1. Enterprise Resource Planning (ERP) Models Dr. Merle Martin Dr. Yan Xiong College of Business CSU Sacramento 10/06/03

2. Agenda • What is ERP? • ERP Advantages and Disadvantages • Application Service Providers (ASP) • FHC – a Case Study

3. What is an ERP System? “Packaged software designed to process an organization’s transactions and facilitate integrated and real-time planning, production and consumer response.” Daniel O’Leary

4. ERP Definition • “ It attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different departments’ particular needs” Koch, C 2002

5. ERP Suppliers • In order of $ sales • SAP • People Soft • Oracle • Baan • J. D. Edwards

6. ERP Market • Info-Tech Consulting Group • 70% of Fortune 500 firms • 37% growth over next 5 years • Global market projected to $15 billion in 5 years

7. Functions • Integrated suite of software application models • Real-time database update • Supports organizations with multiple companies in multiple locations • Supports any number of currencies

8. Functions (Cont.) • Supports multiple languages • Suitable to wide range of industries and organizations • Industry specific templates

9. SAP (R/3) Functions • Financial • AM Asset Management • CO Controlling • FI Financial Accounting • WF Work Flow • IS Industry Solutions

10. SAP (R/3) Functions • Manufacturing • PM Plant Management • PP Production Planning • QM Quality Management • MM Materials Management

11. SAP (R/3) Functions • Other • HR Human Resources • PS Project System • SD Sales and Distribution

12. SAP • Targets very large companies • Industry templates • “ Best Practices” most efficient methods for doing business • Modular design – can choose functions • SAP not just software • “way of doing business”

13. People Soft • Pure Internet environment • Entire CSU system converting over next few years. • Ease if use

14. Oracle • Has leveraged database dominance • Emphasis on security • Integration: linking applications, data. Web services, users and partners

15. BAAN • Unique vertical market capabilities Chemicals Food& Beverage Pharmaceuticals Cable & Wire Pulp & Paper Primary Metals

16. JD Edwards • Focus on mid-sized companies • Easy integration with current systems • Open, scalable, and flexible

17. Agenda • What is ERP? • ERP Disadvantage and Disadvantage • Application Service Providers (ASP) • FHC – a Case Study

18. Why ERP? • Highly competitive markets • Continually changing business environment • Need for integration • Within company • Between dispersed operations • Between alliance partners

19. Why ERP? • Reduce operating costs • Integrate operations (more control) • Increase organization’s time efficiency • Encompass different types of software

20. ERP Advantages • Integrates firm’s activities • Uses “ Best Practices” • Enables organizational standardization • Eliminates information asymmetries • Provides on-line/real-time information

21. ERP Advantages • Allows simultaneous access to information for planning and control • Facilities intra-organization collaboration

22. ERP Advantages • Eliminates redundant efforts and duplicated data • 33% of companies had sales order cost savings • 34% significantly reduced personnel needs • Faster movement of goods, services • more sales generated per month

23. ERP Intangible Advantages • Keeping up with competitors • Save vendor, customer frustration • Savings occur over several years • Implementation takes years • Some companies don’t make ROI calculations • too many intangibles • cultural change (e.g., FHC)

24. ERP Disadvantages • High cost (particularly for small business) • Privacy and security • Long implementation time • Displaces clerical employees • May have to change business to fit software

25. ERP Costs • Total Costs: • License • Training • Implementation • Maintenance • Customization • Hardware required

26. ERP Cost Percentages • Norris et al. 2000 • Software 15% • Hardware 12% • Training 15% • Data Conversion 15% • Reengineering 43% tailor to fit software

27. ERP Critical Success Factors • Top management commitment • Management of change • Resistance to “over-customization” • Heavy infrastructure difficult to change • Similar to battleship changing course

28. Evaluating ERP Software • Functional fit into company’s business • Flexibility and scalability • Complexity (Usability) • Shortened ROI periods • Ability to support multi-site planning and control

29. Evaluating ERP Software • Technology: • Client / server capabilities • Database independence • Availability of regular upgrades • Local support infrastructure • Availability of reference site

30. Agenda • What is ERP? • ERP Advantages and Disadvantages • Application Service Providers (ASP) • FHC – a Case Study

31. Outsourcing ERP • High costs ERP maintenance • ERP outsourcing? • install upgrades • maintain modules • trouble-shoot problems • police platforms

32. Why Outsource ERP? • Lack of specialized ERP staff skills • ERP specialists expensive • cheaper to use ERP outsourcer if don’t use skills on full-time basis • ERP upgrade releases very frequent • Firms want IT to focus on activities that “add value to core processes”

33. Application Service Providers • ASP • Lease expensive software packages such as SAP • Allow multiple users over internet • Charge users by the transaction • Provide startup services • tailoring and training

34. Applications • Deloitte & Touche • SAP • “Hyper Deploy” over Web • One change rather than many • Prospective customers can “play” with application

35. ASP Problem • Confusing array of emerging ASPs: • “Pure Play”: founded explicitly for new ASP market • Application Vendor (e.g., SAP) • Telecommunications Carriers and ISPs; • add ASPs to existing networks • e.g., AT&T, US West

36. ASP Problem • Info-Tech Research predicts that, by year-end 2001, 60% of today’s ASPs will fail due to: • poor business models • choice of partners • failure to execute / consolidate their offerings • KEY DECISION: Gamble early or wait for market to “shake out”?

37. Agenda • What is ERP? • ERP Downsides • Application Service Providers • FHC – a Case Study

38. FHS • Foundation Health Systems • Fortune 500 firm • Was FHC (Corporation) before merger with Health Net • Created by merger of diverse heath provider companies throughout country

39. FHS • Needed to standardize language, culture, and “business rules” • IT Department proposed complete centralization of IT operations • IT centralization attempted, but met with severe resistance from local units • Abandoned shortly after merger

40. FHC ERP Goals • Main objective: to standardize “back office” business rules • Wanted to change organization culture by means of software • Back-end centralized using SAP • Front-end decentralized by business unit • e.g., Dental Care in Texas

41. Sales Offices FHC ERP Model Warehouse Accounting HQ Factory

42. Decentralized Foundation Network Organization Front-line Specialists Field sales and service Front-line Support Local Offices Back-line Specialists Management Centralized (SAP)

43. FHC SAP Implementation • Implementation took 4 years 1996-2000 • Hired specialized expensive, full-time SAP analysts and programmers • Ran into problems and had to reimplement portions of systems

44. FHC ERP Problems • Problems integrating with existing legacy applications • Extensive upgrades

45. FHC ERP Issues • Why did they choose “ best practice” approach? • When didn’t they outsource ERP or ASP? • Why did they hire expensive SAP specialists who would not be needed in future? • Should ERP be used for organizational redesign?

46. Issue Compare what is happening in the E-Business arena and the features of ERP. Is ERP compatible with the future of business? Why or why not?

47. Topics Discussed • What is ERP? • ERP Advantages and Disadvantages • Application Service Providers • FHC – a Case Study