ERP Selection

1. ERP Selection

2. Basic question: How does a firm justify implementing an ERP system? Why are we doing this? How do we know that the benefits outweigh the costs? What is the business case for ERP? What are the categories of benefits? What are the costs? What are the hidden costs?

3. IS/IT Projects Typically Late Over budget Fail to satisfy design specifications ERP projects Are among the largest IT projects there are for most organizations Cost range $5 million to over $100 million (+)

4. Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)

5. Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)

6. 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

7. Cost / Benefit Analysis Assess if project is worth doing, from a financial perspective Quantify costs Quantify benefits Perform financial calculations to assess economic feasibility – are financial benefits significantly greater than financial costs? Types of analysis: Net present value, Payback period, ROI over specified time period

8. Cost ProportionsMabert et al. (2000); Olhager & Selldin (2003)

9. Intangibles in Cost / Benefit Intangible costs and benefits cannot always be measured, 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

10. 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?

11. Categories Technology: Replace outdated hardware and software with more scalable, flexible and maintainable technology Business Process: Replace inefficient legacy processes with new processes that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

12. 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

13. 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

14. 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

15. Improve business processes with an eye to efficiency, new capabilites. 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

16. 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

17. 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’

18. 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 don’t? Measured in non-monetary terms cost and impact on business is not certain E.g. - Availability to promise 110% Guarantee Superior customer response

19. Levi Case What rationale(s) did Levi used to justify ERP decision? Categories Technology Business Process Strategic Competitive

20. How does a firm finally decide whether or not to go ERP? 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