Enterprise Resource Planning
What to Expect
When a customer buys something from a Web site, a store, or a call center, a response is auto- matically triggered in your sales, accounting, planning, and logistics applications. To put it simply, e-commerce is the front office, and enterprise resource planning (ERP) is the back office.
ERP apps reshape a company's back-office structure because they address a difficult IT problem:
overcoming the integration challenges posed by system portfolios containing disconnected, unco- ordinated back-office applications that have outlived their usefulness. Although the Web stampede and the Internet gold rush have seized most of the media spotlight, the corporate world's steady embrace of ERP apps was one of the most significant business and technological trends of the 1990s.
With the rise of e-business, ERP in its current form is rapidly approaching the end of its reign as the central focus of the business applications universe. Today's managers must assess what this change means for them by analyzing the following questions.
• What is the role of ERP apps in the emerging click-and-brick world?
• How do companies leverage the investments they've already made in ERP apps?
The change in focus from operational efficiency to customer-centricity, intimacy and innovation are causing fundamental back-office changes. In this chapter, we discuss the evolution of ERP in rela- tionship to the e-business world. We discuss ERP's historical roots in MRP II and its evolution into as CRP and XRP. The chapter also presents real-world examples of how e-leaders are using ERP to gain operational efficiencies. However, as many firms have discovered, adopting an ERP solution significantly affects a company's architecture, processes, people, and procedures. Today's senior managers must make the right choices when creating their e-business back offices.
What do Microsoft, Coca-Cola, Cisco, Eli Lilly, Alcoa, and Nokia have in common? Unlike most businesses, which operate on 25-year-old back-office systems, these market leaders reengineered their businesses to run at breakneck speed by implementing a transactional backbone called en- terprise resource planning (ERP). These companies credit their ERP systems with having helped them reduce inventories, shorten cycle times, lower costs, and improve overall operations.
Why did ERP technology suddenly become so popular? For large companies, the ERP revolution represents the Holy Grail of corporate computing.[1] The traditional corporate computing environ- ment has been typified by a 20-year-old application running on a mainframe that is too old and slow for modern business. The old systems worked well in their day, when customers expected order fulfillment to take several weeks. Today, in the age of overnight delivery and split-second Internet speeds, customer expectations have changed. Top management realizes that its company's out- moded technological infrastructure cannot meet the demands of the new economy and must be quickly replaced.
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Overhauling a company's antiquated systems is the first step in back-office transformation. ERP integrated application suites provide a framework of applications to automate a company's financial, manufacturing and distribution, human resource, and administrative functions. ERP unites a com- pany's major business processes—production, order processing, inventory management and ware- housing, accounts payable and receivable, the general ledger, and payroll—within a single family of software modules. ERP's strategy helps companies streamline their work flows in order to become more efficient organizations. For large companies, ERP speeds communications and the distribution and analysis of information, facilitating the exchange of data across corporate divisions by unifying the company's key processes.
The ERP phenomenon is not restricted to large firms. In the dot-com world, managing customer relationships is the key to success. If companies don't provide the services customers expect, they will go elsewhere. In an e-business setting, ERP offers customers a more efficient and higher-quality level of service, including the ability to order products online and to inquire about product pricing and an order's status. Smaller dot-com firms are adopting ERP solutions as their prices drop and the rented applications service provider (ASP) business model becomes more prevalent. As a result, leading ERP vendors, such as SAP,[2] Oracle, PeopleSoft, and J. D. Edwards, are reinventing themselves to focus on e-business.
ERP is the technological backbone of e-business, an enterprise-wide transaction framework with links into sales order processing, inventory management and control, production and distribution planning, and finance. In the early 1990s, only large manufacturers saw the benefits to implementing an ERP suite of applications. Today, medium-size and dot-com firms are recognizing the necessity of integrating their back-office processes if they wish to have front-office success in the e-commerce world.
Who Really Uses ERP Suites?
Has your company implemented an ERP system as the foundation for its e-business strategy? If not, your company will face serious technical and process limitations as you attempt to achieve your e-business strategy. Without an ERP solution in place, system integration is almost impossible to attain. If your front- and back-office operations are not linked, sales orders will literally have to be rekeyed. Imagine using such "sneakerware" to process 1,000 orders an hour! As the e-business economy evolves, ERP suites will continue to function as the technological backbone of the enter- prise. Implementing an ERP system is at or near the top of many large corporations'IT agendas.
For example, 3Com Corporation, the data networking company, operates in an industry in which the ability to respond quickly to changing customer needs is the cornerstone of competitive advant- age. The company made its business case for an integrated back-office infrastructure around gain- ing a strategic and operational edge over its competitors. 3Com required a technology platform that could handle hypergrowth, support expanding worldwide operations, and adapt to continuous changes in business and customer needs. 3Com's back-office integration business case also ar- gued for an infrastructure to support its extended enterprise model. Unlike the classic vertically integrated leviathans of the past, 3Com and other high-tech organizations are often, in reality, a widely dispersed collection of subcontractors producing specific products, linked by technology to form an extended enterprise.[3]
Another example is the Chevron Products Company, the refining and marketing arm of the Chevron Corporation. Chevron Products represents about $16 billion of Chevron's $39 billion total revenue and employs some 8,500 people who are responsible for more than 10,000 storage terminals and service stations across the United States. Chevron Products refines crude oil for sale as gasoline, jet fuel, and other petroleum-based products. The company's old information system consisted of approximately 120 disparate, mainframe-based applications. Chevron made its business case for
an integrated back-office infrastructure that would radically reduce the number of software applica- tions used to support Chevron Products'reengineering and massive cost-cutting efforts. The goal of its cost-cutting and business process efforts was to improve its procurement, accounting, and plant management functions.
General Motors (GM) developed a business case for back-office integration to standardize its fi- nancial data and its business processes worldwide. The back-office integration initiative is part of the GM's continuing effort to cut costs by updating legacy infrastructure. GM's financials form a critical backbone link connecting the corporate office with its factories, engineering, and marketing, as well as its growing international operations. In the past, business operations were so different from one division to another that the company's software systems had difficulty communicating. A major impetus for GM's ERP initiative was to reduce the cost of the computer systems the company needs as it builds a series of new auto and component plants throughout the world.[4]
What do 3Com, Chevron, and GM have in common? These companies have chosen to purchase preintegrated ERP software frameworks in order to gain control over disparate groups of core busi- ness applications. GM's back-office operation is evolving from a business operations bureaucracy to a point-and-click service-delivery network.
Although not every ERP implementation is the same, most will fall into one of three primary cate- gories. The first category consists of organizations that sell a single product or a few products within a single industry. Among single-product companies are many e-commerce companies, such as eToys, which require fairly simple ERP capabilities. The second category, strategic business unit (SBU) firms, includes organizations that sell only a few products, largely in a single industry. Delta Airlines, Dell, Microsoft, and Nike are single SBU firms. The third group comprises large corporate conglomerates that market their products to many industries and have many SBUs. General Electric, IBM, Colgate-Palmolive, and Nabisco are multiple-SBU firms. ERP implementations in multiple-SBU companies, such as Chevron and General Motors, are extraordinarily difficult and require uncom- mon project management and leadership skills in order to succeed.
The Basics of Enterprise Resource Planning
Figure 8.1 illustrates the core applications that form a standard ERP framework. ERP is a phase in the increasing integration of not only technology but also all of an enterprise's internal and external constituencies. ERP is the second phase in this process, as depicted in Figure 8.2.
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Figure 8.1. Elements of Enterprise Resource Management
Figure 8.2. Evolution of ERP
The multiple applications comprising an ERP system are themselves built from smaller software modules that perform specific business processes within a given functional area. For example, a manufacturing application normally includes modules that permit sales and inventory tracking, fore- casting raw-material requirements, and planning plant maintenance.
The systems'integration across the various ERP modules allows managers to know what's going on in the farthest reaches of their businesses. Is it worth investing millions of dollars to obtain such operational transparency? Corporate management seems to think so. Today ERP applications in turn are evolving into sophisticated corporate portals. This new generation of portals is easy to use and more effective in providing integrated access to crucial data, applications, and processes.
Why enterprise portals? The portal metaphor mimics the way people work. The applications today are too convoluted requiring too many separate actions. To get things done employees have too many applications to interact with, scan through too many data sources, and manually pull infor- mation from multiple sources. The portals, such as MySAP, are designed to do this integration seamlessly.
Before going into details of each element of the ERP, it is necessary to understand the evolution of the overall framework.
The Evolution of ERP
Wave 1: Manufacturing Integration (MRP)
The historical origin of ERP is in the inventory management and control software packages that dictated system design during the 1960s. The 1970s saw the emergence of material requirements planning (MRP) and distribution resource planning (DRP), which focused on automating all aspects of production master scheduling and centralized inventory planning, respectively.
During the 1980s, the misnamed MRP II systems emerged to extend MRP's traditional focus on production processes into other business functions, including order processing, manufacturing, and distribution. MRP's integrative capabilities showed the business community how technology could link seemingly disparate business functions. As MRP's contributions became apparent, corporate executives sought to achieve similar benefits by integrating other company functions, including fi- nance, human resources, and project management. MRP II is a misnomer, as it provided automated solutions to a wide range of business processes, not just those found within a company's manu- facturing and distribution functions. As a result, MRP II was renamed ERP.
Wave 2: Enterprise Integration (ERP)
The key business drivers forcing structural migration from MRP to ERP include replacing legacy systems, gaining greater control, managing globalization, handling regulatory change, and improv- ing integration of functions across the enterprise. These drivers vary in intensity by industry, but their combined impact is forcing managers to reevaluate the IT application's capabilities.
• Replacing creaky legacy systems. —Too many systems and too little integration make for poor business strategy. Companies with large volumes of outdated software applications spend con- siderable sums on application maintenance but derive minimal benefit from their use, compared to the competitive advantages attainable using more recent technology. Core systems in busi- nesses everywhere contain applications that need to be replaced. The replacement market for human resources apps alone represents a $30 billion installed base of software for migrating businesses'processes from legacy systems to newer e-business solutions. The goal is to deploy modern application frameworks that reflect current business practices and are capable of adapt- ing to changes in the business environment of the future.
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• Gaining greater control. —Too many expenses and too many administrative headaches: Man- agers want to know how much their business has sold, what's been shipped, and a complete inventory status. Most legacy applications cannot provide such information. As one manager of a large company told us, "You can't manage what you don't know. Before our ERP implemen- tation, it was 4 to 6 weeks after the close of the month before we had information reconciled, and we still weren't sure of the accuracy. Previously, information was integrated manually and, therefore, was not reliable or timely. That was at the heart of my needs."
• Managing global operations. —Too many dispersed operations, not enough control: In order for a company to manage its local activities and to coordinate its worldwide operations, its technol- ogy systems must change. Three reasons dictate this need to change: stringent business con- ditions accentuated by channel and brand proliferation, the pressures of managing globally, and intense service demands by customers. Meanwhile, the span, scope, and intricacy of these global system implementations increases daily. For example, Dow-Corning's ERP installation includes about 1,400 concurrent users and 8,000 regular users in 84 sites across 17 countries.
[5] Dow must be able to handle the currency, language, tax, and statutory requirements of many countries. The company's goal is to support these regional needs with a minimum amount of customization. Enterprise globalization has increased the performance pressure on a company as customers insist that manufacturers produce higher-quality goods with shorter delivery times and lower prices. To meet these demands, companies must have an accurate, timely information process.
• Handling industry deregulation and regulatory change. —Too much change, no way to manage it: In many industries, new government policies, such as deregulation, often drive application requirements. For example, under the Telecom Act of 1996, U.S. telecommunications compa- nies must resell local phone service to their competitors, forcing them to manage inventories, prices, and customer arrangements in formats not tracked today. Other government- driven regulatory changes were Y2K compliance and the conversion to the Euro.
• Improving integration of decisions across the enterprise. —ERP links information application islands. Many companies have disparate, decentralized systems that prohibit various functional units from communicating easily. Financial applications don't communicate with the manufac- turing system, which doesn't communicate with marketing. Until the advent of ERP, true system integration was difficult to achieve. As a result, most large enterprises find themselves contend- ing with a hodgepodge of disparate, disjointed applications, creating an environment of confu- sion, misunderstanding, errors, and limited use of corporate information assets. The ERP model attempts to minimize information coordination problems by creating an integrated core of ad- ministrative and financial applications that serve as a focal point for all enterprise applications.
The first step in accomplishing these objectives is for firms to gain an integrated view of their busi- ness operations. The idea behind integration is quite simple: Use technology to develop process standardization across multiple business units in order to generate continued margin expansion and greater return on capital.
A significant factor in the second wave of ERP development was Y2K preparation, which was often cited as a major reason for ERP adoption. Hundreds of companies worldwide "went live" during 1999 as they switched off their legacy computer systems and turned on their newly installed ERP software. However, as these companies quickly realized, their ERP implementations represented only the end of the beginning. The next step in their technological growth would require adopting software solutions to support their e-business strategies.
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Wave 3: Customer-Centric Integration (CRP)
Let's face facts. First came bricks, then came clicks. Now the challenge is integrating the two. Many of the companies that sell ERP software—including SAP, PeopleSoft, and troubled Baan, acquired by London-based Invensys—struggled once their markets became saturated and the demand for Web-based platforms surged. These companies are reinventing themselves as CRP (customer- centric resource planning) providers. Companies everywhere are racing to find the right combination of bricks and clicks.
e-Commerce is compelling companies to replace homegrown, industry- specific point applications with CRP applications. Why? Because traditional e-commerce configurations use cumbersome middleware to attempt to connect Web applications to back-end systems. This strategy involves the following drawbacks.
• It's expensive and time consuming. It is not unusual for ERP projects to cost hundreds of millions of dollars and to take more than 5 years to complete.
• A company's business rules and data are often scattered over multiple applications. In a multi- vendor world, data redundancies create inaccuracies and costly integration efforts.
• Upgrades are costly. Because multiple Web, middleware, and back-office vendors are involved with the implementation, accountability issues invariably arise when business rules conflict or technical problems occur.
Another key CRP driver occurs when a company changes its business model from a make-to-stock, demand forecast model to an e-commerce build-to-order, customer- driven model (see Figure 8.3). e-Commerce build-to-order and fulfill-to-order business models give customers more choices at a time when they have never been more confident that they can get what they want, when they want it, at the price they want. Traditional ERP solutions are ill-equipped to meet the business requirements of the build-to-order/fulfill-to-order business paradigm, having been developed to meet the business requirements of make-to-stock/ configure-to-order strategies.
Figure 8.3. Evolution of Business Models
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ERP's business requirements have evolved from their focus on cost cutting, efficiency, and pro- ductivity to a new focus on customer value, effectiveness, and enhanced service delivery. Effective manufacturing and service delivery in the build-to-order/fulfill-to-order business world requires cus- tomer-centric planning and a unified, real-time transaction environment. CRP strategies assume that companies must plan continuously instead of the classic ERP assumption of long planning cycles.
Ericsson, the wireless giant, provides an excellent example of a company that recently implemented a CRP system to transform its service-delivery model. To support the company's migration from a purely functional to a truly integrated operation, Ericsson's manufacturing and distribution division made CRP a critical element of its business reengineering effort. Following the implementation of a CRP system from Glovia, Ericsson reportedly enjoyed the following significant operational im- provements.[6]
• Sales order processing lead time was reduced from 1 hour to 10 minutes.
• Purchase order lead time was reduced from 1–4 hours to less than 5 minutes.
• Production scheduling run time was reduced from 18 hours to 30 minutes.
• Ninety-eight percent of orders are now delivered on time.
These benefits are quite impressive. Ericsson's CRP applications track cost accounting information related to sales orders, materials, money, labor, and asset utilization. The company's goal is to acquire a single, integrated view of all its information resource applications, including the general ledger, accounts payable/ receivable, order entry, billing, sales, marketing, materials, purchasing, product data management, shop floor control, and manufacturing operations, to name only the most common.
Wave 4: Interenterprise Integration (XRP)
Your company has squeezed as many inefficiencies as possible out of operations but you're still getting trounced by competition. What's going on? The answer lies in supply chain integration. ERP apps are adapting to the e-business requirement that a company's partners benefit from the same seamless integration as the company itself. This fourth wave of ERP development, known as ex- tended resource planning (XRP), extends the organizational foundation of an ERP backbone be- yond the four walls of the enterprise to its customers, suppliers, and trading partners. Examples of XRP are B2B marketplaces. A main goal of an XRP implementation is to provide better synchroni- zation with trading partners in order to reduce inventories, foster strategic pricing, improve cycle times, and increase customer satisfaction throughout the supply chain.
Current ERP systems offer little in terms of interenterprise planning. ERP has traditionally excelled at transaction management, the ability to manage the administrative activities associated with hu- man resource, financial, inventory, and order processes. For example, although it has order pro- cessing functionality, an ERP system provides little or no information about the order's profitability or the best way to deliver the order to the customer. ERP differs from supply chain planning (SCP).
Whereas the ERP approach asks, Should I take your order? the SCP approach asks, Can I take your order? Today's ERP systems are rudimentary. Data from ERP systems provides a snapshot in time of a business process, but doesn't support the continuous-planning requirements central to a successful SCP system. SCP's continuous-planning capability refines and enhances the plan in real time, adjusting the plan to accommodate any last-minute changes before the plan is executed.
Attempting to devise an optimal plan using ERP-based systems has been compared to driving down a busy freeway while looking in the rear-view mirror.
XRP systems complement traditional ERP systems by providing intelligent decision support capa- bilities. An XRP system is designed to overlay existing systems, pulling data from every step in the supply chain and providing a clear, global picture of where the enterprise is heading. XRP-generated plans allow companies to quickly assess the impact of their actions across the entire supply chain, including the company's impact on customer demand.