ERP Rationale
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Transcript of ERP Rationale
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ERP Selection
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Basic question: How does a firm justify implementing anERP system?
Why are we doing this? How do we know that the benefitsoutweigh the costs?
What is the business case for ERP?
What are the categories of benefits?
What are the costs?
What are the hidden costs?
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IS/IT Projects
Typically
Late
Over budget
Fail to satisfy design specifications
ERP projects
Are among the largest IT projects there are for mostorganizations
Cost range $5 million to over $100 million (+)
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Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)
Time to Install ERP US Sweden
12 months 34% 38%
13 to 24 months 45% 49%
25 to 36 months 11% 8%
37 to 48 months 6% 4%
> 48 months 2% 1%
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Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)
Installation Cost US Sweden
< $5 million 42% 40%
$5 million to $25 million 33% 35%
$26 million to $50 million 10% 18%
$51 million to $100 million 7% 7%
> $100 million 7% In prior
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ERP Life Cycle
The ERP Life Cycle is composed of 5 major Phases Grouping of related activities
Three major activities Analysis: understanding business needs how do we want
configure the software (choose from software options)
Design: prototyping, pilots, etc.
Implementation: final configuration, testing (lots), and rollout
Two additional phases Project planning
Support
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Cost / Benefit Analysis
Assess if project is worth doing, from a financialperspective
Quantify costs
Quantify benefits Perform financial calculations to assess economic
feasibility are financial benefits significantly greaterthan financial costs?
Types of analysis: Net present value, Payback period,ROI over specified time period
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Cost ProportionsMabert et al. (2000); Olhager & Selldin (2003)
Where money spent US Sweden
Software 30% 24%
Consulting 24% 30%
Hardware 18% 19%
Implementation team 14% 12%
Training 11% 14%
Other 3% 1%
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Intangibles in Cost / Benefit
Intangible costs and benefits cannot always bemeasured, but must be considered.
Sometimes, intangibles determine if project
proceeds or not. Intangible Benefits
Increased levels of service
Customer satisfaction
Survival
Need to develop in-house expertise
Intangible Costs Reduced employee moral
Lost productivity
Lost customers or sales
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Need to define business rationale/anticipated
benefits for imple ERP: Helps set clear, unambiguous objectives
>Why?
Makes the firm commit necessary resources
Provides direction for ERP design focus
> For example, business process improvement
Determine how success will be measured
> This is sometimes critical to whether or not the project is approved
> Metrics: examples?
Ensure senior management on board
> Why?
O O S S S @
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Categories
Technology: Replace outdated hardware and software with
more scalable, flexible and maintainable technology
Business Process: Replace inefficient legacy processes with newprocesses that are grounded in best practices
Strategic: Implement a technology platform that gives the
organization abilities it did not have before
Competitive: Provide the organization a better ability to
compete in their industry
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Year 2000
The Y2K bug
Quoted Y2K costs: $1 + per line of code (typical large organization:
10s of millions of lines)
Multiple distinct, disparate systems
Multiple vendors and platforms
Inability to access and share critical information
Expensive to maintain (muliple DBs, OS, programming
environments) Staff acquisition and training a big issue
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Technology Rationales
Poor quality of existing systems
Often the result of a band aid approach
the 10 room shack
difficult to fix, impossible to improve
Need to integrate corporate acquisitions
Different coding schemes, disparate platforms cross
company integration very difficult
Common integration platform
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Often made on yes-no basis
Solve Y2K?
Facilitate integration of processes? Acquired companies? Scalable?
More easily maintained and supported?
Strong non-monetary motivation (although)
Cost avoidance is often sited as rationale
Technology an enabler of direct monetary impacts
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Improve business processes with an eye to efficiency, newcapabilites.
Personnel and IT cost reduction
especially accounting, clerical and IT personnel
Productivity improvements
affecting any number of process areas
Less paper, handoffs
Financial Cycle Close timely official financial information for decision-making
Real time availability of data
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There may be specific, quantifiable monetary goals
Some goals e.g., quality are difficult to quantify in monetary terms
Predictability / accuracy of measurement depends on
reengineering method
Common monetary goals:
productivity gains do more with less people and associated
reduction in costs
Increased reliability due to better maintenance: no unscheduled
downtime, Reduction in raw material purchases/less inventory
fewer warehouses
lower freight costs
Reduced costs associated with accounting function
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Facilitate new strategies for the organization
Reasons beyond process / transaction efficiency
better customer satisfaction, quality corporate image
allow base for emerging technology : e-commerce Allow the organization to do things it could not do before
Allow company to enter new markets
Measured in non-monetary terms
Employee retention and attraction
Project a professional, modern image
New revenue generating opportunities
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Our competitor has it, so we need it to stay in business
Why does our competitor have it?
Do we need it too?
What happens if we dont?
Measured in non-monetary terms
cost and impact on business is not certain
E.g. - Availability to promise 110% Guarantee
Superior customer response
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Levi Case
What rationale(s) did Levi used to justify ERP
decision?
Categories Technology Business Process
Strategic
Competitive
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How does a firm finally decide whether or not to goERP?
By addressing the question..What keeps executives
awake at night? Is there some crisis (technical, competitive, or other) that
necessitates a change?
Organizations often need to be galvanized into action