Enterprise System

1
Implementation
Sumeet Gupta
2 Outline

 A Short Overview of SAP R/3

 Implementation Issues
 Case: Vandelay Industries
 Putting the Enterprise Into the Enterprise System
3
ERP Implementation Issues
Case: Vandelay Industries
4 Issues in Implementation

 What benefits do software like R/3 bring to an organization?

 What are the differences between IT-led improvement and improvement-
led IT
 IS ERP a source of competitive advantage to an organization?
 What are the firm-level and industry-level issues surrounding ERP usage?
5 Case: Vandelay Industries

 Technical aspects of ERP and R/3

 Why has R/3 been so successful in the US? Why does it appear to be so far
ahead of its competitors? What are its drawbacks?
 Project Management considerations for Deloitte and Vandelay
 What role do consultants play in the implementation of ERP systems?
 Is the total project budget of $20 million reasonable for this engagement? What
assumption do you need to make to answer this question?
 Why have so many re-engineering efforts been failures? Will technology enabled
change management help improve the success rate as opposed to BPR
practice of Clean Sheet change?
6 Case: Vandelay Industries

 Approaches to process standardization and best practices

 How do you improve ‘best practices’?
 What are the major drawbacks that you see from undertaking an ERP
implementation? Are they are drawbacks once the system is up and running?
 If you were Elaine Kramer, what would your greatest worries be as you started this
implementation? What about if you were the Vandelay CEO?
 Competitive implications of technology-enabled change
 What competitive requirement does R/3 fulfill for Vandelay?
7 Reasons for success of ERP and R/3
Advantages
 Based on Client-Server
architecture
 Data stored in a single fully-
integrated database
 Seamless interaction between
modules
 Consistent GUI for all functions
 Oriented around process and not
functions
 Introduces standardization and no
need to maintain several
platforms
Drawbacks
 Inward-facing and supports single
company. Not JVs, partnerships ..
 Based on closed programming
standard ABAP /4 language and
is difficult to modify or extend
 R/3 not web-amenable
 Requires work-around to be used
with pull-based manufacturing
systems (JIT, TPS etc.)
 Configuration is quite time-
consuming
 Client-server more expensive than
mainframe based model
8 Reasons for success of ERP and R/3
9 Reasons for success of ERP and R/3
10 Project Management Considerations
for Deloitte and Vandelay
 Use of Consultants
 To facilitate the process of installing R/3, configuring and converting over from
previous systems (change management), which requires deep expertise
 Event of ERP implementation is a chance to make large-scale changes in both
organization structure and business practices. This requires use of consultants
 Consultants use such opportunity to train their newcomer talent while billing
clients
 Employees of vendors may themselves become consultants for such
implementation to other organizations
11 Project Management Considerations
for Deloitte and Vandelay
 Project budget and overruns (possible)
Total Project Budget $20,000,000

Case Facts
Total Project Timeframe 18 Months
Full time team membership 50 (20 Vandelay employees, 30 consultants)

Total number of Vandelay employees requiring training on R/3 13000 (2/3 of 20,000 total employees)

Assumptions
Average training time, for employees requiring training: 2.5 days (20 Hours or 0.01 years)
Average consultants billing rate (fully loaded): $150/hr or $300,000/yr
Average Vandelay emplyee salary (fully loaded): $60,000/yr

Expenses
Total consulting fees $13,500,000 ($300,000 x 30 x 1.5)
Total salary expense for full-time team members: $1,800,000 ($60,000 x 20 x 1.5)
Total salary expense for employees during training: $7,800,000 ($60,000 x 13,000 x 0.01)

Total Consulting and Salary Expense $23,100,000

12 Project Management Considerations
for Deloitte and Vandelay
 Clean Sheet Vs Technology-enabled re-engineering
13 Project Management Considerations
for Deloitte and Vandelay
Clean Sheet
 No ‘blinders’ from any software or
technology. Potential for truly radical
new processes
 Process design is relatively quick
 Software search process takes time
 Potentially extensive software re-writes
take time and cost money
 No guarantee that processes will be
achievable
Technology-Enabled
 Unique, radical process will not result. The
exercise is mostly process
implementation as best practices are
included in the software
 Process design takes time as software
capabilities need to be taken into
account
 Software selection is done in advance,
or is a foregone conclusion
 Because software capabilities are
considered throughout the design
process, modifications are likely minor
 Resulting processes are going to be
technically achievable
14 Approaches to process standardization
and best practices
 R/3 bundles best practices in the software which are intended to be
standardized
 Total process standardization depends on the existing tradition and culture
of the company
 Some approaches
 Standardize only processes that create database entries. This will give visibility
over the entire data in common formats
 External interfaces to other firms: customer, suppliers etc. is as consistent as
possible
 Ensure that both external and internal interfaces are as consistent as possible
 Standardize as many ‘best practices’ as possible and allow tinkering on R/3
processes that are considered peripheral
15 Approaches to process standardization
and best practices
 Best practices, re-engineering and continuous improvement
 Technology-enabled change is same as clean-sheet approaches to BPR as both
attempt to move an organization from one set of routines to another
 Re-engineering around best-practices has serious shortcomings as a strategy for
operational improvement
 It is not a continuous improvement effort as best practices need not be improved
 The theory and evidence around organizational improvement suggests that complete
reliance on step changes through re-engineering is not a good idea. Processes and
operations improve most effectively when they build over time from a self-generated
base of knowledge and expertise.
 Best-practices brings improvements from outside an operation. Re-engineering with best
practices is a questionable strategy as it ignores the fact that people are best sources of
knowledge about improving their operations, and they accept change more willingly
when they help define it.
16 Competitive Implications of
Technology-enabled change
 Whether such change provides competitive advantage over rivals
 R/3 helps in process improvement and reduction in process time and thus make
the system more efficient and competitive
 However, the question is whether these advantages are sustainable as R/3 could
be implemented by competitors
 ERP becomes a source of competitive leveler rather than that of competitive
advantage. Firm have to look outside its processes for ways to distinguish
themselves
 Achieving Strategic fit between
17
Enterprise System and the Enterprise
Are Enterprise Systems living up to companies’ expectations?
18 The Allure of Enterprise Systems

 Enterprise system are designed to solve the fragmentation of information in

large business organizations.
 Maintaining different systems leads to enormous costs
 For storing and rationalizing redundant data
 For rekeying and reformatting data
 For updating and debugging obsolete software code
 For programming communication links between systems to automate the transfer of
data

 Indirect costs – Poor customer responsiveness

 An ES streamlines a company’s data flows and provides management with
direct access to a wealth of real-time operating information
19 Horror Stories

 Foxmeyer Drug argues that its system drove it into bankruptcy

 Mobil Europe spent hundreds of millions of dollars on its system only to
abandon it when its merger partner objected
 Dell computer found that its system would not fits its new, decentralized
management model
 Applied materials gave up on its system when it found itself overwhelmed
by the organizational changes involved
 Dow Chemicals spent 7 years and close to half a billion dollars
implementing a mainframe based enterprise system and later decided to
switch to a client-server version.

The primary reason for such failure are not technical but business related.
Companies fail to reconcile the technological imperatives of the enterprise
system with the business needs of the enterprise itself
20 The Problem with Enterprise Solutions

 Dauntingly complex, enterprise software requires significant money, time

and expertise
 It is a generic solution and imposes its own logic on a company’s strategy,
culture and organization
 Software decides the business flows whereas businesses must decide what kind
of software is good for the business
 Vendor designs based on best practices but it is still the vendor who decides
what is the best
 In some cases better solution will be obtained where in others the problem may
worsen
 Vendor based customization is possible (such as modules) but not much
 The package may be used by all companies in the industry – erasing the
source of differentiation and competitive advantage.

Question: Is the vendor defined process the best way of doing business?
21 The Problem with Enterprise Solutions

 Example
 An industrial products manufacturer renders 25% faster customer service than its
competitors often by circumventing formal processes and systems. It has gained
a large and loyal clientele who are happy to pay a premium price for its
products
 After installing Enterprise System it has to follow more rational but less flexible
formal process for filling orders and thus risk its core source of competitive
advantage
 Now consider if the same Enterprise System is installed by all companies in the
market – The source of competitive differentiation vanishes
22 Achieving Strategic Integration
Lessons to Learn

 Mantra 1: ES must strengthen the competitive differentiation and not

dissolve it.
 Example: Compaq did not copy the Dell build-to-order Supply Chain model
because it saw danger in adopting processes indistinguishable from those
of its competitors as build-to-order environment require superior capabilities
for forecasting demand and processing orders.
23 Achieving Strategic Integration
Lessons to Learn

 Mantra 2: For companies that compete on cost it is important to weigh the

short-term gains over long-term gains

 Example: Air products and Chemicals did not follow its competitors in
installing large complex enterprise system as the cost of ES might force it to
raise its prices leading to lost sales in some of the commodity gas markets in
which it operates. The companies existing system were adequate to meet
its need and it has no plans to exchange information electronically with
competitors.
 In the Long run: In petrochemical industry ES has improved the flow of
information through the supply chain to such a degree that they have
become a de facto operating standard.
24 Achieving Strategic Integration
Lessons to Learn

 Mantra 3: ES use must strategically fit with the culture of the organization

 While on one hand ES allow companies to streamline their management

structures, creating flatter, more flexible and more democratic
organizations by providing universal, real-time access to operating and
financial, on the other hand they involve the centralization of control over
information and the standardization of processes as in hierarchical
organizations.
 Such ES can be used to inject more discipline in the organization or free
people to be more innovative and more flexible.
25 Achieving Strategic Integration
Lessons to Learn

 Mantra 4: For Global Corporations the decision of the amount of globalization

and localization across cultures must be seen based on the impact on the
company’s bottom line.
 ES brings uniformity in operating practices across the geographically dispersed
units
 Dow chemicals used ES as a way to cut costs by streamlining global financial and
administrative processes
 Owens Corning used ES to establish a new global-procurement organization by
replacing 211 legacy systems and thus coordinate order-management, financial
reporting, and supply chain processes across the world

 However, such uniformity may be counterproductive (E.g., HP, Monsanto,

Nestle)
 If companies do not tailor their operations to local customer requirements and
regulatory structures, they risk sacrificing key markets to more flexible competitors
 Need to roll out different versions of same ES that supports local operating practices
26 Achieving Strategic Integration
Case: Elf Atochem North America

 A 2 billion dollar regional chemicals subsidiary of French company Elf

Aquitaine
 Founds itself hampered by the fragmentation of critical information systems
following a series of mergers in early 1990s
 Ordering systems not integrated with production systems
 Sales forecasts were not tied to budgeting systems
 Each unit was tracking and reporting its financial data independently
 Decides to implement an ES SAP R/3 but viewing its as an opportunity to
take a fresh look at the company’s strategy and organization
27 Achieving Strategic Integration
Case: Elf Atochem North America

 Problems
 Found that the real problem was not the fragmentation of systems but its
organization although customers were shared, each unit was managed
autonomously
 To place a single order would require a customer to place many different phone
calls to many different units and to pay for the order, a customer would have to
process a series of invoices
 To process the order it would take four days and seven handoffs between
departments although the actual work was of four hours only
 Because each unit managed inventory and scheduled production
independently, the company was unable to consolidate inventory or coordinate
manufacturing at the corporate level and consequently more than $6 million in
inventory was written off every year and plant had to be shut down frequently for
unplanned production line-changes.
 Since ordering and production systems were not linked, sales representatives
could not promise firm delivery dates, thus losing customers
28 Achieving Strategic Integration
Case: Elf Atochem North America

 Decides based on its strategic need: In petrochemical business, the

competition is based on service
 It structured its ES implementation in a way to radically improve its service levels
 Focused its efforts on four key processes: Materials management, production
planning, order management, and financial reporting as there were all cross-unit
processes and hence most distorted by the fragmented organizational structure
 It did not install modules for HRM and plant maintenance as these had no
impact on customers
 Also made fundamental changes to its organizational structure
 Combined accounts receivables and credit departments so as to consolidate all of a
customer’s order into a single account and issue a single invoice and allowed the
company to monitor and manage overall customer profitability
 Combined all its units’ customer service department into one department providing
each customer with a single point of contact for checking on orders and resolving
problems
 Created a position for demand manager (to integrate sales and production planning)
29 Achieving Strategic Integration
Case: Elf Atochem North America

 Result
 Real-time information to connect sales and production planning – demand and
supply. As orders were entered or changed, the system automatically updated
forecasts and factory schedules thus enabling the company to quickly alter its
production runs in response to customer needs
 Competitive advantage as only one competitor has this capability
30 Enterprise Systems Framework
Stress the Competitive Culture
Enterprise Differentiation •More control: Improve
and Not the •Service: Specific module
that enhance service
Centralization
•Less control: Grant
System levels must be installed
•Product: ES likely to
Autonomy

strengthen

Geographical Competition
Spread •Low: Strengthen the
•Need for standardization: competitive advantage
Implementation across •High: Compete on
most modules customer service
•Need for localization:
Implementation across
only those modules that
need to be standardized
31 Conclusion

 ES are inherently complex and highly costly

 Companies that do not think through the full business implications of ES
face disastrous consequences
 A speedy implementation of an ES may be a wise business move, a rash
implementation is not
 Top management must be directly involved in planning and
implementation of ES
 See the implementation of an ES from the business perspective and not
from the technology’s perspective
32 Conclusion

 Careful deliberation to answer questions such as:

 How might an ES strengthen our competitive advantages?
 How might it erode them?
 What will be the system’s effect on our organization and culture?
 Do we need to extend the system across all our functions, or should we
implement only certain modules?
 Would it be better to roll the system out globally or restrict it to certain regional
units?
 Are there other alternatives for information management that might actually suit
us better than an ES?
33