planning 1.2.1 Pre material requirement planning (MRP stage) 1.2.2 Material requirement planning 1.2.3 MRP- II 1.2.4 ERP 1.2.5 Extended ERP 1.2.6 ERP Planning –II 1.2.7 ERP-A manufacturing perspective 1.3 Risks and benefits – 1.3.1 Risk implementation 1.4 Fundamental technology of ERP 1.5 Issues to be consider in planning design and implementation of cross functional integrated ERP systems ERP SOLUTIONS AND FUNCTIONAL MODULES 2.1 Overview of ERP software solutions 2.2 Small, medium and large enterprise vendor solutions, 2.3 Business process Reengineering 2.4 Business process Management 2.4.1 Steps of BPM II 2.5 Functional Modules. 2.5.1 ERP Production planning module 26-36 2.5.2 ERP purchasing module 2.5.3 ERP Inventory control module 2.5.4 ERP Sales module 2.5.5 ERP Marketing module 2.5.6 ERP Financial module 2.5.7 ERP HR module 3 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING ERP IMPLEMENTATION 3.1 Planning Evaluation and selection of ERP systems 3.2 ERP Implementation life cycle 3.2.1 Pre-evaluation Screening 3.2.2 Package Evaluation 3.2.3 Project Planning Phase 3.2.4 Gap-Analysis 3.2.5 Reengineering 3.2.6 Configuration ERP Implementation 3.2.7 Implementation Team Training 3.2.8 Testing 3.2.9 Going Live 3.2.10 End-user training 3.2.11 Post – implementation III 37-49 3.3 ERP implementation, Methodology and Frame work- Training 3.4 Data Migration. 3.5 People Organization in implementation 3.5.1 Consultants and Vendors 3.5.2 Employees. POST IMPLEMENTATION 4.0 ERP Implementation 4.1 Maintenance of ERP IV 50-60 4.2Organizational and Industrial impact; 4.3Success factors of ERP Implementation 4.3.1 Key success factors 4.4 Failure factors of ERP Implementation. EMERGING TRENDS ON ERP 61-68 5.1 Extended ERP systems and ERP add-ons 5.2 CRM 5.2.1 Benefits of ERP Module 5.3 Supply Chain Management (SCM) 5.4 Business analytics & Intelligence 4 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING 5.5 Wireless Technology used in ERP 5.6 Future trends in ERP V 5.7 Cloud Computing 5.7.1. SAP and the Internet QUESTION BANK 69-98 UNIVERSITY QUESTIONS 99-100 5 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING UNIT I INTRODUCTION Overview of enterprise systems – Evolution - Risks and benefits - Fundamental technology - Issues to be consider in planning design and implementation of cross functional integrated ERP systems. 1.1.1. Introduction ERP is an acronym that stands for Enterprise Resource Planning. ERP software saw phenomenal interest from the corporate sector during the period 1995-2000. The ERP market is estimated to be in excess of USD 80 Billion in the year 2000 Many analysts feel that today’s global business environment - products and services customized to suit the individual needs of millions of customers, delivered over multiple timelines in a 24X7 basis - would have been impossible without such enterprise software. Undoubtedly ERP represents one of the most complex and demanding application software in the corporate environment. 1.1.2 What is ERP? ERP is a package software solution that addresses the enterprise needs of an organization by tightly integrating the various functions of an organization using a process view of the organization. A. ERP software is ready-made generic software; it is not custom-made for a specific firm. ERP software understands the needs of any organization within a specific industry segment. Many of the processes implemented in an ERP software are core processes such as order processing, order fulfillment, shipping, invoicing, production planning, BOM (Bill of Material), purchase order, general ledger, etc., that are common to all industry segments. B. ERP does not merely address the needs of a single function such as finance, marketing, production or HR; rather it addresses the entire needs of an enterprise that cuts across these functions to meaningfully execute any of the core processes. C. ERP integrates the functional modules tightly. It is not merely the import and export of data across the functional modules. The integration ensures that the logic of a process that cuts across the function is captured genuinely. This in turn implies that data once entered in any of the functional modules (whichever of the module owns the data) is made available to every other module that needs this data. This leads to significant improvements by way of improved consistency and integrity of data. D. ERP uses the process view of the organization in the place of function view, which dominated the enterprise software before the advent of ERP. 6 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING 1.1.3. Why ERP? In spite of heavy investments involved in ERP implementation, many organizations around the world have gone in for ERP solutions. A properly implemented ERP solution would pay for the heavy investments handsomely and often reasonably fast. Since ERP solutions address the entire organizational needs, and not selected islands of the organization, ERP introduction brings a new culture, cohesion and vigor to the organization. After ERP introduction the line managers would no longer have to chase information, check compliance to rules or conformance to budget. What is striking is that a well-implemented ERP can guarantee these benefits even if the organization is a multi- plant, multi- location global operation spanning the continents. In a sense ERP systems can be compared to the “fly-by-wire” operation of an aircraft. ERP systems similarly would relieve operating managers of routine decisions and leave them with lots of time to think, plan and execute vital long-term decisions of an organization. Just as “fly-by-wire” operation brings in amazing fuel efficiency to the aircraft operation by continuous monitoring of the airplane operation, ERP systems lead to significant cost savings by continuously monitoring the organizational health. The seemingly high initial investments become insignificant in the face of hefty long-term returns. At another level, organizations today face the twin challenges of globalization and shortened product life cycle. Globalization has led to unprecedented levels of competition. To face such a competition successful corporations should follow the best business practices in the industry. Shortened life cycles call for continuous design improvement, manufacturing flexibility and super efficient logistics control; in short a better management of the entire supply chain. This in turn presupposes faster access to accurate information both inside the organization and from the entire supply chain outside. The organizational units such as Finance, Marketing, Production and HRD need to operate with a very high level of integration without losing flexibility. ERP systems with an organizational wide view of business processes, business needs of information and flexibility meet these demands admirably. 1.1.4 Need for Enterprise Resource Planning Organizations today face twin challenges of globalization and shortened product life cycle. Globalization has led to unprecedented levels of competition. To face such competitions, successful corporations should follow the best business practices in the industry. Shortened life cycles call for continuous design improvements, manufacturing flexibility, super-efficient logistics control and better management of the entire supply chain. All these need faster access to accurate information, both inside the organization and the entire supply chain outside. The organizational units such as finance, marketing, 7 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING production, human resource development etc. need to operate with a very high level of integration without losing flexibility. ERP system with an organization-wide view of business processes, business need of information and flexibility meet these demands admirably. One of the developments in computing and communication channels is providing tighter integration among them. 1.1.5 Definition of ERP Researchers and practitioners have defined ERP in many different ways. Minahan (1998) defines ERP as a complex software system that ties together and automates the basic processes of a business. ERP has been defined by various authors but with few differences. Kumar et al. (2000) define enterprise resource planning (ERP) systems as “configurable information systems packages that integrate information and information-based processes within and across functional areas in an organization” Al-Mashari and Zairi (2000) states that ERP represent an optimal enterprise-wide technology infrastructure. The basic architecture of an ERP system builds on one database, one application, and a unified interface across the entire enterprise. Nah et al. (2001) defines ERP as “An enterprise resource planning (ERP) system is typically defined as a packaged business software system that facilitates a corporation to manage the efficient and effective use of resources (materials, human resources, finance, etc.) by providing a total integrated solution for the organization’s information- processing requests, through a process-oriented view consistent across the company.” 1.4 Evolution of Enterprise Resource Planning Enterprise resource planning (ERP) has evolved as a strategic tool, an outcome of over four decades. This is because of continuous improvements done to the then available techniques to manage business more efficiently and also with developments and inventions in information technology field. 1.2.1 Pre Material Requirement Planning (MRP) stage Prior to 1960s businesses generally relied on traditional ways of managing inventories to ensure smooth functioning of the organizations. These theories are popularly known as ‘Classical Inventory Management or Scientific Inventory Control Methods’. Most 8 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING popularly used among them were Economic Order Quantity (EOQ); Bill of Material (BOM) etc. However these systems had very limited scope. ERP system has evolved from the Material Planning System of 1980’s. There are various phases through which this evolution process has gone through. The various phases of development of resource planning system in relation to time and evolution of concept of ERP. Figure 1.1 Stages of ERP Evolution 1.2.2. Material Requirement Planning (MRP) MRP was the fundamental concept of production management and control in the mid- 9 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING 1970s and considered as the first stage in evolution of ERP. Assembly operations involving thousands of parts such as automobile manufacture led to large inventories. The need to bring down the large inventory levels associated with these industries led to the early MRP systems that planned the order releases. Such planned order releases ensured proper time phrasing and accurate planning of the sub-assembly items, taking into account complex sub-assembly to assembly relationships characterized by the Bill of Materials. Example: A typical example is a bicycle manufacture. To manufacture 100 units of bicycles, one needs 200 wheels, 100 foot-pedals, and several thousands of spokes. On a given day, a plant may have 40 units of complete bicycles in stock, 57 units of wheels, 43 units of foot-pedals and 879 units of spokes. If the plant is to assemble 20 units of bicycles for the next 4 days of production, wheels and spokes-is a non trivial problem. If the independent demand of the spare parts is also to be taken into account, one can visualize the complexity of it. A typical automobile plant with hundreds, if not thousands of parts, has to face problems that are in order of magnitude even more difficult. MRP systems address this need. Using the processing power of computers, databases to store lead-times and order quantities and algorithms to implement Bill-of-Material (BOM) explosion, MRP systems brought considerable order into the chaotic process of material planning in a discrete manufacturing operation. Essentially MRP addresses a single task in manufacturing alone. Material requirement planning (MRP) system was adopted by firms for creation and maintenance of master data and bill of material across all products and part within an organization. MRP on the other hand was an outgrowth of bill of material (BOM) processing, which is purchase order management that utilizes parts list management and parts development. 1.2.3 Manufacturing Resources Planning II (MRP- II) A natural evolution from the first generation MRP systems was the manufacturing planning systems MRP II that addressed the entire manufacturing function and not just a single task within the manufacturing function. MRP II went beyond computations of the materials requirement to include loading and scheduling. MRP II systems could determine whether a given schedule of production was feasible, not merely from material availability but also from other resource point of view. Typically, the resources considered from MRP II systems would include production facilities, machine capacities and precedence sequences. The increased functionality enabled MRP II systems provided a way to run the system in a loop. First it was used to check the feasibility of a production schedule taking into account the constraints; second to adjust the loading of the resources, if possible, to meet the production schedules; third 10 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING to plan the materials using the traditional MRP II systems. Both MRP system and MRP II systems were fairly successful in industry. Due to the power of information systems- databases, algorithms and their integration, organizations did find real support for efficiently managing the manufacturing function in the eighties. 11 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING 1.2.4 Enterprise Resource Planning (ERP) The nineties saw unprecedented global competition, customer focus and shortened product life cycles. To respond to these demands corporations had to move towards agile (quick moving) manufacturing of products, continuous improvements of process and business process reengineering. This called for integration of manufacturing with other functional areas including accounting, marketing, finance and human resource development. Activity-based costing would not be possible without the integration of manufacturing and accounting. Mass customization of manufacturing needed integration of marketing and manufacturing. Flexible manufacturing with people empowerment necessitated integration of manufacturing with the HRD function. In a sense the 1990s truly called integration of all the functions of management. ERP systems are such integrated information systems build to meet the information and decision needs of an enterprise 4 spanning all the functions of management . 1.2.5 Extended ERP (E-ERP) Further developments in the enterprise resource planning system concept have led to evolution of extended ERP (E- ERP) or web - enabled ERP. With globalization on one hand and massive development in the internet technology on the other, need for web based IT solution was felt. Thus E- ERP is development in the field of ERP which involves the technology of Internet and World Wide Web (WWW) to facilitate the functions of an organization around the web. 1.2.6 Enterprise Resource Planning II (ERP- II) ERP II is the advanced step of E-ERP. It is the software package which has strengthened the original ERP package by included capabilities like customer relationship management, knowledge management, workflow management and human resource management. It is a web friendly application and thus addresses the issue of multiple office locations. 12 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING 1.2.7 ERP – A Manufacturing Perspective ERP systems evolved out of MRP and MRP II systems. MRP systems addressed the single task of materials requirements planning. MRP II extended the scope to the entire manufacturing function. The manufacturing industry traditionally had a better climate to use computers. First of all the manufacturing community being dominated by engineers had no computer phobia. Second the extensive use of Computer Aided Drafting (CAD), Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) had prepared the manufacturing function to use computers well, in fact exceptionally well. In fact manufacturing engineers contributed significantly to the theoretical computer science by way of contributions in the areas of graphics, computational geometry, significant visualization, feature recognition etc. Large corporations like General Motors (GM), Ford, Hewlett Packard (HP), and Digital primarily viewed themselves as manufacturing companies until the 1980s. Naturally complex MRP systems were considered the ultimate in enterprise information systems. The investments in hardware and software to manage such complex manufacturing solutions gave these systems a visibility unparalleled in the industry. Compared to these systems accounting systems, financial systems or personnel information systems were relatively inconsequential to the organization. With the globalization of operations and the proliferation of computer networks, it was important that the manufacturing organizations extend their information system across the supply chain. The supplier’s information system spread across continents with complex combinations of hardware and software need to be integrated. Similarly the dealer-distributor network had to be integrated with the manufacturing information systems. The reduction in product life cycle necessitated a quick response manufacturing system that had its ears tuned to the market. This forced manufacturing information systems to have a tighter integration with marketing information systems. The manufacturing flexibility had translated into mass customization calling for further integration of information systems. The opening up of several world economies including that of the Asian giants like China and India, the emergence of trade blocks and consolidated markets such as European Union paved the need for accounting and finance functions to be tightly integrated with manufacturing functions. It was not sufficient anymore just to manufacture and sell but organizations had to arrange for finance, comply with complex trade restrictions, barriers, and quotas. The balance sheets needed to account for multiple currencies, multiple export import rules and regulations, multiple accounting codes, practices, accounting periods. This necessitated further 13 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING integration of accounting and financial information systems with manufacturing systems. In fact with large capacities built around the world particularly in Asian countries, outsourcing and contract manufacturing became viable alternative even in the high-tech industries like semi conductor manufacturing. Suddenly the need was for an Enterprise Information System that looks beyond the manufacturing function to address inbound logistics, outbound logistics, manufacturing, materials managements, project management, quality management, accounting, finance, sales and personnel management. It was nearly impossible to integrate individual modules of information systems. What was necessary was a system that addressed the enterprise needs from the design stage. ERP systems were the natural choice in this changed scenario. 1.3 Benefits of ERP: (a) Business integration: The first and the most important advantage lie in the promotion of integration. The reason ERP packages are called integrated is the automatic data up gradation between related business components, since conventional company information systems were aimed at the optimization of independent business functions in business units, almost all were weak in terms of the communication and integration of information that transcended the different business functions in the case of large companies in particular, the timing of system structure and directives differs from each product and department / functions and sometimes they are disconnected. For this reason, it has become an obstacle in the shift to new product and business classification. In the case of ERP packages the data of related business functions is also automatically updated at the time a transaction occurs. For this reason, one is able to grasp business details in real time, and carry out various types of management decisions in a timely manner based o that information. (b) Flexibility: The second advantage of ERP packages is their flexibility. Diverse multi functional environments such as language, currency, accounting standards and so on are covered in one system and functions that comprehensively managed multiple locations that span a company are packaged and can be implemented automatically. To cope with company globalization and system unification, this flexibility is essential, and one could say that it has major advantages, not simply for development and maintenance, but also in terms of management. (c) Better analysis and planning capabilities: Yet another advantage is the boosting of planning type functions. By enabling the comprehensive and unified management of related business and its data, it becomes possible to fully utilize many types of decision support 14 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING systems and stimulation systems. Furthermore, since it becomes possible to carry out flexibility and in real time the feeling and analysis of data from a variety of dimensions, one is able to give decision makers the information they want, thus enabling them to make better and informed decisions. (d) Use of latest technology: The fourth advantage is the utilization of latest developments in information technology (IT). The ERP vendors were very quick to realize that in order to grow and to sustain that growth: they have to embrace the latest developments in the field of information technology. So they quickly adopted their systems to take advantages of the latest technologies like open systems, client server technology, internet/ intranet, computer aided acquisition and logistics support, electronic commerce etc. It is this quick adaptation to the latest changes in information technology that makes the flexible adaptation to changes to future business environments possible. It is this flexibility that makes the incorporation of the latest technology possible during the system customization, maintenance and expansion phases. (e) Reduced inventory and inventory carrying cost: The manufacturing nature of many ERP users makes the issue of process and material costs savings paramount. The main factor behind these savings is that implementation of the ERP system allows customers to obtain information on cost, revenues and margins, which allow it to better, manage its overall material cost structure. This ability to manage costs is best seen in savings that organizations can obtain in their inventory systems. Customers can perform a more complete inventory planning and status checking with the ERP system. These checks and plans reveal existing surpluses or shortages in supplies. Improved planning and scheduling practices typically lead to inventory reductions to the order of 20 per cent or better. This provides not only a one time reduction in assets (cost of the material stocked), but also provides ongoing savings of the inventory carrying costs. The cost of carrying inventory includes not only interest but also the costs of warehousing, handling, obsolescence, insurance, taxes, damage and shrinkage. (f) Reduced manpower cost: Improved manufacturing practices lead to fever shortages and interruptions and to less rework and overtime. Typical labor savings from a successful ERP system are a 10 per cent reduction in direct and indirect labor costs. By minimizing rush jobs and parts shortages, less time is needed for expediting, material handling, extra setups, disruptions and tracking splits lots odd jobs that have been set aside. Production supervisors have better visibility of required work and can adjust capacity or loads to meet schedules. Supervisors have more time for managing, directing and training people. Production personnel have more time to develop better methods and improve quality. (g) Reduced material costs: Improves procurement practices lead to better vendor negotiations 15 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING for prices, typically resulting in cost reductions of 5 per cent or better. Valid schedules permit purchasing people to focus on vendor negotiations and quality improvements rather than spending their time on shortages and getting material at premium prices. ERP systems provide negotiation information, such as projected material requirements by commodity group and vendor performance statistics. Giving suppliers better visibility of future requirements help them achieve efficiencies that can be passed on as lower material costs. (h) Improves sales and customer service: Improved coordination of sales and production leads to better customer service and increased sales. Improvements in managing customer contacts, making and meeting delivery promises, and shorter order to ship lead times, lead to higher customer satisfaction, goodwill and repeat orders. Sales people can focus on selling instead of verifying or apologizing for late deliveries. In custom product environment, configurations can be quickly identified and prices, often by sales personnel or even the customer rather than the technical staff. Taken together, these improvements in customer service can lead to fewer lost sales and actual increase in sales, typically 10 per cent or more. ERP systems also provide the ability to react to changes in demand and to diagnose delivery problems. Corrective actions can be taken early such as determining shipment priorities, notifying customers of changes to promise delivery dates, or altering production schedules to satisfy demand. (i) Efficient financial management: Improves collection procedures can reduce the number of days of outstanding receivables, thereby providing additional available cash. Underlying these improvements is fast, accurate invoice creation directly from shipment transactions, timely customer statements and follows through on delinquent accounts. Credit checking during order entry and improved handling of customer inquires further reduces the number of problem accounts. Improved credit management and receivable practices typically reduce the days of outstanding receivables by 18 per cent or better. Trade credit can also be maximized by taking advantage by supplier discounts and cash planning, and paying only those invoices with matching recipients. This can lead to lower requirements for cash-on- hand. The benefits from ERP come in three different forms i.e. in the short-term, medium-term and long-term. When initially implemented, in a year of the organization going live with ERP, it helps in streamlining the operational areas such as purchase, production, inventory control, finance and accounts, maintenance, quality control, sales and distribution, etc. This benefit is in form of ‘automating’ the transactions which promises accuracy, reliability, availability and consistency of data. 1.3.1. RISK IMPLEMENTATION: 16 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING Even in a single site, implementing ERP means "Early Retirement Probably." An ERP package is so complex and vast that it takes several years and millions of dollars to roll it out. It also requires many far-flung outposts of a company to follow exactly the same business processes. In fact, implementing any integrated ERP solution is not as much a technological exercise but an "organizational revolution." Extensive preparation before implementation is the key to success. Implementations carried out without patience and careful planning will turn out to be corporate root canals, not competitive advantage. Several issues must be addressed when dealing with a vast ERP system, and the following sections discuss each of them in detail. Top Management Commitment Implementing an ERP system is not a matter of changing softwaresystems, rather it is a matter of repositioning the company and transforming the business practices. Due to enormous impact on the competitive advantage of the company, top management must consider the strategic implications of implementing an ERP solution. Management must ask several questions before embarking on the project. Does the ERP system strengthen the company's competitive position? How might it erode the company's competitive position? How does ERP affect the organizational structure and the culture? What is the scope of the ERP implementation only a few functional units or the entire organization? Are there any alternatives that meet the company's needs better than an ERP system? If it is a multinational corporation, the management should be concerned about whether it would be better to roll the system out globally or restrict it to certain regional units? Management must be involved in every step of the ERP implementation. Some companies make the grave mistake of handing over the responsibility of ERP implementation to the technology department. This would risk the entire company's survival because of the ERP system's profound business implications. It is often said that ERP implementation is about people, not processes or technology. An organization goes through a major transformation, and the management of this change must be carefully planned (from a strategic viewpoint) and meticulously implemented. Many parts of the business that used to work in silos now have to be tightly integrated for ERP to work effectively. Cutting corners in planning and implementation is detrimental to a company. The top management must not only fund the project but also take an active role in leading the change. A review of successful ERP implementations has shown that the key to a smooth rollout is the effective changemanagement from top. Intervention from management is often necessary to resolve conflicts and bring everybody to the same thinking, and to build cooperation among the diverse groups in the organization, often times across the national borders. 17 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING Top management needs to constantly monitor the progress of the project and provide direction to the implementation teams. The success of a major project like an ERP implementation completely hinges on the strong, sustained commitment of top management. This commitment when percolated down through the organizational levels results in an overall organizational commitment. An overall organizational commitment that is very visible, well defined, and felt is a sure way to ensure a successful implementation. Reengineering Implementing an ERP system involves reengineering the existing business processes to the best business process standard. ERP systems are built on best practices that are followed in the industry. One major benefit of ERP comes from reengineering the company's existing way of doing business. All the processes in a company must conform to the ERP model. The cost and benefits of aligning with an ERP model could be very high. This is especially true if the company plans to roll out the system worldwide. It is not very easy to get everyone to agree to the same process. Sometimes business processes are so unique that they need to be preserved, and appropriate steps need to be taken to customize those business processes. An organization has to change its processes to conform to the ERP package, customize the software to suit its needs, or not be concerned about meeting the balance 30 percent. If the package cannot adapt to the organization, then organization has to adapt to the package and change its procedures. When an organization customizes the software to suit its needs, the total cost of implementation rises. The more the customization, the greater the implementation costs. Companies should keep their systems "as is" as much as possible to reduce the costs of customization and future maintenance and upgrade expenses. Integration There is a strong trend toward a single ERP solution for an entire company. Most companies feel that having a single vendor means a "common view" necessary to serve their customers efficiently and the ease of maintaining the system in future. Unfortunately, no single application can do everything a company needs. Companies may have to use other specialized software products that best meet their unique needs. These products have to be integrated along with all the homegrown systems with the ERP suite. In this case, ERP serves as a backbone, and all the different software are bolted on to the 18 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING ERP software. There are thirdparty software, called middleware, which can be used to integrate software applications from several vendors to the ERP backbone. Unfortunately, middleware is not available for all the different software products that are available in the market. Middleware vendors concentrate only on the most popular packaged applications and tend to focus on the technical aspects of application interoperability rather than linking business processes. Many times, organizations have to develop their own interfaces for commercial software applications and the homegrown applications. Integration software also poses other kinds of problems when it comes to maintenance. It is a nightmare for IS personnel to manage this software whenever there are changes and upgrades to either ERP software or other software that is integrated with the ERP system. For every change, the IT department will be concerned about which link is going to fail this time. Integration problems would be severe if the middleware links the ERP package of a company to its vendor companies in the supply chain. Maintaining the integration patchwork requires an inordinate and ongoing expenditure of resources. Organizations spend up to 50 percent of their IT budgets on application integration? It is also estimated that the integration market (products and services) equals the size of the entire ERP market.When companies choose bolt-on systems, it is advisable to contact the ERP vendor for a list of certified third-party vendors. Each year, all the major ERP vendors publish a list of certified third-party vendors. There are several advantages to choosing this option, including continuous maintenance and upgrade support. One of the major benefits of ERP solutions is the integration they bring into an organization. Organizations need to understand the nature of integration and how it affects the entire business. Before integration, the functional departments used work in silos and were slow to experience the consequences of the mistakes other departments committed. The information flow was rather slow, and the departments that made the mistakes had ample time to correct them before the errors started affecting the other departments. However, with tight integration the ripple effect of mistakes made in one part of the business unit pass onto the other departments in real time. Also, the original mistakes get magnified as they flow through the value chain of the company. For example, the errors that the production department of a company made in its bill of materials could affect not only the operations in the production department but also the inventory department, accounting department, and others. The impact of these errors could be detrimental to a company. For example, price errors on purchase orders could mislead financial analysts by giving a distorted view of how much the company is spending on materials. Companies must be aware of the potential risks of the errors and take proper steps, such as monitoring the transactions and taking immediate steps to rectify the problems should they 19 SCE DEPARTMENT OF MANAGEMENT SCIENCE BA 7301 ENTERPRISE RESOURCE PLANNING occur. They must also have a formal plan of action describing the steps to be taken if an error is detected. A proper means to communicate to all the parties who are victims of the errors as soon as the errors are detected is extremely important. Consider the recent example of a manufacturing company that implemented an ERP package. It suddenly started experiencing a shortage of manufacturing materials. Production workers noticed that it was due to incorrect bills of materials, and they made necessary adjustments because they knew the correct number of parts needed to manufacturer. However, the company did not have any procedures to notify others in case any errors were found in the data. The domino effect of the errors started affecting other areas of business. Inventory managers thought the company had more material than what was on the shelves, and material shortages occurred. Now the company has mandatory training classes to educate employees about how transactions flow through the system and how errors affect the activities in a value chain. It took almost eight weeks to clean up the incorrect bills of materials in the database. Companies implementing electronic supply chains face different kinds of problems with integration of information across the supply chain companies. The major challenge is the impact automation has on the business process. Automation changes the way companies deal with one another, from planning to purchase to paying. Sharing and control of information seem to be major concerns. Companies are concerned about how much information they need to share with their customers and suppliers and how to control the information. Suppliers do not want their competitors to see their prices or order volumes. The general fear is that sharing too much information hurts their business. Regarding controlling information, companies are aware that it is difficult to control what they own let alone control what they do not own. Companies need to trust their partners and must coordinate with each other in the chain. The whole chain suffers if one link is slow to provide information or access. The management also must be concerned about the stress an automated supply chain brings within each organization. For instance, a sales department may be unhappy that electronic ordering has cut it out of the loop, while manufacturing may have to adjust to getting one week's notice to order changes and accommodate those changes into its production orders. ERP Consultants Because the ERP market has grown so big so fast, there has been a shortage of competent consultants. The skill shortage is so deep that it cannot be filled immediately. Finding the right people and keeping them through the implementation is a major challenge. ERP implementation demands multiple skills functional, technical, and interpersonal skills. Again, consultants with 20 SCE DEPARTMENT OF MANAGEMENT SCIENCE

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