ERP: Intro, Benefit, Implementing

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Enterprise Resource PlanningMary SumnerFirst Edition

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Table of Contents

P E A R S O N C U S T O M L I B R A R Y

I

1. A Foundation for Understanding Enterprise Resource Planning Systems

1

1Mary Sumner

2. Re-engineering and Enterprise Resource Planning Systems

17

17Mary Sumner

3. Planning, Design, and Implementation of Enterprise Resource Planning Systems

39

39Mary Sumner

4. ERP Systems: Sales and Marketing

59

59Mary Sumner

5. ERP Systems: Accounting and Finance

75

75Mary Sumner

6. ERP Systems: Production and Materials Management

91

91Mary Sumner

7. ERP Systems: Human Resources

107

107Mary Sumner

8. Managing an ERP Project

119

119Mary Sumner

141

141Index

◆ THE EMERGENCE OF ENTERPRISE RESOURCE PLANNING SYSTEMS

A FoundationforUnderstandingEnterpriseResourcePlanningSystems

Objectives

1. Develop an understanding of how ERP systems can improve the effectiveness ofinformation systems in organizations.

2. Understand the business benefits of enterprise resource planning (ERP) systems.

3. Understand the history and evolution of ERP.

In the past several years, many organizations have initiated Enterprise ResourcePlanning (ERP) systems, using such packages as SAP, Peoplesoft, and Oracle.The ERPmarket is one of the fastest growing markets in the software industry. In research con-ducted by APICS, 34.5% of companies with revenues over $1 billion who were APICSmembers planned to purchase or upgrade an ERP system (Umble, Haft, and Umble,2003). AMR Research predicts that the sales of ERP software will reach $180 billionby 2002 (Kalling, 2003). According to one study, the ERP market may reach $1 trillionby 2010 (Bingi, Sharma, and Godla, 1999).

Enterprise resource planning systems are a major investment. Companies haveinvested between $50,000 and hundreds of millions of dollars in ERP software, usinga variety of business justifications, including the replacement of numerous legacy

From Chapter 1 of Enterprise Resource Planning, First Edition. Mary Sumner. Copyright © 2005by Pearson Education, Inc. All rights reserved.

1

A Foundation for Understanding Enterprise Resource Planning Systems

systems, reduction in cycle times from order to delivery, and reduction in oper-ating costs. The on-line, real-time operational data that ERP systems provide enablemanagers to make better decisions and improve responsiveness to customer needs(Ross, Vitale, and Willcocks, 2003). There is evidence that organizations are satisfiedwith ERP. Based upon a sample of 117 firms in 17 countries, the Conference Boardreports that 34% of the organizations were satisfied with ERP, 58% were somewhatsatisfied, 7% were somewhat unsatisfied, and only 1% were unsatisfied (McNurlin,2001).

WHAT IS ERP?

ERP systems are the software tools used to manage enterprise data. ERP systems helporganizations deal with the supply chain, receiving, inventory management, customerorder management, production planning, shipping, accounting, human resource man-agement, and other business functions (Somers and Nelson, 2003).

According to Deloitte Consulting, an ERP system is a packaged business softwaresystem that allows a company to “automate and integrate the majority of its businessprocesses; share common data and practices across the enterprise; and produce andaccess information in a real-time environment.” ERP systems are different from legacysystems in that organizations use ERP to integrate enterprise-wide information sup-porting financial, human resources, manufacturing, logistics, and sales and marketingfunctions (Shanks, Seddon, and Willcocks, 2003). An ERP system provides an enter-prise database where all business transactions are entered, processed, monitored, andreported.

One of the most challenging issues associated with ERP systems is that the soft-ware imposes processes on the organizations that implement it.The issue of whether tomake modifications or not is a significant challenge that every organization imple-menting ERP must face.

To be competitive, organizations must improve their business practices and shareinformation with their suppliers, distributors, and customers.An ERP system introduces“best practices,” which are defined as “simply the best way to perform a process.” Thebiggest mistake made in implementing ERP, especially in a manufacturing environ-ment, is to redesign the new system to work in the old environment (Honig, 1999).

THE EVOLUTION OF ERP

In the 1960s, most software packages included inventory control capability. MaterialRequirements Planning (MRP) systems, which were introduced in the 1970s, used amaster production schedule and a bill of materials file with the list of materials neededto produce each item (see Table 1). Later on, MRP systems were enhanced by addingtools for sales planning, customer order processing, and rough-cut capacity planning—which provided input into production scheduling, known as closed-loop MRP (Somersand Nelson, 2003). In the 1980s, MRPII systems incorporated the financial accountingsystem along with manufacturing and materials management systems (Somers andNelson, 2003).

MRPII led the way toward an integrated business system that developed the mate-rial and capacity requirements for production and translated these requirements into

2


Types of Systems Time Purpose Systems

Reorder point 1960s Used historical data to Designed to manage high-systems forecast future inventory volume production of a

demand; when an item falls few products, with below a predetermined constant demand; focus level, additional inventory on costis ordered

Materials requirement 1970s Offered a demand-based Focus on marketing;planning (MRP) approach for planning emphasis on greater systems manufacture of products production integration

and ordering inventory and planningManufacturing 1980s Added capacity planning; Focus on quality;resource planning could schedule and manufacturing strategy(MRP-II) systems monitor the execution of focused on process control,

production plans reduced overhead costs,and detailed cost reporting

MRP-II with 1990s Provide ability to adapt Focus on the ability to manufacturing production schedules to create and adapt new execution (MES) meet customer needs; products and services on a systems provide additional feedback timely basis to meet

with respect to shop floor customers’ specific needsactivities

ERP (enterprise Late 1990s Integrate manufacturing Integrates supplier,resource planning) and onward with supply chain processes manufacturing, and systems across the firm; designed to customer data throughout

integrate the firm’s business the supply chainprocesses to create a seamless information flow from suppliers, through manufacturing, todistribution to the customer

TABLE 1 Historical Evolution of ERP Systems

financial information. By the 1990s, ERP systems provided seamless integration of allinformation flows in the company—financial accounting, human resource, supply chainmanagement, and customer information (Somers and Nelson, 2003).

THE “INTEGRATED” SYSTEMS APPROACH

ERP systems impose an “integrated systems” approach by establishing a common setof applications supporting business operations. In fact, successful implementation of anERP system typically requires re-engineering business processes to better align withthe ERP software (Brown and Vessey, 2003; Dahlen and Elfsson, 1999). Limited cus-tomization makes it simpler to upgrade the ERP software as new versions and add-onsemerge over time. As you can see from Table 2, an ERP system overcomes the ineffi-ciencies of independent systems and non-integrated data by providing integrated datato support multiple business functions.

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Before ERP After ERP

Information systems Stand-alone systems Integrated systemsCoordination Lack of coordination among Supports coordination across

business functions (e.g., manu- business functionsfacturing and sales)

Databases Non-integrated data; data Integrated data; data have thehave different meanings same meaning across multiple(e.g., customer); inconsistent functionsdata definitions

Maintenance Systems are maintained on a Uniform maintenance;piecemeal basis; inconsistencies changes affect multiple systemsresult; it is costly to maintain separate legacy systems

Interfaces Difficult to manage interfaces Common interfaces acrossbetween systems systems

Information Redundant, inconsistent Consistent real-time information information (e.g., about

customers, vendors)System May not be state of the art Relies on a client-server architecture modelProcesses Incompatible processes Consistent business processes

which are based upon an information model

Applications Disparate applications Single applications (e.g., many different purchasing (e.g., a common purchasing systems) system)

TABLE 2 Before and After ERP: Systems Standpoint

◆ BUSINESS BENEFITS OF ERP

From an overall business standpoint, an ERP system achieves a number of importantobjectives, including maximizing throughput of information, minimizing response timeto customers and suppliers, pushing decision making down to the lowest appropriatelevel, and providing timely information to decision makers. Most important, an ERPsystem integrates information throughout the supply chain. From a business stand-point, this means cost reduction, inventory reduction, and improved operating perfor-mance (see Table 3).

ERP systems are designed to provide business benefits in sales and distribution,manufacturing, costing, field service, and accounting. Surveys of U.S. and Swedish man-ufacturing firms show that ERP benefits include timely information, increased interac-tion across the enterprise, and improved order management (see Table 4).

In sales, increased efficiency leads to the ability to provide lower quotes, reducedlead times, and improve overall responsiveness to customers’ needs. In manufactur-ing, concurrent engineering means faster product design and production. In field

4


Before ERP With ERP

Cycle time Costly bottlenecks Time and cost reduction of business processes

Transactions Multiple transactions use Faster transactions, using processing multiple data files common data. Reduces the time

and cost of multiple updatesFinancial Increased cost of excess Improves operational management inventory, cost of overdue performance (e.g., less excess

accounts receivable inventory, reduction in accountsreceivable)

Business Proliferation of fragmented Re-engineering around a businessprocesses processes with duplication of model that conforms with “best

effort practices”Productivity Lack of responsiveness to Improvements in financial

customers and suppliers management and customer serviceSupply chain Lack of integration Linkages with suppliers and management customerseBusiness Web-based interfaces support Web-based interfaces are

isolated systems and their front-end to integrated systemscomponents

Information Lack of tactical information for Allows cross-functional access toeffective monitoring and control the same data for planning andof organizational resources control. Provides widely available

informationCommunications Lack of effective communications Facilitates organizational

with customers and suppliers communications with customersand suppliers

TABLE 3 Before and After ERP: Business Standpoint

ERP Performance Outcomes Sweden Average* U.S. Average*

Quickened information response time 3.81 3.51Increased interaction across the enterprise 3.55 3.49Improved order management/order cycle 3.37 3.25Decreased financial close cycle 3.36 3.17Improved interaction with customers 2.87 2.92Improved on-time delivery 2.82 2.83Improved interaction with suppliers 2.78 2.81Reduced direct operating costs 2.74 2.32Lowered inventory levels 2.60 2.70

*scale: 1 (not at all) to 5 (a great extent)

Sources: Mabert, Soni, and Venkataramanan, 2000; Olhager and Selldin, 2003.

TABLE 4 Benefits of ERP

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service, data on customer service histories and parts under warranty are availableto show charges are accurate. Suppliers are paid more rapidly because accountspayable systems are responsive and accurate. Overall, the level of operational excel-lence throughout the business is optimized, from customer order through distributionand service. Case studies from organizations implementing ERP illustrate the businessbenefits noted in the surveys (Mabert et al., 2000; Olhager and Selldin, 2003).

Table 5 shows the tangible benefits of ERP are lower inventory levels,improved on-time delivery, and decreased financial closing cycles. In addition to hard-dollar savings, such as reduced procurement costs and increased manufacturing


ERP Performance Outcomes Examples

Quickened information • Responses to customer billing inquiries occurred inresponse time real-time as opposed to 15–20 minute response time at

IBM Storage Products Company (Jensen and Johnson,1999)

Increased interaction across • Simplification of processes at Boeing (Jensen and the enterprise Johnson, 1999)

• Growth in interfacility coordination at Owens Corning(Palaniswamy and Frank, 2000)

• Real-time access to data across the organization atDiebold (Palaniswamy and Frank, 2000)

Improved order management/ • 90% reduction in cycle time for quotations from 20 toorder cycle 2 days at Fijitsu (Jensen and Johnson, 1999)

• Faster, more accurate order processing at Valenite(Palaniswamy and Frank, 2000)

• Time for checking credit upon receiving an order wasreduced from 15–20 minutes to instantaneous at IBMStorage Products Company (Jensen and Johnson, 1999)

Decreased financial close • 50% reduction in financial closing time from 10 days tocycle 5 days at Fijitsu (Jensen and Johnson, 1999)Improved interaction with • Lead times to customers were reduced from 6 weeks tocustomers 2 weeks at Par Industries (Bingi, Sharma, and Godla, 1999)Improved on-time delivery • On-time product delivery rate increased to 90% at

Earthgrains (Bingi, Sharma, and Godla, 1999)• Delivery performance improved from 80% on-time to

more than 90% on-time at Par Industries (Bingi, Sharma,and Godla, 1999)

Reduced direct operating • Operating margins improved from 2.4% to 3.9% at costs Earthgrains (Bingi, Sharma, and Godla, 1999)Lowered inventory levels • Inventory levels were reduced significantly at Owens

Corning (Palaniswamy and Frank, 2000)• Lower levels of inventory at Valenite (Palaniswamy and

Frank, 2000)• Work-in-process inventory dropped almost 60% at Par

Industries (Bingi, Sharma, and Godla, 1999)

TABLE 5 Business Benefits of ERP

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throughput, ERP systems provide soft-dollar benefits, including increased sales andrevenues, improved margins, and improved productivity (Laughlin, 1999). ERP canspeed up business processes, reduce cycle time, and reduce the cost of businessprocesses, such as credit checking (Piturro, 1999; Davenport, 2000).

ERP systems offer many advantages from a systems standpoint. They eliminatelegacy systems that maintain incompatible data and cause fragmentation. Integratedsystems provide shared information across the organization, and this information canbe used to monitor business performance (Davenport, 2000; Oliver, 1999). In addition,ERP systems are a foundation for eBusiness because they provide the back-officefunctions that enable customers to place and to track orders via the web (Davenport,2000). Additional applications such as Customer Relationship Management (CRM)rely on the foundation of ERP (Oliver, 1999).

In surveys of the motivation to implement ERP in Sweden (Olhager and Selldin,2003) and the United States (Mabert et al., 2000), some of the major motivationsinclude the need to replace legacy systems, the need for standardization, the impor-tance of gaining a competitive advantage, and the need to improve interactions withsuppliers and customers (see Table 6).

◆ ERP MODULES

The major ERP vendors, including SAP, Oracle, and Peoplesoft, support the majorfunctional areas of the business, including sales order processing, purchasing, produc-tion planning, financial accounting, management accounting, and human resources.Vendors addressing the mid-cap market (e.g., $50 to $400 million in sales) includeMicrosoft’s Great Plains ERP software. In an analysis by Mabert et al., the mostpopular modules which are implemented by firms in the United States are the financial

Company’s Motivation to Implement ERP Swedish Average* U.S. Average*

Replace legacy systems 4.11 4.00Simplify and standardize systems 3.67 3.85Gain strategic advantage 3.18 3.46Improve interactions with suppliers, customers 3.16 3.55Ease of upgrading systems 2.96 2.91Link to global activities 2.85 3.17Restructure company organization 2.70 2.58Solve the Y2K problem 2.48 3.08Pressure to keep up with competitors 2.48 2.90

*scale: 1 (not important) to 5 (very important)

TABLE 6 Company’s Motivation to Implement ERP

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Function SAP Oracle PeopleSoft

Sales Order Sales and Marketing Sales Supply ChainProcessing Distribution (SD) Supply Chain ManagementPurchasing Materials Procurement Supplier Relationship

Management (MM) ManagementProduction Planning Production Planning (PP) ManufacturingFinancial Accounting Financial Accounting (FA) Financials Financial Management

SystemsManagement Controlling (CO)AccountingHuman Resources Human Resources (HR) Human Resources Human Capital

Management

Source: Vendor Websites

TABLE 7 ERP Modules Supported by Vendors

◆ ERP DESIGN ALTERNATIVES

In evaluating ERP, most organizations consider alternative design options and each ofthese options has its own price as well as its own advantages and disadvantages. A“vanilla” ERP implementation, which is the complete implementation of a vendorERP system, is costly and time-consuming but offers the benefits of total integrationand re-engineering of business processes. Implementation of selected ERP modules,such as the financial and accounting modules, is less costly and time-consuming butlacks the benefits of total integration of data across multiple functional areas of thebusiness. This alternative is less costly but the benefits are not as great.

Building an in-house ERP system is the most time-consuming and expensive alter-native, and it poses considerable risks. The advantage of this approach is that the orga-nization can build a software system based upon its own unique processes, and its soft-ware will not be shared with its competitors as with the “vanilla” ERP alternative.However, management can argue that operational processes, such as financial account-ing, production planning, and materials management, do not necessarily provide acompetitive advantage, and the substantial investment involved in developing andimplementing a customized system cannot be justified.

Finally, another alternative is to maintain current legacy systems.The problem withthis approach is the organization could be putting itself into a competitive disadvan-tage by not having an ERP system in place when its competitors do. An ERP system isbuilt upon the re-engineering of business processes around “best practices” and pro-vides the advantages of data integration and standardization. By implementing anERP, an organization can keep up with its competitors.

and accounting modules (Mabert et al., 2000). Most firms implement a single ERPpackage rather than selecting different modules from different ERP vendors.

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Based upon a number of factors, including data integration, cost-effectiveness,competitive environment, business impact, and time, most organizations concludevanilla ERP implementation or partial ERP implementation are preferable toin-house development or maintaining the legacy system. Table 8 provides possible sce-narios for ERP implementation in “Fortune 500” type corporations.

In two surveys of ERP implementation in the United States (Mabert et al., 2000)and Sweden (Olhager and Selldin, 2003), the authors note that implementing a singleERP package was the most common approach (see Table 9).

Option Cost and Time Advantages Disadvantages

Vanilla ERP $150 million Complete Competitors have accessimplementation over 5 years standardization of to the same system

business processes Disruption of operationsbased upon vendor’s over 3–5 years“best practices”

Partial ERP $108 million Partial changes in Disruption of operationsimplementation over 2–3 years business processes over 2–3 years(e.g., selected modules)In-house $240 million Custom-designed Long-term analysis anddevelopment over 7–10 years ERP system—unique design process; high

from competitors expenseStatus quo No cost but No business process May provide a competitive

no gain change; little disruption disadvantage because of operations competitors have an ERP

system

TABLE 8 Menu of ERP Alternatives

Implementation Approach Swedish % U.S. %

Single ERP package 55.6 39.8Single ERP package with other systems 30.1 50Multiple ERP packages with other systems 6.5 4.0Best-of-breed from several ERP packages 3.9 3.9Totally in-house developed 2.0 0.5In-house plus specialized packages 2.0 1.0

TABLE 9 Implementation Approach

◆ THE BUSINESS CASE FOR ERP

One of the major requirements in justifying the acquisition of an ERP system involvesan assessment of the tangible (e.g., hard-dollar) and intangible benefits. According to asurvey of 62 Fortune 500 companies by Benchmarking Partners, Inc., for Deloitte

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Tangible Benefits % of Companies

Inventory reduction 32Personnel reduction 27Productivity improvement 26Order management improvement 20Financial close cycle reduction 19IT cost reduction 14Procurement cost reduction 12Cash management improvement 11Revenue/profit increase 11Transportation/logistics cost reduction 9Maintenance reduction 7On-line delivery improvement 6

Source: Fryer, Bronwyn, “The ROI Challenge,” CFO,September, 1999, p. 90.

TABLE 10 Tangible Benefits with ERP

Intangible Benefits % of Companies

Information/visibility 55New/improved processes 24Customer responsiveness 22Integration 13Standardization 12Flexibility 9Globalization 9Y2K 8Business performance 7Supply/demand chain 5

Source: Fryer, Bronwyn, “The ROI Challenge,” CFO,September, 1999, p. 90.

TABLE 11 Intangible Benefits with ERP

Consulting, the most important tangible benefit realized after the ERP system wentlive was inventory reduction (Fryer, 1999). The survey results in Table 10 showed thesetangible benefits:

In terms of intangible benefits, information availability is a big factor (seeTable 11). Information can enable managers to make better decisions about how toallocate resources effectively. In addition, improved customer responsiveness, processintegration, and increased flexibility, though intangible, can lead to tangible benefits

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ERP Cost Component Swedish % U.S. %

Software 24.2 30.2Hardware 18.5 17.8Consulting 30.1 24.1Training 13.8 10.9Implementation team 12.0 13.6

TABLE 12 ERP Cost Components

because they put the organization in a better position to win contracts and to generateincreased revenues by cost reduction (Fryer, 1999).

COST-BENEFIT ANALYSIS FOR ERP

The decision to implement an ERP system is a business investment decision, similarto the decision to build a new warehouse, hire a new executive, or invest in a trainingprogram. As such, the ERP investment decision must create measurable business ben-efits that justify the acquisition costs and the costs of system implementation. As youhave learned in this chapter, the business benefits of ERP include streamlining busi-ness processes, providing web-based access to information resources, reducing inven-tory and personnel, and improving overall productivity. The costs of implementing anERP include the hardware, software, technical support, project management, internalteam commitment, external consultants, and training.

In their analysis of the cost components of ERP, both surveys of ERP implementa-tion in the U.S. (Mabert et al., 2000) and Sweden (Olhager and Selldin, 2003), indicatethat software cost and consulting costs are major cost components (see Table 12).

One method of conducting a cost-benefit analysis of an ERP project is to use netpresent value. Net present value takes into consideration the time value of money. Thetime value of money can be understood through a simple example. If you invested$1,000,000, assuming an interest rate of 10%, you would expect to receive a return of$1,610,510 in five years. In determining the net present value of a capital budgetingdecision, the time value of money is taken into account. A five-year timeframe isappropriate in evaluating an ERP project since a minimum of three years will be spentin actual implementation. In a large-scale project, the timeframe for evaluating returnson the investment in ERP might be as long as ten years.

In Table 13, you will see a cost-benefit analysis for an ERP project, using the netpresent value method of evaluating the project proposal. Costs are non-recurring, orstart-up costs, and recurring costs. The start-up costs include the original investment inthe ERP software. In this case, the software cost is $2,420,000. The original hardwareinvestment is $1,850,000, which includes servers and networking capability in a clientserver environment. The other non-recurring costs include consultants’ time ininstalling and configuring the software, which is an additional $3,000,400. Project man-agement time, internal team time, and project steering committee time is estimated tobe $400,000, and initial training time is $1,280,000. These figures are in line withresearch on ERP implementation costs conducted in the United States and Sweden(Olhager and Selldin, 2003; Mabert et al., 2000).

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Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Software 2,420,000Software Licenses 220,000 220,000 220,000 220,000 220,000Hardware 1,850,000Consulting 3,000,400Training 1,280,000Implementation 400,000 400,000 400,000 400,000TeamTotal Costs 8,950,400 620,000 620,000 620,000 220,000 220,000Savings 0Reduced Inventory Costs 2,750,000 2,750,000 2,750,000 2,750,000 2,750,000Reduced Adminis- 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000trative CostsIntangible Benefits

Total Savings 0 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000Net Balance �8,950,400 3,380,000 3,380,000 3,380,000 3,780,000 3,780,000DCF Factor 1.000 0.909 0.826 0.751 0.683 0.621Discounted Bal. �8,950,400 3,072,420 2,791,880 2,538,380 2,581,740 2,347,380Cumulative �8,950,400 �5,877,980 �3,086,100 �547,720 2,034,020 4,381,400Discounted Bal.

TABLE 13 Net Present Value of an ERP Project

In our example, the recurring costs (i.e., costs which recur over time) include thecosts of software licenses, maintenance agreements, project management time, internalteam time committed to the project, and consultants’ time used on a recurring basis.For example, ongoing software licenses represent 10% of the original software cost,which is $220,000 per year.The time spent by the implementation team will continue tobe budgeted for $400,000 per year.

The benefits of the ERP project will not take place until the system is in opera-tion. Assuming that project implementation takes three years at a minimum, thebenefits will not accrue until the project’s fourth year. In our example, the measur-able, or tangible, business benefits include inventory reduction, which represents asavings of $2,750,000 per year. In addition, personnel reduction represents an addi-tional savings of $1,250,000 per year. Intangible benefits might include improvedemployee morale, improved customer satisfaction, and less duplication of effort inmaintaining multiple databases, but these intangible benefits are not recorded in thespreadsheet.

As you can see from Table 13, the proposed ERP project will have a positive dis-counted balance in Year 1, and the company will break even on its software investmentin ERP in Year 4, when the cumulative discounted balance is $2,034,020. Based uponthis analysis, the investment in an ERP system is a wise investment.

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CAN ERP PROVIDE A COMPETITIVE ADVANTAGE?

Ultimately, for the return on investment in ERP systems to be realized, these systemsshould yield a strategic advantage. In many industries, however, all the major compa-nies have an ERP system. If an entire industry is adopting ERP systems, as in the caseof industries such as oil, chemicals, consumer products, and computers, then the basisfor attaining a competitive advantage is unrelated to implementing the ERP. The basisfor achieving a competitive advantage shifts to implementing the ERP system betterthan anyone else (Davenport, 2000). Another way to achieving a competitive advan-tage is to migrate to new software versions more quickly than competitors do(Kremers and Van Dissel, 2000).

Another source of gaining competitive advantage through ERP implementation isto use vanilla ERP modules to support core operations and to build customized mod-ules to support unique processes which provide a competitive edge (Holland, Light,and Kawakek, 1999). The increased availability of operational data and the use of datafor analysis may also provide companies with an advantage (Mabert, Soni, andVenkataramanan, 2001).

Even if ERP implementation may not provide a competitive advantage, compa-nies which do not implement ERP may still find themselves at a competitive disadvan-tage, particularly in industries in which ERP implementation is widespread. Companiesusing ERP will be able to take advantage of best practices in running their businessesto reduce cycle time, to improve the speed and accuracy of information, and to attainbetter financial management (Davenport, 2000).

◆ THE CHALLENGE OF IMPLEMENTING AN ERP SYSTEM

ERP systems projects involve considerable time and cost, and it may take some timeto realize ERP’s benefits. Research by Standish Group illustrates that 90% of ERPprojects are late or over budget. Meta Group survey data, based on 63 companies,showed that average implementation cost of ERP was $10.6 million and took23 months to complete (Stein, 1999).

The successful implementation of ERP requires a multi-stage approach (Markus,Axline, Petrie, and Tanis, 2000; Parr and Shanks, 2000; Holland and Light, 2001), andthe benefits of ERP may not occur until later stages. Markus et al., proposes threestages: the project phase, the shakedown phase, and the onward and upward phase.The ERP software is introduced during the project phase and is implemented into thefirm’s operations during the shakedown phase. It is not until the onward and upwardphase, during which the ERP modules are successfully integrated with operations, thatthe organization can achieve the actual business results, such as inventory reduction(Markus et al., 2000).

Parr and Shanks identify four phases: a planning phase, a re-engineering phase,a design phase, and a configuration and testing phase (Parr and Shanks, 2000). Theynote that re-engineering business practices around the ERP software is critical to suc-cessful implementation. In their stage analysis, Holland and Light (2001) suggest thebenefits of ERP occur when ERP modules are implemented successfully and when

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Questions for Discussion

◆◆◆ Case

Business ResearchYou are a business analyst for MPK Industries, aconsulting firm that tracks worldwide trends ininformation technology. Using suggested on-linedatabases and Internet resources, provideanswers to the following questions:

1. What is the expected future growth of theERP marketplace in terms of overallsales?a. Break this down by sales in the United

States and international sales.

b. Break this down by Fortune 500 compa-nies and mid-cap companies (e.g., mid-cap companies are defined as havingsales between $50 and $400 million peryear).

2. What is the relative market share of themajor ERP vendors?a. Break this down by sales in the U.S. and

international sales.b. Break this down by Fortune 500 compa-

nies and mid-cap companies.

1. Use on-line library databases to identify articles in trade publications that provide casestudies of ERP implementations. These articles may provide some insight into each of thesequestions:a. How widespread is the use of ERP across certain industries? b. What are the benefits reported from implementing ERP?c. What are its limitations?

2. Research and learn about the implementation of ERP. Use trade publications and on-linelibrary databases (e.g., ABI Inform, ProQuest, First Search, Wilson Select Plus, availablethrough your library) to conduct a search for articles.a. Find a success story of ERP implementation. What factors contributed to the success of

this implementation?b. Find a story of problems encountered with an ERP implementation. What factors con-

tributed to the encountered obstacles?

◆ SUMMARY

In summary, organizations have a business justification for implementing ERP sys-tems.The business benefits of ERP include improved accessibility of information, real-time access to data across the organization, improved cycle time for orders, decreasedfinancial close time, reduced operating costs, and lowered inventory levels. In addition,ERP systems provide the opportunity to re-align business processes with best practicesand to integrate enterprise-wide information supporting financial, human resources,manufacturing, and sales and marketing functions.

organizations can use the ERP foundation to add advanced modules such as customerrelationship management (Holland and Light, 2001).

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Bingi, P., M. Sharma, and J. Godla. 1999. “Criticalissues affecting ERP implementation.”Information Systems Management 16: 7–14.

Brown, C. V., and I. Vessey. 2003. “Managing thenext wave of enterprise systems: Leveraginglessons from ERP.” MIS Quarterly Executive2: 65–77.

Dahlen, C., and J. Elfsson. 1999. “An analysis ofthe current and future ERP market—With afocus on Sweden.” Master’s Thesis.Stockholm, Sweden: The Royal Institute ofTechnology. http://www.pdu.se/xjobb.pdf.

Davenport,T. 2000. Mission Critical: Recognizingthe Promise of Enterprise Systems. Cambridge:Harvard University Press.

Fryer, Bronwyn. Sept. 1999. “The ROIchallenge.” CFO 85–90.

Holland, C., B. Light, and P. Kawakek. 1999.“Beyond enterprise resource planningprojects: Innovative strategies forcompetitive advantage.” Proceedings of the7th European Conference on InformationSystems, J. Pries-Heje, C. Ciborra, K. Kautz,J. Valor, E. Christiaanse, D. Avison, andC. Heje (Eds.), Copenhagen Business School,288–301.

Holland, C., and B. Light. 2001. “A stagematurity model for enterprise resource plan-ning systems use.” Database for Advances inInformation Systems 35: 34–45.

Honig, Susan. 1999. “The changing landscape ofcomputerized accounting systems.” CPAJournal 69: 14–20.

Jensen, R., and R. Johnson. 1999.“The enterpriseresource planning system as a strategicsolution.” Information Strategy 15: 28–33.

Kalling, T. 2003. “ERP systems and the strategicmanagement processes that lead tocompetitive advantage.” InformationResources Management Journal 16: 46–67.

Kremers, M., and H. Van Dissel. 2000. “ERPsystem migrations.” Communications of theACM 43(4): 53–56.

Laughlin, S. P. 1999. “An ERP game plan.”Journal of Business Strategy 20: 32–37.

Mabert, V. M., A. Soni, and M. A.Venkataramanan. 2001. “Enterprise resourceplanning: Common myths versus evolvingreality.” Business Horizons 44: 269–276.

Mabert, V. M., A. Soni, and M. A.Venkataramanan. 2000. “Enterprise resourceplanning survey of U.S. manufacturing firms.”Production and Inventory ManagementJournal 41: 52–88.

Markus, M. L., S. Axline, D. Petrie, and C. Tanis.2000. “Learning from adopters’ experienceswith ERP: Problems encountered and successachieved.” Journal of Information Technology15: 245–265.

McNurlin, B. 2001. “Will users of ERP staysatisfied?” Sloan Management Review42: 13.

Olhager, Jan, and Erik Selldin. 2003. “Enterpriseresource planning survey of Swedish

SUGGESTED RESOURCES FOR ON-LINE RESEARCH

Web site What It Provides

www.amrresearch.com Results of vendor surveyswww.technologyevaluation.com Market researchwww.computerworld.com/softwaretopics/erp Links to useful ERP sites, articles,

publications, and chat roomswww.erpfans.com Links to support groups for many vendorswww.apics.org/resources/magazine/current Link to current APICS news

15


manufacturing firms.” European Journal ofOperational Research 146: 365–373.

Oliver, R. 1999. “ERP is dead. Long live ERP.”Management Review 88: 12–13.

Palaniswamy, R., and T. Frank. 2000. “Enhancingmanufacturing performance with ERPsystems.” Information Systems Management17: 43–55.

Parr, A., and G. Shanks. 2000. “A model of ERPproject implementation.” Journal ofInformation Technology 15: 289–303.

Piturro, M. 1999. “How midsize companiesare buying ERP.” Journal of Accountancy188: 41–48.

Plotkin, H. March 1999.“ERP: How to makethem work.” Harvard Management Update 3–4.

Ross, Jeanne, Michael Vitale, and LeslieWillcocks. 2003. “The continuing ERPRevolution: Sustainable lessons, new modelsof delivery,” in Second-Wave EnterpriseResource Planning Systems. Graeme Shanks,Peter Seddon, and Leslie Willcocks (Eds.),Cambridge: Cambridge University Press,2003. pp. 102–132.

Shanks, Graeme, Peter Seddon, and LeslieWillcocks. 2003. “Introduction: ERP—thequiet revolution,” Second-Wave EnterpriseResource Planning Systems. Cambridge:Cambridge University Press, 2003.pp. 1–23.

Somers, Toni, and Klara Nelson. 2003. “Theimpact of strategy and integration mecha-nisms on enterprise system value: Empiricalevidence from manufacturing firms.”European Journal of Operational Research146: 315–338.

Stein, T. 1999. “Making ERP add up—companies that implemented enterpriseresource planning systems with little regardto return on investment are starting to lookfor quantifiable results.” Information Week24: 59.

Umble, Elisabeth, Ronald Haft, and M. MichaelUmble. 2003. “Enterprise resource planning:Implementation procedures and criticalsuccess factors.” European Journal ofOperational Research 146: 241–257.

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Re-engineeringand EnterpriseResourcePlanningSystems

Objectives

1. Recognize the factors associated with the evolution to enterprise systems, including businessprocess re-engineering, client-server networking, and the emergence of integrated databases.

2. Understand the role of process modeling in re-designing business processes.

◆ BACKGROUND

In the twentieth century, we have seen the emergence of the “factory farm,” which rev-olutionized American agriculture through the use of technology. Technology alone,however, was not the main reason for the tremendous productivity improvementsassociated with this form of organization, the factory farm. These productivityimprovements were possible because of the combination of technology plus new, inno-vative procedures. This was one of the first instances of “re-engineering.” In this chap-ter, you will learn how ERP has contributed to business process re-engineering, com-bined with the use of new information technology.

The definition of re-engineering is “the fundamental rethinking and radicalredesign of business processes to achieve dramatic improvements in critical, contem-porary measures of performance, such as cost, quality, service, and speed” (Hammerand Champy, 1993). To understand re-engineering, it is important to understand theconcept of the value chain. The value chain consists of the primary and secondaryactivities of the firm. Re-engineering strives for the efficient re-design of the com-pany’s value chain.

In Table 1, the primary activities of the firm include inbound logistics, operations,outbound logistics, marketing, and service. These activities are essential to creating,producing, marketing, selling, and supporting a product or service. An information sys-tem supports each of these primary activities. This information system can cut the cost


17

Re-engineering and Enterprise Resource Planning Systems

Primary Inbound Outbound MarketingActivities Logistics Operations Logistics and Sales Service

Functions Materials Manufacturing; Order Advertising; Service;handling; parts assembly processing; promotion repairdelivery shipping

Information Automated Manufacturing On-line Marketing Remotesystems warehousing control systems order entry analysis machinesupporting systems systems systems diagnosticsprimary activities

TABLE 1 The Value Chain: Primary Activities

Support Activities Information Systems

Organization Electronic mail (facilitates communications throughout theorganization)

Human resources Skills databasesTechnology Computer-aided design and manufacturingPurchasing On-line links to suppliers’ databases

TABLE 2 The Value Chain: Secondary Activities

of performing a value activity, or it can be used to provide a “value-added” feature tothe product or service. For example, the value activity, called outbound logistics, dealswith processing orders to customers. An on-line order entry system which enables cus-tomers to order electronically can cut the time and cost of this value activity. The valueactivity, called service, can be supported by remote machine diagnostics, which “addsvalue” by providing on-line diagnostic support.

In Table 2, a set of secondary activities support the primary activities of the orga-nization. These secondary activities include organizational structure, human resources,technology, and purchasing. Information systems can support each of these secondaryactivities as well. For example, electronic mail can support the organizational structureby facilitating timely communications. Information systems can support purchasing byenabling purchasing agents to link into suppliers’ databases to place orders, determineinventory levels, and check pricing.

Supply chain management involves the planning and control of all tasks along thebusiness value chain. In this way, suppliers can link directly to manufacturers, manufac-turers can link directly to retailers, and retailers can link directly to customers. Theseelectronic linkages reduce costs, improve the timeliness of order processing anddelivery, and increase service levels.

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Driving Forces External Responses Internal Changes

Deregulation Customer focus Re-engineering workConsolidation Quality emphasis Corporate cultural changeChanging values Responsiveness TeamsCustomer sophistication Strategic relationships Empower workersTechnological advances Downsizing Quality management

TABLE 3 Motivation for Business Re-engineering

In today’s economy, some of the major motivations for streamlining andre-engineering business processes are customer sophistication, deregulation, andincreasing competition on a global level. These driving forces provide a rationale forre-thinking existing business practices and using technology to create new forms ofwork (see Table 3). As with the factory farm, productivity increases require the useof technology and changes in existing work methods and procedures. ERP can intro-duce process improvement and process re-design.

In a work environment which has fragmented business processes, an externalevent, such as a competitor’s price change, may trigger a whole set of fragmentedbusiness processes, which involve multiple individuals and take extra time (seeIllustration 1). In general, responsiveness to market demands and a focus on customerneeds require quick response time and the simplification and integration of processes.

◆ BUSINESS PROCESS RE-ENGINEERING

In many current systems, technology has mechanized old ways of doing work. The bestway to see this is to use several case studies, explaining the situation before and afterre-engineering took place.The first case study deals with the Accounts Payable Systemat Ford Motor Company. In the “before re-engineering” situation, independent data-bases were maintained by Purchasing, Receiving, and Accounts Payable. When itemswere purchased, a record was set up in the Purchasing database. When shipments fromthe Supplier were received, the Receiving Department would update its database withthe amount received. If the shipments were partial shipments, then the record in thePurchasing database did not match up with the record in the Receiving database.Theseinconsistencies created problems in Accounts Payable, which had its own database andwas responsible for providing the vendor payments

After re-engineering, an integrated database supporting Purchasing, Receiving,and Accounts Payable included “common data.” You will see these re-engineeredprocesses in Illustration 2. The company instituted a new “business rule” that Acc-ounts Payable should only pay Suppliers when shipments were received (i.e., we payfor what we get). In this way, many of the inconsistencies were eliminated. The

19


Priceapproval

Price impactrequestRequest

Need forprice change

Impactanalysis

Need forprice change

Fieldnotice

Pricenotice

Catalogchange

Pricechange

Pricechange

Finance

Costaccounting

Accountsreceivable

Competitiveanalysis

Marketing

Productmanager

Salesperson

Sales

Salesregion

Salessupport

Competitive price move

ILLUSTRATION 1 Work Environment with Fragmented Business Processes

number of administrative staff in Accounts Payable was significantly reduced withthe procedures and the common database. One of the most important principles ofbusiness re-engineering is to “break away from outdated rules.” In this case, the proce-dural change, the technological support, and the cross-functional collaborationreduced the administrative cost. Elements of business re-engineering are summarizedin Table 4.

In addition to Ford Motor Company’s Accounts Payable re-engineering exam-ple, many excellent case studies in re-engineering exist (see Table 5). At IBMCredit Authorization, for example, the re-engineering process eliminated a multi-step

20


Purchase order

Purchasing

Goods

ReceivingWarehouse

Payment

Accounts payableDatabase

ILLUSTRATION 2 Re-engineering Example: Ford Motor Accounts Payable

Elements Activities

Business processes Do not automate existing business processes; break awayfrom outdated rules

Integration Integrate business processesTechnology Use technology to re-design business processesCross-functional coordination Re-design business processes from a cross-functional viewTiming Improve processes continuouslyObjective Implement market-driven strategies designed to provide a

competitive edge

TABLE 4 Elements of Business Re-engineering

authorization process involving multiple departments and led to the design of a posi-tion responsible for making the credit authorization decision. At Xerox ProductDevelopment, a concurrent engineering process, using a common integrated database,reduced product development lead times and improved responsiveness to marketneeds. Proctor and Gamble collaborated with Wal-Mart to manage the inventory of

21


Before Re-engineering After Re-engineering Business Impact

Ford Motor Company Independent databases An integrated database Fewer inconsistencies;Accounts Payable maintained by supporting multiple reduction in clerical

purchasing, receiving, functions (e.g., overhead; betterand accounts payable purchasing, receiving, responsiveness to

accounts payable) customersIBM Credit Multi-step credit A “deal structurer” Timely decisionAuthorization authorization process makes the credit making; more

involving multiple authorization decision, effective customerdepartments and using multiple service; elimination ofmultiple individuals databases redundant tasks and(e.g., a pricer, checker) bottlenecks

Xerox Product Sequential product Concurrent Elimination of bottle-Development development process, engineering, using a necks and delays;

which meant that common integrated faster productworkers had to wait database and a development;until prior steps were computer-assisted responsiveness tocompleted design system market needs

Wal-Mart Inventory Wal-Mart ordered its Wal-Mart let its vendor, Better inventoryManagement own stock of Proctor and Gamble, management; more

merchandise from replenish its inventory effective inventoryvendors; dealt with according to market replenishmentexcess inventory or trendsinsufficient inventory

Hewlett-Packard’s Decentralized Central negotiation of Cost savings throughPurchasing Process purchasing led to a corporate volume the use of centrally

loss of corporate-wide discounts and use of a negotiated discountsdiscounts shared database of

negotiated prices

TABLE 5 Re-engineering Case Studies

Wal-Mart stores. Hewlett-Packard (HP) reaped substantial cost savings by creating ashared database of centrally-negotiated prices.

You will see an illustration of Xerox Product Development’s process before andafter re-engineering in Illustration 3.

In summary, these re-engineering examples apply a number of principles, whichare summarized in Table 6. One of these principles, “organize around outcomes,” pro-vides a rationale for creating newly designed jobs, such as Mutual Benefit Life’s posi-tion of “case manager,” who is responsible for coordinating all underwriting tasks. Thisposition is possible because the case manager has access to multiple databases. In thisexample, as in others, the combination of a re-engineered job and information technol-ogy is the key to improved productivity and reduced costs.

The HP Purchasing database supports two different re-engineering principles. Oneprinciple, “treat geographically dispersed resources as if they were centralized,” isimplemented because local branch managers have access to a common databaseof centrally negotiated vendor prices. In addition, local managers can make their

22

Engineering evaluationand development

Conceptualdesign

Product definition Process definition

Design cost estimate

Review for release readinessEngineering release

Request forengineering action

Conceptual design

Engineering andevaluation development

Engineering andevaluation development

Drawing anddata repository

Product definition

Process definition

Design cost estimate

Engineering reviewEngineeringrelease

Data

ILLUSTRATION 3 Re-engineering Example: Xerox

After

Before

23

Principle Case Study Example

Organize around outcomes, Mutual Benefit Life A case manager performs andnot tasks coordinates all underwriting

tasks centrallyHave those who use the output Hewlett-Packard Department managers makeof the process perform the their own purchases using aprocess shared database of approved

vendorsLink parallel activities during Xerox Concurrent engineering teamsthe process, rather than at the participate in new productend of the process design and engineeringTreat geographically dispersed Hewlett-Packard Each division has access to aresources as if centralized shared purchasing database at

HP’s corporate officeCapture information at Mutual Benefit Life Customer service the source representatives enter insurance

application information into acentral database

Subsume information Mutual Benefit Life Customer serviceprocessing work into the representatives have access toreal work that produces information for decisionthe information makingFlatten organizational layers Mutual Benefit Life, Decision making is

Hewlett-Packard, Xerox decentralized to the appropri-ate level; in many cases, thiseliminates or lessens the needfor mid-management

TABLE 6 Principles of Re-engineering Applied


own purchases, rather than going through a central purchasing bureaucracy. Thisimplements the principle “have those who use the output of the process perform theprocess.”

All of these re-engineering examples support common themes. One of thesethemes is to decentralize decision making to the decision maker to be responsive tothe customers’ needs. This has the effect of flattening organizational layers becausethere is less need for mid-level management. Another common theme is that the useof information technology (e.g., shared databases, networking) facilitates the newlyre-engineered processes. In the Mutual Benefit Life, Hewlett-Packard, Xerox, andFord examples, access to central databases is essential to new ways of doing work.These new ways of doing work mean re-designing jobs. The positions of “customerservice representative,” who makes underwriting decisions at Mutual Benefit Life,and “deal structurer,” who makes credit authorization decisions at IBM Credit, areexamples of re-engineered jobs. With decentralized decision making, these positionsentail judgment, leadership, and the ability to adapt to changing customer needs (seeTable 7).

24

Organization Traditional Re-engineered

Job design Narrow BroadStructure Hierarchical FlatCareer moves Vertical HorizontalWork rules Procedures JudgmentManagement Supervision LeadershipPeople skills needed Structured Adaptive

TABLE 7 Re-structuring Business Processes Means Re-structuring Jobs

◆ PROCESS MODELING

In order to depict the changes in data and processes associated with businessre-engineering, a commonly used tool in systems analysis is the process model. Theprocess model consists of five objects:

• The business process: The process depicts the business activities which are accom-plished (e.g., check credit, mail invoice).

• The data store: The store depicts data that are needed by the business processes.• The data flow: The flow depicts data being transferred from a process to another

process or between a process and a data store.• The organizational unit: The organizational unit depicts the units of the organiza-

tion in which these processes take place (e.g., Accounts Receivable, Sales).• The event, including triggers and outcomes: A trigger is an event which “triggers”

a process, and an outcome is an event which results from a process.

A short case illustrates the design of a process model. Neighborhood FoodCooperative is a rapidly expanding organization which provides its members with gro-ceries at favorable rates, because of its ability to buy in bulk from farmers and whole-sale suppliers. The Board of the Cooperative is interested in analyzing its administra-tive processes, including purchasing and distribution. A process model can depict thefollowing processes.

The Cooperative functions on a weekly cycle. Members may send in or delivera shopping list at any time during the week, either in handwritten form, orusing the pre-printed form for which the Cooperative has suppliers (e.g., eggs,meat, vegetables, etc.).The list is scanned, and any items which the Board hasdecided will not be supplied this week (e.g., coffee) are deleted. Each Fridayafternoon, all the lists are merged to get an overall demand for each item, sothat the staff can survey the prices (by calling each supplier for each item) andget the best deal. By closing time on Friday, orders covering all goods neededhave been placed with suppliers by phone; these are followed by written con-firmations. Suppliers invoice the Cooperative, ten days net, and the invoicesare held in Accounts Payable and paid weekly. On Sunday, the shipments aredelivered to the Cooperative where they are checked to be certain that the


25

Receive billin mail to bepaid with thenext week’s

order

Paysuppliersweekly

(10 days net)

Deliverorder

ifnecessary

Prepareindividual

orders

Delivershipments toCooperative

Invoicethe

Cooperative

Supplyprices to

Cooperative

Checkshipment foraccuracy andorderliness

Follow uporder with

writtenconfirmation

Mergelists to get

overalldemand

Checkinvoice foraccuracy /Put in A/P

Placeorders

by phone

Callfor prices

Accept andscan lists/

Delete itemsthat won’t be

supplied

Distributepreprinted

forms

Send in or delivershopping listalong with

payment forprevious week

Pick uporder from

CooperativePay fees

Memberreceives

order

Weeklycycle

begins

Memberreceives

order

Members

Suppliers

CO-OP

Unspec.Suppliers

/Items

Doesmember

have goodcredit?

Hasmember

paidfees?

CO-OPA/R

CO-OPA/P

Ordersystem

Itemprices

SupplierA/R

Members

NoYes

Yes

FIGURE 1 Order Processing System at Neighborhood Food Co-op

26

correct items were shipped.The individual shopping baskets of the membersare then made up for pick-up by the customer or for delivery.

In Figure 1, you will see a process model depicting an order processing system atNeighborhood Food Cooperative.

The process model is useful in the re-engineering process. First, it is useful for ana-lytical purposes because it provides a graphical representation of the activities of thecurrent system. An analysis of the current system provides insight into changes inprocess, information flows, work structure, and organization which are needed toimprove the productivity of the current system. Based upon these changes, a processmodel can be built that incorporates these changes and is based upon “best practices.”A best practice is a better way of doing business; it is an improved method.

The best practices supported by modules within ERP systems are based upon thefollowing: re-engineered process models, which depict improved process changes; inte-grated data, which are shared by multiple processes; and structural changes, whichstreamline business functions and maximize productivity. Seeing the differencesbetween the current business process model and the new process model is usefulbecause this gives everyone an opportunity to analyze the changes in work flow, worksystems, and work structures that will occur as a result of the ERP implementation.


◆ RE-ENGINEERING AT RELIABLE FINANCE COMPANY

A case study will provide an excellent example of how a process model can be used todepict the changes in business processes and information in re-engineering.

BACKGROUND OF THE BUSINESS

The Reliable Finance Company (RFC) started in a small mid-western town in the1890s, lending money to farmers and businessmen. RFC assumed risks that the com-mercial banks were unwilling to take and charged slightly higher interest rates.

Now, RFC has 178 branches, from Denver to Cleveland and from Detroit toHouston. The company is committed to making loans to individuals to assist them inmaking such purchases as automobiles, appliances, and home improvements.

Ed Clarkson, grandson of its founder, along with a new management team, man-ages the company. They have decided on a growth plan that would expand the numberof RFC branches to 400 within the next three years and to 1,000 branches withinanother five-year period after that. The locations will be selected in growing suburbs,especially in Texas, Florida, California, and Arizona.

These expansion plans will require an enhanced information system to supporttransactions processing for loans, payments, and settlements. The President has askedthe MIS Department to develop recommendations for the re-design of the existingconsumer loan system.

ANALYSIS OF THE CURRENT LOAN APPLICATION AND SCREENING SYSTEM

The first system to be analyzed is the loan application and screening system. Some ofthe activities for loan application screening are handled by the branches, and someof the activities are handled by the home office, which is located at Centerville, Indiana.

27


Each RFC branch has a manager, several customer service advisors, and clericalstaff. Applicants for loans complete a Loan Application Form with the assistance of acustomer service advisor. The branch personnel check local income and bank refer-ences, and the Branch Manager gives the application a preliminary screening prior tosending the materials to the Home Office in Centerville. At the Home Office, the staffin the Screening Department check if the loan applicant has defaulted on any priorloans with RFC and check on outstanding and delinquent loans to ensure all currentloans held by the applicant are in good order. Finally, the Screening staff obtain anexternal credit report from TRW to determine the applicant’s creditworthiness basedupon other external loan activities. Based upon data from the Branch and HomeOffice credit searches, the Loan Officer in the Home Office determines whether toaccept or reject the loan application.

If the loan application is accepted, the Loan Department generates a check for theloan amount and sends a confirmation of the loan’s acceptance to the branch personnel.Loan paperwork is sent to Accounting, which sets up the loan account in theOutstanding Loans File.TheAccounting Department prints aVoucher Booklet,which issent to the Branch. Once the Branch receives the letter of acceptance and the VoucherBooklet, it notifies the customer to come and collect the check and Voucher Booklet.

The branch personnel keep copies of the vouchers in a local Outstanding Loansfile for each customer.These voucher copies are organized by due date. In this way, theBranch Manager can see what payments are due each day. The information systemsdepartment produces monthly management reports summarizing new loans by branch.

When a new loan is confirmed, the branch personnel set up an index card file foreach customer, with details such as name, address, Loan ID, and principal amount. Thisinformation is not shown on the voucher copies, and it is often useful in identifyingaccounts to which payments should be applied. Figure 2 depicts the current loanapplication screening process.

CURRENT PROBLEMS

At the current time, RFC is planning to expand the number of branches from 187 to400 in the next three years, and to a target of 1,000 branches over the next five yearsafter that.To accommodate expansion plans, the current system will need to be stream-lined, modified, and enhanced.

One problem is the various steps in the loan approval process typically take 10–13working days. In many of the cities where RFC has branches, commercial banksapprove or disapprove loan applications in 2–3 days. This means that some of the bestloan candidates (e.g., those who are the best credit risk) obtain approval for their loansat least a week before RFC gets around to approving them. RFC is losing some of itsbest loan prospects to the commercial banks.

OBJECTIVES

Management is interested in achieving the objective of reducing the time it takes toapprove a loan from 10–13 days to 2–3 days in order to be competitive with the com-mercial banks. In order to attain this goal, a new process model has been designed. Inthe new process model, a branch-level customer service representative has local accessto all of the databases needed to make the loan approval decision (see Figure 3).

28

Applicant

Cust. Svc.advisors

Completeloan app.

form

Keeporganized copies

of vouchers

Collect checkand voucher

booklet

Notify applicantthat check and

booklet are ready

Assistapplicantwith form

Set upcustomer

file

Branchmanager

Clerical(branch)

Screeningstaff

TRW

Loanofficer

Loandept.

Acct.dept.

Unspec.

Letter ofacceptance

Index cardfile (cust. info)

Outstandingloans

(local file)

Need aloan

Loanreceived

Check localincome andbank refs.

Verify allcurrent loansin good order

Obtainexternal

credit report

Providecredit report

Generatecheck for

amt. of loan

Preliminaryscreening ofapplication

Set upnew loanaccount

Printvoucherbooklet

Accept/rejectloan app.?

Loanrecords

Creditreport data

Outstandingloans (homeoffice file)

Send materials

Accepted

Loanpaperwork

Voucherbooklet

FIGURE 2 Process Model of the Current Loan Application Screening System

29

Applicant

Clerical/Customerservice rep.

Loan officer/Branchmanager

Unspec.

Completeloan

applicationform

Need aloan

Collect checkand voucher

booklet

Verify loanapplicationinformation

Compareapplicant to

“delinquencyprofile”

Sendrejectionletter to

applicant

Notifyapplicant that

check andbooklet are

ready

Print voucherbooklet

Approve/reject loan

app.?

Set up newloan account

Generateloan check

Approved

Delinquencyprofile

data store

Loanreceived

Customerinformation

file

Outstandingloan file

Loandelinquency

records

TRW(creditreport)

Applicantext. bankrecords

Applicantemployerrecords

Retrieve

Create

Retrieve

Rejected

FIGURE 3 Process Model of the New Loan Application Screening System

30


◆ MAKING RE-ENGINEERING WORK

In his analysis of why re-engineering efforts are a failure, Rosenthal argues that orga-nizations need to apply a “clean slate approach” to process re-design and to moveaway from the status quo. Based upon an in-depth study of re-engineering projects in20 companies, Rosenthal found that 11 of the 20 projects measured less than 5% inoverall returns, through increased revenues or decreased costs, from re-engineeringefforts (Rosenthal, 1993).

The reason why so many re-engineering projects fail, Rosenthal notes, is that manyof these projects are too narrowly focused (e.g., they focus on a single activity within asingle function, such as accounts receivable) or are too general in nature (e.g., theirobjective may be to create more knowledgeable reservations agents, whereas cus-tomers just want faster bookings). When a process or series of processes is re-engineered, jobs need to be re-designed and reward structures need to be in place toprovide incentives to change behavior.

Re-engineering efforts at Banca di America e di Italia (BAI),AT&T, and SiemensNixdorf illustrate re-engineering that works. At BAI, when a customer comes in tomake a deposit, the teller can analyze the customer profile using on-line databasesand suggest new financial services. AT&T created a project management position tocoordinate PBX sales from the beginning to end, resulting in a percentage increasefrom 31–71% in bills paid within 30 days of installation. At Siemens Nixdorf, remotediagnostics of networking issues helped troubleshoot 80% of the possible repairs andenabled service technicians to focus on the important issues. In addition, parts wereloaded into service technicians’ cars so they did not need to make two trips, one todiagnose the problem and another to make the repair (see Table 8).

A clean slate approach to process re-design calls for continuous training for newroles so individuals do not fall back into “old behavior.” There must be a way of mea-suring performance and tracking progress toward achieving new goals. Communicationsare important so people understand why their behavior should be changed. Finally,information technology should support the re-engineering of business processes(Rosenthal, 1993).

Re-designedCompany Processes Before After

BAI Branch customer 64 activities, 9 forms, 25 activities, 2 forms,service 14 accounts 2 accounts

AT&T PBX sales 12 project handoffs 3 handoffsSiemens Nixdorf Field service 30 support centers; 5 support centers;

1,800 headcount 800 headcount

TABLE 8 Re-engineering that Works

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Increased power Client workstations have access to server-based softwareIncreased control Server-based software can be systematically maintained and

upgradedIncreased efficiency Multiple locations can use common information resourcesImproved user interfaces Graphical user interface (GUI) interfaceImproved database control Common access to a relational database

TABLE 9 Characteristics of a Client-Server Computing Environment

◆ HOW INFORMATION TECHNOLOGY FACILITATES ERP

ERP relies upon the use of information technology, including client-server computingand shared databases. Many of the changes in business process design, work re-engineering, and sharing of information resources are facilitated through the imple-mentation of information technology.

EMERGENCE OF CLIENT-SERVER COMPUTING

The basic rationale for client-server computing is that application use is dividedbetween a “client,” which is usually a personal computer, and a “server,” or multipleservers, which offer certain resources. The components of client-server computinginclude a relational database, a server or servers, workstations, a network, and clientsoftware for the workstations. In the client-server environment, desktop systemsare connected via networks to dedicated background servers, including file servers,print servers, application servers, and database servers. Its advantages can be seen inTable 9.

INTEGRATED DATABASES

The emergence of integrated databases is a foundation for ERP systems. Prior to inte-grated databases, each functional unit within an organization created, maintained, andupdated its own databases (e.g., customer databases, supplier databases, employeedatabases) (see Illustration 4). After the emergence of integrated databases, organiza-tional units shared common data maintained in central databases.

The advantages of integrated databases are data sharing, reduced data redun-dancy, improved data consistency, data independence, and improved data integrity.Data sharing means a common data resource supports functional units across thecompany. This reduces redundancy and contributes to data consistency. For example,a customer number is consistent across modules, including sales and marketing,financial accounting, and customer service. If for some reason a vendor numberchanges, this change is made anywhere the vendor number is used across applicationmodules.

In addition, data independence means that data can be maintained separatelyfrom the application modules, which use the data. If a data definition is changed,

32


Productplanning

Productdevelopment

Competitiveanalysis

Productmanagement

Sales

ClaimsCustomer

service

Costaccounting

Accountsreceivable

Data Data

Data Data Data

Data Data

Data Data

ILLUSTRATION 4 Before: Data Are Maintained Independently By Various Organizational Units

then changes do not need to be made to application modules, which use the data. Forexample, if a customer zip code is changed from a five-digit numeric field (63102) to anine-digit numeric field (63102-1107), the data definition for the zip code is changed inthe database management system, but the programs using this data element need notbe changed. This substantially reduces application maintenance costs.

Finally, a database management system improves data integrity and provides cen-tral data administration. The database administrator can control access to data,updates to the database, and security. Professional data administration procedures,including backup and recovery, are assured. The security and integrity of the databaseare important for the management of information and the effective use of informationfor decision making.

ERP systems rely upon the use of an integrated database, in which data elementsand their relationships are defined to support multiple applications. Integrated data-bases provide concurrency control, which enables multiple users to make updates tothe database. In addition, the database administrator provides controls to assure thatonly authorized personnel can add, delete, and update data in the database. Securityprocedures include login identification, account codes, and passwords.

33


◆ THE EMERGENCE OF PROCESS ENTERPRISES

As organizations implement ERP, they are moving away from the “silos,” or the spe-cific units focused on products, regions, or functions.To emerge as a process enterprise,organizations need to stress teamwork over turf and hierarchy and to focus on achiev-ing “process goals.” One of the ways of making the transition to process management isto give authority over work and budgets to “process owners.” (Hammer, 1999).

A case in point is Texas Instrument’s calculator business in the early 1990s. TIhad long product development life cycles, and they were losing business to competitors.Management wanted to re-engineer TI’s calculator business, and this is what happened:

The first pilot teams not only failed to achieve the desired reductions in devel-opment times but also barely managed to operate at all. They were, in effect,sabotaged by the existing organization, which viewed them as interlopers.Functional departments were unwilling to cede people, space, or responsibilityto the teams. The technical writers and designers charged with creating docu-mentation got instructions from the product team and then got conflictingorders from their supervisors in the marketing department. The corporatetraining unit refused to relinquish control over the development of trainingmaterials, and the advertising department insisted on continuing to createproduct advertising. An effort that had been intended to create harmony inproduct development instead created discord.

Productplanning

Productdevelopment

Competitiveanalysis

Productmanagement

Sales

ClaimsCustomer

service

Costaccounting

Accountsreceivable

Data Data Data Data

Uniform, Consistent, Available Information

ILLUSTRATION 5 After: Databases Are Integrated Across Functional Lines

34


The problem was that the power still resided in the old functional departments.Management tried to superimpose an integrated process on a fragmented organization.To introduce re-engineering successfully, management created organizational unitsresponsible for product development (e.g., of calculators) and created a process ownerwith budgetary authority to manage the process.The process owner had authority overdesigning the process, measuring its performance, and training the workers. The resultwas that product development time was reduced by 50% (Hammer, 1999).

At IBM, a similar transition occurred. IBM wanted to standardize its operationsworldwide, by instituting common processes for order fulfillment and product devel-opment to replace the diverse processes used in different parts of the world and for dif-ferent products. However, independent country and product managers provided aroadblock to rolling out the standardized processes.

What did IBM do? It changed the management structure and gave responsibilityfor each process to a member of the Corporate Executive Committee. This shiftedpower away from the country and product managers to senior management andresulted in the successful implementation of standardized processes, resulting in cus-tomer satisfaction and $9 billion in cost savings (Hammer, 1999).

ERP AND BUSINESS PROCESS CHANGE

The process changes associated with making re-engineering work are critical to thesuccess of ERP. At Owens Corning, an ERP implementation failed because regionalmanagers rejected the software or sought to tailor it to the needs of their own units. Toovercome this resistance, Owens Corning created the role of “process owner,” with theauthority to design the process, measure its performance, and train front-line workersto perform it. This role had to be maintained, or the old organizational structureswould have re-emerged (Hammer, 1999).

◆ SUMMARY

ERP provides an opportunity to re-design business processes. With re-engineering,business processes are simplified and business rules are improved. In addition, re-designing processes provides the foundation for new opportunities, such as eBusiness.To make process management work, all employees must “buy into” the new processesand understand their role in contributing to the success of the new system. Re-engineering with ERP enables organizations to be more responsive to changingmarkets and to shifts in competitors’ strategies.


1. Conduct a search of on-line databases to find a case in business re-engineering, similar tosome of the cases mentioned in this (e.g., Ford Motor Company, Mutual Benefit Life,Hewlett-Packard).a. Was an ERP system associated with the business-process re-engineering?b. What business benefits were derived from adopting best practices?c. What obstacles needed to be overcome as a result of implementing changes in work

flow, work methods, and work systems?

35

2. How does the implementation of ERP contribute to business process re-engineering?3. How does information technology facilitate the process of business re-engineering. Without

information technology, would business process change be possible?


◆◆◆ Case

Re-engineering the Payment Processing System at RFCRead the following case, which describes the cur-rent payment processing system at RFC, andcomplete the activities at the end of the case.

DESCRIPTION OF THE CURRENTPAYMENT PROCESSING SYSTEMOnce the loan is set up, customers can pay inthree different ways. First, customers can bringtheir payments into the branch in the form ofcash, check, or money order. Second, they canmail their payments to the branch. The branchpersonnel verify their Loan ID, if necessary bychecking the Customer card file, and update theloan Outstanding Loans File by pulling thevoucher copy corresponding to the payment andstamping it “paid” and then filing it in the PaidVouchers file in sequence by Loan ID and duedate sequence.

The actual payments are then batched anddeposited in the branch bank each afternoon.The Home Office is notified by means of anAdvice of Payment Received (APR), which isfilled out for each payment and mailed to theHome Office.

Third, customers may pay the Home Officedirectly. If they do so, the Home Office PaymentProcessing Department verifies that each pay-ment is complete, by checking the enclosedvoucher. If the voucher is missing, the paymentprocessing clerk uses a printout of the centralOutstanding Loans File to look up the Loan IDcorresponding with the correct account.Then thebranch personnel are notified of the payment bymeans of an APR, which is then mailed to thebranch personnel.

The details of the payment are used toupdate the Outstanding Loans File in the HomeOffice. Each evening, a batch payment processing

run is used to update all the accounts centrally,based upon payments received during that work-ing day. In addition, the branch personnel use theAPRs from the Home Office as well as its owninternal records of payments that have been sentdirectly to the branch personnel to update itsown local Outstanding Loans File.

Payments made directly to the Home Officeare batched and sent directly to the Home Officebank.The payment processing system produces apayment report for the Accounting Departmentand a branch-by-branch payment report for eachBranch Manager.

DELINQUENCY ANALYSIS SYSTEMOn a weekly basis, the delinquency analysis sys-tem is run. It checks the Outstanding Loans Filein the Home Office and determines if paymentsare overdue. It generates an Aged Trial BalanceReport, which indicates which payments are 15,30, 45, and 60 days overdue. When a payment is15 days overdue, a polite First Reminder is sent.When a payment is more than 30 days overdue,a second (less polite) reminder is sent. Fourreminders, with increasing degrees of insistence,are sent. All of these reminders are computer-generated. After the loan becomes 60 days over-due, it is moved to the Collections Department,and collections agents follow up at that time.

SETTLEMENT ACCOUNTING SYSTEMFrom time to time, customers want to finish pay-ing a loan before it becomes due. In these cases,the customer requests a settlement figure, whichis the amount required to settle the outstandingbalance on the loan. If the request is urgent, theBranch Manager will phone the request to the

36


Home Office. The information systems depart-ment now prepares a settlement run, which isprocessed nightly, with the urgent request forthe settlement balance. The settlement balanceis sent back to the Branch Manager the nextmorning.

PROBLEMS WITH PAYMENTPROCESSINGAt the current time, RFC is planning to expandthe number of branches from 187 to 400 in thenext three years and to a target of 1,000 over thenext five years after that. To accommodateexpansion plans, the current system will need tobe streamlined, modified, and enhanced. Someof its current problems are the following:

1. About 80% of the payments are made tobranch personnel, and the rest are mailedto the Home Office. Of the payments thatare mailed, the payment voucher from theVoucher Booklet is missing in about halfthe cases. This does not matter so much atthe branch location because the branchpersonnel maintain a local customer cardfile with the name and Loan ID. However,at the Home Office, it is more difficult totrace payments. At the current time,incoming payments without an accompa-nying voucher are identified by checkingagainst a printout of the OutstandingLoans File. However, unidentified pay-ments sometimes generate an APR to thewrong branch, and the entire processcauses more clerical work and errorcorrection.

2. The bottlenecks in processing paymentstrigger additional problems. Considerableclerical overhead is caused by situationswhere people do not pay until ten daysafter their due date, and because ofvarious delays, their payment does notactually get posted to the OutstandingLoans File until after the DelinquencyAnalysis run has sent them their firstreminder. When they call the branchpersonnel to protest receiving a reminder,the personnel have to call the HomeOffice and trace their payment. Forty-fourpeople are currently tied up in theCustomer Service section at the Home

Office, and much of their time is spentdealing with late and missing paymentmatters.

3. Throughout the system, excessive clericaloverhead occurs. In 129 of the 187branches, a full-time clerical person wasengaged in maintaining the local branchloans file, in pulling voucher copies, inrecording payments, and in making outAPRs. In the other 58 branches, theseactivities take between 2–5 hours per day.

4. Since the Outstanding Loans File isalways several days out of date, it is oftendifficult to isolate loans that are delin-quent until it is too late. About 2.5% of allloans are never repaid. Last year$4,795,000 was written off as uncol-lectible. Although processing delaysaccount for not flagging late payerssooner, management feels that RFC coulddo a much better job of weeding outpotential delinquents during the initialapproval process. To do this, RFC wants tobuild a picture of the potential delin-quent, including age, occupation, income,family size, location, mobility, and a hostof other criteria. A delinquency profilewill aid in identifying “high potential fordelinquency” accounts. This profile can bedeveloped, maintained, and modified byOperations Research personnel on anongoing basis.

5. Because of error and adjustment activi-ties, it is rarely possible to balance thebooks for month end before the twelfth(12th) of the succeeding month. Thisgreatly complicates planning for cash flowand frequently requires RFC to borrowmore money that it needs and at higherinterest charges.

CASE EXERCISE1. Draw a current process model for the

payment processing system at RFC.2. What changes in business processes and

information do you feel will improve thepayment processing system at RFC?

3. Draw a new process model for a re-engineering payment processing system at RFC.

37


ReferencesHammer, Michael. 1990.“Re-engineering work:

Don’t automate, obliterate.” HarvardBusiness Review 68: 104–112.

Hammer, Michael. 1999. “How process enterprises really work.” Harvard BusinessReview 77: 108–118.

Hammer, Michael and Champy, James. 1993.Re-engineering the Corporation. HarperBusiness.

Rosenthal, Jim. 1993. “How to make re-engineering work.” Harvard BusinessReview 71: 119.

38

Planning,Design, andImplementationof EnterpriseResourcePlanningSystems

Objective

Understand the information systems development process for enterprise systems, includingplanning, design, and implementation.

In this chapter, you will learn about the traditional approach to information systemsdesign and how it compares with Enterprise Resource Planning (ERP) systems

design. ERP design and implementation differs from traditional systems development.In ERP design, the organization acquires a packaged software system that definesprocesses and practices for the business. The main challenge in implementing ERP iswhether to change the organization’s business processes to fit the software or whetherto modify the software to fit the organization’s business processes. In this chapter, youwill learn about the trade-offs involved in re-engineering business processes to fit thesoftware versus customizing the software.


39

Planning, Design, and Implementation of ERP Systems

◆ TRADITIONAL SYSTEMS DEVELOPMENT

The traditional systems development life cycle included the phases of problem defini-tion, feasibility study, systems analysis, systems design, detailed design, implementa-tion, and maintenance (see Table 1). In systems analysis, the analyst undertakes adetailed analysis of the current system, using tools and techniques, such as processmodels and data models. Using these models, the systems designer analyzes bottle-necks, duplication of effort, inconsistencies, and other problems with the currentsystem.

The fundamental approach used in traditional systems development is to analyzethe current system’s shortcomings and to develop a “new” system, which builds inchanges in processes and data that will support the firm’s business requirements. Therationale is that automating the current system is counterproductive because thecurrent system may have problems, including redundant processes, insufficient data,

Step Activities Tools and Techniques

Problem definition Identify problems with the Interviewing and datacurrent system collection

Feasibility study Assess the need for a systems Preliminary cost analysisproject, including technical,economic, and management feasibility

Systems analysis Undertake a detailed analysis Logical process models—of the current system, including present system;processes, information flows, Logical data models—and work organization present system;

Organization charts (functional hierarchydiagrams)

Systems design Development of objectives for Logical process models—the new system; re-engineering proposed system;of processes and information logical data models—

proposed system;organization charts—proposed system

Detailed design Design of specifications for Program design specificationsthe proposed system output design; input design

Database design; forms designImplementation Software implementation; Coding; testing;

training end-users; documentationdevelopment of reporting systems; design of controls and security

Maintenance Ongoing technical support;ongoing upgrades and enhancements

TABLE 1 Information Systems Design: Traditional Approach

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and inefficient workflow. The systems design process provides an opportunity to re-engineer or re-invent the current system prior to automating it. The systems designprocess seeks to assure logical database design prior to detailed design, during whichthe specifications for the physical system are developed (e.g., output design, inputdesign). Once the physical design specifications are set, then the system is pro-grammed, tested, and implemented.

The problem with the traditional systems development life cycle is that it takes toomuch time and costs too much. The traditional life cycle follows a “waterfall”approach, in which there is a sequence of steps, starting with planning and analysis tobe followed by design, detailed design, and implementation. Since the mid-1980s, com-panies have been seeking faster methods of developing information systems.

◆ NEW APPROACHES TO SYSTEMS DEVELOPMENT

Three different approaches designed to speed up the building of information systemswere prototyping, end-user development, and software packages. In the late 1980s, pro-totyping was introduced as a methodology for obtaining user requirements morequickly and accurately. Using prototyping, systems designers could show “models” ofsystems documents (e.g., reports, screens) to end-users to get a better idea of theirrequirements. While this approach enabled end-users to specify their requirements, itdid not necessarily speed up the systems implementation process, including coding,testing, and debugging.

End-user development was another approach introduced in the mid- to late-1980sand is still relevant for many applications. Equipped with spreadsheets and databasepackages, like Microsoft Excel and Access, end-users constructed their own informa-tion systems. While this approach worked effectively for local departmental applica-tions, it was not appropriate for the development of large-scale production systemsrequiring quality assurance, security, documentation, backup, and live production.

In the late 1980s, software packages became more prevalent. They offeredeconomies of scale in development, enhancement, and maintenance, and many compa-nies moved toward purchasing commercial off-the-shelf software. ERP systems arelarge-scale, integrated commercial off-the-shelf software packages that support theentire value chain of business functions.

◆ THE ERP SYSTEMS DEVELOPMENT PROCESS

The ERP systems design process is different from the traditional systems developmentprocess.The ERP systems development process includes planning, requirements analy-sis, design, detailed design, implementation, and maintenance (see Table 2).

Planning starts with a needs assessment, which provides a business justification forthe purchase of the software. This needs assessment phase is important because of themajor investment in an ERP system and its business impact.The requirements analysisphase of an ERP project involves specifying the business processes to be supported bythe ERP package. Most ERP vendors offer “best practices,” which are models of func-tions supported by the ERP system.

41


Step Activities Tools and Techniques

Planning Conduct a needs assessment; Interviewing; cost justificationprovide a business justification,based upon the difference between the existing system and the proposed system

Requirements Analyze current business Use best practices models to analysis processes and specify the see what the company can

processes to be supported; gain by implementing the select the ERP system new system

Design Re-engineer business processes Use the ERP methodology’saround the best practices model best practices or customizeof the ERP system or customize the software

Detailed design Choose standard models, Interactive prototypingprocesses, inputs, and outputs (e.g., customer lists, vendor lists)

Implementation Configure the system; Work with vendors to correctmigrate data from the old any “bugs” in the software;system to the new system; clean processes and datadevelop interfaces; Use reporting toolsimplement reporting systems;conduct testing;implement controls, security;train end-users

Maintenance and Provide technical support; Add enhanced functionality continuous provide upgrades and to existing modulesimprovement enhancements

TABLE 2 ERP Systems Design Process

In the design phase of the project, the project sponsors introduce the best prac-tices, which the ERP system supports. This entails re-engineering business processes tofit the software. This is fundamentally different from the traditional systems develop-ment approach, in which the systems designer defines new business requirements andimplements software to conform to these requirements. One of the fundamental designdecisions in implementing an ERP package is whether to re-engineer the organiza-tion’s business processes to fit the software or to customize the software to fit the orga-nization’s business practices.

PLANNING: MAKING THE BUSINESS CASE FOR ERP

The business justifications for ERP include tangible and intangible benefits, includ-ing inventory reduction, operating cost reductions, overdue accounts collection,process improvement, and reduction in cycle times (Ross, Vitale, and Willcocks,2003). The technology and business rationales for ERP packages are illustrated inTable 3.

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Technology Rationales Business Rationales

Ability to use timely operational data Inventory cost reductionsAbility to integrate systems, instead of IT cost reductionsmaintaining many separate systemsAbility to enhance systems without Personnel cost reductionsincurring the time and cost of custom development and modificationsAbility to implement new features, such as Increased profitabilityCustomer Relationship Management (CRM)Access to on-line, real-time operational data Productivity improvementReduction in the time and cost of systems Better cash managementdevelopment and maintenance

TABLE 3 Rationales for ERP

REQUIREMENTS ANALYSIS

Requirements analysis activities involve (1) analyzing business processes and (2) spec-ifying the processes to be supported by the ERP package. Since the company is buyinginto the vendor’s view of best practices, it is important to select a system which fits withthe organization’s goals and competitive strategy (Umble, Haft, and Umble, 2003).Most vendors offer best practices for specific industries, such as the chemical industryand oil industry.

The process of selecting the best ERP system entails working through a checklistof activities (see Table 4) (Umble et al., 2003).

Aside from the business issues, there are a number of technology factors to con-sider in selecting an ERP vendor and an ERP system (see Table 5).

DESIGN: RE-ENGINEERING VERSUS CUSTOMIZING

The fundamental decision in ERP systems design is re-engineering versus customizing.In the re-engineering approach, the team selects a commercial off-the-shelf ERP andre-engineers business processes to fit the package. In the customizing approach, theteam selects a commercial ERP and customizes the ERP to meet unique requirements(see Table 6).

An in-depth analysis of the trade-offs between re-engineering and customizing anERP system illustrates several important factors. Re-engineering the business to fit thesoftware can disrupt the organization because this represents changes in procedures,work flows, and data. However, customizing an ERP can make upgrading to newer ver-sions difficult since vendor-supplied versions will be based upon vanilla versions of thesoftware (see Table 7).

ALTERNATIVE ERP DESIGN OPTIONS

ERP systems can be designed using various approaches.A complete vanilla ERP pack-age is easiest to implement because the organization can follow the vendor-prescribed

43


Steps Activities Complete Y/N

Create the vision Develop corporate objectives for ERPCreate a feature/function list Use a team who are familiar with company

processes; map current processes to the new best practices

Create a software Narrow the field based on size of company,candidate list industry type; talk to existing buyers in

the industry Narrow the field to four Conduct preliminary analysis of strengthsto six serious candidates and weaknesses; determine goodness of fitCreate the Request For Develop a list of features and functionsProposal (RFP)Review the proposals Consider strengths and weaknesses of

each proposalSelect two or three finalists Have the finalists demonstrate their

packagesSelect the winner Consider numerous factors (e.g., supplier

support, closeness of fit, technological risk)Justify the investment Conduct a cost-benefit analysis;

tangible benefits include improved material control, reduced costs, increased productivity, increased on-time deliveries,improved customer service, inventory reduction, and elimination of redundant databases; intangible benefits include reduced cost, higher morale, and improved communications; make a GO, NO GO decision

Negotiate the contract Participate in contract reviewRun a pre-implementation Have the cross-functional team review pilot the pilotValidate the justification Involve the cross-functional team in a

final GO, NO GO decision

TABLE 4 Selecting an ERP System

Technology Factors Questions

Cost of technology What are the start-up and recurring costs?Installation What consulting assistance is offered (time, cost)?User interfaces What interfaces are supported?Upgradability What is the frequency of upgrades?Computing environment What is the computing environment?Personnel requirements What expertise is needed for design and implementation (business

analysts, consultants)?

TABLE 5 Technology Factors to Consider in Selecting an ERP System

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Pros Cons

Customizing Supports unique business An ERP may not support these approach processes; strategic processes unique business processes;

are maintained re-inventing the wheel; customiza-tion is difficult, since modules areintegrated; difficult to upgrade thesoftware to newer versions, sinceupgrades are based on vanillaversions

Re-engineering Is supported by an ERP solution; Does not support strategic or approach takes advantage of shared or unique business processes;

generic processes within industries resistance occurs when there is (e.g., industry templates); best extensive organizational changepractices may represent improvedprocess changes; documents bestpractices; works well when there is minimal organizational change

TABLE 6 Re-engineering vs. Customizing

Re-engineering Approach Customizing Approach

Re-engineering Supports re-engineering Re-engineering is independent of thebusiness processes processes to fit the software tool being implemented (e.g., its

system’s best practices models, processes, outputs)Organizational fit Works well with minimal May disrupt the organization less

organizational change, but because software is designed toextensive re-engineering may support current methods of work disrupt the organization organization and structure

Evolution Evolution depends upon vendor Evolution can support unique userupgrades and enhancements to requirementsthe system

Timeliness Software is available and ready May involve lengthy systemsto implement development activities

Cost Implementation is cost-effective May involve extensive cost of customimplementation

Requirements Puts boundaries on the design; Provides greater flexibility fordesigns conform with business meeting unique requirements; notmodels and best practices constrained by the tools’ best

practices; no boundaries for thedesign

Competitiveness Other firms have access to the Do not have to use software to whichsame design everyone in the industry has access

Fit Requirements will be supported Unique requirements may not beby an ERP system supported by an ERP system

External consulting More of a turnkey approach, May entail the expense of muchparticularly using a vanilla external consultingimplementation

TABLE 7 Detailed Comparison: Re-engineering vs. Customizing Approach

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Customization RelativeModule Implementation Frequency Implementation*

Purchasing 93% 60.5%Order entry 92.4% 67.8%Materials management 91.8% 60.7%Production planning 90.5% 69.2%Financial accounting 87.3% 50.7%Distribution/logistics 84.8% 67.9%Financial control 82.3% 53.1%Asset management 63.3% 41%Human resources 57.6% 33%Quality management 47.5% 36%

*Percentage of firms which have customized the module.

TABLE 8 ERP Modules and Level of Customization—Sweden

methodology and use consultants with specialized vendor expertise. Firms are moresuccessful in implementing ERP systems under budget or on-budget when the amountof customizing is kept to a minimum (Mabert, Soni, and Venkataramanan, 2000).

Nevertheless, many organizations customize ERP modules. A large percentage offirms surveyed in Sweden (Olhager and Selldin, 2003) decided to customize the ERPsystem they selected (see Table 8).

When an ERP system is customized, the time and cost of the project increasesalong with the risk associated with successful implementation. This is because the cus-tomized software cannot be as easily integrated with new versions of the ERP, whichare introduced by the vendor over time. In their study of ERP implementation,Mabert, et al., found that firms which were able to implement ERP under budget oron-budget made fewer modifications than over-budget firms. Making modificationsin the ERP software contributed to a 50% increase in project duration (Mabert, et al.,2000).

Some organizations decide to maintain their legacy systems and add ERP mod-ules to support specific functions, such as Financial Accounting and CustomerRelationship Management (CRM). Though this approach is cost-effective comparedwith a full-scale ERP implementation, it deprives the organization of the benefits ofan integrated ERP that supports multiple business functions, and it leads to the main-tenance of legacy and ERP systems. The one advantage of this approach is that it dis-rupts the organization less because users do not need to accept changes in businessprocedures.

Another approach to ERP implementation is to use outsourcing and to have anexternal vendor operate the system. One of the best ways of outsourcing ERP is to usean Application Service Provider (ASP), which provides the ERP software on a time-sharing basis to its customers (see Table 9). This enables the client to have access totechnological expertise and is more cost-effective than a full-scale internal ERP imple-mentation. However, any outsourcing decision is dependent upon the reliability and

46


Option Time Cost Advantages Disadvantages

Vanilla Moderate Moderate Easiest to May forfeit internal systemsimplementation implement which provide a strategicof a single advantagevendor ERPSingle-vendor ERP High High Maintains strategic Poses greater risk andwith customization processes higher cost because vendor

modifications cannot be easily adopted

In-house with Moderate High Minimizes the extent Higher cost because ofsupplementary of change that users maintaining legacy systemsERP modules have to accept and new ERP modules;

limited benefits because oflack of integration

ASP Moderate Moderate Provides vendor Creates dependence on support and the providerexpertise at lower cost

TABLE 9 Menu of ERP Alternatives

stability of the vendor, and the organization is vulnerable (Ross, Vitale, and Willcocks,2003).

The decision for which approach to use in implementing ERP should be basedupon the extent to which the business benefits of ERP can be realized using eachapproach. If only partial business benefits can be achieved via an in-house system withsupplementary ERP capabilities, then management should consider a full-scale imple-mentation approach, using vendor-supported ERP implementation or an outsourcingapproach to ERP services.

DETAILED DESIGN

In the project’s detailed design phase, the team selects the models, processes, andinformation supported by the system.The best practices methodology provides modelssupporting the business processes for each functional area within the business (seeTable 10). The process for using the best practices includes these steps:

1. Select applicable business processes.2. Discard inapplicable business processes.3. When business processes are not matched up with the system, they serve as a foun-

dation for re-engineering (re-organizing processes, organization).4. Identify any areas not covered by the best practices and which may require the

development of customized models.

Detailed design involves interactive prototyping and extensive user involvementin determining systems design elements. In SAP’s environment, the following elementscan be implemented (see Table 11).

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Model Purpose Characteristics Example

Component model What is done? Shows the major functions Create materialsupported by the system master

Organizational model Who does what? Shows the breakdown of Salesorganizational units

Data model What information Shows the information Material orderis needed? needed by the company

Interaction model What information Shows the major Materialsmust be exchanged organizational units managementbetween different involved in informationcomponents? processing (e.g., sales,

procurement, production)

TABLE 10 Models Supporting the Best Practices

Entity Definition Example

Organizational element Depicts the enterprise structure Plantusing an SAP application

Master data Data that is created centrally Customer masterand available to all applications

Transactions Application programs that conduct Create sales orderbusiness processes

Output Information that is released Sending an order confirmation to a customer

Workflow Optimizes activities Processing a travel requestform

Reporting Generates reports Financial analysis report

TABLE 11 SAP Design Elements

Figure 1 illustrates Customer master data, which provides relevant data to multiplemodules, including financial accounting and sales.

Figure 2 illustrates sales transactions. When a sales order is created, the user mustenter the customer number from the Customer master and the Material master num-bers from the Material master for the items being ordered. This copies relevant cus-tomer data and material data to the sales order.

Figure 3 illustrates various reporting systems, including reports generated viainformation systems, such as financial, logistics, and human resources reports. In addi-tion, tools for database query and ad hoc reporting are used to generate reports fromseparate databases. These advanced reporting systems are known as executive infor-mation systems and business warehouse applications.

48


Master data(Customer master data)

Financialaccounting data

(only relevant forcompany code)

General data(cross-enterprise)

Sales data(only sales-

relevant data)

FIGURE 1 Master Data: Customer Master

Ordering party 1xxxCustomer

master

Materialmaster

Item Material Quantity

1

2

HD-1300

P-103

10

20

Company code

Salesorganization

Distributionchannel

Division

Plant

Storagelocation

Sales document

FIGURE 2 Sales Transactions

Source: Copyright SAP AG.


ImplementationERP implementation includes addressing configuration issues, migrating data from theold system to the new system, building interfaces, implementing reports, and pilot test-ing. Many companies contract with a technical support specialist from the softwaresupplier to assist in implementation.

Configuring the ERP system requires the project team to address a number of fac-tors, including data ownership and data management, as shown in Table 12.

49


◆ ERP IMPLEMENTATION STEPS

ERP implementation includes establishing security and permissions, so users have theaccess they need. Migrating data from the old system to the new system means ensur-ing that data to be migrated are accurate and that data bridges work. Building inter-faces to other systems, such as office systems (e.g., Lotus Notes), can be very important

Factor Things to Consider

Data ownership Who is responsible for data integrity? (centralized responsi-bility versus local responsibility?)

Distribution of procedures Which business processes should be centralized?Which processes should remain under local control?

Transactions Does the ERP provide an audit trail of transactions at thetraceable level?Does the ERP provide an audit trail of transactions at theaggregate level?

Data management Will the ERP support centralized data management—a masterrepository?Will the ERP support local data management?

TABLE 12 Factors to Consider in Configuring an ERP System

Output

Output

SAP BW

Businesswarehouse

Pull

SAP

Output

Executiveinformation

system

Pull

Informationsystems

(LIS, HIS, ...)

SAP

Output

Push

Data stored in tables in SAPDocuments

Report ononline

transactions

FIGURE 3 Reporting Systems


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Implementation Strategy Percent

Big bang 42.1Mini big bang 20.4Phased by module 17.1Phased by site 20.4

TABLE 13 Implementation Strategy (Swedish firms)

to successful operation. Documentation is provided by the vendor and should bereviewed. User training is also an important priority. Training end-users, which is criti-cal to successful implementation, is often not extensive enough (Umble et al., 2003).

The issue of whether to cutover to the new system all at once, or to phase in mod-ules sequentially, is an important one. The cutover approach, known as the big bangapproach, is more rapid, but there might not be sufficient resources to accomplish it.Most large firms choose to phase in modules by module or by site. Smaller firms canimplement the big bang approach with reasonable success. Based upon a survey ofSwedish firms (see Table 13), a large percentage of firms use the big bang or the minibig bang approach, the latter being a partial vendor implementation (Olhager andSelldin, 2003).

Since ERP projects represent considerable time commitments and cost, many risksare involved in implementation, and these risks can trigger time and cost overruns.These risks can be reduced if the company decides to implement a complete vendorpackage because the vendor-tested implementation technique will be followed.However, if the organization does not choose a full vendor implementation, then riskassessment and analysis should become part of the implementation strategy. One riskassessment model proposes that at the beginning of each phase of the project, projectmanagers should conduct a risk analysis to determine what might go wrong and whatstrategies will be used if problems occur. Having a plan of action and externalresources available at the outset of the each project phase can minimize the implemen-tation risk.

◆ SUMMARY

In ERP systems development, the project team specifies the functions to be sup-ported by the ERP package and has the choice of re-designing the organization’sbusiness processes to fit the software or customizing the software. In addressingthis question, the project team must determine the business benefits that can beachieved by implementing the vendor’s best practices and the overall maintainabilityof the software. Critical success factors for ERP implementation include the com-mitment of top management and project management, organizational change man-agement, an effective implementation team, data accuracy, and extensive educationand training.

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◆◆◆ Case

Response to Request for Proposal for an ERP SystemThe purpose of this project is to give students anopportunity to learn about various ERP systemsand to present vendor characteristics and qualifi-cations in response to a Request for Proposal(RFP). The RFP has been developed to meet theneeds of a mid-sized manufacturing company,Wingate Electric.

In this project, the class will be organizedinto teams, and each team will represent one offour or more ERP vendors who are respondingto an RFP for an ERP financial module, whichcan be integrated with a larger ERP system overtime. The case provides selection criteria to eval-uate the alternative ERP financial modules, anda brief description of the scoring method of eval-uating the alternatives. Each team (representingone of the vendors) will have an opportunity toconsult various resources, including the vendorweb sites, on-line library resources, trade publi-cations, and marketing publications.

The case includes directions for each team,which will give a presentation to a mock panel ofuser managers of the company considering theERP options. The panel of user managers can beselected from local businesses or from the uni-versity community. The presentation will bereviewed by the panel of user managers using an

Evaluation Form, and the panel will make theselection decision based upon the “winning”team. The panel of user managers will providefeedback to each team with respect to thestrengths and weaknesses of each of their pre-sentations, and the rationale for their selectiondecision.

The materials for the Case Study include:

• Company Background• The RFP• The selection criteria to evaluate the

alternative ERP modules supportingfinancial applications

• Scoring method, which describes thescoring method of evaluating thealternatives

• Team directions• Team vendor assignments and resources for

vendor research• List of user managers (e.g., job titles,

background)

A. COMPANY BACKGROUNDWingate Electric is a mid-sized manufacturingcompany that makes small electric motors forappliances, lawn mowers, and small tractors. The


1. How does the traditional systems development life cycle differ from the ERP informationsystems design and implementation process?

2. What are the advantages of the re-engineering method of implementing ERP? What are itsdisadvantages?

3. What are the advantages of the customizing method of implementing ERP? What are itsdisadvantages?

4. Dell wanted a more flexible architecture and the opportunity to select software from vari-ous vendors. What were the advantages and disadvantages to using this approach? (See:D. Slater, “An ERP package for you, and you, and even you,” CIO Magazine, February 15,1999.)

5. What are the advantages and disadvantages of using an ASP to implement ERP?

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company, founded by Bob Wingate, has been inbusiness for 100 years. It is currently owned byhis two sons, Dick and Steve Wingate, on a 50/50basis. Dick, the CEO, handles the marketing andbusiness development side of the business, andSteve, the Chief Operating Officer, is responsiblefor internal operations management.

The MIS systems at Wingate Electric arehome-grown systems that have been patchedtogether over the years. These systems supportthe major accounting and financial functions,including sales order processing, inventory con-trol, accounts payable, accounts receivable, andgeneral ledger. These applications use multiplelegacy file systems, and much of the data areredundant. Since updates must be made to multi-ple files, some of the data are inconsistent. Withlittle documentation, making queries to existingdatabases is difficult.

Competitors within the industry are adopt-ing ERP systems to integrate financial and man-ufacturing data, and Wingate Electric is beingleft behind. Competitors are adopting web-basedfront ends for order processing, order tracking,and order follow-up, but Wingate cannot move inthis direction because its back-office systems arein disarray.

The owners of Wingate Electric havedecided to issue a RFP for an ERP system whichsupports their accounting and financial functionsand which can be extended to support their pro-duction and manufacturing applications overtime. The panel of user managers who will bereviewing the presentations in response to theRFP will be the following:

Dick Wingate, CEO

Steve Wingate, Chief Operating Officer

Robert Murdick, Chief Financial Officer

Richard Hayes, Marketing Manager

Kathryn Martell, Director of AccountingOperations

B. REQUEST FOR PROPOSALDate: February 1, 2005Wingate Electric is a mid-sized manufacturingcompany that makes small electric motors forappliances, lawn mowers, and small tractors. Thecompany, founded by Bob Wingate, has been in

business for 100 years. The company is currentlymanaged by its owners, Dick and Steve Wingate.Dick Wingate, the CEO, is responsible for over-all business development and marketing. SteveWingate, the COO, is responsible for operationsmanagement.

Wingate Electric currently does $400 mil-lion in sales. Its customers include major manu-facturers of small appliances and vehicles, andthey would like to have web-based order pro-cessing and order tracking capability, and this isone motivation for acquiring an ERP foundationfor web-based applications.

The MIS systems at Wingate Electric arehome-grown applications that have becomefragmented over time. They are difficult to main-tain, and they do not use an integrated relationaldatabase. Managers have trouble gaining accessto data for query and reporting purposes.

Wingate Electric is interested in acquiringan ERP system, which supports its financial andaccounting functions, including accounts receiv-able, accounts payable, and general ledger.The ERP financial system will be implementedfirst, and the company is interested in addingmodules supporting production planning andmanufacturing in the next phase. Ideally,the ERP system will also support Sales andMarketing, Human Resources, CRM, andeBusiness. These capabilities will be imple-mented in subsequent phases, depending uponthe success of the ERP modules supportingfinancial and accounting functions.

The budget for ERP is estimated at$1,000,000, excluding the cost of acquiring thenecessary upgrades in hardware, software, andnetworking facilities. In the current environ-ment, the firm has 100 microcomputer worksta-tions, a Windows NT network, and a Hewlett-Packard server supporting its legacy systems.

The timeline for selecting the ERP modulessupporting finance and accounting is threemonths. The due date for the RFP response isMarch 1, 2005. Upon receipt of the proposals,four or more vendors will be asked to give pre-sentations and to respond to questions. Theselection committee will make a decision within30 days after the presentations have been given.The selection criteria are listed below. Five ofthese criteria deal with supplier-related issues,and five of them deal with the evaluation of the

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ERP modules supporting finance and account-ing. Proposals and presentations should addresseach of these selection criteria.

C. SELECTION CRITERIA FOR ERPSUPPLIER

1. Corporate History, Experience, andCorporate Profilea. Overall Historyb. Number of Years of Experiencec. Position in the Industry

2. Market Strategy and Strategic Directiona. Market Shareb. Market Strategyc. Future Market Strategyd. Overall Strengths

3. Product Offerings, Integration, andScalabilitya. Overall ERP Product Lineb. Module Integration Strategyc. Web-based Application Strategyd. New Offerings (e.g., business intelli-

gence, CRM)4. Consulting Support

a. Support for Configuration ofApplication Modules

b. Technical Support for SystemImplementation

c. Cost of Consulting Supportd. Availability of Consulting Support

5. Availability of Traininga. Training in Configurationb. Technical Training

Selection Criteria for ERP ModulesSupporting Financial and AccountingFunctions:

6. Fit with Current Business Processesa. Fit with Sales and Order Processing

Processesb. Fit with Financial Accounting Processes

(A/R, A/P, General Ledger)c. Fit with Managerial Accounting

Processes7. Reporting Applications

a. Current Reporting Capabilitiesb. Availability of Tools for Database Query

and Reportingc. Web-based Reporting Capability

8. User Friendlinessa. Availability of Tutorialsb. Availability of Application Module

Documentationc. Technical Documentation

9. Costa. Cost of ERP Modulesb. Cost of Configuration and

Implementation Supportc. Cost of Trainingd. Cost of Maintenance Fees and Software

Licenses10. Ability to Integrate Finance and

Accounting Module with other ERPModulesa. Integration with Production and

Manufacturing Modulesb. Integration with Sales and Marketing

Modulesc. Integration with Human Resources

Modulesd. Integration with web-based

Applications

D. SCORING METHODThe selection committee will use the score sheet(see below) to rate each vendor on each of theselection criteria. The selection committee willrate each presentation on the basis of the selec-tion criteria, which include ten criteria in all. Fiveof these criteria pertain to ERP supplier charac-teristics, and five of these criteria pertain to thecharacteristics of the ERP modules under con-sideration. For each criteria, the selection com-mittee will use a rating scale of 1 to 10, with 10being the most possible points that can be scoredin any one category.

In addition, the selection committee willrate each presentation on several bonus/penaltyitems, which can add or detract from the totalscores. These bonus/penalty items will havea possible value of �5 or �5 points each, asillustrated on the score sheet below. Thesebonus/penalty items include the effectiveness ofthe overall presentation, and the special, value-added qualifications (noted below). The overallpossible maximum score for each presentation is110 points.

The selection committee will consist ofindividuals who will play the roles of user

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TABLE 1 Selection Committee Score Sheet

Team Members:

Score Weight Item Criteria Comments

10 #1 Corporate history, experience,and profile

10 #2 Market strategy and strategic direction10 #3 Product offerings, integration, scalability10 #4 Consulting support (e.g., configuration,

technical)10 #5 Training availability (e.g., configuration,

technical)10 #6 Current business process fit10 #7 Reporting applications (e.g., tools,

web-based)10 #8 User-friendliness (e.g., tutorials,

documentation)10 #9 Cost (e.g., modules, training,

maintenance)10 #10 Ability to integrate with other

ERP modules100 possible Basic total score

Bonus/Penalty Items�5/�5 Presentation effectiveness�5/�5 Unique qualifications110 possible max Basic score �/�

Bonus/penalty total

management. In addition, each of the teams willrate the other team presentations using the samescore sheet.

E. DIRECTIONS TO TEAMSEach team will assume the role of an ERP ven-dor responding to the RFP. Each team shouldhave 3–6 students, with 5 students as ideal, andeach team will have three weeks to prepare forthe presentation to the selection committee. Inpreparation for the presentations, each teamshould do research on its ERP vendor’s charac-teristics in order to address each of the selectioncriteria. For example, to respond to the corpo-rate history, experience, and corporate profile

criteria, the team will need to use externalresources for research about the vendor.

The presentations should be accomplishedin 25 minutes, with each team member having5 minutes. There will be an additional 5 minutesfor questions from the Selection Committee.

The teams can augment their oral presenta-tions with audio-visual aids, including computer-based Powerpoint presentations. They can bringhandouts, articles in trade publications aboutuser experiences with the ERP modules underconsideration, and information about externalresources (e.g., web sites, trade reviews), whichthe Selection Committee might want to consult.The purpose of the exercise is to make the pre-sentations as real as possible.

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At the end of the presentations, the selectioncommittee will deliberate about each of the pre-sentations, using the criteria that have been estab-lished on the score sheet. They will tabulate theirscores and rank the presentations in sequence(e.g., first place, second place, third place). Afterreporting the results, the selection committee willgive informal feedback to each of the teams.

F. TEAM VENDOR ASSIGNMENTS ANDRESOURCES FOR VENDOR RESEARCH

Each team will represent a specific ERP vendor(see Table 2 in this section).

Each team will be responsible for develop-ing their presentation in response to the RFP.In developing its proposal, each team shouldaddress each of the selection criteria as effectivelyas possible. To do so, it can use various resources,including vendor web sites, on-line library data-bases with articles in trade publications, vendormarketing materials, and trade reviews.

G. LIST OF USER MANAGERS (JOB TITLES, BACKGROUND)

The selection committee and will consist of fivemembers: Dick Wingate, CEO; Steve Wingate,Chief Operating Officer; Robert Murdick, ChiefFinancial Officer; Richard Hayes, MarketingManager; and Kathryn Martell, Director ofAccounting Operations.

Dick Wingate, the CEO, handles marketingand business development. He is a natural sales-person and is extensively involved in communityactivities and charitable organizations, such asthe Rotary Club, American Cancer Society, andBoy Scouts. He enjoys skiing and golf, and he

owns a golf condo in Florida. Through his con-tacts, he has been instrumental in growing thesales of the business.

Steve Wingate, the Chief Operating Officer,is responsible for internal operations manage-ment. Steve is more internally focused than hisbrother, Dick. He earned a Bachelor’s degree inengineering from Purdue University, and he hasused his technical background to assume animportant role in quality management. He iscautious about expenditures, and he scrutinizesthe budget to avoid unnecessary expendituresand to control costs. He lives in the same middle-class neighborhood where he grew up, whichspeaks to his conservative lifestyle. Because ofhis cost-conscious mentality, Steve is hesitant tomake a big investment in an ERP system.

Robert Murdick, Chief Financial Officer,came to Wingate Electric after spending tenyears at Ernst and Young, a public accountingfirm. He chose to join the management atWingate Electric because the opportunity towork with a team to expand a mid-sized com-pany offered considerable challenge. In his con-sulting career, Bob traveled extensively, and hefinds that his career at Wingate Electric providesgreater autonomy and flexibility. Bob’s account-ing background convinces him that an invest-ment in an integrated financial and accountingsystem would be a good investment.

Richard Hayes, Marketing Manager, wasone of the most productive members ofWingate’s sales force before joining the manage-ment team. For seven years, Richard was the topsales performer in this industry niche in thecountry. Richard was able to earn this distinctionthrough his dedicated commitment to servingthe needs of his customers. Richard has a posi-tive attitude toward automation. He encouragedhis sales force to use laptops with computer-based sales prospecting software.

Kathryn Martell, Director of AccountingOperations, started at Wingate Electric as aclerk-typist 18 years ago. She is known for herstrong work ethic and perfectionism. She is loyalto the company, and she works long hours. Sheorganizes the company picnic and Christmasparty each year. Kathryn is resistant to change,and she is skeptical about spending a lot ofmoney on a computer-based information system.Her opinion is that most of the inefficiency canbe remedied by adding staff members.

TABLE 2 Team Vendor Assignments

Vendor Financial Team Assignment Module

A Great Plains FinancialManagement

B Peoplesoft FinancialManagementSolutions

C Oracle ERP FinancialsD SAP Financial

Accounting (FA)

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References

Davenport, Thomas. 2000. Mission Critical:Realizing the Promise of Enterprise Systems.Cambridge, MA: Harvard Business SchoolPress.

Gremillion, L.L., and P. Pyburn. 1983. “Breakingthe systems development bottleneck.”Harvard Business Review 130–137.

Langenwalter, G., 2000. Enterprise ResourcesPlanning and Beyond: Integrating Your EntireOrganization. Boca Raton, FL: St. LuciePress.

Mabert, V.A., A. Soni, and V.A.Venkataramanan. 2000. “Enterprise resourceplanning survey of U.S. manufacturing firms.”Production and Inventory ManagementJournal 41: 52–58.

Oden, H., G. Langenwalter, and R. Lucier. 1993.Handbook of Material and Capacity Require-ments Planning. New York: McGraw-Hill.

Olhager, Jan, and Erik Selldin. 2003. “Enterpriseresource planning survey of Swedish manu-facturing firms.” European Journal ofOperational Research 146: 365–373.

Ross, Jeanne, Michael Vitale, and LeslieWillcocks. 2003. “The continuing ERPrevolution: Sustainable lessons, newmodes of delivery,” in Second-WaveEnterprise Resource Planning Systems.Graeme Shanks, Peter Seddon, and LeslieWillcocks (Eds.), Cambridge: CambridgeUniversity Press, 102–132.

Umble, Elisabeth, Ronald Haft, and M. MichaelUmble. 2003. “Enterprise resource planning:Implementation procedures and criticalsuccess factors.” European Journal ofOperational Research 146: 241–257.

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ERP Systems: Sales and Marketing


59

ERP Systems:Sales andMarketing

Objectives

1. Understand the sales and marketing module.

2. Recognize the interrelationships among business processes supporting sales and marketing,production, accounting and finance, and human resources.

As an introduction to this chapter on Sales and Marketing, sales and marketingfunctions can create problems, which lead to lack of responsiveness to customer

needs, lack of productivity, and lack of profitability.

CASE: ATLANTIC MANUFACTURING

Atlantic Manufacturing is a manufacturer of custom configured small motorsthat go into jet skis, snowmobiles, and other recreational vehicles. Its customersrepresent major consumer manufacturing companies. In June 2004, it reportedthese problems in order acquisition, operations, distribution, and accounting.

SALES AND DISTRIBUTION

✓ Salespersons have to call the home office for quotations for many productsbecause of many possible configurations.

✓ Salespeople are making quotas, but profitability is declining because thestandard cost system is not providing accurate information with respect tocosts.

✓ Customers are asking for reduced lead times, which could be achieved ifAtlantic’s engineers worked more closely with their suppliers.

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CREDIT

✓ Recently, customers were put on “credit hold” when they were not able topay on a timely basis. However, when the credit manager was out of townfor several weeks, an order went through to this customer by mistake.Nothing could be collected on this account because the customer couldnot pay.

CUSTOMER SERVICE AND REPAIR

✓ Atlantic has a stand-alone system to take care of field service. When servicetechnicians repair equipment in the field, they do not always bill the cus-tomer for the correct amount since the system does not have informationindicating which replacement parts are covered by the warranty.

✓ Since the field service system is a stand-alone system and does not integratewith other systems within the company, quality control people mainly useanecdotal evidence to identify potential problems.

In contrast, Atlantic’s competitors are offering their customers lower quotes andreduced lead times. Salespersons are creating quotes using laptops from their cus-tomers’ offices. Credit checking is automatic on all new orders, and salespersons haveimmediate access to customer credit information. Field service technicians have accessto data indicating which parts are covered by warranty to the customer and which partsare covered by supplier warranty.

In the Atlantic Manufacturing case, a number of problems are affecting orderentry, credit management, and field service. The lack of an integrated system can causeincorrect credit, inadequate inventory, shipping delays, incomplete invoices, andaccounts receivable delays (see Table 1). These problems can significantly affectprofitability and customer service.

Subsystems Problems

Sales order entry Incorrect pricing; incorrect credit information; calls to customersto get the correct information

Inventory Incorrect inventory; delays in inventory updates; inadequateinventory to fill orders; partial shipments

Shipping and delivery Delays in shipping and deliveryInvoicing Inaccurate or incomplete invoicesPayment processing Customers may not include a copy of their invoice with their

payment; incorrect posting of paymentsAccounts receivable Delays in accounts receivable posting; reminder letters are

generated to customers who have paid

TABLE 1 Problems with Sales Order Processing

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◆ SALES AND MARKETING PROCESSES

Sales and marketing processes include operational-level and management controlprocesses (see Table 2). Operational processes include daily activities, such as prospect-ing, contact management, telemarketing, and direct mail. Sales representatives need tocreate and maintain lists of prospects by location, by product category, and by salespotential and need to create and maintain a contact management system, which trackscustomer preferences, sales history data, and the history of sales calls. When sales aredone via telemarketing, telemarketing databases are used for contacts and follow-ups.Direct mail processes create and maintain mailing lists, some of which are designed fortarget markets.

Traditionally, sales and marketing operational functions are supported by salesorder processing systems, which capture order data, and point-of-sale (POS) systems,which capture data at the point of sale. These systems are linked to inventory manage-ment systems, which update inventory levels for stock items based upon sales data.

◆ MANAGEMENT CONTROL PROCESSES IN SALES AND MARKETING

Management control activities in sales and marketing are designed to allocate salesand marketing resources in order to achieve maximum revenues. One of the mostimportant areas is sales management.

SALES MANAGEMENT PROCESSES

Sales managers are responsible for creating territories and for allocating sales people’stime to generate maximum revenue and service. The decisions which sales managersneed to make include the following:

• How should territories be shaped?• How can we allocate salesperson time to call on the highest potential accounts?• Which customers are most profitable?• Which products are most profitable?

The information that sales managers use to make decisions is largely based uponan analysis of past sales. Summary reports, comparative analysis reports, and exceptionreports are all useful tools in analyzing sales trends and determining how to best allo-cate resources. Examples include the following:

• Comparison of sales, product revenues, customer revenues, and territory revenuesagainst benchmarks of success

Operational Prospecting; contact manage-ment; telemarketing; direct mail

Management control Sales management; product pric-ing; advertising and promotion;sales forecasting

TABLE 2 Sales and Marketing Processes

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• Comparison of the productivity of each salesperson to the average for thedepartment

• Listing of the most profitable products in each territory• Listing of the products that represent the highest percentage of sales for each

salesperson• Listing of the customers that represent the highest percentage of sales for each

salesperson

See sales analysis reports examples in Figure 1 and 2.

Sales Management software is used by sales managers to assess the productivity ofthe sales force and the success of products, by salesperson, by territory, and by customertype. Specifically, sales management software achieves these and other objectives:

• To identify weak products in a territory• To compare salesperson performance by product type and customer type

FIGURE 1 Sales Analysis Report

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FIGURE 2 Sales Analysis Chart

• To compare salesperson performance against sales goals• To analyze salesperson performance within territories• To identify trends in customer purchases• To identify potential shortages or excess stock in inventory

Sales analysis will drive decisions about how to allocate sales personnel, how to orga-nize territories, how to serve customer needs, and how to train sales personnel to usetheir time more effectively to generate maximum revenues from the highest potentialaccounts.

SALES FORECASTING PROCESSES

Sales forecasting is important to determine the potential needs of customers in variousmarket segments. Sales forecasting activities include segmenting the market into targetgroups of potential customers and planning products/services to meet the customers’needs. Sales forecasts can be developed for overall sales, for sales by territory, for salesby each product or service, for sales for new products/services, and for sales by salesrepresentative. Sales forecasts use information on past sales history as well as informa-tion about competition, customer demand, and demographic trends.

ADVERTISING AND PROMOTION

Another important marketing process, which requires decisions about how to allocateresources, is advertising and promotion. The major questions are the following:

• Which advertising media and promotional channels should I use?• Which advertising channels and media are most effective in addressing specific

market targets?

The effectiveness of advertising campaigns needs to be constantly monitored.

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PRODUCT PRICING SYSTEMS

What prices should I establish for products? This is a key question to be addressed aspart of marketing management. To make pricing decisions, the marketing managershould know the expected product demand, the desired profit margin, the product pro-duction costs, and the competing products. Pricing depends upon pricing strategy.Pricing models are built from data from various forces that influence pricing, includingconsumer price indices, expected consumer disposable income, volume of productsproduced, labor costs, and raw materials costs.

◆ SALES AND MARKETING MODULES IN ERP SYSTEMS

Traditionally, sales and marketing software supports operational and managementcontrol processes, including contact management, sales management, and sales analysis/forecasting. The difference between Sales and Marketing modules within an EnterpriseResource Planning (ERP) system and traditional sales and marketing software is thatERP systems provide integrated marketing support systems, including contact files,order entry files, and sales history files. In addition, ERP systems provide CustomerRelationship Management (CRM) software, which provides information to salespeo-ple about the previous experiences of customers, including purchases, product prefer-ences, and payment history.

With an ERP module, a customer places an order, and a sales order is recorded(see Figure 3). The system schedules shipping and works backward from the shippingdate to reserve the materials, to order parts from suppliers, and to schedule manufac-turing. The module checks the customer’s credit limit, updates sales forecasts, and cre-ates a bill of materials. The salesperson’s commission is updated. Product costs andprofitability are calculated. Finally, accounting data is updated, including balancesheets, accounts payable, ledgers, and other financial information.

Customer order

Goods issue

Create deliveries Picking withtransfer order

Warehouse

Packing

Shipping documents Update stockPost general ledger

FIGURE 3 The Sales and Distribution Process


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Subsystem What It Does

Pre-sales Tracks customer contacts; provides the customer with a price quoteSales order Uses the price quote to record items to be purchased; determines the processing sales price; records order quantities; configures quantity discounts;

checks customer creditInventory sourcing Checks the inventory database to see if items can be delivered on time;

updates the production planning database to avoid any shortfallsDelivery Releases documents to the warehouse: items are picked; orders are

packed and shippedBilling* Uses sales order data to create an invoice; updates accounting

records; increases (debits) accounts receivablePayment* Accepts payment; decreases the customer’s accounts receivable

balance with the amount of payment

*Handled by the Accounting module.

TABLE 3 The Sales and Marketing Module and Related Modules

FIGURE 4 SAP Screen (Create Standard Order)

The purpose of the Sales and Marketing module within ERP is to identify salesprospects, to process sales orders, to manage inventory, to handle deliveries, to providebilling, and to accept and process payments (see Table 3).

As with other ERP modules, the Sales and Marketing module provides the bene-fits of standard codes, a common database, standard documents, an audit trail, and dataintegration (see Figure 4 and Table 4). For example, a standard document number fol-lows an order throughout its life cycle, including partial shipments, partial payments,and returns. This document flow prevents errors and inaccuracies and keeps account-ing data relevant.


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◆ ERP AND CUSTOMER RELATIONSHIP MANAGEMENT

An ERP system supports back-office functions, such as sales, accounting, humanresources, and manufacturing, and the ERP system provides a foundation for advancedapplications, such as CRM, and Supply Chain Management (SCM). CRM representsthe systems that interface with the customer, and SCM represents the systems whichinterface with the supplier. CRM, which provides an important front end to sales andmarketing, is described in the next section.

CRM is a comprehensive sales and marketing approach to building long-term cus-tomer relationships. CRM relies upon the foundation of ERP. CRM provides a singleinterface to the customer, so a salesperson who has a customer will know about all theworldwide interactions for that customer. For example, if there is a problem with fillingan order for a Wal-Mart store in Albany, New York, the salesperson calling on theWal-Mart store in Carlsbad, California, will know about it.

Using the following scenario, you can see how a CRM can make the differencebetween losing and gaining business.

Scenario 1: You are on your way to see one of your company’s best customers(they represent 5% of the company’s total sales). When you get there, youlearn the customer is angry. His entire firm has been at a standstill for48 hours because he cannot get delivery on a part for a high-speed colorlaser printer; he has a critical deadline to meet on some marketing materials,and he’s been on the phone for the past day to no avail. You have lost hisbusiness. Somehow, you had not heard about any of this.

Scenario 2: You are on your way to see one of your company’s bestcustomers (they represent 5% of the company’s total sales). En route, youturn on your laptop, and you receive a customer alert that there has been anequipment failure on a high-speed color laser printer. When you arrive, yourservice tech is there installing the broken part. He was able to order theneeded part via eBusiness and had it dispatched by courier. The customeradmits that he probably needed a laser printer upgrade because he hasbeen using excessive volumes. You have increased your revenue from thiscustomer.

Feature Benefit

Standard codes Each customer has a standard codeCommon database Common database supports all modulesStandard documents Standard document number (e.g., sales order number) sticks with

the transaction throughout the process, including shipping andaccounting

Audit trail Standard document number helps track partial shipments, partialpayments, returns

Data integration Sales records are integrated with accounting records

TABLE 4 Advantages of Sales and Marketing ERP Software

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These two scenarios show how knowledge of customer needs can affect customerservice and customer retention. CRM software had its roots in sales force automationsoftware, which is designed to provide sales representatives with sales activity manage-ment, sales and territory management, contact management, lead management, config-uration support, and knowledge management.

Sales Activity ManagementSales Activity Management guides sales representatives through each step of the salesprocess, including generating leads, contacting prospects, handling order placement,and assuring order follow-up.

Sales and Territory ManagementSales and Territory Management helps sales managers study the pipeline, monitorsalespeople’s activities, and optimize teams.

Contact ManagementContact Management helps sales representatives organize their contact data in data-bases, so they can query these databases and ask questions, such as “Who is the client’spurchasing agent?” and “Which customers received a recent promotion for productXYZ?”

Lead ManagementLead Management enables sales representatives to monitor leads, to generate nextsteps, and to refine selling efforts by using on-line support. Managers can distributeleads to field sales representatives based upon the representative’s product knowledge.Lead management enables sales people to track prospect attributes, such as productinterests, budget amounts, and likely competitors. Query capability makes it possible toask the following questions:

• At what step in the sales cycle do we lose our prospects?• How many appointments did Mark have with XYZ company?• What percentage of leads in the Eastern Michigan territory resulted in sales last

month?• How did order amounts for product ABC in San Francisco compare with order

amounts in Seattle?

Configuration ManagementConfiguration Management provides product-specific configuration support to com-panies that must build products for their customers. Technology vendors, appliancevendors, and computer vendors are examples of companies which need to create prod-uct configurations, make price quotes, and communicate these electronically via a lap-top, while sitting in the customer’s office.

Knowledge ManagementKnowledge Management offers access to information resources. Informationresources in sales include the following: corporate policy handbooks, sales presentationslides, company phone lists, proposal templates, industry and competitor data, pressreleases, and transcripts of sales meetings. Some of this information can be made avail-able via the corporate intranet. Before making a follow-up call to a customer who has

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attended a sales presentation, it is useful to review the presentation along with anynotes from prior meetings with the customer.

CRM systems build upon sales force automation capabilities and offer advancedfunctions that can be integrated with an ERP system. The major functions of a CRMsystem include one-on-one marketing, telemarketing, sales force automation, salescampaign management, call center automation, e-Selling, data warehousing, and cus-tomer service.Without an underlying Sales and Marketing ERP module, the CRM sys-tem could not acquire needed operational-level data on sales, orders, and sales orderhistory to support CRM functions. CRM data are accessible via a data warehouse andare separate from the operational database supported by the ERP system. A datawarehouse is a repository of integrated data, which enables sales representatives tomake queries and to generate reports on customer-specific trends.

CUSTOMER SERVICE

The processes, which are part of customer service, are initiated when the customer callswith a service request. The service notification triggers a service order, which is dis-patched to a service technician. Once the job is complete, the technician confirms thehours worked and the materials used. Based on the billing request from the serviceorder, the Accounting Department generates a billing document.

Key Features Characteristics

One-on-one marketing Tailors products, pricing, and promotions to the customerTelemarketing Facilitates customer contact and call list managementSales force automation Maintains information on customer contacts in a database;

forecasts customer’s needsSales campaign management Organizes marketing campaigns, including the creation of

call listsCall center automation Enables queries to a product marketing databasee-Selling Delivers on-line systems that enable customers to configure

products on-line, including a shopping basketCustomer service Handles customer service, from the customer request for

service to the service technician reporting time and materialsused

TABLE 5 Customer Relationship Management (CRM)

◆ INTEGRATION OF SALES AND DISTRIBUTION WITH OTHER MODULES

Sales and Distribution modules within SAP are integrated with other ERP modules(see Figure 5). First, the Sales and Distribution module is interfaced with the FinancialAccounting module. In SAP, for example, you assign a billing transaction to a specificsales organization, a distribution channel, and a division. This information is trans-ferred to Financial Accounting (see Table 6).

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CO/PAFinancialaccounting

Businessinformationwarehouse

Customerrelationshipmanagement

Internetsales

Mobilesales

Tele-sales

Sales anddistribution

Projectsystems

Productionplanning

Advancedplanning and

optimizer

Materialsmanagement

Warehousemanagement

BillingDelivery

date

Salesorders

StockreservationStock removal

Pickingremovalfrom stocklocation

Data

OrderCustomer

managementMake

to order

Availabilitycheck

FIGURE 5 Sales and Distribution Integration

SalesBilling document

Customer

Distributionchannel: 01

Division: 01

Value: 100.00

Sales org.: 0001

Financial accountingAccount assignment

Company code: 0001

A/R Receivable

Revenues

100.00 100.00

100.00

FIGURE 6 Transferring Billing to Financial Accounting

Data integration across functional modules saves time, facilitates customer ser-vice, and improves productivity and profitability. As an example of data integration,the Sales and Distribution modules interface with other SAP modules, includingthe Materials Management, Human Resources, Quality Management, FinancialAccounting, and Controlling modules.



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◆ SUMMARY

Sales and Marketing modules in an ERP system are designed to support sales orderentry, inventory sourcing, delivery processing, billing, and payment processing. Thecore Sales and Marketing module is a foundation for CRM systems. CRM modulessupport sales management, contact management, lead management, and configurationmanagement. In addition, interrelationships exist between sales and marketing mod-ules and modules supporting materials management, human resources, financialaccounting, management accounting, and quality management.

Questions for Discussion1. Gather information about the best practices which are associated with the Sales and

Marketing modules within an ERP package. You can do this by (1) conducting research onthe web; (2) interviewing a user of a Sales and Marketing package; (3) using an on-line data-base to find an article in a trade publication which describes the effective use of a Sales andMarketing module; or (4) using a Sales and Marketing module within an ERP system toidentify new best practices.a. What are the best practices, which you have discovered?b. How do they contribute to overall productivity?c. What information for decision making do they provide?

2. The Sales and Marketing module within ERP is regarded as the module with the most inter-faces to other modules, including Human Resources, Materials Management, ProductionPlanning, and Financial Accounting. Describe the interfaces between the Sales and Market-ing module and each of these other modules:

Materials management MM Material master describes spare parts used in repairsand services sold to the customer

Human resources HR Matches technician’s qualifications with requirementsneeded for specific service orders

Quality management QM Checks condition of materials being shipped back toa customer following repair

Financials FI Bills customers for service and receives paymentsControlling CO Service order can collect costs and become an input

into profitability analysis

TABLE 6 Integration of Sales and Distribution with Other Modules

Module What Information Is Shared with Sales and Marketing

Human resourcesMaterials managementProduction planningFinancial accounting

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Featured Article: Staples and Integrated ERPUsing the following excerpt, how is technol-ogy helping Staples achieve a competitiveadvantage?

STAPLES KIOSKS CONNECT CUSTOMERSAND MERCHANDISECustomer service drives Paul Gaffney’s commit-ment to integration. And profits show that com-mitment matters.

“Our most profitable customers are thosewho use the full range of the way we do busi-ness,” says Gaffney, the CIO at Staples inFramingham, Mass. He adds that customers“want to get a very consistent and seamlessexperience. When you do the right thing for yourbest customers, good things happen.”

The CIO of the office-supplies giant stressesthat for those good things to happen, it’s essen-tial to have an overarching strategy that usesIT to advance the company’s mission. Gaffneyadds that “trying to be more holistic in our out-look is one of the things that separates great ITorganizations from the rest of the pack.”

One of the products of Gaffney’s enter-prisewide focus on the customer is the onlinekiosk, dubbed Access Point, that is installed in allof the company’s 1,040 U.S. stores. Creating thekiosks required connecting the company’se-commerce website, Staples.com, with its point-of-sale (POS) system, order management sys-tem, distribution system and supply chain. Onthe people front, staffers from the retail, catalog,online, finance, distribution, merchandising andtraining areas, practically everyone but the cafe-teria chefs, collaborated. For example, the kiosksoffer customers the option of buying, say, anoffice chair at the kiosk using a credit card, thentaking a bar-code printed receipt up front tothe register to pay in real-time. Customers canalso use the kiosks to access a library of infor-mation about products and services, view aninventory of 45,000 online products, and buildPCs to order (eliminating the need for more than35 percent of stores to carry computers). “We’reletting customers do business the way they wantto do business, not the way we want them to,”says Gaffney.

But the benefits don’t go solely to cus-tomers. For Staples, the multimillion-dollarAccess Point project has introduced many cus-tomers to Staples.com. The company estimatesthat a customer who shops in both stores andone other channel (Staples.com or catalog) has alifetime value of two and a half times that of astore-only shopper.

And the company’s approach toward inte-gration goes beyond customer-facing systems.Another major integration project involvedconsolidating the Staples and Quill fulfillmentcenter facilities. Staples acquired Quill, a mail-order office products company, in 1998. Toconnect the two disparate order managementsystems, Staples could have gone the point-to-point route, which would have required buildingcustomized connections between the two sets ofapplications. But the Staples team chose insteadto implement an integration layer built on IBM’sMQ series. “That way, if we had a future acquisi-tion, or needed more volume in the future, wewon’t have to do a new point-to-point integra-tion project,” says Gaffney.

Reducing the number of direct linkagesbetween systems is one part of Gaffney’s holisticstrategy. Standardization is another. “Every ISorganization is trying to deliver more businessresults for less money. One tool is reducing thenumber of different technologies that you needyour staff to be proficient in. If you have four orfive [technology] approaches, you’ve dilutedyour staff’s proficiency. I think it’s a productivityimperative,” Gaffney says.

Staples is just starting to look hard at how itcan standardize, but Gaffney pointedly says thatWeb services will play a key role. Because ofthat, Gaffney doesn’t feel a need to standardizehis platform on either Sun’s Java 2 PlatformEnterprise Edition (J2EE) or Microsoft’s .Net,since Web services can work with both. “Webelieve it’s more important to focus on goodsemantics, for example, getting the definition ofthe interface right on our next generation inter-nal pricing service, than to get hung up onwhether it’s a J2EE or Microsoft deployment,”he says.

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To ensure that his IS organization continuesto maintain a big- picture integration strategy,Gaffney has appointed a team, led by two vicepresidents in IS but involving people from allbusiness areas, to help Staples get a detailed lookat its business processes.They also want to deter-mine how people and technologies map againstthose processes (for example, to see if there aremultiple groups of people using multiple tech-nologies, all to produce a sales forecast). Theycan then use the information they uncover to

move ahead on the integration projects that willhave the most business impact.

SOURCE: Datz, Todd, “Strategic Alignment; Yourbusiness processes can’t enable superior customerservice or an efficient supply chain without inte-grated systems. The four companies profiled heredemonstrate the benefits of a strategic perspectiveand long-term commitment to integration.” CIO,Aug 15, 2002, p. 1–64.

ReferencesDyche, Jill. 2002. The CRM Handbook. A

Business Guide to Customer RelationshipManagement. New York: Addison-Wesley.

Hasan, Matt. 2003.“Ensure success of CRM witha change in mindset.” Marketing News 16.

Parke, Shep. 1998. “Avoiding the unseen perilsof sales technology.” Sales and Field ForceAutomation.

Rigby, D., F.R. Reichheld, and P. Schefter. 2002.“Avoiding the pitfalls of CRM.” HarvardBusiness Review, 101–109.

Ruquet, Mark E. 2003. “Evaluating CRM:Many hurdles remain for carriers.” NationalUnderwriters. Cincinnati: NationalUnderwriters Company.

Schultheis, Robert, and Mary Sumner. 1998.Management Information Systems: TheManager’s View. 4th ed. Burr Ridge, IL:Irwin/McGraw-Hill.

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ERP Systems: Accounting and Finance


75

ERP Systems:Accounting and Finance

Objectives

1. Understand the accounting and financial systems within ERP.

2. Recognize the interrelationships among business processes supporting sales and marketing,production, accounting and finance, and human resources.

Difficulties with accounting functions can create problems that lead to bottle-necks, mis-information, lack of responsiveness to suppliers, and poor control (see

Table 1).


At the current time, Atlantic Manufacturing is experiencing similar issues withits paper-intensive accounting systems.

✓ Manufacturing sometimes ships products to customers with inaccuratepaperwork, so Accounts Receivable has to track down the product specifica-tions to ensure customers are making proper payment. In some cases, theoriginal invoices are incorrect.

✓ Accounts payable to suppliers is bogged down, and Purchasing has to con-tact Accounting to get details about payment dates.

✓ Sales people report they could sell a large quantity of items at a reducedprice. Should Atlantic submit a quotation? There is no management infor-mation to help sales managers determine if they can make a profit by sellingitems at a slightly reduced price.

In the Atlantic Manufacturing Case, problems occur when a lack of coordinationexists between sales and accounting and between manufacturing and accounting.Many problems occur when accounting information is out of date or inaccurate. Forexample, when customer accounts receivable balances fall out of date, this results inmis-information to sales about customer credit limits.

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Business decision making about product profitability is difficult when financialinformation is maintained in separate databases for marketing, production, and pur-chasing. These multiple databases make determining product profitability difficult.Providing information on cost differences (e.g., standard costs versus actual costs) ofinventory is difficult, and accurate inventory costing is the basis for determining prod-uct profitability.

◆ ACCOUNTING AND FINANCE PROCESSES

At the conceptual level, an accounting system supports operational and managementcontrol functions. At the operational level, an accounting system produces transac-tions, such as paychecks, checks to vendors, customer invoices, and purchase orders.You can see the workings of an accounting system by looking at the conceptual modelprovided (see Figure 1).

The accounting processes begin when a sales order is entered. This generates aninventory update to the inventory system, which maintains information about eachitem in stock and triggers the purchase of additional stock when stock levels reachcertain points. The purchase order system creates purchase orders and tracks whichpurchase orders have been filled, which items are on back order, and when orders areexpected to be received.

Subsystems Problems

Credit management Accounts receivable balances on customer accounts canfall out of date and result in mis-information in salesabout customer credit limits

Product profitability Inconsistent recordkeeping, keyed into multiple data-bases, may result in incorrect data on product profitability

Finished goods inventory Delays in increasing finished goods inventory whenfinished goods are transferred from manufacturing intothe warehouse

Inaccurate inventory costing Difficulty providing information on cost variances (e.g., the difference between standard costs and actualcosts)

Consolidating information Difficulty closing books at the end of accounting periods,from subsidiaries which is complicated when multiple subsidiaries deal

with multiple currencies; difficulty integrating financialinformation generated from incompatible systems, withdifferent databases

Management reporting Separate databases for marketing, production, andpurchasing make it difficult to provide management with an integrated analysis of profitability and cash flow

Creating an audit trail Difficulty creating an audit trail of transactions whenmultiple transactions use multiple databases

TABLE 1 Problems without ERP

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Monthly statements

CashInvoices

Verifiedsales orders

Verifiedpurchase orders

Accounting

Inventorywithdrawals

Inventory totals

Customerorders

Packagingslips

Inventory

Order torestock

inventory

Customers

Purchasing

Accounts payable

Payroll

Payroll totals

Purchases andcash payments

totals

Checks tocreditors

Fixed assets

Fixed assetregister totals

Sales and cashreceipts totals

Accounts receivable

General ledger

Accountingreports

Management

�

�

Name of DepositorAddressCity, State

Pay to theorder of

NAME OF YOUR BANKCITY, STATE

|:051503051|: 51 8757 0" 0497 /0000195900/

Depositor’s signature

Dollars$

Creditors

FIGURE 1 Conceptual Model of an Accounting System

The sales order generates an invoice to the customer from the Accounts ReceivableSystem. When payments are made, the accounts receivable balance is updated. Whenpayments are overdue, the Accounts Receivable System generates an Aging Reportthat shows account balances, which are 30, 60, and 90 days overdue.The inputs and out-puts of the Accounts Receivable System include daily transactions (see Figure 2).

In the accounting system, payments to suppliers or vendors are made through theAccounts Payable System (see Figure 3).

Accounts receivable

Sales order

Payments

Adjustments(returns)

Schedule of accountsreceivable

Custom statements

Aging report

�

FIGURE 2 Accounts Receivable

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◆ MANAGEMENT CONTROL PROCESSES IN ACCOUNTING

Control processes within accounting include budgeting, cash management, capital bud-geting, and investment management. Budgeting processes entail tracking revenues andexpenses and comparing these amounts to actual expenses and revenues. Budgetaryanalysis includes comparing current budget allocations to prior year’s allocations andcomparing current revenues and expenditures to prior years’ revenues and expendi-tures. For example, a budget analyst can compare a department’s travel expenses forthe current year with the former year and find a 25% increase in travel expenditures.Another analysis may find that revenues generated from sales in one region are muchgreater this year than in prior years. In both of these cases, the budgetary analysis mayraise further questions for investigation. For example, sales managers may want to takeadvantage of potential growth areas by assigning additional sales representatives orintroducing new products into these regions.

CASH MANAGEMENT PROCESSES

Cash management ensures the organization has sufficient cash to meet its needs and toplace excess funds into use through investments. A cash flow analysis shows the esti-mated amount of revenues and expenditures each month. Budget analysts can performwhat-if cash flow analysis to determine the impact of different business conditions,such as decreased revenue, deferred expenditures, deferred hiring, and leasing fixedassets instead of purchasing them.

Accounts payable

Purchase orders

Payments

Adjustments(returns)

Checks to creditors

Schedule of accounts payable, duedates for purchases on account, lastdate when discounts can be taken

List of bills due

�

FIGURE 3 Accounts Payable

CAPITAL BUDGETING PROCESSES

Capital budgeting processes analyze the impact of possible acquisitions. Capital bud-geting uses evaluation tools, such as net present value (NPV), internal rate of return(IRR), and payback period. In NPV analysis, the manager can determine the presentvalue of future cash flows. For example, if the current discount or interest rate is 10%,then you would receive $1,000,000 on an investment of $909,090.90 a year from now.The present value of $1,000,000 to be spent one year from now is $909,090.90. In IRR,the organization can determine if it can make a better return by acquiring an assetnow or by investing its money in another venture. A third form of analysis for capitalbudgeting is payback period. In this analysis, you determine the time at which theincrease in revenues or savings in expenses will match the investment in the newasset.

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◆ ACCOUNTING AND FINANCE MODULES IN ERP SYSTEMS

Traditionally, computerized accounting systems provide operating-level software toproduce invoices, checks, monthly statements, financial statements, and other financialoutputs. Financial Accounting deals with financial statements required for externalreporting purposes (e.g., balance sheets and P&L statements). External reportingrequirements are established by general accounting standards, as well as legal require-ments. Management accounting systems or management control systems provideinformation on product profitability and cost center profitability, which enables man-agers to make business decisions.

The difference between traditional computerized accounting systems and ERPmodules supporting the Accounting and Finance departments is that financial infor-mation is shared in an integrated database (see Table 3). For example, whenfinished goods are transferred into the warehouse, financial statements are updatedwith up-to-date cost information. ERP modules provide up-to-date information oncost variances, so that product pricing and profitability decisions can be made withaccurate information.

The Accounting module is an integral part of the entire ERP system, and mostaccounting entries are automated as different business transactions occur. One of themajor benefits of using the Accounting module within an ERP system is that the sys-tem creates a document flow of all transactions. If the customer has a question aboutan invoice, an accounting representative can trace the data to the original order docu-ment (see Table 4).

FINANCIAL ACCOUNTING MODULES IN ERP

Financial Accounting deals with financial statements required for external reportingpurposes (e.g., balance sheets and P&L statements). External reporting requirements

Operational General ledgerFixed assetSales orderAccounts receivableAccounts payableInventory controlPurchase orderPayroll

Management Control BudgetingCash managementCapital budgeting

TABLE 2 Summary of Accounting Processes

Table 2 summarizes the accounting processes at the operational and controllevel. In summary, operational processes produce daily transactions on a periodicbasis. Management control processes, such as budgeting and cash management, sup-port decisions on how to allocate resources to maximize profitability and to cutcosts.

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Subsystem What It Does

Credit management Accounts receivable balances are automatically updated, sosales has up-to-date information on customer credit limits

Product profitability Data is entered and stored in an integrated database,leading to uniform results

Finished goods inventory ERP automatically updates the increase in the monetaryvalue of finished goods when finished goods are transferredto the warehouse; financial statements are updated

Inaccurate inventory costing Provides up-to-date information on cost variances, whichenables the company to establish prices that will enable it tosell products profitably

Consolidating information Provides an integrated database with the capability offrom subsidiaries converting multiple currenciesManagement reporting ERP database is integrated, so all information is consistent,

complete, and accurate; a data warehouse provides acomprehensive database for management reporting

Creating an audit trail ERP provides interconnected document flow, whichestablishes an audit trail and makes it possible to researchand link source documents

TABLE 3 How ERP Supports Accounting and Finance

are set by general accounting standards, as well as legal requirements. FinancialAccounting modules post all accounting transactions, and these transactions arereflected in the general ledger (see Figure 4).

Within Financial Accounting is the Accounts Receivable subsystem. The AccountsReceivable module monitors customer accounts, accepts payments, updates accounts,generates due date lists, generates balance confirmations, and produces account state-ments. The accounts receivable module interfaces with Cash Management (seeFigure 5).

Accounts Payable handles all payments to suppliers, including international pay-ments, and takes advantage of available discounts (see Figure 6).

MANAGEMENT ACCOUNTING MODULES IN ERP SYSTEMS

Management accounting modules provide an internal accounting perspective for man-agers who are responsible for directing and controlling operations. Managementaccounting modules provide information about variances between planned versus

Order placed Doc 789654Order requirements transferred to Materials Management Doc 667852Picking request tells warehouse what items are on order Doc 995380Goods removed from inventory Doc 345621Invoice generated Doc 786453Accounting entries posted Doc 094531

TABLE 4 Document Flow Creates an Audit Trail

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Accountsreceivableaccounting

Accountspayable

accounting

Assetaccounting

Treasury management

General ledger

Balance sheet Profit & loss

Human resources

Inventory mgmt.

Purchasing

Sales

FIGURE 4 Financial Accounting Process


Accountingdocument

Accountingdocument

Payment transactionsDunning notice

Balancesheet

Incomingorders Delivery

Invoice/A/R accounting

document

OO

Cashmanagement

Profit &loss (P/L)

Cash mgmt. &forecast date

FIGURE 5 Accounts Receivable


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actual data, data are the basis for planning. Key management accounting activitiesinclude the following:

Cost Center Accounting: Cost centers are organization sub-areas treated as indepen-dent account assignment objects in cost accounting.

Internal Orders: Internal orders are used as a basis for collecting and controllingcosts according to the job incurring the costs.

Activity-Based Costing (ABC): ABC monitors costs by business process rather thanby cost center, so the cost of a business process can be determined.

Product Cost Controlling: Product cost controlling calculates the costs of manufac-turing a product or providing a service. This provides information to ProfitabilityAnalysis to calculate contribution margins.

Profitability Analysis: Profitability analysis analyzes profit or loss by individual mar-ket segments, which include products, customers, and orders.

Profit Center Accounting: Profit center accounting evaluates the profit or loss of anorganization’s individual, independent areas.

Consolidation: Consolidation provides the ability to consolidate financial data forexternal and internal accounting perspectives.

• Profit center accounting, profitability analysis, and cost center analysis provide acompany-wide view of costs and enable management to answer questions, such as

Accountingdocument

Accountingdocument

Payment transactionsPayment program

Balancesheet

Purchaseorder

Goodsreceipt

Invoicereceipt/Invoice

verification

Cash mgmt. &forecast date

OO

Cashmanagement

Profit &loss (P/L)

FIGURE 6 Accounts Payable


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the following:• Which products are most profitable?• Which divisions are most profitable?• Which customers are most profitable?

These questions can be broken down further. For example, you could ask whichcustomers in the New York territory are most profitable during the month ofDecember. Which products in the Seattle territory are most profitable during the Junethrough August timeframe? All of these questions enable management to allocateresources, including product development, sales force hours, and management time, soresources will be devoted to the highest-potential accounts and products. This maxi-mizes overall profitability and business performance.

Increasingly, businesses are using profit centers, or responsibility centers, to man-age operations. Each profit center manager is responsible for his/her own business, andfor the profit and loss of the business. Profit center accounting creates reports on theperformance of these profit centers (see Table 5).

Business Scenarios Functions

Profit center accounting Provides profitability reports with planned versus actualcomparisons; provides profitability reports with a comparisonof current period versus cumulative period

Profitability analysis Identifies which products or markets have the highest contribution margins

TABLE 5 Management Control Functions in ERP

FIGURE 7 Profitability Analysis

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◆ THE NEW ROLE FOR MANAGEMENT ACCOUNTING

ERP systems provide on-line real-time data for decision making. With ERP,“Accountants are no longer at the back of the corporate ship issuing delayed reportsabout the history of the voyage . . . Instead, they will be on the bridge with the CEO,offering real-time cost information to help steer the ship into the future” (Kaplan andCooper, 1998).

ERP systems offer two types of data. The first type of data is operational data,which provides feedback on the quality and efficiency of processes. Operational data,for example, includes information on cycle time and defects and the cost of people andmachines used in operations.

With ERP, managers have access to activity-based cost (ABC) information. ABCinformation traces the costs from resources (e.g., people, machines) and applies thesecosts to specific products, services, and customers. Using ABC systems, managers cananswer important questions, such as the following:

• How much does it cost to make a product?• How profitable is a customer?• How profitable is a product?

This information differs from operational information. A comparison of opera-tional control systems and ABC systems is shown in Table 7.

ABC information, running as a part of an ERP system, provides managers withinformation on the profitability of customers and products with real-time data on salesand production. This information is strategic because it can guide decisions on market-ing strategy and business strategy. For example, information indicating that a certainproduct line is profitable would lead sales managers to develop incentives for salespersonnel to focus on marketing this product line.

To understand data within the proper context, managers need to link informationcoming from operational control systems with information coming from ABC systems.

Module Interface

Financial Accounting The source of data for Management Accounting (e.g., revenuepostings to the general ledger)

Materials Management Posts cost of goods to Management AccountingProduction Planning Posts the cost of bills of materials, which are created in

Production PlanningPersonnel Administration Posts expenses for payroll transactionsSales and Distribution Posts revenue from billing documents

TABLE 6 Integration of Managerial Accounting and Control Systems with Other ERP Modules

The Managerial Accounting module within ERP is a central clearinghouse foraccounting information that is created, updated, and used by many different functionalareas of the business, including financial accounting, materials management, produc-tion planning, personnel administration, and sales and distribution (see Table 6).

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The ABC system budgets the quantity and expense of committed resources and feedsthis information into the operational control system, which monitors the actualexpenses.As an example, an order entry department has eight clerks, and the ABC sys-tem uses the standard that each clerk can process 2,000 orders per month.Total depart-mental output is 16,000 orders per month. The operational control system tests thestandard by examining the actual quantity of accomplished work. If the order entrydepartment loses a person but can still process 16,000 orders without difficulty, thenthis information can be used to recalculate the capacity of order processing activity to2,285 orders per month per person (Kaplan and Cooper, 1998).

Process standards must be updated based upon continuous improvements. Whenchanges in efficiency are updated (e.g., the ability to process 2,285 orders per month),the system can update the activity cost driver rates. Increases in materials, energy, andwage rates can cause budgeted expenses to rise, and cost driver rates can be updatedaccordingly.

The implications of having real-time data for managerial accounting is of enor-mous importance. ERP systems provide a “coming of age” for managerial accountingbecause information on customer, product, and market profitability can be based onreal-time information. However, these data must be used in context. Managers shouldnot be using ABC systems for real-time operational control. Rather, they should linkoperational data and ABC data as a basis for guiding continuous improvement.

Operational Control Systems ABC Systems

Purpose Provides information about Provides strategic cost informationprocess and business unit about the underlying economies ofefficiencies the business

Data Information must be timely, Estimates are sufficient; lower accurate, and specific to the requirements for accuracywork group

How cost is defined Relevant information on the Cost of resources across the value cost of people, machines, chain of providing a product orenergy, which are used in service (e.g., from suppliers to after-operating processes sale service)

Questions addressed What scrap metal is left over How much does it cost to make afrom production? product and serve a customer?

How profitable is a product?How profitable is a customer?

Scope Specific to a responsibility Aggregates costs across multiplecenter cost and responsibility centers

Example Measure actual expenses of Measure what it costs to connect aa specific process: a customer customer to the Internet includinghelp desk customer help desk, credit check,

dispatching, billing, and customerservice

Adapted from: Kaplan, Robert and Robin Cooper. “The promise and peril of integrated systems,”Harvard Business Review, July/August 1998, pp. 109–119.

TABLE 7 A Comparison of Operational Control and ABC Systems

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The partnership between ERP and ABC establishes a connection between the keyenabler of management decision making (e.g., ABC) and the key enabler of informa-tion flow in the organization (e.g., ERP). Now that operational managers have accessto on-line, real-time ABC data, they can focus on measuring product and customerprofitability and reducing operating costs. The partnership between ABC and ERPallows management accountants to play the role of proactive business strategistsrather than reactive, retrospective reporters (Shaw, 1998).

◆ SUMMARY

The purpose of the Accounting and Financial modules is to support financial account-ing and management accounting functions. Financial information is created, main-tained, and updated for external reporting purposes. Management accounting informa-tion is internal information designed to support management decision making. Byanalyzing profitability and business unit performance, managers can allocate resourcesto marketing the most profitable products and services, and this will increase revenuesand reduce costs.

Questions for Discussion1. Gather information about the best practices, which are associated with the Financial

Accounting module within an ERP package. You can do this by (1) conducting research onthe web; (2) interviewing a user of a Financial Accounting module; (3) using an on-line data-base to find an article in a trade publication that describes the effective use of an FinancialAccounting module; or (4) using an Financial Accounting module within an ERP system toidentify best practices.a. What are the best practices you have discovered?b. How do they contribute to overall productivity?c. What information for decision making do they provide?

2. The Financial Accounting module is often the first module to be implemented within anERP system. Why do many companies start with the Financial Accounting module?

3. Many divisions of organizations seek decentralized financial control. How can an ERP sys-tem be implemented to ensure local financial decision making and control?

4. The Management Accounting module within ERP has interfaces to many other modules,including Human Resources, Sales and Distribution, Materials Management, ProductionPlanning, and Financial Accounting. Describe the interfaces between the ManagementAccounting module and each of these other modules:

Module What Information Is Shared with Management Accounting

Human ResourcesSales and DistributionMaterials ManagementProduction PlanningFinancial Accounting

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5. The Mid-Level Market for ERPThe high-end accounting software vendors (e.g., SAP, PeopleSoft, BAAN, Oracle) see thepotential of the mid-level market, and to edge into it, they have been scaling down theirexpensive and complex products. The mid-level market is variously described as organiza-tions with annual revenue of between $20 million and $200 million or with more than 100employees.

By removing some high-end functions and restricting users’ ability to customize theremaining ones, the vendors can trim prices and, they claim, can accelerate implementationfrom an average of two years to between three to six months. For a mid-sized organization,this is a major plus because it usually lacks the information technology (IT) staff required tocustomize an ERP package.

Gather research on ERP packages that address the needs of the mid-level market.What challenges do mid-market companies face in implementing ERP software?

Source: Jones, Roberta Ann. “Spotlight on midlevel ERP software.” Journal ofAccountancy. v. 193, No. 5, May 2002, pp. 24–47.

Featured ArticleRead these excerpts from the article, “Thechanging landscape of computerized accountingsystems,” and answer these questions: (1) Defineeach of the “in-technologies and systems.”(2) What is their relationship to the successof ERP?

MORE POWER AND GREATERSTANDARDIZATIONThe world of accounting systems softwareused to be divided into two parts: the low endand the high end. This worked quite well beforee-commerce, e-business, and enterprise resourceplanning came along. These, coupled withcheaper and more powerful computers, havegiven rise to a new breed of accounting systemsbeyond the high end. The good news, however, isthat while the pricing of the new breed is notcheap, it is far less than the mainframe- and mini-computer-based systems that previously wereneeded to perform the same functions. Also, forthe first time, database management withinaccounting systems is becoming standardizedunder the SQL-based client-server system. Thismeans ease of movement for databases from oneapplication to another.

The computer has revolutionized the wayenterprises keep their accounting records. Aftertransactions are recorded they can be manip-ulated sorted, analyzed, summarized, andturned into financial statements with ease. The

observer does not even know whether LucaPacioli’s double-entry concept is still being used.Accounting seems to be the perfect applicationfor making the most of computing power.

As we face the 21st century and the thirdmillennium, questioning what technology has instore for accounting systems is quite appropriate.With prices for consumer PC systems hoveringaround $600–1,000, and low-end accounting soft-ware priced at about $100, businesses can affordto have computerized accounting. But, are theold programs enough to run a business in the21st century?

The New Marketplace. Today the com-puter accounting industry has three major levels,with the mid and lower levels each split into twogroups.

ERP vendors dominate the highest tier ofaccounting systems, where software solutions canstart at $150,000.The mid level (where previouslyhigh-end functions are found),with software costsat $8,000–$50,000, is divided into SQL-based sys-tems and non-SQL-based systems.Lastly,the low-end systems,which still provide some bang for thebuck, carry prices in the $100–5,000 range. Thisgroup is also broken down into two strata: thevery low-end systems, and a class of “larger” sys-tems that are more functional and robust but fallfar short of the mid-level systems.

Another force at work is the introduction ofe-commerce and e-business into the accounting

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systems mix. Most, if not all, mid- and high-endproducts provide some sort of communicationsinterface with the Internet. Many of these inter-faces are based on ODBC and the ability to havemultiple software and hardware products com-municate directly with the accounting systemand its databases.

Even low-end vendors such as Peachtreeoffer an e-commerce module. Peachtree’sPeachLink provides small businesses with thewherewithal to do business on the Internet.PeachLink allows the user to list products andservices on the Web, take orders, and evenreceive payments.

THE 21ST CENTURY MARKETPLACEMost of the major accounting systems manufac-turers agree with the following view of the futureaccounting marketplace:

“In” technologies and systems

E-commerce and e-business

Best practices

SQL

GUI front ends

Web-enabled applications

Extended enterprise solutions

Value chain

Internet-based Commerce. Commerce con-ducted over, through, by, or with Internet-relatedtechnologies will be the single hottest technologyin the next decade.Vendors that responded to ane-mail survey all stressed a vision of e-commerceor e-business solutions. Each and every non-respondent’s website also stressed e-commerceor e-business.

A new feature in Quicken 99 exemplifiesthe attention that accounting vendors are payingthe Internet. Quicken, the highly popular andsimple to use home accounting system, now pro-vides remote entry of transactions throughthe Web. This capability allows users of Quicken99 to enter transactions through Intuit’s(Quicken’s publisher) site and store them forlater retrieval.

E-business has been defined as theexchange of goods and services using electronicmeans. Electronic data interchange (EDI) andelectronic funds transfer (EFT) are examples of

e-business primarily conducted at the commer-cial or wholesale level. E-commerce is the use ofthe Internet to conduct business. Amazon.comand online securities trading are examples ofe-commerce at the retail level.

The use of SQL as the back-end database,and its ability to use ODBC as a methodologyfor transmitting information to and from otherapplications, makes using the Internet forbusiness transactions easier than ever. DellComputer Corporation currently handles$10 million in retail transactions per day over theInternet, according to Lettie Ledbetter of DellComputer’s public relations department.

Enterprise Resource Planning. LynneStockstad, director of global marketing at GreatPlains software, sees the back office applicationof ERP as follows:

“This application category is the backboneof a strategic business management solu-tion. . . . It typically includes fully integratedapplications across financials, distribution,human resources/payroll, service manage-ment, and manufacturing. ERP solutionshave predominantly been implemented bythe Fortune 500 businesses. However, majormidmarket vendors . . . are now offering thisfull scope of ERP solution[s].” ERP leadersSAP, PeopleSoft, and Baan have, as stated,moved into the middle tier of businesses,breaking into the Fortune 500 and beyond.They have done this by repositioning andrestructuring their current selection of ERPproducts to run on the mid-tier platform ofchoice, Windows NT.

Nevertheless, the former high-end accountingproducts, which have been reclassified by theseERP vendors, should not be discounted. AsStockstad stated, ERP and the creation of pro-grams that support this system of managementare on the wish lists of the now mid-levelaccounting systems.

Solutions which in the past cost in the mil-lions of dollars can now be achieved for less than$500,000. This new accessibility to ERP allowsinformation power that was not previouslyavailable to be used by smaller corporations.Solutions geared toward specific industry sets orimplementation of management theories (suchas best practices) foster tighter integration of the

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accounting, managerial, and operational func-tions of the business.

The addition of the Internet to ERP ande-commerce has morphed even this newfoundjargon with a new glossary of terms, mostnotably the extended enterprise solution (EES).

Best Practices. Arthur Andersen definesbest practices as “simply the best way to performa process.” The boom in ERP and e-commercegives rise to the need to institute best practices,to both improve the bottom line and create anair of control over what is to be a new explosionin information. From accounting to marketingdata, inventory control to depreciation sched-ules, it is the art of data warehousing that isenabling the small and large business to managegrowth in changing economic times. By imple-menting best practices, from planning to imple-mentation, companies are able to reengineertheir business and maximize productivity. A bestpractice forces a reexamination of the businessfrom all points of view, essentially requiring thecorporate entity to redefine itself.

The largest mistake made during the imple-mentation of a new accounting system, espe-cially a manufacturing requirement processing(MRP) or ERP system, is to redesign the newsystem to work in the old environment. This isoften done without a thorough examination ofthe effectiveness of existing procedures and an

evaluation of where best practices can optimallybe employed.

Structured Query Language. As mentionedpreviously, SQL is quickly becoming the data-base of choice. Vendors from Peachtree toAccountmate are rolling out SQL-basedaccounting systems, offering improved manage-ment of increasing amounts of data. The use ofSQL standardizes the database aspect of theseupper-end accounting systems. Before the accep-tance of SQL, every vendor either used disparatedatabase systems or created or modified theirown database system. This made it difficult toshare information with other systems located onshared resources.

THE RULER OF THE ROOSTToday, and most certainly tomorrow, ERP rulesthe roost, requiring CPAs’ and businesses’accounting staffs to retool and reeducate them-selves in this new management philosophy. ERP,best practices, and ad hoc SQL queries will existnot only in large enterprises but also in mid-sizedcompanies.

SOURCE: Honig, Susan, “The changing landscapeof computerized accounting systems,” CPAJournal, v. 69, n. 5, May, 1999, pp. 14–20. Copyright:Copyright New York State Society of CertifiedPublic Accountants 1999.

ReferencesBaxendale, Sidney, and Farah Jama. 2003. “What

ERP can offer ABC.” Strategic Finance 85:54–57.

Connolly, James. 1999. “ERP: Corporatecleanup.” Computerworld 33: 74–78.

Kaplan, Robert, and Robin Cooper. 1998. “Thepromise and peril of integrated systems.”Harvard Business Review 109–119.

Schultheis, Robert, and Mary Sumner. 1998.Management Information Systems: The

Manager’s View. 4th ed. Burr Ridge, IL: Irwin/McGraw-Hill.

Shaw, Russell. 1998. “ABC and ERP: Partners atlast?” Management Accounting 80: 56–58.

Smith, Mark. 1999. “Realizing the benefits frominvestment in ERP.” Management Accounting34: 34.

Stein, Tom. 1999. “Making ERP add up.”Information Week. 59.

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ERP Systems:Production and MaterialsManagement

Objectives

1. Understand the production and materials management systems within ERP.

2. Recognize the interrelationships among business processes supporting sales and marketing,production and materials management, accounting and finance, and human resources.

As an introduction to this chapter on Production and Materials Management, wewill go back to the Atlantic Manufacturing case and see how difficulties with pro-

duction and materials management functions create capacity problems, supplier prob-lems, and order filling delays.


Issues occur in the Materials and Manufacturing processes, as well as in thePurchasing processes.

MATERIALS AND MANUFACTURING

✓ Materials and manufacturing people at Atlantic are constantly dealing withshortages, capacity problems, and supplier problems. A capacity problemforced them to air express a shipment to a customer to meet the promiseddelivery date, incurring much greater costs.

✓ A last-minute change in specifications failed to make it to the shop floorbefore the order was assembled and shipped. This caused a time delay indelivering the correct merchandise.

✓ The product design process is basically sequential, so it takes between 9 and12 months from concept to production. Competitors can design and manu-facture products with shorter lead times.


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ERP Systems: Production and Materials Management

✓ When engineering starts to design a product, it often does not have detailedinformation from Marketing about the details of what customers want.

✓ Excess inventory is a problem.

PURCHASING

✓ Purchase requisitions get lost in the approval process, because paperwork isall manual. It is difficult to track some of the paperwork down, so buyerssometimes create multiple purchase requisitions.

In this chapter, you will learn about how Production and Materials Managementcan help companies control costs and provide efficient order fulfillment, from cus-tomer orders to purchase requisitions.

◆ BACKGROUND

The history of manufacturing systems shows the evolution of systems that weredesigned to re-order inventory using a re-order point to systems, which adapt produc-tion schedules to meet customer needs. Increased flexibility, increased responsivenessto customer demand, and increased integration are themes associated with manufac-turing system evolution.

The manufacturing systems of the 1960s, 1970s, and 1980s were designed to man-age high-volume production of a few products. These systems used large mainframe-based databases and were designed to implement large-scale production plans toaddress constant demand. If too much was manufactured, however, then excess inven-tory could become a significant problem. These systems were not flexible enough toprovide customized products in limited quantities quickly.

By the late 1980s, the rules of thumb governing manufacturing changed.Customers expected their suppliers to create new products and services to meet theirneeds. This meant that production schedules needed to be more changeable and flexi-ble to accommodate changing customer demands. Manufacturing Execution Systems(MES) provided continuous feedback and control of manufacturing processes, sochanging market needs could be addressed. MES provided components to managemachine resources, to prioritize production schedules, to control workflow, to managelabor, and to automate document flow.

In the 1990s, ERP systems were instrumental in integrating manufacturingprocesses with other business processes. ERP systems manage processes across thesupply chain so that customers’ needs for information about products and services aremet. ERP systems achieve operational efficiency through integration of data.

Prior to ERP, customers primarily dealt with distributors and retailers; the manu-facturer was far removed from the customer. With ERP, the supply chain becomesmore integrated, and many manufacturers sell directly to customers.This enables man-ufacturers to develop a better sense of customers’ needs and to adapt to their needsmore efficiently.

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Many of the problems with traditional systems occur because of lack of integrationbetween production planning, sales, purchasing, and accounting. If production plansare not linked to expected sales levels, then there may not be sufficient inventory tomeet demand. There may be too many slow-moving items because customers nolonger demand these items. This is particularly true in industries where buyer prefer-ences change, such as clothing, consumer electronics, and computers.

Inaccurate production forecasts trigger incorrect purchasing decisions byMaterials Management, leaving excess raw materials and finished goods inventory.Excess inventories impact the cash flow and profitability of the business because theyrepresent significant costs (see Table 1). To minimize excess inventory, productionmust be based upon an accurate sales forecast.

◆ PRODUCTION PLANNING AND MANUFACTURING PROCESSES

Production Planning and Manufacturing Processes include all the activities necessaryto ensure production. Production systems achieve these objectives:

1. Producing the production plan2. Acquiring raw materials3. Scheduling equipment, facilities, and workforce to process these materials4. Designing products and services5. Producing the right quantity and the required level of quality at the time required

by production goals

The production planning and manufacturing processes, which achieve these goals,include operational-level and managerial-control processes (see Table 2).

Operational-level processes handle daily activities, such as purchasing, receiving,Quality Control (QC), and inventory management. The function of purchasing is toobtain the right quantity of raw materials and production supplies. In receiving, itemsare inspected and received, and information about their status is passed along toaccounts payable, inventory, and production. QC identifies vendors who ship badlymade or unreliable materials. QC continues to monitor the quality of production goodsas they move from raw materials, to goods-in-process, to finished goods inventory. In

Subsystems Problems

Production Planning Production planning may not be linked to expected sales levels;difficulty in adjusting production to reflect actual sales;difficulty in meeting anticipated sales demand

Production Materials costs and labor costs can deviate from standard costs,and this will change manufacturing costs

Purchasing/Materials Production manager may not be able to give the Purchasing/Management Materials Management manager a good production forecastAccounting Differences occur between standard costs and actual costs

TABLE 1 Problems in Production Planning and Materials Management

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Operational PurchasingReceivingQuality Control (QC)Cost accountingMaterials managementInventory management/control

Management control MRPJust-in-time (JIT) manufacturingCapacity planningProduction schedulingProduct design

TABLE 2 Production Planning and Manufacturing Processes

Total Quality Management (TQM) environment, emphasis is placed on anticipatingand preventing defects. Continuous feedback about quality is critical.

In modern production planning and manufacturing, information systems supportthese processes. Shop floor data collection systems are used to enter data about thestatus of goods-in-process, including the amount of worker time devoted to each phaseof the production process. In factory floor automation, microcomputers with key-boards enable factory floor personnel to enter data about the time spent on a joborder, piece counts, and the amount of scrap materials.

Materials Management systems provide information on inventory levels of pro-duction materials, usage of these materials in production, and location of materials. Billof Materials (BOM) systems provide a list of ingredients for the final product, includ-ing raw materials, subassemblies, and component parts.

Inventory management systems maintain inventories at their proper levels.Traditionally, a re-order point system makes certain that sufficient production materialsare ordered with sufficient lead time to arrive at the plant when they are needed in theproduction process. Another inventory management tool is economic order quantity,which identifies the economic order quantity for each item.

Finally, cost accounting systems collect and report information about theresources used in production processes to determine accurate production costs, includ-ing the cost of personnel, materials, equipment, and facilities (Schultheis and Sumner,1998).

◆ MANAGEMENT CONTROL PROCESSES IN PRODUCTION AND MANUFACTURING

MATERIAL REQUIREMENTS PLANNING (MRP)

Material Requirements Planning (MRP) supports these processes:

• Identifying stock that planned production calls for• Determining the lead time to get the stock from suppliers

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MRP The amount and timing of raw materials orders to support theMaster Production Schedule (MPS)

BOM The recipe of materials needed to make a productLead times The time for the supplier to receive and process the order, and ship

it to the manufacturerLot sizing Production quantitiesMPS Master Production ScheduleGross requirements Raw materials needed for productionPlanned orders Sufficient raw materials for production

TABLE 3 MRP Vocabulary

• Calculating safety stock levels• Calculating the most cost-effective order quantities• Producing purchase orders for needed stock items in the right amounts

MRP uses inputs from the Master Production Schedule (MPS). The MPS uses thesales forecast to identify the products needed and when they are needed.

It is useful to have some basic vocabulary for production and manufacturingprocesses (see Table 3).

The ideal production and manufacturing environment is a just-in-time (JIT) sys-tem, in which enough inventory is on hand to serve needs.To make a just-in-time systemwork, suppliers need to deliver enough material to meet the production schedule. Thecompany needs to develop close working relationships with suppliers to make thiswork. Suppliers can use Electronic Data Interchange (EDI) or the Internet to monitorthe manufacturer’s inventory levels by linking into their inventory systems. In this way,they can replenish the manufacturer’s inventory on a JIT basis.

CAPACITY PLANNING PROCESSES

The purpose of capacity planning is to determine if there is enough production capac-ity, in terms of personnel, space, machines, and other production facilities, to meet pro-duction goals. Capacity planning requires detailed information about human resources,BOM, goods-in-process inventories, finished goods inventories, lot sizes, status of rawmaterials, orders in the plant, and lead time for orders. The result is time-phased plansfor each product and for each production work area. Additionally, personnel capacityplanning estimates the number and type of workers, supervisors, and managers neededto meet the master production plan.

Production Scheduling information systems allocate specific production facilitiesfor the production of finished goods to meet the master production schedule. Thisallows managers to control projects and project completion times/dates and to deter-mine the impact of problems on projected completion dates.

Product Design and Development information systems integrate informationabout component costs into product design/engineering in order to reduce costs. Forexample, a product designer can compare component costs from two or three alterna-tive sources and build the most cost-effective component into the product designbefore the product goes into manufacturing (Schultheis and Sumner, 1998).

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◆ PRODUCTION PLANNING AND MANUFACTURING MODULES IN ERP SYSTEMS

The introduction of ERP extends the production information system to finance, mar-keting, human resource management, and other functions. ERP modules for produc-tion planning and manufacturing support materials requirements planning, shop floorcontrol, inventory management, and capacity planning. The ERP system accesses costaccounting data through integration with the financial accounting system.

The ideal computer-integrated manufacturing system is designed to integrate allsoftware and hardware used in manufacturing by merging manufacturing databases.This concept eliminates paperwork and bottlenecks associated with non-integrateddata. The objective is to decrease design costs, to decrease lead time, to increase pro-ductivity of engineering and design processes, to decrease work-in-process inventory,and to decrease personnel costs.

With an ERP system, sales forecasts are used to determine production levels andto develop a production plan. Sales forecasts are an input into the sales and operationsplan, which determines resource requirements for production. Demand Managementcreates an MPS, which determines the quantities and dates for finished products thatare needed. The MRP component develops a detailed material plan, which is a set ofplanned orders for materials to be purchased or for materials to be transferred from aplant (see Table 4).

The MRP module determines what needs to be ordered at what time in order tofulfill the requirements of the MPS, and this triggers the purchasing of needed rawmaterials and/or subassemblies. The MRP function develops the planned orders, andthese orders are sent to Production as work orders. Each work order includes a list ofrequired materials from the BOM, and the manufacturing operations, which need tobe performed. Materials are issued to these work orders in the manufacturingprocess.

Subsystems How an ERP Works

Sales Forecasting Production has access to sales forecasts, so it can adjust productionlevels to actual sales if sales differ from expectations

Sales and Operations Determines if production facilities can produce enough to meetPlanning consumer demandDemand Management Breaks down the production plan into weekly production;

produces the MPS, which is the production plan for finished goodsMRP Determines the amount and timing of raw materials orders or

subassemblies to support the MPSPurchasing Generates Purchase Orders for raw materialsDetailed Scheduling Schedules production based on demandProduction Uses the detailed schedule to manage operationsAccounting ERP captures data on the shop floor for accounting purposes

TABLE 4 How ERP Supports Production Planning

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ForecastingSales &

operationplanning

Demandmanagement MPS MRP Manufacturing

executionOrder

settlement

Sales infosystem

CO/PA

Procurement

Inventory

Capacity

Costing

Production master data

Reporting and analysis

Planning process

Execution process

FIGURE 1 Manufacturing Planning and Execution Process

Source: Figure 108, SAP01, SAP Overview, p. 331.

SAP’s modules in Production Planning support Sales and Operations Planning,Demand Management, the MPS, MRP, Manufacturing Execution, and OrderSettlement (see Figure 1). Each of the modules provides important inputs into the nextmodule (see Table 5).

Module Function

Sales and Operation Planning Determines the rate at which the company providesmanufacturing, engineering, and financial resources to supportthe sales plan

Demand Management Links forecasting functions to the MPS and the MRPMPS Creates planned orders for top-level items to satisfy

requirements from Demand ManagementMRP Determines which material you need, in what quantity,

and at what time; generates replenishment schedules for all manufactured components, purchased parts, and raw materials

Manufacturing Execution Creates production orders from planned orders;production orders contain data on production objectives,material components, required resources, and costs

Order Settlement Confirms production order operations; collects data on quantities produced, completion dates

TABLE 5 SAP Modules in Production Planning

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The Sales and Operations Plan, which determines what manufacturing resourcesare needed to support the sales forecast, is an input into Demand Management(see Figure 2). Demand Management links the forecast to the MPS and MRP. MRPdetermines which materials are required, in what quantity, and at what time, and thencreates the necessary orders through the procurement process. Procurements convertsthe planned order into a purchase requisition, or production planning converts theplanned order into a production order.

The MPS and MRP are inputs into Manufacturing Execution, which creates theproduction orders. The production orders have data on production goals, materials,resources, and costs. Manufacturing Execution is an input to Order Settlement, whichcollects data on production amounts, times, and completion dates.

FIGURE 2 Sales Forecast

◆ MATERIALS MANAGEMENT MODULES IN ERP SYSTEMS

The Procurement Process determines needs, identifies potential sources of supply,compares alternative quotations, creates a purchase order, tracks the status of apurchase order, receives goods, and verifies invoices upon receipt of goods (seeTable 6).

An ERP system provides needed integration between the Materials Managementsubsystem and other subsystems (see Table 7). For example, all purchase orders areassigned to a cost center in the Management Accounting module. In ProductionPlanning, the inventory function posts components needed to fill Production Orders.Purchasing and Financial Accounting share common vendor data.

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Activity Description

Determine requirements Determines needs, based upon re-order point, regularchecking of stock, and forecasting based upon usage

Source determination Identifies potential sources of supplyVendor selection Compares alternative quotationsPurchase order processing Uses information from a purchase requisition to create a

purchase orderPurchase order follow-up Provides status of purchase ordersGoods receiving and Confirms the receipt of goodsinventory managementInvoice verification Matches invoices with information on goods which have been

received

TABLE 6 The Procurement Process

Interface With Interface Type

Management Accounting Purchase orders are assigned to a Cost CenterFinancial Accounting Purchasing maintains vendor data which are defined jointly

with Financial AccountingSales and Distribution When a Purchase Requisition is created, it is assigned to a

sales orderProduction Planning Inventory Management posts components needed for

production orders

TABLE 7 Integration of Materials Management with Other Subsystems

◆ THE FUTURE OF ERP IN MANUFACTURING AND THE SUPPLY CHAIN

Manufacturers are moving toward JIT manufacturing environments since companieswant to carry less inventory and want to produce more customized products. Emergingdevelopments in manufacturing are the convergence of manufacturing executionsystems and ERP, the use of advanced planning and scheduling systems, advanced datacollection strategies, and eBusiness.

MANUFACTURING EXECUTION SYSTEMS (MES) AND ERP

The convergence of MES and ERP systems is a recent development. MES are factoryfloor information and communication systems which provide feedback from the fac-tory floor on a real-time basis. MES support data collection, detailed scheduling, labormanagement, quality management, maintenance management, product tracking, andperformance analysis.These systems provide feedback from the factory floor on a real-time basis (Manetti, 2001).

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ERP vendors are expanding their modules to extend closer to the plant floor, andMES vendors are expanding their shop floor solutions to include front-end and back-end applications such as order fulfillment and warehouse management systems. Apartnership between MES and ERP systems yields outstanding results: better shopfloor to front office communication, better customer service, and improved informa-tion for decision making.

ADVANCED PLANNING AND SCHEDULING (APS) SYSTEMS

APS Systems work with ERP systems by providing business analysis and decision sup-port capabilities. The majority of ERP systems are still transactions-oriented and havelimited decision support features. An APS system leverages the data residing in a com-pany’s ERP system to provide decision support for production planning, demand plan-ning, and transportation planning (Kilpatrick, 1999).

DATA COLLECTION

In the past, data collection focused on using a network of bar code readers to gatherinventory movement and shop activity on the plant floor. To reduce on-hand invento-ries and transaction costs, today’s data collection goes far beyond bar codes and thenetwork of collection stations. Real-time data are gathered directly from the shop floorusing mobile and Internet-enabled devices, bar-coding capabilities, and easy interfaces(Turbide, 2000). Automating routine data collection with mobile user interfaces opti-mizes the flow of information 300% or more (Turbide, 2000). Choosing a data collec-tion system that integrates tightly with a powerful ERP package gives companies acompetitive edge.

eBUSINESS STRATEGIES IN MANUFACTURING ERP

The business world is looking for less inventory and more customized products.Manufacturing is moving toward JIT manufacturing, whereby the exact suppliesneeded for manufacturing are acquired on a timely basis. eBusiness offers the potentialto improve materials management by facilitating communications between all links inthe supply chain.

Business-to-business (B2B) electronic commerce increased in transaction valuefrom $43 billion in 1998 to $1.3 trillion by 2003. This is ten times the value of businessto consumer electronic commerce (Manetti, 2001). B2B applications enable procure-ment organizations to interact with a multitude of suppliers, creating more competitivebidding. Technology allows buyers to provide suppliers with their material resourceplanning forecasts and, using this information, suppliers can make bids to meet a com-pany’s specific needs.

eBusiness buyers benefit from the rise of eMarketplaces or exchanges.eMarketplaces aggregate buyers, sellers, content, and business services, making tradi-tionally fragmented markets more efficient. eMarketplaces lower the cost of doingbusiness by eliminating inefficient processes which are part of traditional paper-basedsupply chains. By reducing search costs, eMarketplaces enable buyers to evaluate alter-native supply sources. eMarketplaces offer a number of advantages, including lower

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prices, lower transaction costs, improved electronic communications, and communityfeatures, such as discussion forums. eMarketplaces maintain neutrality, rather thanfavoring sellers over buyers or pushing one seller over another.

Web technology enables suppliers to see Requests for Proposals (RFPs), technicalspecifications, and purchasing requirements so they can respond more quickly to meetthese requirements. Some companies reduce supply chain lag times by giving suppliersa chance to obtain real-time demand forecasts, so these suppliers can ship raw materi-als and parts without waiting for a purchase order.

Finally, eMarketplaces have transformed the role of purchasing agents. Prior to theemergence of eMarketplaces, purchasing agents spent a good deal of their time pro-cessing purchase orders and expediting shipments. With eBusiness, purchasing agentscan devote their efforts to more strategic activities, such as organizing e-partnershipsand analyzing alternative sourcing possibilities.

◆ SUMMARY

The discussion of Production and Materials Management illustrates how the produc-tion plan is based on the sales forecast. Once the sales plan is developed, then theDemand Management function determines the quantities and dates required for fin-ished products. The MPS satisfies the requirements of Demand Management, and theMRP system determines what is needed, in what quantity, and at what time to fulfillthe requirements of the MPS. In the next step, Purchasing or Procurement generatespurchase orders for materials or subassemblies, which are needed for the productionprocess. All of these Production and Materials Management processes are essential toERP.

Questions for Discussion1. Many people argue that MRP is a precursor to ERP, and that ERP systems were designed

to integrate MRP systems with financial and accounting systems.a. Given the interrelationship between MRP and ERP, does it make sense for a non-

manufacturing company to adopt an ERP system?b. Have manufacturing systems been the basis for all ERP systems?

2. Gather information about the best practices, which are associated with the ProductionPlanning and Materials Management modules within an ERP package. You can do this inone of four ways: (1) Conduct research on the web; (2) Interview a user of a ProductionPlanning/Materials Management module within an ERP package; (3) Use an on-line data-base to find an article in a trade publication which describes the effective use of aProduction Planning/Materials Management module; or (4) Use a Production and MaterialsManagement module within an ERP system.a. What are the best practices you have discovered?b. How is the ERP system with Production and Materials Management modules superior

to a non-integrated Manufacturing system (i.e., where the Financial Systems and MRPsystems are separate).

c. What information for decision making does the integrated system provide?

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Featured Article

3. The Production Planning and Materials Management modules within ERP have interfacesto other modules, including Human Resources, Sales and Distribution, and FinancialAccounting. Describe these interfaces:

What information is shared with Production PlanningModule and Materials Management

Human ResourcesSales and DistributionFinancial Accounting

The article “What ERP can offer ABC”describes the integration of manufacturing andaccounting data, which is made possible throughthe use of ERP. Based upon this article, answerthese questions:

1. What manufacturing data is used by themanagerial accounting module within ERP?

2. How is this information used to controlcosts, to maximize productivity, and tostreamline operations?

3. How does this data integration supportmanagerial decision making?

“WHAT ERP CAN OFFER ABC”One of the greatest stumbling blocks in imple-menting an activity-based costing (ABC) systemis finding the right activity cost driver to use inattributing the cost of an activity to products orother cost objects.The nonfinancial measures thatare typically used as activity cost drivers are rarelyfound in the accounting system. Measures such asnumber of sales orders,number of material moves,and number of engineering change notices pertype of product are more likely found elsewhere.

Because the activity cost drivers aren’tunder the control of the accounting system, theactivity cost-driver information isn’t subject tothe same process controls used to add reliabilityto the accounting numbers. In the early days ofABC-based costing, activity cost-driver informa-tion was often derived from a “back-of-an-envelope” information system.

Enterprise Resource Planning SystemsEnterprise resource planning (ERP) systemscan significantly increase the availability and

reliability of activity cost-driver information.ERPsystems have become popular in recent yearsbecause they typically integrate financial account-ing, managerial accounting, cost accounting, pro-duction planning, materials management, salesand distribution, human-resource management,quality management, and customer service usinga relational database.The use of a relational data-base permits functional areas to share informa-tion without reentering the data or duplicating thedata in databases throughout the organization.

One of the more dramatic ways thatERP systems provide reliable activity cost-driver information is by integrating productionplanning, materials management, and cost andmanagement accounting. In cost and manage-ment accounting, activity-based costing is usedto increase the accuracy of the product-costinformation and to develop activity-based bud-gets. Before ABC, the materials handling costsand other materials management costs wereoften allocated to products based on a percent-age of the direct material costs associated witheach product. The percentage amount used inthe allocation was based on the relationshipbetween budgeted materials management costsand the expected total cost of direct materials.

Turning Overhead Costs into Direct CostsTo simplify this presentation, we will focus onABC support in the widely used R/3 Systemfrom SAP. It’s important to note that ERP sys-tems from other vendors typically include anABC feature with degrees of integration thatvary from company to company. Check yourvendor’s support team for specifics.

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SAP’s R/3 system links production plan-ning’s bill of materials with material movementinformation that is available in the materialsmanagement portion of the system. It permitsthe establishment of standards for material han-dling. In fact, in many respects, the use of the R/3system results in material handling cost as adirect cost rather than as the traditional indirect(overhead) cost.

The R/3 system is capable of regardingmaterials handling as a process whose activitycost driver is the “number of pallet moves.” Thecost of the materials handling process is thenattributed to a product based on the variousdirect materials that are moved in the manufac-ture of the product specified in a productionorder. The bill of materials (BOM) for the pro-duction order will reveal direct material partnumbers that will be needed. Materials manage-ment personnel will have already entered intothe R/3 system information about the number ofunits of each direct material part number thatwill fit on a pallet. One unit of direct materialpart number B123 might require 1/20th of a pal-let (20 units per pallet), and one unit of directmaterial part number A456 might require 1/50thof a pallet (50 units per pallet).

If we assume that a unit of product PDQrequires one unit of direct material B123 andone unit of direct material A456, then the R/3system can calculate a standard direct cost thatincludes material handling costs. Those materialhandling costs formerly would have beenregarded as indirect (overhead) costs. Table 1 in

this section (featured below) shows the directcosts associated with a production order for1,000 units of product PDQ. Those direct costswere calculated using an activity-based costingapproach to product costing.

In costing the bill of materials for the produc-tion of 1,000 units of product PDQ, the R/3 systemwould link production planning’s BOM for PDQwith material management’s “bill of services,”which specifies the portion of a pallet required byeach unit of the various raw materials. That BOMwould be related to the standard direct materialcosts maintained by the financial accounting por-tion of the R/3 system for inventory costing pur-poses. The associated bill of services would berelated to the activity cost-driver charging rate forthe materials handling process as determined bythe ABC system. These relationships are possiblebecause the data resides in the R/3 system’s rela-tional database. Using this relational database,each direct material part number on the BOM isconverted to its related cost based on the standarddirect material costs maintained by the financialaccounting portion of R/3 for inventory valuationpurposes. Further, the quantity of required directmaterials is converted into required pallet moves,and the required pallet moves are costed using theactivity cost-driver charging rate calculated by theABC system.

R/3 Support for Activity-BasedBudgetingThese same relationships between productionplanning, materials handling, and accounting,

TABLE 1 Calculation of Standard Cost for a Production Order

Direct material B123 1,000 products � 1 unit � $10.00 per unit � $10,000Direct material A456 1,000 products � 1 unit � $25.00 per unit � 25,000Materials handling:***1,000 products � 1 unit of B123 � 1/20 � $50* � 2,5001,000 products � 1 unit of A456 � 1/50 � $50* � 1,000Total Direct Product Cost** $38,500Direct Cost per Unit of Product $38.50

* This $50 represents the activity cost-driver rate for the material handling process. This amount is calculated bydividing the annual budgeted costs of the materials handling process by the annual capacity of the process interms of the number of pallet moves.

** This example has omitted other direct costs for simplicity purposes.

*** If a direct material required only a portion of a pallet, the number of pallets would be increased to the nextwhole number of pallets.

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as represented in the R/3 system, are a tremen-dous benefit when the ABC system is usedfor budgeting purposes. Activity-based budget-ing (ABB) attempts to anticipate the demandson a process, such as materials handling, giventhe estimated production of various products instandard batch sizes. Table 2 in this section (pre-sented above) shows the required number ofpallet moves by the materials handling processgiven a budgeted annual production of 100,000units of product PDQ in lot sizes of 1,000 units.

When the budgeted production of all prod-ucts (product PDQ and others) is considered, theR/3 system will have estimated the quantity ofthe various direct materials and the number ofpallet moves required to support the total bud-geted production. The activity-based budget willalready have an estimated budgeted cost and anestimated practical capacity in terms of palletmoves for the materials handling process. Let’sassume that the budgeted annual cost for materi-als handling was $5 million and the budgetedannual capacity at that budgeted level was100,000 pallet moves (resulting in the $50 activ-ity cost-driver charging rate mentioned earlier).If the production budget estimated that 120,000pallet moves would be required for the year, theactivity-based budgeting system would revealthat the demands on material handling would be20,000 pallet moves in excess of the budgetedcapacity. This should certainly result in a reeval-uation of the materials handling process and itsbudget.

This reevaluation could result in processimprovements, including placing more units ofraw material on each pallet or reducing the aver-age length of each move. If no process improve-ments are possible, the manufacturer may haveto increase the capacity of pallet moves byincreasing the resources budgeted for the mate-rials handling process. The final budget formaterials handling cost and materials handlingcapacity will determine the activity cost-drivercharging rate for each pallet move. Thus, the $50activity cost-driver charging rate used in deter-mining the direct cost for product PDQ couldchange as a result of a shift in the budgeted prac-tical capacity and/or the budgeted cost.

Other ProcessesSAP’s R/3 system collects a multitude of nonfi-nancial measures that are potential activity costdrivers for use in ABC systems. It can count andrecord the number of line items on a sales order,the number of sales orders for each type of prod-uct, the weight of each item on a shipping docu-ment, the number of shipping containers persales order, and more.

This information is collected as part of a for-mal process that has built-in controls designed toensure reliability. These controls include auto-matic counting of line items on a sales order. Asthe sales-order information is entered into theR/3 system, the system counts and records thenumber of different products that are includedon the sales order. As the orders are processed,the system counts the number of sales ordersfor each product type. Another control includesthe mandatory inclusion of information in themaster record. For example, the master recordfor direct material B123 must include the maxi-mum number of units of the direct material thatwill fit on a pallet (20 units for B123) before themaster record will be incorporated into the ERPsystem.

Bar coding of product information isanother control that adds integrity to the system.SAP’s R/3 can record information directly intothe system by reading bar-code information con-cerning direct materials input and product out-put.A feature of R/3 is the use of sensing deviceson machines that will record data in the systemwithout human intervention. With this feature,

TABLE 2 Budgeted Pallet Moves for Product PDQ

Direct Material 1,000 � 1/20 � 50 pallet B123 moves per production

orderDirect Material 1,000 � 1/50 � 20 pallet A456 moves per production

orderTotal for Product 70 pallet moves per PDQ production order of 1000If 100,000 units of product PDQ require 100production orders, then the budgeted annualproduction of product PDQ will require 7,000pallet moves.

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ReferencesFitzgerald, K. 1999. “Buyer’s interest keeps

growing.” Purchasing: The Magazine of TotalSupply Chain Management S8–S12.

Kilpatrick, J. 1999. “Advanced planning systemsspark the supply chain.” APICS: ThePerformance Advantage 25–28.

Liker, Jeffrey, Ed. 1997. Becoming Lean: InsideStories of U.S. Manufacturers. Portland, OR:Productivity Press.

Manetti, J. 2001. “How technology is transform-ing manufacturing.” Production and InventoryManagement Journal 42: 54–64.

Pine, B. Joseph, and Stan Davis. 1999. MassCustomization: The New Frontier in BusinessCompetition. Cambridge, MA: HarvardBusiness School Press.

Rondeau, P.J., and L.A. Litteral. 2001.“Evolution of manufacturing planning andcontrol systems: From reorder point toenterprise resource planning.” Production andInventory Management Journal 42: 1–7.

Schultheis, Robert, and Mary Sumner. 1998.Management Information Systems: TheManager’s View. 4th ed. Burr Ridge, IL: Irwin/McGraw-Hill.

Turbide, D. 2000. “Welcome to the newmillennium.” Midrange ERP: TheManagement Magazine for MidsizedManufacturers 10–16.

every time a punch press makes a “punch,” thesystem automatically records the number ofpieces created by the “punch.”

SAP’s R/3 system has an abundance of non-financial measures that may be used by activitiesas activity cost drivers.These measures have a highdegree of integrity because of the way they arecollected and recorded. Now, activity-based cost-ing can move beyond the back-of-an-envelopeinformation for determining the activity charging

rates used to assign activity costs to products orother cost objects. Integrating the ERP informa-tion with the ABC process saves time andresources.

SOURCE: Baxendale, Sidney J; Jama, Farah,“What ERP can offer ABC,” Strategic Finance,v. 85, no. 2, August, 2003, p. 54–57. Copyright:Copyright Institute of Management Accountants,Aug. 2003.

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ERP Systems: Human Resources


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ERP Systems:HumanResources

Objectives

1. Understand the Human Resources (HR) processes supported by an ERP system.

2. Recognize the interrelationships among business processes supporting human resources,financial accounting, and other modules.


Atlantic Manufacturing is facing a number of issues relevant to HumanResources (HR), in terms of recruiting, retention, and cost control of benefits.

RECRUITING

✓ In recent years, recruiting talented sales representatives has become increas-ingly difficult. In addition, turnover among sales representatives is very high.Often, Atlantic makes an investment in training a new sales representative,and that investment is lost when the sales rep leaves the firm.

✓ It is difficult to make queries to the HR files to identify good candidates forjob openings within the firm. For example, the firm had an opening for a webdesigner several months ago, and it was impossible to go through the variouspersonnel files to identify possible internal candidates.

HUMAN RESOURCES DATA ADMINISTRATION

✓ Paperwork supporting the HR function seems to grow and grow. Thishas meant adding administrative staff to maintain and to update employeeand job salary history data and to provide numerous governmental reportsassociated with affirmative action, the Family Medical Leave Act, andOSHA.

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COMPENSATION AND BENEFITS ADMINISTRATION

✓ The firm needs better data on the most relevant compensation packages forcertain hard-to-find job descriptions, such as sales managers.They want to beable to offer competitive compensation packages that will enable them toretain qualified personnel, but they do not want to offer unnecessary pro-grams that will increase their costs.

✓ The cost of employee benefits has increased dramatically over the past sev-eral years. Atlantic is interested in developing strategies, which will controlthe costs of these health benefits. A better information system would enablethem to assess the costs and benefits of alternative health insurance pro-grams, early retirement plans, and educational program reimbursements.

Subsystems Problems

Employee information Need to query employee information to identifycandidates with required skill sets

Applicant selection and Need to develop selection criteria to provide a more stableplacement workforceGovernment reporting Need to maintain and update data for government

reporting requirementsJob analysis and design Need to design positions, which will minimize turnover by

providing breadth and depth of responsibilitiesCompensation Need to develop competitive salary and benefits packages

for key positionsBenefits administration Need to analyze alternative benefits scenarios to minimize

costs and maximize employee loyalty and satisfaction

TABLE 1 Problems with Human Resources

A number of problems are affecting the quality and responsiveness of the HRfunction (see Table 1). Most of these problems deal with the lack of access to informa-tion about employees, skill sets, job descriptions, turnover data, retention data, andbenefits plans that will enable managers to make queries and to generate reports forexternal agencies, including government agencies.

◆ HUMAN RESOURCE MANAGEMENT PROCESSES

The business processes supporting HR can be categorized into operational anddecision-making processes (see Table 2). Operational-level processes include creatingand maintaining employee information, position information, and handling the

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HR Processes

Operational Employee information; position control; application selection/placement; performance management info; government reporting;payroll information

Management Job analysis and design; recruiting information; compensation;control employee training/development

TABLE 2 Business Processes Supporting Human Resources

job application screening and placement process. Other important operational-levelactivities include government reporting, payroll administration, and performance man-agement (Schultheis and Sumner, 1998).

Managers need information to make decisions in order to allocate humanresources effectively to achieve organizational goals. This means designing job specifi-cations that enable the organization to recruit and retain highly qualified individuals.Designing compensation packages to attract and retain employees is important toachieving organizational goals. Employee training and professional development arecritical to maintain appropriate skill sets, to improve productivity, and to maintain loy-alty and morale.

Future workforce planning entails determining future workforce requirementsand emerging skill sets. The gap between current workforce profiles and futureskill sets needs to be analyzed so these skill sets can be developed. This may meanretraining internal candidates, acquiring external expertise, and outsourcing certainfunctions.

◆ HUMAN RESOURCES INFORMATION SYSTEMS

HR information systems have evolved in much the same way as information systemssupporting finance, sales and marketing, and production and manufacturing.Historically, there has been a reliance on stand-alone, specialized applications support-ing applicant tracking, compensation and benefits planning, skills training, and timeand attendance reporting. This proliferation of applications leads to redundant data,which are difficult to maintain. Another shortcoming of legacy human resource man-agement systems is their failure to link HR data with financial data. HR software thatmaintains and updates information on benefits, payroll, and labor without a tie-in tofinancial systems has limited value. By blending HR and financial data, the value of theHR function has increased for the organization as a whole.

An HR module within an ERP system offers the linkage between HR applicationsand financial systems and a standard set of processes based on best practices. However,as with any other ERP solution, it is not advisable to customize the system.

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◆ HUMAN RESOURCE MODULES IN ERP SYSTEMS

The components of HR modules within an ERP system include HR Management,Benefits Administration, Payroll, Time and Labor Management, and Employee/Manager Self Service (Ashbaugh and Rowen, 2002).

• HR Management records personnel activity from the job application toretirement. Advanced systems can read résumés and enter pertinent data intothe database.

• Benefits Administration links employee data to benefits data, including employeebenefit election data. Advanced systems enable employees to elect and updatebenefits’ preferences via the web.

• Payroll produces paychecks, tax reports, and sends accounting data to the generalledger.

• Time and Labor Management collects data for time/work reporting.• Employee Self Service provides web-based self-service reporting for travel

reimbursement, personnel data changes, benefits enrollment, and trainingclasses enrollment.

An ERP system can support these HR processes (see Table 3).

Subsystem How ERP Works

Employee information Maintains personnel information, including job history,salary, and retirement and benefit choices

Skills inventory Maintains information on special skills, work experiencePosition control Defines each position within the organization; provides

common job categories, descriptions, and specificationswhich can be used across the organization

Application selection/placement Maintains information for recruiting, screening,evaluating, and selecting candidates for employment

Compensation Maintains compensation data; maintains employeecompensation changes (e.g., salary increases, salaryhistory, job evaluation results, appraisal results)

Performance management Maintains performance appraisal data and productivitydata

Training and development Tracks information about courses, instructors, students,systems and registrations; identifies training deficits and enables

employees to book appropriate trainingGovernment reporting Provides reports in response to government statutes,

including the Age Discrimination Act, the Equal PayAct, the Occupational Safety and Health Act, theFamily Leave and Medical Act

Payroll Generates payroll and various statements

TABLE 3 Human Resource Processes Supported by ERP

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FIGURE 1 SAP Screen (Display Personal Data)

One of these operational-level processes, Display Personal Data, is shown inFigure 1.

In addition to supporting these capabilities, ERP modules support attendancereporting, determination of overtime and bonus wages, and tracking of absences, whichare due to vacation, illness, or leave. HR systems handle booking of travel services andassociated expense reimbursement. You can see an SAP screen for creating DisplayTravel in Figure 2.

ATTRIBUTES OF HUMAN RESOURCE MODULES IN ERP SYSTEMS

The attributes of a HR module within an ERP system include integration, a commondatabase underlying all individual modules, and a common relational database, whichpromotes ad hoc query and reporting capabilities. ERP modules provide flexible andscalable technology, an audit trail, which provides the ability to review the history ofchanges to the database, and drill-down capability, which is the ability to reach thesource document of the prior step in the process. Workflow management depicts theelectronic routing of documents within the HR module. As with other ERP modules,the HR module provides process standardization.

Additional ERP attributes include security, user friendliness, web features, anddocument management and imaging capability. Security, including login security andrecord security, limits access to certain screens. User friendliness is supported by stan-dard menus and flexible reporting tools. ERP modules provide web capabilities,enabling job seekers to download employment applications and to submit résumés on-line. Document management and imaging, which provides access to repositoriesof electronically stored documents, is an increasingly important feature of ERP(Ashbaugh and Rowen, 2002).


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MANAGEMENT CONTROL MODULES IN ERP SYSTEMS

Beyond maintaining databases on employees, positions, skills, applicants, and perfor-mance, a HR information system provides information that enables the organization tomanage workforce characteristics. The objective of a good HR strategy is to acquire,place, train, and develop employees to meet organizational needs. HR information sys-tems support managerial decision-making needs by offering query and reporting toolsfor what-if analysis, (see the questions in Table 4).

An SAP screen which enables management to make a Compensation Changebased upon a compensation review is illustrated in Figure 3.

A comprehensive HR module within an ERP package maintains and updatesemployee files, skills inventory files, job analysis files, design files, affirmative actionfiles, and occupational health and safety files.These operational data provide a founda-tion for HR applications that support organizational effectiveness. Strategic HR appli-cations are Human Capital Inventory, Position Control, Labor/Management Relations,and Business Intelligence (Ashbaugh and Rowen, 2002).

Human Capital Inventory. A human capital inventory enables the organization totrack employees from application to retirement, including information on skills track-ing, career planning, and linkage between performance evaluations and organizationalgoals. For example, tracking skills needed by IT personnel who develop mission-criticalapplications may provide a rationale for a strategic decision to invest in trainingdesigned to maintain these skills.

Position Control. When position control is linked to budgeting, managers can planand budget for personnel costs. For example, if a strategic decision is made to limit the

FIGURE 2 SAP Screen (Display Travel)


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Subsystem Questions and Decisions

Recruiting Do we have any internal candidates with a B.S. in Marketingand with Spanish-speaking ability?What are our most effective recruiting sources (e.g., universities, web sites, referrals, search firms)?

Job Analysis What are the characteristics of our most effective managers (e.g., educational background, experience)?What are the characteristics of information technology (IT) professionals whom we retain?What jobs experience the highest turnover?What skill sets are missing among our HR professionals?

Compensation What salaries and compensation packages do we need to offerour sales representatives to be competitive in our industry?What is the impact of various pay plans on retention andpromotion of personnel?What do external market surveys say about job pricing?

Benefits How can we control the cost of employee health benefits?Can we reduce employee benefit costs by providing self-selection of benefits?

Workforce development What replacement personnel need to be planned for becauseof retirements?What should the future workforce look like? What new skillsets will we need?What additional human resources will we need in theshort-term and long-term?What are the implications of workforce needs for training anddevelopment?What is the impact of a proposed merger on workforcedevelopment and retention?What is the availability of a skilled workforce in variouslocations under consideration for the placement of a newfactory?

TABLE 4 Human Resource Decisions Supported by an ERP System

cost of contract plant maintenance personnel, then a link to budgets is essential tomeasure if this strategy is being followed.

Labor/Management Relations. HR modules provide accurate information such astracking of seniority lists and disciplinary actions and tracking and analysis of griev-ances and worker’s compensation. Data depicting trends in employee absences, costsfor overtime work, and trends in employee benefits’ costs, are particularly valuable inlabor negotiations.

Business Intelligence is the use of advanced analytical tools to provide insight intoorganizational trends. Many interesting organizational trends are occurring in HR,including turnover analysis, recruitment and training analysis, and salary/workforceplanning. Business intelligence is important to understanding these trends and devel-oping human resources policy.

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FIGURE 3 SAP Screen (Compensation Change)

◆ INTEGRATION OF HR MODULES WITH OTHER MODULES

One of the major benefits of an ERP system is the integration of modules. In the caseof HR, the payroll, compensation, and expense reimbursement subsystems are inte-grated with the Financial Accounting Subsystem. This saves needless duplication ofeffort and provides a cost basis for making HR decisions.

◆ SUMMARY

HR management, decision making, and workforce development are among the moststrategic areas of focus today. In the past, many human resource management systemshave focused upon creating, maintaining, and updating personnel records. This processwas so time-consuming that it was difficult to use these data for decision making. Withthe introduction of comprehensive, integrated ERP systems with HR modules, it isnow possible to participate in short-term and long-term workforce development sopersonnel can be recruited, developed, compensated, and retained to meet overallorganizational objectives.

Questions for Discussion1. Compensation for sales representatives is an important issue in many industries. If compen-

sation packages are inadequate, salespeople will move to other firms with more attractivecompensation packages.What information can a HR module provide to enable managers todevelop compensation strategies to attract and retain successful sales representatives?


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Featured ArticlePlease read the following article, “Keep Track ofYour Employees,” and answer these questions:

1. What are the benefits of automated timeand attendance records?

2. What advantages might accrue to employ-ees using these systems?

Though companies have been squeezing laborcosts the past couple of years, many large busi-nesses still do so without a clear picture of theiremployees’ time, attendance, and skills. Trackingthose factors is often done through a hodgepodgeof manual processes or legacy applications.

“The time-keeping task has been neglectedat many companies,” says Paul Hamerman, ananalyst at Forrester Research. “Most have apiecemeal approach of manual or disconnecteddumb time-card systems or some automation insome places, but most companies haven’tinvested in end-to-end solutions.” Hamermanestimates that only about a third of midsizeto large companies have standardized and

automated time and attendance systems. Themarket for software that provides company-wideautomation of time and attendance hit about$275 million in 2002, with almost 8% growth pre-dicted for this year, Hamerman says. “Any com-pany with a large contingency of hourly employ-ees needs to do this,” he says. Industries such ashealth care, retail, financial services, manufactur-ing, and hospitality are among prime targets forsuch systems.

The most obvious benefit from automatingtime and attendance is the elimination of thetime-consuming and error-prone manual processof figuring out time sheets and time cards andrelaying that information to a payroll unit.“Another advantage is better analysis and con-trol over labor allotment, costs, and scheduling,”Hamerman says.

Banner Health realized those benefits whenit recently rolled out Kronos Inc.’s time- andlabor-management software. The operator of 19hospitals, six long-term care centers, and other

2. How can an HR system enable an organization to meet reporting requirements that areconsistent with the following government statutes?a. Age Discrimination in Employment Actb. Equal Pay Actc. Family Leave and Medical Actd. Occupational Safety and Health Act (OSHA)e. Title VII of the Civil Rights Act of 1978f. Vocational Rehabilitation Act of 1973

3. Collect information about the best practices, which are associated with the HR modulewithin an ERP package. You can do this by (1) conducting research on the web; (2) inter-viewing a user of an HR package; (3) using an on-line database to find an article in a tradepublication that describes the effective use of an HR module; or (4) using an HR modulewithin an ERP.a. What are the best practices which you have discovered?b. How do they contribute to overall productivity?c. What information for decision making do they provide?

4. Many organizations purchase the HR module from one ERP vendor (e.g., Peoplesoft) andthe Financial Accounting modules from another ERP vendor (e.g., SAP).a. What do you see as the advantages of this approach?b. What do you see as the disadvantages of this approach?

5. Turnover among IT professionals has been a big issue for many years.There is a tremendousinvestment made in training IT professionals, and this is why turnover represents a consid-erable cost. What information will enable the manager to understand turnover and todevelop human resources strategies to minimize turnover among IT professionals?

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services, including family clinics and home-careservices in seven states, has deployed the KronosWorkforce Central application suite to 15,000employees. It will soon be rolled out to nearly all26,000 workers, says Kathy Schultz, Banner’sdirector of application development.

Using Kronos, Banner employees log on forwork at badge terminals, the Web, or an interac-tive voice-response phone application. Thisinformation goes into Banner’s payroll systemsand is available to managers in real time. Forexample, nursing supervisors can adjust staffingplans based on factors such as which employeeshave worked overtime or the skills needed for ashift.

It was a culture change that also providedemployees with a financial benefit: Those withdirect deposit can access their pay a day earlier,Schultz says. Under the old process, Banner’sbank sometimes didn’t get payroll data in time tocredit employees’ accounts so that funds wereavailable on payday.

Smurfit-Stone Container Corp.’s stan-dardization of workforce management on

Workbrain Inc.’s Web-based ERM3, anemployee-relationship management softwaresystem, is part of a larger effort to consolidatesystems and processes. The $7.5 billion-a-yearcontainer maker also is implementing SAPfinancial apps and has installed PeopleSoft Inc.as the standard package for payroll processing.

Smurfit-Stone wants to optimize schedulingand tracking of more than 30,000 employees inthe 275 North American facilities of its packag-ing-products manufacturing business. ERM3interfaces with the PeopleSoft apps, so time andattendance information is sent from ERM3 toPeopleSoft payroll.

While Kronos and Workbrain are leadingproviders of time and attendance solutions, othervendors include CyberShift Inc. and StrombergLLC, Forrester’s Hamerman says. Large ERPpackages also include time-tracking modules.

SOURCE: Marianne Kolbasuk McGee, “KeepTrack of Your Employees,” Information Week,June 30, 2003, p. 59.

ReferencesAshbaugh, Sam, and Miranda Rowen. 2002.

“Technology for human resources manage-ment: Seven questions and answers.” PublicPersonnel Management 31: 7–20.

Schultheis, R., and M. Sumner. 1998.Management Information Systems:The Manager’s View. Burr Ridge, IL:McGraw-Hill/Irwin Publishing.

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Managing an ERP Project


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Objectives

1. Recognize the importance of project management and control in minimizing the risk factorsassociated with implementing ERP systems.

2. Understand the process of organizational change and its application to enterprise systemdevelopment, implementation, and operations.

ERP projects often represent the single largest investment in an information systemsproject for many companies and, in many cases, the largest single investment in any

corporate-wide project.The magnitude and complexity of these projects poses consider-able risk, which explains the “war stories” connected with implementing ERP systems(see Table 1).

◆ WHAT RESEARCH SHOWS ABOUT ERP PROJECTIMPLEMENTATION SUCCESS

In their study of firms that have implemented ERP systems, Mabert, Soni, andVenkataramanan, 2001, described the firms’ implementation experiences, determinedthe business returns from ERP, and determined what factors influenced these experi-ences and returns (Mabert et al., 2001).Their sample included firms ranging from largefirms with annual revenues of more than $5 billion with more than 20,000 employees tosmaller firms with revenues of less than $500 million per year and fewer than 20,000employees. SAP/R3 was the most frequently reported ERP, representing 65.3% of thesample. J.D. Edwards followed at 12.9%, and Oracle with 8.9%.

The overall data suggest that the firms felt they achieved more than 65% of theexpected business case targets. The firms which were able to implement ERP eitherunder-budget or on-budget attained a greater proportion (i.e., by 11%) of the plannedbusiness case than the overbudget firms (Mabert et al., 2001).

Although the response data indicated that 70% of the firms felt their ERP systemwas a successful project, the majority of firms (55.5%) indicated the actual ERP systemimplementation cost exceeded the original estimated budget by an average of 60.6%.The range of experiences included a low of 10% to a high of 200% (Mabert et al., 2001).

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Certain factors influence whether firms are under/on budget or overbudget forimplementation. First, under-budget or on-budget firms make fewer modifications thanthe overbudget firms.According to their survey data, these modifications contribute to a50% increase in project duration.In addition,under-budget or on-budget firms establishgreater authority for project implementation and implement more effective communi-cations. Finally, the under-budget and on-budget firms manage their ERP implementa-tions better, and they manage their businesses better. This enables them to generateadditional revenues to cover the cost of ERP implementation (Mabert et al., 2001).

In general, ERP systems projects bring about a host of new questions. Some ofthese questions and issues are the following:

• What technology challenges (e.g., hardware, software, and networking) are encoun-tered in implementing an enterprise-wide information management system?

• What organizational challenges (impact on business processes) are addressed?• What people challenges (e.g., recruitment, training, retraining, and retaining) are

encountered?• What challenges are associated with project size and scope?• What are the strategies for minimizing the risks associated with the technology,

organization, people, and size/scope?

◆ CAUSES OF INFORMATION SYSTEMS PROJECT FAILURES

Project What Happened

FoxMeyer Corporation Drug distributor FoxMeyer claimed that the bungled ERP SAP ERP System installation in 1996 helped drive it into bankruptcyW.W. Grainger, Inc. Grainger spent $9 million on SAP software and services in SAP ERP System 1998 and 1999; during the worst six months, Grainger lost

$19 million in sales and $23 million in profitsHershey Foods Corp. To meet 1999’s Halloween and Christmas candy rush, HersheyIBM-led installation and compressed the rollout of a new $112 million ERP system byintegration of SAP, several months; sales fell 12% in the quarter after the systemManugistics Group Inc., went liveand Siebel Systems, Inc.softwareTri Valley Growers An agricultural cooperative, Tri Valley bought at leastOracle ERP and $6 million worth of ERP software and services from Oracle inapplication integration 1996; Tri Valley stopped using the Oracle software and stopped

paying the vendor; Oracle denied all claims; the case wassettled in January 2002

Universal Oil Products After a 1991 ERP deal with Andersen resulted in unusableLLC ERP with Andersen systems for Universal Oil, the industrial engineering firm criedConsulting fraud, negligence, and neglect in a $100 million lawsuit in 1995

TABLE 1 War Stories

Much has been written about the causes of information systems project failures.Poor technical methods is only one of the causes, and this cause is relatively minorin comparison to larger issues, such as communications failures and ineffective

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Failure Cause Result

Resource failures Conflicts of people, time Incorrect systems with poor reliability,and project scope due to difficulty with maintenance, andinsufficient personnel dissatisfied users

Requirement Poor specification of Leads to developing the wrong systemfailures requirements with many changes in requirements

downstreamGoal failures Inadequate statement of Leads to developing the wrong system

system goals by management by leading to requirement failuresTechnique failures Failure to use effective soft- Causes inadequate requirements

ware development approaches, specification, poor reliability, highsuch as structured analysis/ maintenance costs, scheduling anddesign budget problems

User contact Inability to communicate Causes inadequate requirementsfailures with the system user specification, and poor preparation for

accepting and using the information system

Organizational Poor organizational struc- Leads to poor coordination of tasks,failures ture, lack of leadership, or schedule delays, and inconsistent

excessive span of control qualityTechnology Failure of hardware/ Cause schedule delays, poorfailures software to meet specifica- reliability, maintenance problems, and

tions and failure of the dissatisfied system usersvendor to deliver on time,or unreliable products

Size failures When projects are too large, Caused by insufficient resources,their complexity pushes the inadequate requirementsorganization’s systems devel- specifications, simplistic projectopment capabilities beyond control, poor use of methodologyreasonable limits

People management Lack of effort, stifled creativ- Time delays and budget overruns failures ity, and antagonistic attitudes occur, poor project specifications, and

cause failures system is difficult to maintainMethodology Failure to perform the This type of failure can lead to any offailures activities needed while the consequences of system failure

unnecessary activities are performed

Planning and control Caused by vague assignments, Work assignments may overlap, deliver-failures inadequate project manage- ables may be poorly defined, and poor

ment and tracking tools communication may resultPersonality failures People clashes Passive cooperation and covert resis-

tance, with possible acts of vengeance

TABLE 2 Causes of Project Failures

leadership. In Robert Block’s analysis, twelve categories classify most system failures(see Table 2).

In summary, Block points out that successful projects are on time, within budget,reliable, maintainable, and meet the goals and requirements of users. Block also pointsout that managers who succeed do an initial evaluation of a project. They evaluate the

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rules, players, goals, constraints, and project manager’s responsibility and authority, andthe feasibility of success (Block, 1983).

◆ RISK FACTORS IN INFORMATION SYSTEMS PROJECTS

Studies dealing with risk factors in information systems projects describe issues oforganizational factors, skill set, management support, software design, user involve-ment, technology planning, project management, and project escalation.

Some risk factors are associated with organizational factors, including the extent ofchanges being proposed, sufficiency of resources, and magnitude of potential loss(Barki, Rivard, and Talbot, 1993). Project managers may have to address issues overwhich they have no control, such as changing scope/objectives and conflicts betweenuser departments (Keil, Cule, Lyytinen, and Schmidt, 1998). Lack of developmentexpertise, lack of application-specific knowledge, and lack of user experience con-tribute to project risk (Barki et al., 1993; Ewusi-Mensah, 1997).

Lack of senior management commitment (Keil et al., 1998) and lack of agreementon a set of project goals/objectives (Ewusi-Mensah, 1997) lead to time/cost overruns.Misunderstanding requirements and continuously changing requirements contributeto project risk. Lack of an effective methodology and poor estimation can lead to costand time overruns (Keil et al., 1998). Software risk factors include developing thewrong functions, developing the wrong user interface, shortfalls in externally furnishedcomponents, and shortfalls in externally performed tasks (Boehm, 1991).

Lack of user commitment, ineffective user communications, and conflicts amongsuser departments are sources of risk (Keil et al., 1998). Lack of adequate technicalexpertise and lack of an adequate technology infrastructure to support projectrequirements contribute to escalating time and cost overruns and are associated withproject abandonment (Ewusi-Mensah, 1997). Technological newness (e.g., need fornew hardware, software), application size (e.g., project scope, number of users, teamdiversity), application complexity (e.g., technical complexity, links to existing legacysystems) and failure of technology to meet specifications are project hazards (Barkiet al., 1993).

Project risk assessment is based upon project size, technological experience, andproject structure (McFarlan, 1981), and managers need to control these risks. Projectmanagement and control failures, caused by inadequate planning and tracking, cancontribute to unrealistic schedules and budgets and to project failure (Boehm, 1991).In information technology (IT) projects, there is a tendency to discount problems andtheir severity may remain unknown for a long period of time. When projects run intodifficulty, there is a tendency to escalate projects because of societal norms (e.g., need-ing to save face) and to keep pouring resources into a failing project. This creates agreater risk of failure. (Keil and Montealegre, 2000).

Managers should recognize and implement strategies to minimize the risk ofproject failure, as outlined in the above description. If they recognize the nature andmagnitude of the risks they face in implementing ERP systems, they can minimizethese risks by employing project management and control strategies to address thechallenges they face.

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Lower Risk Higher Risk

Business process Extensive re-design of business Extensive customization to alignre-design processes to fit the package package with existing business

processesScope of business Scope of project affects 0–25% Scope of project affects 50–100% processes of business processes of business processes

TABLE 4 Organizational Factors in ERP Projects

◆ RISKS IN IMPLEMENTING AN ERP SYSTEM

TECHNOLOGY RISKS

Implementing an ERP system poses unique challenges and risks. These risks involvetechnology, organization, people, and project size. The technology risks depend uponhow consistent the new technology is with the current corporate infrastructure andoperating system environment (see Table 3). When an organization introduces tech-nology that is inconsistent with current database, operating system, and network man-agement environments, the risk is greater.

ORGANIZATIONAL RISKS

The second area of risk deals with organizational factors. When business processes arere-designed to fit the package, the risk of excessive time and cost investments decreases(see Table 4). Customization poses the risk of extra, if not excessive project costs.

PEOPLE FACTORS

The third area of risk deals with people resources (see Table 5). If the IT professionalstaff is familiar with the application-specific modules, then the likelihood of imple-menting the system effectively will be enhanced. However, if the current skill mix ofthe IT staff does not include knowledge of application-specific ERP modules, the orga-nization will incur significant costs in re-skilling the workforce or in acquiring externalconsultants.


Technology fit System consistent with current System implementation willtechnology infrastructure require major changes in

technology infrastructureFit with technological Technical requirements Technical requirements expertise (e.g., database, operating system, (e.g., database, O/S, network) for

network) for the system are the system are not consistent consistent with technology with technology know-howexpertise

TABLE 3 Fit with Organizational Technological Expertise

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Knowledge of IT staff knowledgeable in IT staff has limited knowledgeIT staff application-specific modules of application-specific modulesKnowledge of User representatives fully User representatives have limiteduser staff involved in the project involvement in the project

TABLE 5 People Factors in ERP Projects

PROJECT SIZE

The fourth source of risk deals with project size.As already mentioned, an ERP projectcan be the largest single investment in a corporate technology project that an organi-zation undertakes. The sheer size of these projects, as measured in time, staff commit-ment, budget, and scope, poses considerable risk and causes increased concern foraccountability on the part of users and senior management.

◆ MANAGING LARGE-SCALE ERP PROJECTS

We can learn from experience in managing commercial off-the-shelf software projects.Large-scale projects involving software packages are MRP projects and ERP projects.Package implementation is different from custom implementation because users arelikely to want to customize programs in the package to fit their unique needs, and usersare dependent upon the vendor for assistance and updates (Lucas, Walton, andGinzberg, 1988). Some of the variables associated with the successful implementationof packages are greater vendor participation in implementation and support, a higherrating of user/customer capabilities by the vendor, and a higher rating of user skills byMIS management.

The experience implementing large-scale MRP and ERP packages provides a bet-ter understanding of lessons learned. Commitment from top management and ade-quate training are critical success factors for implementation (Duchessi, Schaninger,and Hobbs, 1989). Lack of training leads to difficulties in MRP system implementation(Ang, Yang, and Sum, 1994).

ERP projects, which are commercial off-the-shelf packages, pose unique chal-lenges.As in all large-scale projects, top management support, presence of a champion,good communication with stakeholders, and effective project management are criticalsuccess factors in ERP projects (Bancroft, Seip, and Sprengel, 1998). Unique ERPimplementation factors include re-engineering business processes, understanding cor-porate cultural change, and using business analysts on the project team.

Based upon interviews with senior members of ERP implementation teams,Parr, Shanks, and Darke identified factors necessary for successful implementationof ERP systems, where success is understood to be adherence to time and budgetaryconstraints (Parr et al., 1999). Management support of the project team, a project teamwith the appropriate balance of technical/business skills, and commitment to change byall the stakeholders were important.

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Risk Category Risk Factor

Organizational fit ➢ Failure to re-design business processes➢ Failure to follow an enterprise-wide design which

supports data integrationSkill set ➢ Insufficient training and re-skilling

➢ Insufficient internal expertise➢ Lack of business analysts with business and

technology knowledge➢ Failure to effectively mix internal and external

expertise➢ Lack of ability to recruit and retain qualified ERP

systems developersManagement strategy ➢ Lack of senior management support

➢ Lack of proper management control structure➢ Lack of a champion➢ Ineffective communications

Software design ➢ Failure to adhere to standardized specificationswhich the software supports

➢ Lack of integrationUser involvement and training ➢ Insufficient training of end-users

➢ Ineffective communications➢ Lack of full-time commitment of customers to

project management and project activities➢ Lack of sensitivity to user resistance➢ Failure to emphasize reporting

Technology planning/integration ➢ Inability to avoid technological bottlenecks➢ Attempting to build bridges to legacy applications

Source: Sumner, M. 2002. “Risk factors in managing enterprise-wide/ERP projects.” Journal ofInformation Technology 15: 317–327.

TABLE 6 Summary of Risk Factors in ERP Projects

MANAGING THE RISK FACTORS IN ERP PROJECTS

Strategies for controlling the risk factors in ERP projects include management com-mitment to re-designing business processes, obtaining business analysts with knowl-edge of application-specific modules, obtaining top management support, and makinga commitment to using the vendor-sponsored project management methodology (seeTable 7). In addition, technical expertise is needed to plan and monitor client-serverimplementation and upgrades (Sumner, 2002).

A summary of the risk factors affecting the management of ERP projectsdescribed in case studies of major corporate ERP implementations (Sumner, 2002) isin Table 6.

COMPARISON OF SUCCESSFUL VERSUS UNSUCCESSFUL ERP PROJECTS

A number of research projects address the question of what factors distinguish success-ful ERP projects vs. unsuccessful ERP projects. These factors include customization,

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Type of Risk Strategies for Minimizing Risk

Organizational fit ➢ Commitment to re-designing business processes➢ Top management commitment to restructuring

and following an enterprise-wide design whichsupports data integration

Skill mix ➢ Effective recruiting and retaining of specializedtechnical personnel

➢ Effective re-skilling of the existing IT workforce➢ Obtaining business analysts with knowledge of

application-specific modules➢ Effective use of external consultants on project

teamsManagement structure and strategy ➢ Obtaining top management support

➢ Establishing a centralized project managementstructure

➢ Assigning a championSoftware systems design ➢ Commitment to using project management

methodology and best practices specified byvendor

➢ Adherence with software specificationsUser involvement and training ➢ Effective user training

➢ Full-time commitment of users to projectmanagement roles

➢ Effective communicationsTechnology planning/integration ➢ Acquiring technical expertise

➢ Acquiring vendor support for capacity planningand upgrading

➢ Planning for client-server implementation,including client workstations

Source: Sumner, M. 2002. “Risk factors in managing enterprise-wide/ERP projects.” Journal ofInformation Technology 15: 317–327.

TABLE 7 Strategies for Controlling Risk Factors in ERP Projects

the use of consultants, supplier relationship management, change management, anduse of business impact measures. Project-related factors associated with success versusfailure include the way projects are divided, project leadership, project focus, the proj-ect champion role, and the flexibility of the project schedule. Additional factors aremanagement reporting needs, user training, and technological challenges.

CustomizationIt costs more and takes much longer to implement ERP when the modules are modi-fied (Mabert et al., 2003). Customization increases project time and cost dramatically,Brown and Vessey note, and implementing the best practices embedded in the vendorpackage greatly increases the chance of project success (Brown and Vessey, 2003). Oneof the primary benefits of ERP is business process re-engineering that can be gained byadopting best practices, but many organizations do not achieve this benefit becausethey modify the ERP system to avoid having to change.

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Use of External ConsultantsEffective management of external consultants is important for ERP project successbecause the consultants can offer valuable expertise in cross-functional businessprocesses, in system configuration, and in application specific modules, such as finan-cial modules (Brown and Vessey, 2003). However, problems can occur when manage-ment outsources the entire ERP project to a contractor, without involving internal ITpeople. Organizations should use consultants but take advantage of opportunities todevelop internal knowledge (Willcocks and Sykes, 2000).

Supplier Relationship ManagementBecause of the dependence on external vendors and consultants in the ERP imple-mentation process, it is important to build effective relationships, facilitate contracts,and monitor contracts (Willcocks and Sykes, 2000). Successful ERP projects use avendor-accelerated implementation strategy to help implement the system on time(Mabert et al., 2003).

Change ManagementIn implementing ERP, companies often fail to address resistance to change, especiallyresistance to changes in job design. Individuals need to understand the interrelation-ships the ERP system creates. For example, if you enter bad data in one place, the datawill affect others (Ross,Vitale, and Willcocks, 2003). Since ERP implementation entailschanges in business processes, change management is essential (Brown and Vessey,2003). An organizational culture that fosters open communications is important toavoid resistance to change (Scott and Vessey, 2002).

Business MeasuresSince many firms fail to establish specific benefits in measurable terms at the outset ofan ERP project, it is difficult to determine the benefits (Ross et al., 2003). This canmake it difficult to acquire ongoing resources. Success strategies are continuously mon-itoring project outcomes, and capitalizing on small successes (Scott and Vessey, 2002).

PROJECT-RELATED FACTORS

Project DivisionComparisons of successful versus unsuccessful ERP projects indicate that a good ideawould be to subdivide the project into smaller projects and to achieve tangible busi-ness benefits for each project (Motwani, Mirchandanai, Madan, and Gunasekaran,2002; Willcocks and Sykes, 2000).

Project LeadershipProject leadership is an important issue, and project leaders need to have a proventrack record (Brown and Vessey, 2003). One of the lessons learned in case studies ofERP projects is that a strong project leader needs to keep the project on track, evenwhen changes require following contingency plans (Scott and Vessey, 2002).

Project FocusThere is often too much focus on technology rather than on the business benefits ofERP. Focusing on user needs over technology is a success strategy for ERP implemen-tation (Willcocks and Sykes, 2000).

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ADDITIONAL FACTORS

User TrainingUser training is critical to ERP success. Organizations must be willing to invest in usertraining because people’s jobs will change. User training should focus on businessprocesses, not just technical training in how to use the software (Willcocks and Sykes,2000).

Management Reporting NeedsMany organizations ignore management reporting requirements. This is because ERPsystems do not always have effective query and reporting tools (Ross et al., 2003).However, excellent query and reporting tools for ERP systems can be acquired fromthird-party vendors.

Technological ChallengesTechnological challenges can be complex. To be successful in implementing ERP, firmsneed to recognize the complexity of data conversion and interface development (Scottand Vessey, 2002).

A summary of factors contributing to successful versus unsuccessful ERP projectsis illustrated in Table 8.

TWO PROJECTS: FOXMEYER VERSUS DOW CHEMICAL

In 1993 and 1995, FoxMeyer Drug and Dow Chemical initiated ERP projects.The FoxMeyer Drug project was a failure and has been blamed for the company’sbankruptcy in 1996. There were some similarities between the two projects. Bothcompanies implemented a vanilla version of SAP R/3 software. Both companiesexperienced similar challenges, such as insufficient ERP skills and conversion from amainframe to a client-server infrastructure. Neither company invested in change man-agement, and neither seemed to have a good project planning strategy. Even thoughthe Dow Chemical project experienced difficulties, it was ultimately successful. Thetwo case studies demonstrate that overcoming the risks inherent in implementing ERPis important (Scott and Vessey, 2002).

The comparison between the FoxMeyer Drug project and the Dow Chemical pro-ject reveals some interesting differences. FoxMeyer lost a major customer, Phar-Mor,in 1993, and signed a new customer, University HealthSystem Consortium (UHC),

Role of the Project ChampionA project champion is essential (Willcocks and Sykes, 2000). Beyond this, project teammembers need to have the authority to make decisions on behalf of their functionalarea (Brown and Vessey, 2003).

Project ScheduleSome slack needs to be built into the project schedule because unforeseen issues willarise in an ERP project. In more successful projects, managers create contingencyplans and measure achievements (Scott and Vessey, 2002).

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Successful Projects Unsuccessful Projects

Customization Did not modify the ERP modules(Mabert et al., 2003)Compromise on a vanilla imple-mentation, by implementing best practices embedded in the vendor package (Brown and Vessey, 2003)

Use of Effectively manage external Outsource the entire ERP project with-consultants consultants to fill in gaps in out involving the internal IT group

expertise (Motwani et al., 2002, (Willcocks and Sykes, 2000)Brown and Vessey, 2003)

Supplier Effectively manage supplier relationship relationships, including management contract monitoring and

contract facilitation (Willcocks and Sykes, 2000)Follow the vendor accelerated implementation strategy (Mabert et al., 2003)

Change Effectively manage change (Brown Fail to address resistance to change,management and Vessey, 2003) including changes in job design (Ross,approach Foster a culture with open communi- Vitale, and Willcocks, 2003)

cations (Scott and Vessey, 2002)Business Fail to establish specific benefits inmeasures measurable terms (Ross et al., 2003)Project Subdivide the project into smallerdivision projects, with tangible business

benefits (Willcocks and Sykes,2000; Motwani et al., 2002)

Project Obtain project leaders with a provenleadership track record (Brown and Vessey,

2003), who can keep the project ontrack (Scott and Vessey, 2002)

Project focus Focus on business benefits of ERP Focus on technology (Willcocks and(Willcocks and Sykes, 2000) Sykes, 2000)

Project Obtain a project champion champion from the business side

(Willcocks and Sykes, 2000)Project schedule Create slack in the schedule

(Scott and Vessey, 2002)Management Ignore management reporting needsreporting (e.g., query and reporting tools)

(Ross et al., 2003)User training Focus on business processes, Focus on teaching technical skills

not just technical training (Willcocks and Sykes, 2000)(Willcocks, 2002)

Technological Recognize the complexity of con-challenges verting data and creating interfaces

(Scott and Vessey, 2002)

TABLE 8 Factors Contributing to Successful versus Unsuccessful Projects

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FoxMeyer Dow Chemical

Corporate characteristics Wholesale drug distribution $2.5 billion producer of siliconebusiness products

Business environment Lost a major customer Faced lawsuits from silicone breast(Phar-Mor) in 1993 and implantssigned up a new customer (UHC)

Project characteristics Initiated SAP R/3 project Initiated SAP/R3 implementation in 1993 in 1995

Project portfolio Installed a warehouse automation system at the same time

Organizational culture Less open culture; employees Culture more accepting of changedid not express concerns to management

Viewpoint regarding Unrealistic expectations Focused on small winsbusiness benefits of ERP about the return on

investment in ERPBusiness factors UHC contract required

major changes in the software

Project planning/ Inadequate project planning Adjusted scope when projectmanagement difficulties occurred; maintained

control over the projectRelationship with Used external consultant Relied on internal people to external consultants (Andersen Consulting) design processes and configure

the systemProject champion Project did not have a Strong leadership from a project

champion champion

Adapted from: Scott, Judy and Vessey, Iris, “Managing risks in enterprise systems implementations,”Communications of the ACM, Vol. 45, No. 4, April 2002, pp. 74–81.

TABLE 9 Differences between FoxMeyer Drug versus Dow Chemical’s ERP Implementation

but the contract with UHC required changes to the software, causing the overall SAPproject cost to go over $100 million. At the same time, FoxMeyer embarked on imple-menting new warehouse automation software.Technical issues clouded the SAP imple-mentation. For example, project managers did not run tests to discover that SAP couldnot process the 420,000 transactions per day that had been processed on the main-frame (Scott and Vessey, 2002).

Dow Chemical experienced project implementation difficulties, but was able toovercome the risks. Dow Chemical’s project had a strong project leader and a projectchampion (see Table 9). Even though they did not have a good project plan in place atthe outset, Dow Chemical was able to adjust the project scope when difficultiesoccurred and to maintain control over the project (Scott and Vessey, 2002). DowChemical fostered open communications, and this contributed to project success,whereas employees at FoxMeyer did not express their concerns openly even though

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they had concerns about the project. Finally, FoxMeyer had unrealistic expectationsabout the return on investment in ERP and even underbid contracts based upon itsperception that costs would decrease. In contrast, Dow achieved small wins.

If there is a lesson to be learned from the comparison of the FoxMeyer versus theDow Chemical projects, it is that sound management is a critical success factor. Riskswill be encountered in any ERP project, and these risks must be addressed throughsound leadership and effective project management.


◆ SUMMARY

ERP projects tend to be large and complex, and require expertise that is not typicallyfound internally within the organization implementing the ERP system. As such, thesehigh-risk projects require multiple strategies to minimize risks (Applegate, McFarlan,and McKenney, 1999). A steering committee, responsible for system selection, moni-toring, and managing external consultants, must be involved throughout the project(Bingi, Sharma, and Godla, 1999). External consultants with knowledge about specificmodules (Piturro, 1999) are critical, but their knowledge should be transferred to inter-nal employees.

Selecting a vendor may be a lifelong commitment (Davenport, 2000). ERP imple-mentations require companies to adapt the organization to the package throughbusiness process re-engineering. A close fit between the software vendor and the userorganization is positively associated with successful package implementation (Jansonand Subramanian, 1996). User training is important, so frontline workers will be able tohandle the demands of the new ERP system (Sweat, 1999).

Most important, ERP systems integrate information and standardize processes. Iforganizations find this consistent with their overall business strategies, then they willperceive greater value from ERP.

Questions for Discussion1. Use articles in trade publications which are available in the library or through on-line data-

bases to explore factors contributing to the problems encountered in these ERP projects.The timeframes are given so you can find articles during the appropriate timeframes:a. FoxMeyer Drug (project cancelled in 1996)b. Dow Chemical (project cancelled in 1998)c. Dell Computer (project cancelled in 1998)d. Hershey’s (project in 1999–2000 timeframe)

2. Use articles in trade publications which are available in the library or through on-line data-bases to explore factors contributing to the successful implementation of ERP projects. Inyour analysis, include the following:a. Technology factorsb. Project management factorsc. User-related factors

3. Using Microsoft Project, do the following:a. You will see a project management schedule for an ERP project below. This project

management plan has been created using Microsoft Project.

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1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

4 days

7 days

7 days

14 days

4 wks

8 wks

1 wk

3 wks

2 wks

1 wk

8 wks

3 wks

2 wks

1 wk

6 wks

6 wks

Mon 1/19/04

Wed 1/28/04

Wed 1/28/04

Thu 1/29/04

Thu 2/19/04

Thu 2/19/04

Thu 2/19/04

Mon 3/29/04

Mon 4/26/04

Mon 5/3/04

Thu 4/1/04

Wed 6/2/04

Mon 6/28/04

Mon 7/5/04

Mon 5/3/04

Mon 7/5/04

Finalize vendor decision

Hire SD (sales/distrib.) consultant

Develop internal project team

Select client-server system

Implement client-server system

Develop SD interfaces

Hire MM (materials mgmt.) consultant

Install SD module

Test SD module

Bring SD module into production

Develop MM interfaces

Install MM module

Test MM module

Bring MM module into production

Develop SD training

Develop MM training

Task NameID Duration Start JanuaryJan.

FebruaryFeb.

MarchMar.

AprilApr.

MayMay

JuneJune

JulyJuly

AugustAug.

Project: ERPprojectmanagementplanDate: Mon 3/22/04

Task

Split

Progress

Milestone

Summary

Project summary

External tasks

External milestone

Deadline

Page 1

FIGURE 1 Project Management Plan

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Featured Article“FOXMEYER’S PROJECT WAS A DISAS-TER. WAS THE COMPANY TOO AGGRES-SIVE OR WAS IT MISLED?”

CASEDivide the class into two teams, one arguing onbehalf of FoxMeyer that SAP was to blame, andone arguing on behalf of SAP that FoxMeyer’smanagement was to blame. Each team shouldaddress these questions:

1. Was FoxMeyer misled?2. What strategies could have been put into

place to avoid the project disaster?3. What business misjudgments occurred?4. Was FoxMeyer’s failure due to technology

failure or business failure?

“Don’t know whether the deficiencies resultedfrom the fact that the systems just didn’t workor from the fact that there was poor implemen-tation,” says Bart A. Brown Jr., a Wilmington,Del.-based bankruptcy trustee appointed tooversee the case of FoxMeyer Drug Co.,Carrollton, Tex. But if even 20% of what he hasread of the situation in previous media accountsis true, Brown says, “then it sounds like there isa claim there.”

Then the nation’s fourth largest distributorof pharmaceuticals to both druggists and hospi-tals, FoxMeyer in the early ’90s bet its future on a

massive enterprisewide software and warehouse-automation project and lost. In August 1996 thecompany filed for protection under Chapter 11of the federal bankruptcy code.

The bankruptcy court must decide whetherFoxMeyer—which expected to save $40 millionannually from a massive overhaul of its com-puter systems that were designed to serve arapidly expanding customer base—was misled byany of the software companies and systemsintegrators it dealt with. They are: SAP AG,Walldorf, Germany, which supplied enterprise-wide financial and logistics software; AndersenConsulting, which provided implementationexpertise through an on-site team that at onepoint numbered about 50 people; and PinnacleAutomation Inc., St. Louis, which throughits operating subsidiaries supplied conveyors,carousels, and a warehouse-management systemfor FoxMeyer’s distribution center in WashingtonCourt House, Ohio.

FoxMeyer executives complained to thebankruptcy trustee earlier this year that the tech-nology vendors had oversold their capabilitiesduring the sales process. Bankruptcy trusteeBrown expects to decide by year-end whether hisoffice will pursue legal action against the ven-dors on behalf of FoxMeyer or to allow the rightto make a legal claim to revert to Avatex Groupof Dallas, the new name of FoxMeyer HealthCorp., the parent firm of FoxMeyer Drug.

ID Activity Duration

A Create a list of software features which are needed 3 monthsB Create a list of ERP software candidates 3 monthsC Narrow choices down to 3 or 4 candidates 3 monthsD Develop a Request for Proposal 1 monthE Participate in Vendor Presentations 3 monthsF Review Vendor Proposals 1 monthG Evaluate and Select the Best Alternative 1 monthH Negotiate for Pricing and Licensing Agreements 2 monthsI Develop implementation schedule 2 months

b. Create a project management schedule for an ERP selection decision using MicrosoftProject. Use these parameters:

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One thing no one disagrees on is thatFoxMeyer Drug crashed and burned. Once a$5 billion company, FoxMeyer filed underChapter 11 shortly after taking a $34 millioncharge to cover uncollectible costs related toshipping and inventory troubles.

The reason for FoxMeyer’s collapse, though,remains a subject of debate. A FoxMeyerspokesperson told the Wall Street Journal in late1996 that computer-integration problems relatedto the company’s IT effort-whose total price tagultimately topped $100 million were “a signifi-cant factor leading to the bankruptcy filing.”

While executives at Avatex declined com-ment, some technology experts who were on thescene agreed to be interviewed for this article.Christopher Cole, chief operating officer atwarehouse-automation vendor Pinnacle, says theFoxMeyer mess was “not a failure of automa-tion. It was not a failure of commercial softwareper se. It was a management failure.”

To understand what happened at FoxMeyer,it’s best to start with the company’s businessstrategy and plans for technology to supportit. FoxMeyer was afraid its customer orders—involving some 300,000 items daily, according toone person who worked on the technologyoverhaul—would soon outgrow the capacity ofits aging Unisys mainframe. To gear up to handlecontinued growth in the business, the companyembarked upon a search for a client/server basedsystem that would enable it to relieve the stresson this system while keeping up with anticipatedgrowth in business volume.

A key concern that the FoxMeyer projectteam had to address early on was the system’sability to handle the sheer magnitude ofFoxMeyer’s business. FoxMeyer was taking andfilling orders from thousands of pharmacies andhospitals each day. Because each pharmacycould order hundreds of items at once, it wascommon for the company to process hundredsof thousands of transactions daily.

To make sure the new systems were up tohandling that volume, SAP’s software was testedon client/server hardware supplied by bothDigital Equipment Corp., Maynard, Mass., andHewlett-Packard Co. (HP), San Jose, the latter ofwhich ultimately was selected. “But there are alot of variables in doing benchmarking and vol-ume testing,” says Kenneth Woltz, president ofWoltz & Associates Ltd., Chicago-based consul-

tants, “and I believe that just increased the risk. Iwould hate to guess how many HP systems theyhad coupled together and what changes had tobe made to the Oracle database to process theirhuge volume.”

Woltz, who advised FoxMeyer during theearly stages of the project, contends that theimplementation appeared troubled almost fromthe start. “Andersen had been selected as theSAP partner,” he recalls. “And I remember ameeting where a presentation was being madethat laid out a schedule for the entire implemen-tation to be completed in 18 months.”

Woltz says he challenged that goal as totallyunrealistic. “Many IT personnel put forth thesemaster schedules where each of the modules is tobe implemented in two to three months,” heexplains, “but I’ve never seen that happen inreality in a large, complex organization.”

A successful implementation of a newgeneral-ledger accounting system sometimestakes up to a year by itself, Woltz argued. Hebelieved FoxMeyer lacked available users onstaff with the sophistication to handle a fast-track installation. “My position was, ‘Go slower.’Competition was tough in this industry, but manycompanies underestimate how long it takes toimplement changes in core business processes,”he says.

Andersen’s role, Woltz says, was to installSAP. “They put together the master schedule forimplementing SAP financials and logistics mod-ules,” he adds.

Comments an Andersen spokesperson, “Wedelivered, the work we performed was success-fully completed, and we were paid in full.”

SAP officials agree that volume was anissue at FoxMeyer and continues to be a sourceof some concern at McKesson Corp., SanFrancisco, which bought FoxMeyer Drug’s assetsin October 1996. (The value of potential claimsagainst SAP, Andersen, and Pinnacle wereexcluded from this transaction.)

However, Robert Pawlick, who served asproject manager for SAP America Inc. at theFoxMeyer site, says that thanks to the testruns conducted at FoxMeyer, “there was somemeasurement evidence that these systems couldperform at that level.”

SAP’s functionality came under closescrutiny as well. At that time, SAP wasregarded are as a supplier of accounting and

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Chronology of a Crash

Date Event

March 1993 FoxMeyer seeks solutions to system capacity issues. SAP introduced toFoxMeyer account by Digital

May 1993 SAP R/3 package selected; Phar-Mor, a major customer, seeks bankruptcyprotection

July 1993 Questions regarding SAP’s capacity to handle FoxMeyer’s order volumes areraised; benchmark testing process begins

Jan.–Mar. 1994 FoxMeyer picks Hewlett-Packard hardware platform; signs AndersenConsulting as its SAP implementation partner

Feb. 1995 SAP financial, sales, and distribution modules begin coming on-line to serveUniversity HealthSystem contract

May 1995 Washington Court House distribution center scheduled to openFeb. 1996 Thomas Anderson, FoxMeyer’s Health’s president and CEO (and champion of

the company’s integration/warehouse automation projects), is asked to resigndue to delays in new warehouse and realizing the SAP system projected savings

Aug. 1996 FoxMeyer Drug files for Chapter 11 protection from its creditorsOct. 1996 McKesson buys FoxMeyer Drug businessMarch 1997 Status of FoxMeyer Drug bankruptcy shifts to Chapter 7 liquidationDec. 1997 Projected date for bankruptcy trustee Bart A. Brown Jr. to decide if his office

will pursue claims on behalf of FoxMeyer Drug against SAP, Andersen, andPinnacle

manufacturing software than a developer of sys-tems with extensive functionality for warehousemanagement. So FoxMeyer elected to go with awarehouse system from McHugh SoftwareInternational (formerly McHugh-Freeman),which it purchased through Pinnacle.

SAP, though, thinks it could have providedboth systems. “Part of our claim to fame is thatwe have an excellent sales-and-distribution setof functionality,” says Peter Dunning, SAPAmerica’s executive vice president for globalaccounts. “I think the slight wrinkle [atFoxMeyer] was that they were in more of ahigh-volume, complex-pricing environment.”As a result, “There were certainly some differ-ences that they wanted in the software.” SAPsolved them without holding up any software-implementation deadlines, he says.

Regardless, the decision to go with two dif-ferent vendors for two of the company’s mostimportant business systems added still greatercomplexity to an already challenging situation.“Now you had two major packages that neededto be integrated,” Woltz asserts, “and that is a

tough [job], in part because it is difficult to get twodiverse vendors’ knowledge of the nitty-gritty oftheir products in order to design a real-time inte-gration. Despite the difficulty in assessing theinternals of application packages, we did get intoenough depth to know that there were manyfunctional holes.”

A significant change in FoxMeyer’s businessadded to the problems. In July 1994 the companywon a contract to supply University Health-System Consortium (UHC), a nationwide net-work of major teaching hospitals, in a deal thatwas expected to yield up to $1 billion in revenuesannually for five years.

Once this pact was signed, recalls Pawlick,who now is SAP America’s global support man-ager, “the focus of the project dramaticallychanged from giving them headroom on theircurrent mainframe system, which had been one ofFoxMeyer’s driving factors, to satisfying the needsof the University HealthSystem Consortium.”

Prior to this contract, explains SAP’sDunning, FoxMeyer had planned to have a smallamount of capacity left on the Unisys platform

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once the SAP implementation was complete.“But with this new contract,” he says, “theirvolumes would severely increase, and they ranout of capacity on their mainframe.” Thethroughput capacity of the SAP project had tobe increased, Dunning says.

SAP claims to have met such technical chal-lenges in a manner that FoxMeyer found satis-factory. “In fact, FoxMeyer was a selective, butvery good reference for SAP,” Pawlick maintains.

Adds Dunning, “McKesson reinforced thework we had done at FoxMeyer.” Shortly afterpurchasing FoxMeyer’s assets, he explains,McKesson, planning an SAP implementation ofits own, examined the FoxMeyer installation andwas so impressed that it decided not only to keepthe equipment, but also to speed up its ownproject. “They had SAP fully installed,” saysBuzz Adams, senior vice president for processimprovement at McKesson. “McKesson haslearned some useful lessons from FoxMeyer.”

McKesson was fortunate to avoid the corpo-rate migraines that accompanied the troubledstart-up of FoxMeyer’s Washington Court Housedistribution facility. “I don’t think some of thethings were thought through well enough,” saysPinnacle’s Cole, regarding this portion of theinstallation. (His company supplied hardwarethat FoxMeyer and Andersen integrated into a340,000-sq-ft warehouse designed to service hos-pitals and pharmacies unrelated to the UHCcontract.) “As an example, we were told to designa system that could ship in X number of hours,and we designed a system that could do that.Then later, it became a requirement that they beable to ship in one-third to one-half that time.”

By the same token, he says, “I rememberthere being an enormous issue on balancing sys-tem traffic.” While FoxMeyer initially countedon a typical shipment or package to make threeor four stops along its automated route withinthe warehouse, in reality, this figure could windup at eight or nine, a condition that sometimescaused conveyors to gridlock. But Cole contendsthat “the problem wasn’t that the conveyor shutdown; it was that the way they were runningorders through there was such that they weregridlocking the system.”

Pinnacle does accept responsibility forproblems such as the occasional motherboardfailure, although Cole states that such glitches

were “never the pacing issue.” Rather, he saysthat the inhouse Unisys-based management-information system under which FoxMeyer wastrying to run the new equipment “choked anddied.” For example, he reports that between theexisting system and the new SAP implementa-tion, “they had an enormous amount of troublefeeding us the information we needed on atimely basis.” Nor did the facility debut on time.Slated to open in May 1995, the warehousebegan shipping goods that August, and even thatdate was one FoxMeyer had difficulty meeting asa result of labor problems. Workers from otherOhio warehouses that the Washington CourtHouse center was supposed to replace alreadyhad begun leaving their jobs en masse.

“The transition from closing old warehousesdid not go smoothly,” Cole recalls. Equipmentoutages resulted in the shipping of numeroushalf-finished orders. Then, when customerswould complain about missing items, FoxMeyerrepresentatives, unaware of what was happeningon the warehouse floor, would authorize makeupshipments that turned out to be duplicates butwere never reported as such by recipients.

FoxMeyer also suffered losses in transfer-ring inventory to the new center. Because of adebilitating morale problem among departingworkers, Cole explains, a lot of merchandise wasdumped into trucks and arrived at WashingtonCourt House with packages damaged or brokenopen or otherwise unsalable as new product.“That led to a huge shrinkage in inventory,” Colestates. “As an outsider looking at it, I wouldimagine that they lost a lot there, as well as withthe problems of their own internal computersystem.”

Meanwhile, FoxMeyer was faring poorlyelsewhere in its business. The UHC contract,which initially had helped boost the distributor’sstock value, ultimately delivered neither the vol-umes nor the profit margins expected.

“FoxMeyer was the price cutter in theindustry,” says Adam Feinstein, a researchassociate who follows the drug and medical-supply wholesale industry for SalomonBrothers in New York. That factor, combinedwith the information-system and warehouse-management initiative, pushed the companyover the edge, he says. “They spent a lot ofmoney and tried to put together a progressive

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management-information system,” he says, “butthey overspent and bit off more than they couldchew.”

Woltz offers a somewhat similar assessment.“Most companies would be wise to sell what theycan currently deliver, perhaps with modestenhancements required to close the deal, butcertainly not commit to a fast-track schedule ona technology implementation that has not beenproven,” he asserts.

As for the system’s anticipated savings,Dunning says the $40 million figure FoxMeyerexecutives liked to use didn’t come from SAP.“We generally don’t do calculated savings to thatextent, especially when it involves a lot of soft-ware that’s not ours.”

Dunning sums up SAP’s involvement in theFoxMeyer fiasco this way: “It’s one of those sto-ries where the operation was a success, and thepatient died.”

Trying to win market share by price-cuttingbased on anticipated savings from new computersystems proved not to be a smart strategy.“If youput in new systems hoping [that] will give youefficiencies, without improving your overallprocesses, it rarely works,” says McKesson’sAdams.

SOURCE: Jesitus, John, “Broken promises?”Industry Week, v. 246, n. 20, Nov 3, 1997, p. 31–36.Copyright: Penton Publishing, 1997.

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139

Index

IndexPage references followed by "f" indicate illustratedfigures or photographs; followed by "t" indicates atable.

AAccountability, 125Accountants, 85, 87, 90, 105Accounting, 2-4, 7-8, 15, 20, 28, 32-34, 36, 46, 48-49,

53-54, 56, 60, 65-67, 69-71, 75-90, 91,93-94, 96, 98-99, 101-103, 108, 111,115-116, 135

finance and, 53-54future of, 99

Accounting department, 36, 69Accounting standards, 80-81Accounting systems, 15, 76, 80, 88-90, 94, 101accounts payable, 6, 19-22, 53, 65, 76, 78-83, 93Accounts receivable, 5, 20, 25, 31, 33-34, 53, 61, 66,

76-78, 80-82accuracy, 13, 26, 51, 86, 102

of information, 13Acquisitions, 79activity-based costing, 83, 102-103, 105adjustments, 78-79Advances, 15, 19Advantages, 7-9, 32, 47, 52, 67, 100, 116Advertising, 18, 34, 62, 64

corporate, 34product, 18, 34, 62, 64

Affect, 4, 61, 68, 128Age, 37, 86, 111, 116Age Discrimination in Employment Act, 116Agencies, 109Agent, 68Agents, 18, 31, 36, 101

report, 36agreement, 123Agreements, 12, 134AIDS, 55Allocations, 79anticipate, 104Application, 24, 27-30, 32-33, 46, 48, 54, 88-89,

110-111, 113, 117, 120-121, 123-128, 136Applications, 3-4, 7, 28, 33, 41, 48, 52-55, 67, 72, 89,

100, 110, 112-113, 116, 126Art, 4, 90Assets, 78-79, 135, 137

current, 79fixed, 78-79

attention, 89Attitudes, 122attributes, 68, 112audit trail, 50, 66-67, 77, 81, 112Authority, 34-35, 121, 123, 129authorization, 20-22, 24availability, 10, 13, 54-55, 70, 102, 114

testing, 13Available, 5-6, 14, 34, 45, 48, 51, 68, 81, 89, 103, 117,

132, 135

Bback order, 77backup, 33, 41Balance sheet, 82-83Balance sheets, 65, 80Bankruptcy, 121, 129, 134-136

liquidation, 136Banks, 27-28bar-coding, 100Behavior, 31Benchmarking, 9, 135Benefits, 1, 4-14, 35, 42, 44, 46-47, 51, 66, 72-73, 80,

90, 108-111, 114-116, 127-128, 130-131extended, 90service, 4-6, 44, 46, 72-73, 111

Benefits packages, 109

Best practices, 2, 8-9, 13-14, 27, 35, 41-45, 47-48, 51,71, 87, 89-90, 101, 110, 116, 127, 130

bill of materials, 2, 65, 94, 103billing, 6, 66, 69-71, 85-86Blending, 110Breakdown, 48Bridges, 50, 126Budget, 13, 46, 53, 56, 68, 79, 104, 113, 120-122, 125

defined, 122Budgeting, 11, 79-80, 103-104, 113

capital, 11, 79-80, 113Business analysis, 100Business environment, 131business intelligence, 54, 113-114Business operations, 3Business process, 9, 17, 19, 25, 27, 32, 35-36, 55, 83,

124, 127, 132business processes, 2-5, 7-9, 11, 14, 17, 19-21, 25,

27, 31, 35, 37, 39, 41-43, 45, 47-48, 50-51,54, 60, 73, 76, 91-92, 108-110, 121,124-130, 135

definition, 17, 48transaction, 135

Business review, 38, 57, 73, 86, 90, 139Business rules, 35Business services, 100Business strategy, 15, 85, 135Business to consumer, 100Buyer preferences, 93Buyers, 44, 92, 100-101

Product, 92Role, 101

Buzz, 137

CCapabilities, 47, 53-54, 69, 100, 112, 122, 125, 134Capacity, 2-3, 57, 86, 91, 94-97, 103-104, 127,

135-137Capacity planning, 2-3, 94-96, 127Capital, 8, 11, 79-80, 113

customer, 80fixed, 79-80growth, 79human, 8, 113requirements, 80

Capital budgeting, 11, 79-80Career, 25, 56, 113career planning, 113Case Studies, 6, 14, 19-20, 22, 126, 128-129, 139Case study, 19, 24, 27, 52Cash flow, 37, 77, 79, 93Cash flows, 79Cash management, 10, 43, 79-83change management, 51, 127-129Channel, 49, 69-70, 72Channels, 64

Service, 64Chief financial officer, 53, 56Chief operating officer, 53, 56, 135

COO, 53Civil rights, 116Civil Rights Act, 116Claims, 33-34, 121, 135-137clothing, 93coding, 40-41, 100, 104collaboration, 20Collapse, 135Collections, 36Commercial banks, 27-28Commitment, 11, 51, 56, 72-73, 123, 125-127, 132Communication, 99-100, 122, 125Companies, 1, 9-10, 13-14, 16, 31, 41, 49, 60, 68, 73,

87-88, 90, 92, 99-101, 116, 120, 128-129,132, 134-135, 138-139

Comparative analysis, 62Compensation, 109-111, 113-115Competition, 19, 64, 105, 135

Competitive advantage, 7-8, 13, 15, 72Competitive environment, 9Competitive strategy, 43Competitiveness, 45Competitors, 7-9, 13, 34-35, 53, 61, 68, 91Component parts, 94compromise, 130Computer-aided design, 18Computer-based information system, 56computer-integrated manufacturing, 96conceptual design, 23Concurrency, 33Concurrency control, 33Conditions, 79Conference Board, 2Configuration, 13, 49, 54-55, 68, 71, 128

manufacturing, 54Confirmation, 26, 28, 48Consideration, 11, 54-55, 114Consistency, 32Consolidation, 19, 83Consortium, 129, 136Constraints, 123, 125

changing, 123implementing, 123, 125UNIQUE, 125

Consumer products, 13Contacts, 56, 62, 66, 69Content, 100Continuous improvement, 86Contract, 44, 49, 114, 130-131, 136-137Contracts, 11, 128, 132Control, 2-3, 5, 18, 32-34, 44, 46, 50, 53, 56, 61-62,

65, 76-77, 79-80, 84-87, 90, 92-96, 102,104-105, 108-111, 113-114, 116, 120,122-123, 126, 131, 138

control activities, 62Control processes, 62, 65, 79-80, 93-94Control systems, 18, 80, 85-86, 105

external, 80Controlling, 8, 70-71, 81, 83, 126-127Convergence, 99conversion, 129Cooperation, 122Coordination, 4, 6, 21, 76, 122

manufacturing, 4, 6, 76systems, 4, 6, 21, 76, 122

Copyright, 1, 17, 39, 49-50, 59, 65-66, 70, 75, 82-83,90, 91, 105, 107, 112-113, 115, 119, 138

corporation, 38, 89, 121Corporations, 9, 89cost accounting, 20, 33-34, 83, 94, 96, 102cost driver, 86, 102-103Cost-benefit analysis, 11, 44Costs, 2-3, 5-6, 11-12, 14, 18, 22, 31, 33, 41, 44, 56,

60, 65, 71, 77, 80, 83, 85-88, 91-98,100-103, 105, 109, 113-114, 116, 122, 124,127, 132, 135

distribution, 3, 6, 60, 65, 71, 85, 87, 102labor costs, 65, 93, 116product and, 86-87, 95sales and, 2, 14, 60, 65, 71, 85, 87, 91, 96-98, 102

Countries, 2Credit, 6-7, 20-22, 24-26, 28-30, 61, 65-66, 72, 76-77,

81, 86, 117credit limit, 65CRM, 7, 43, 46, 53-54, 65, 67-69, 71, 73CRM software, 68CRM systems, 69, 71Cross-functional team, 44Culture, 117, 128, 130-131

organizational culture, 128, 131Customer databases, 32Customer demand, 64, 92Customer management, 70Customer needs, 2-3, 19, 24, 60, 64, 68, 92Customer relationship management, 7, 14, 43, 46, 65,

141

67, 69-70, 73CRM, 7, 43, 46, 65, 67, 69, 73trends in, 14

Customer satisfaction, 12, 35Customer service, 5-6, 24, 28, 32-34, 37, 44, 61,

68-70, 72-73, 86, 100, 102Customer service representative, 24, 28Customers, 2-7, 18, 22, 24, 31, 36, 46, 53, 56, 60-65,

67-69, 71-72, 76, 78, 83-85, 92-93, 126, 137

Ddata, 2-9, 13-14, 19, 23, 25, 27-28, 32-34, 40, 42-43,

48-51, 53, 61-62, 65-70, 77, 80-81, 83,85-87, 89-90, 92, 94-100, 102-104, 108-115,117, 120-121, 126-130

Data administration, 33, 108Data collection, 94, 99-100data conversion, 129data flow, 25data model, 48Data repository, 23Data warehouse, 69, 81Database, 2, 15, 19-22, 24, 32-33, 40-41, 48, 53-54,

66-67, 69, 71, 80-81, 87-90, 101-103,111-112, 116, 124, 135

characteristics of, 32, 54development of, 40-41examples of, 24, 89purpose of, 66, 87systems, 2, 15, 19-22, 24, 32-33, 40-41, 48, 53-54,

66-67, 69, 71, 80-81, 87-90, 101-103,111-112, 116, 135

uses, 66database administrator, 33Database design, 40-41Database management system, 33

security, 33database system, 90Database systems, 90databases, 4, 12, 14, 17-19, 22, 24, 28, 31-35, 44, 48,

53, 56, 62, 68, 77, 88-89, 92, 96, 102, 113,132

commercial, 28, 89electronic, 18, 89

dates, 76, 79, 95-98, 101Deadlines, 136debugging, 41Decision makers, 4Decision making, 4, 24, 33, 71, 77, 85, 87, 100-102,

115-116Decision-making, 109, 113Demand, 3, 10, 25-26, 64-65, 92-93, 96-98, 100-101

aggregate, 100excess, 64, 92-93

Demand chain, 10Depreciation, 90Deregulation, 19design, 4, 8-9, 13, 17-19, 21-25, 27, 31-32, 35, 39-57,

91-92, 94-96, 109-110, 113, 122-124,126-128, 130-131, 136-137

elements of, 21principles of, 24

Detailed analysis, 40diagrams, 40Direct mail, 62Discounts, 22, 66, 79, 81Discrimination, 111, 116Disposable income, 65Distribution, 3-4, 6, 8, 25, 46, 49-50, 60, 65, 69-72, 85,

87, 89, 99, 102, 131, 134, 136-137shipping and, 65supply chain management, 3, 8

Distribution center, 134, 136Distribution channel, 49, 69-70Distributors, 2, 92Diversity, 123Documentation, 34, 40-41, 51, 53-55documents, 41, 45, 50, 65-67, 81, 85, 112

distribution of, 50Dollar, 7, 9, 72Dollars, 1, 78, 89Downsizing, 19Downstream, 122

EE-business, 88-89

defined, 89e-commerce, 88-89

E-commerce, 72, 88-90economic order quantity, 94Economics, 138-139Economies of scale, 41Economy, 19Education, 1, 17, 39, 51, 59, 75, 91, 107, 119Efficiency, 4, 32, 85-86, 92Electronic Commerce, 100Electronic data, 89, 95Electronic data interchange, 89, 95

EDI, 89, 95electronic funds transfer, 89Electronic mail, 18E-mail, 89emphasis, 3, 19, 94Employee benefits, 109, 114Employee training, 110Employees, 35, 88, 109-111, 113, 116-117, 120,

131-132loyalty, 109-110

Employment, 111-112, 116Enhancement, 41Enterprise resource planning, 1-16, 17-22, 24-25,

27-28, 31-38, 39, 57, 59, 65, 75, 88-89, 91,102, 105, 107, 119, 139

Enterprise resource planning (ERP) systems, 1, 39,102

enterprise resource planning systems, 1-16, 17-22,24-25, 27-28, 31-38, 39, 57, 102, 139

Environment, 2, 9, 11, 19-20, 32, 44, 47, 53, 90, 94-95,124, 131, 136

Equal Pay Act, 111, 116Error correction, 37ETC, 25Evaluation, 23, 52-53, 79, 90, 111, 122evidence, 2, 16, 61, 135, 139

supporting, 2Exchange, 89Exchanges, 100Expansion, 27-28, 37expect, 11Expectations, 96, 131-132Expected product, 65Expenditures, 56, 79Expenses, 79, 85-86Experience, 54-55, 72, 111, 114, 123, 125, 138expertise, 44, 46-47, 110, 123-124, 126-128, 130, 132,

134Explosion, 90

FFailure, 31, 67, 110, 122-123, 126-127, 129, 134-135,

137Family, 37, 108, 111, 116-117FAST, 138feasibility study, 40Feature, 18, 44, 67, 89, 102, 104, 112feedback, 3, 52, 56, 85, 92, 94, 99Field studies, 139Finance, 20, 27, 53-54, 60, 72, 75-81, 83-90, 91, 96,

105, 110accounting and, 53, 60, 75-81, 83-90, 91summary of, 80

Financial analysis, 48applications, 48

Financial management, 8, 13, 56Financial resources, 97Financial services, 31, 116Financial systems, 76, 101, 110Firms, 2, 4, 7-8, 15-16, 45-46, 51, 57, 114-115,

120-121, 128-129, 139organizational culture, 128organizational processes, 139

Fixed assets, 78-79Flexibility, 10, 45, 56, 92, 127Food, 25, 27Forecasting, 62, 64-65, 96-97, 99

sales, 62, 64-65, 96-97, 99Forecasts, 64-65, 69, 93, 96, 100-101forms design, 40Forrester Research, 116Fragmentation, 7fraud, 121Frequency, 44, 46Front office, 100

GGeneral Ledger, 53-54, 65, 78, 80-82, 85, 111

Germany, 134Global marketing, 89Globalization, 10Goals, 31, 34, 43, 64, 93, 95, 98, 110, 113, 122-123Goods, 21, 25, 65, 77, 80-81, 83, 85, 89, 93-96, 98-99,

137public, 89

Government, 109-111, 116compensation packages, 109-110

Government agencies, 109Graphical user interface, 32Group, 13, 86, 88, 121, 130, 134groups, 15, 64, 73, 88

Hhandouts, 55Hazards, 123Health care, 116Health insurance, 109help desk, 86Hierarchy, 34, 40Hospitals, 116, 134-137HTTP, 15Human capital, 8, 113Human resource management, 2, 96, 109-110, 115

employee training and, 110Human resources, 2, 7-8, 14, 18, 46, 48, 53-54, 60,

67, 70-71, 76, 82, 87, 89, 91, 95, 102,107-117

compensation packages, 109-110, 114-115human resources management, 113, 117

direct deposit, 117

Iillustration, 19-23, 32-34Implementation, 3, 8-9, 11-16, 27, 32, 35-36, 39-57,

88-90, 120-121, 124-128, 130-132, 134-139Inbound logistics, 17Inc., 9, 116-117, 121, 134-135Incentives, 31, 85Income, 28, 37, 65

disposable, 65Industry, 1, 13, 43-45, 53-54, 56, 68, 88-89, 114, 135,

137-138Inefficiencies, 3Information, 1-7, 10-11, 13-16, 17-18, 22, 24, 27-28,

30-34, 36-37, 39-41, 47-48, 50, 52, 55-56,60-62, 64-65, 68-73, 76-77, 80-81, 83,85-90, 92-96, 99-105, 109-111, 113-117,120-123, 126-127, 132, 137-139

information and communication, 99Information management, 110, 121Information system, 17, 27, 50, 56, 96, 102, 109, 113,

122, 138Information systems, 1, 4, 15-16, 18, 28, 37, 39-41,

48, 50, 52, 73, 90, 94-95, 105, 110, 113, 117,120-121, 123, 138-139

Information technology, 14-16, 17, 22, 24, 31-32, 36,88, 114, 123, 126-127, 139

Infrastructure, 123-124, 129Initiative, 137input design, 40-41Insurance, 24, 109integrated ERP systems, 115Integration, 3, 5, 8-10, 16, 19, 21, 47, 54-55, 66-67,

69-73, 85, 89, 92-93, 96, 98-99, 102, 112,115, 121, 126-127, 135-136, 139

Integrity, 32-33, 50, 104-105intelligence, 54, 113-114Interest, 11, 27, 37, 79, 105Interest rate, 11, 79

current, 79Interest rates, 27Internal rate of return, 79

IRR, 79Internet, 14, 70, 86, 89-90, 95, 100

defined, 14, 86, 89Interviews, 125Intranet, 68Inventories, 93-95, 100Inventory, 2-6, 10-15, 18, 21-22, 42-44, 53, 57, 61-62,

64, 66, 71-72, 77-78, 80-82, 90, 92-100, 103,105, 111, 113, 135, 137, 139

management of, 90Inventory control, 2, 53, 80, 90Inventory management, 2, 15, 22, 57, 62, 93-94, 96,

99, 105, 139Investment, 1, 8, 11-13, 16, 41, 44, 56, 79, 90, 108,

142

116, 120, 125, 131-132government, 116net, 11-12, 79

Investments, 79, 124Invoices, 25, 61, 76-78, 80, 98-99IRIS, 131, 138-139IRR, 79

JJargon, 90Job analysis, 109-110, 113-114job descriptions, 109Job design, 25, 128, 130Jobs, 22, 24-25, 31, 114, 129, 137

measuring, 31service, 22, 24, 31, 137

KKiosks, 72Knowledge, 68, 123-128, 132, 136

specialized, 127Knowledge management, 68

LLabor, 65, 92-93, 99, 110-111, 113-114, 116, 137

trends in, 114Labor costs, 65, 93, 116Language, 90Lawsuits, 131Lead time, 94-96Leader, 128, 131Leadership, 24-25, 122, 127-128, 130-132, 138Learning, 15, 139Learning curve, 139Leasing, 79Ledger, 53-54, 65, 78, 80-82, 85, 111, 135ledgers, 65

general ledger, 65letters, 61Licenses, 12, 54Licensing, 134Licensing agreements, 134Lifestyle, 56Liquidation, 136Loans, 27-29, 36-37Local data, 50Logistics, 2, 10, 17-18, 46, 48, 134-135

inventory management, 2transportation, 10warehousing, 18

Loss, 22, 82-84, 123assessment, 123control, 84, 123reduction, 22severity, 123underwriting, 22verification, 83

MManagement, 2-8, 10-16, 18-19, 22, 24-25, 27-28, 31,

33-35, 37, 40, 43, 46-51, 53, 55-57, 61-63,65, 67-73, 76-85, 87-90, 91-105, 109-117,120-132, 134-136, 138-139

activities of, 18, 27functions of, 69, 90

Managers, 2, 10, 22, 24, 35, 51-53, 56, 62-63, 68, 76,79-81, 85-87, 95, 109-110, 113-115, 117,122-123, 129, 131

Manufacturers, 18, 53, 89, 92, 99, 105Manufacturing, 2-4, 6, 8, 14-16, 18, 52-54, 57, 60-61,

65, 67, 76-77, 83, 89-90, 91-102, 105, 108,110, 116-117, 136, 138-139

Manufacturing firms, 4, 15-16, 57, 139Manufacturing operations, 96Manufacturing strategy, 3Margin, 65Margins, 6-7, 83-84, 137Market research, 15Market share, 14, 54, 138Marketing, 2-3, 8, 14, 17-18, 20, 32, 34, 52-54, 56,

59-73, 76-77, 85, 87, 89-90, 91-92, 96, 110,114

defined, 2, 14, 89global, 89needs and, 92people, 34, 61-62, 68, 72-73, 76, 85, 91place, 8, 18, 56

Marketing management, 62, 65

Marketing objectives, 60Marketing strategy, 85Marketplace, 14, 88-89Markets, 1, 35, 62, 84, 100Mass customization, 105master production schedule, 2, 95Material requirements planning, 2, 94Materials handling, 102-104Materials management, 2, 8, 46, 70-71, 81, 85, 87,

91-105materials requirements planning, 96

MRP, 96meaning, 4Measurement, 135Media, 64, 134meetings, 68-69MIS, 15, 27, 53, 76-77, 125, 138Money, 11, 27, 36-37, 56, 72, 79, 137Motivation, 7, 19, 53Myths, 15

NNegligence, 121Negotiation, 22

Planning, 22Process, 22

Net present value, 11-12, 79NPV, 79

Networking, 11, 17, 24, 31, 53, 121New products, 64, 79, 92Norms, 123NPV, 79

OObjectives, 1, 4, 17, 28, 40, 44, 60, 63, 76, 91, 93, 97,

108, 115, 120, 123accounting, 4, 28, 60, 76, 91, 93, 108, 115

Offer, 7, 32, 41, 43, 69, 72, 85, 89-90, 100, 102, 105,109, 114, 128

Oil, 13, 43, 121Operational excellence, 6Operations, 3, 9, 13, 17-18, 35, 37, 53, 56, 60, 81,

84-85, 96-98, 102, 120, 139Operations management, 53, 56operations plan, 96, 98Opportunities, 35, 128Oracle, 1, 7-8, 56, 88, 120-121, 135Oracle Database, 135oral presentations, 55

purpose of, 55Order processing, 2, 6-7, 18, 27, 53-54, 61-62, 86, 99Organization, 2, 6-8, 11, 13-14, 17-18, 25, 27, 32,

34-35, 39-40, 42-43, 45-47, 49, 51, 57, 69,72-73, 79, 83, 87-88, 102, 110-111, 113, 116,121-122, 124-125, 132, 135, 138

control systems, 18definition of, 17, 72

organization charts, 40Organizational change, 45, 51, 120Organizational culture, 128, 131

strong, 128, 131Organizational objectives, 115Organizational processes, 139Organizational structure, 18Organizations, 1-2, 6, 8-9, 14, 31, 34-35, 46, 56, 72,

87-88, 100, 116, 127-129, 132Outbound logistics, 17-18Output, 24, 40-41, 48, 50, 86, 104

potential, 104output design, 40-41Outsourcing, 46-47, 110overhead, 3, 22, 37, 102-103Overhead costs, 3, 102Ownership, 49-50

PPackaging, 78, 117Partnership, 87, 100passwords, 33payback period, 79paychecks, 77, 111payroll, 78, 80, 85, 89, 110-111, 115-117Percentage of sales, 63Perception, 132Performance, 4-7, 10, 16, 17, 31, 35, 63-64, 84, 87,

99, 105, 110-111, 113Performance appraisal, 111Performance evaluations, 113

Perils, 73Permits, 102-103Personality, 122Place, 7-8, 12, 18-19, 25-26, 31, 56, 79, 113, 128, 131,

134planning and scheduling, 99-100Plans, 3, 27-28, 37, 92-93, 95, 109, 114, 117, 128-129,

135business, 3, 27, 37, 92-93, 109, 114, 117, 128-129,

135Policies, 138Politics, 138Portfolio, 131, 139Power, 32, 35, 88-89PowerPoint, 55Present value, 11-12, 79presentations, 52-56, 134press releases, 68Price, 8, 19-20, 65-66, 68, 76, 135, 137-138Prices, 22, 25-26, 65, 81, 88, 101Pricing, 18, 61-62, 65, 69, 72, 80, 88, 114, 134, 136

e-commerce and, 88payment, 61, 65strategy, 65, 72, 114value, 18, 72

Primary activities, 17-18Principal, 28Principles, 20, 22, 24, 138Process control, 3Procurement, 6, 8, 10, 48, 97-101Product advertising, 34product design, 4, 91, 94-95Product development, 21-22, 33-35, 84Product line, 54, 85Product management, 33-34

defined, 33effective, 33

Product managers, 35Product or service, 17-18, 64Product planning, 33-34Product specifications, 76Production, 2-4, 7-8, 15, 41, 46, 48, 53-54, 57, 60,

65-66, 70-71, 76-77, 85-87, 91-105, 110,138-139

decentralized, 87Production costs, 65, 94production order, 97-98, 103-104Production planning, 2, 7-8, 46, 53, 66, 70-71, 85, 87,

93-94, 96-103Productivity, 5, 7, 10-11, 17, 19, 22, 27, 43-44, 60, 63,

70-72, 87, 90, 96, 102, 105, 110-111, 116labor, 110-111, 116

Products, 3, 6, 13, 34-35, 60, 62-65, 68-69, 72, 76, 79,81, 83-85, 87-89, 91-93, 95-96, 99-105, 117,121-122, 131, 136

consumer products, 13defined, 89, 99, 122development of, 34levels of, 6packaging, 117

Professional development, 110Professionals, 114, 116Profit, 10, 65, 76, 82-84, 137Profit center, 83-84Profits, 72, 121program design, 40Project management, 11-12, 31, 51, 120, 123,

125-127, 131-132, 134, 138Project plan, 131Project scope, 122-123, 131Project structure, 123Promotion, 18, 62, 64, 68, 114proposals, 44, 53-54, 101, 134Prospecting, 56, 62

Planning, 56Protection, 134, 136prototyping, 41-42, 47

developing, 41Public relations, 89

defined, 89public relations department, 89purchase order, 21, 77, 80, 83, 98-99, 101purchase requisition, 98-99Purchasing, 4, 7-8, 18-19, 21-22, 24-25, 41, 46, 68,

76-79, 82, 91-94, 96, 98-99, 101, 105, 137Purchasing agents, 18, 101purpose, 3, 48, 52, 55, 66, 86-87, 95

specific, 3, 86, 95

143

QQuality, 3, 17, 19, 41, 46, 56, 61, 70-71, 85, 93-94, 99,

102, 109, 122quality control, 61, 93-94Quality management, 19, 46, 56, 70-71, 94, 99, 102Quantity discounts, 66query, 48, 53-54, 68, 90, 109, 112-113, 129-130Quotas, 60quotations, 6, 60, 98-99

RRate of return, 79

internal, 79Rates, 25, 27, 86, 105Rating, 54, 125Raw materials, 65, 93-97, 101, 103Reach, 1, 77, 112recommendations, 27Records, 29-30, 36, 66-67, 88, 104-105, 111, 115-116Recruiting, 108, 110-111, 114, 127Recruitment, 114, 121redundancy, 32Referrals, 114Reimbursements, 109Relational database, 32, 53, 102-103, 112Relationships, 19, 33, 67, 95, 103, 128, 130reorder point, 3, 105reports, 2, 28, 41, 48-49, 62-63, 69, 78, 84-85,

108-109, 111, 137components of, 111feedback on, 85types of, 85

Repositioning, 89request for proposal, 52-53, 134research, 1, 11, 13-16, 37, 52, 55-57, 71, 81, 87-88,

101, 116, 120, 126, 137, 139conducting, 11, 71, 87, 116planning, 1, 11, 13-16, 37, 52, 55-57, 71, 87-88,

101, 126, 137, 139purpose of, 52, 55, 87

Resources, 2, 5, 7-8, 10-11, 14-15, 18, 22, 24, 32, 46,48, 51-57, 60, 62, 64, 67-68, 70-71, 76, 80,82, 84-87, 89-90, 91-92, 94-95, 97-98, 102,104-105, 107-117, 122-124, 128

enterprise resource planning (ERP), 102response time, 4-6, 19Responsibility, 34-35, 50, 84, 86, 123, 137Retailers, 18, 92Retention, 68, 108-109, 114Retirement, 109, 111, 113Retirement plans, 109

qualified, 109Return on investment, 13, 16, 131-132Revenue, 10, 62, 67, 79, 85, 88Revenues, 1, 7, 11, 31, 62, 64, 70, 79, 87, 120-121,

136RFP, 44, 52-53, 55-56

Request for proposal, 52-53Risk, 28, 44, 46-47, 51, 120, 123-127, 132, 135,

138-139asset, 46business, 44, 46-47, 51, 120, 124-127, 132, 135,

139commercial, 28, 125, 135enterprise, 28, 120, 126-127, 138-139financial, 46market, 138objective, 28operational, 139strategic, 47

Risk management, 138enterprise, 138

Risks, 8, 27, 51, 121, 123-124, 129, 131-132, 138-139Role, 17, 35, 55-56, 72, 85, 87, 101, 127, 129, 135,

139managerial, 85

Rules of thumb, 92

SSafety stock, 95Salaries, 114Salary, 108-109, 111, 114Sales, 1-2, 4, 7-8, 14, 18, 20, 25, 31-34, 48-49, 53-54,

56, 59-73, 76-82, 84-85, 87, 91, 93, 95-99,101-102, 104, 108-110, 114-115, 121,133-134, 136

Sales and marketing, 2, 8, 14, 32, 53-54, 59-73, 76,

91, 110Sales data, 49, 62Sales force, 56, 63, 68-69, 84Sales management, 62-63, 65, 71sales order, 7-8, 48, 53, 61-62, 65-67, 69, 71, 77-78,

80, 99, 104sales order entry, 61, 71Sales potential, 62Sales presentation, 68-69Sales process, 68, 134Sales records, 67Salespeople, 60, 65, 68, 115SAP, 1, 7-8, 47-50, 56, 65-66, 69-70, 82-83, 88-89, 97,

102-105, 112-113, 115-117, 120-121, 129,131, 134-138

scope, 86, 89, 121-125, 131SD, 8Search costs, 100Securities, 89Security, 33, 40-42, 50, 112Selection, 52-56, 89, 99, 109-111, 132, 134, 138Sellers, 100-101Sensitivity, 126Service provider, 46Services, 3, 31, 47, 64, 71-72, 85, 87, 89, 92-93, 100,

103, 112, 116-117, 121attributes of, 112defined, 89quality management, 71

shipping, 2, 18, 61, 65, 67, 104, 135, 137Ships, 76Shrinkage, 137SIMPLE, 11, 89Singapore, 138Size, 37, 44, 121-125Skills, 18, 25, 110-111, 113, 116-117, 125, 129-130Skills training, 110slides, 68Society, 56, 90software, 1-3, 7-8, 11-13, 32, 35, 39-46, 49, 51-54, 56,

63, 65, 67-68, 80, 88-89, 96, 110, 116-117,121-123, 125-127, 129, 131-132, 134-136,138

custom, 43, 45, 125evaluation of, 53, 122outsourcing, 46, 110prototyping, 41-42purchasing, 7-8, 41, 46, 68, 96request for proposal, 52-53, 134tracking, 53, 110, 116-117, 122-123

source documents, 81Sourcing, 66, 71, 101Span of control, 122spreadsheets, 41SQL, 88-90

queries, 90statements, 88view, 89-90

Stakeholders, 125Standardization, 7-10, 72, 88, 112, 117Status, 9, 31, 93-95, 98-99, 136Status quo, 9, 31steering committee, 11, 132Stock, 22, 62, 64-65, 70, 77, 94-95, 99, 137Stories, 105, 120-121, 138Strategic management, 15Strategies, 15, 21, 35, 51, 99-100, 109, 115-116, 121,

123, 126-128, 132, 134competitive, 15, 21, 100, 109corporate, 35, 126functional, 21, 35, 128

Strategy, 3, 15-16, 43, 51, 54-55, 65, 72-73, 85,113-114, 126-130, 135, 138-139

focus, 3, 15, 72, 85, 127-130Stress, 34, 135Students, 52, 55, 111Subsidiaries, 77, 81, 134Success, 14-16, 35, 51, 53, 57, 62-63, 73, 88, 120,

123, 125, 127-129, 131-132, 138summarizing, 28Supply, 2-5, 8, 10, 18, 26, 67, 72-73, 92, 98-101, 105,

136aggregate, 100excess, 5, 92

Supply chain, 2-5, 8, 18, 67, 72-73, 92, 99-101, 105defined, 2, 99

Supply chain management, 3, 8, 18, 67, 105Supply chains, 100

advantages, 100

Support, 3, 5, 7, 11, 13, 15, 18, 20, 24, 27, 31, 33,40-42, 44-47, 49-50, 53-55, 65, 68-69, 71,80, 87, 89, 94-100, 102-104, 111-113, 123,125-127, 135-136

support activities, 18surveys, 4, 6-7, 9, 11, 15, 114Sweden, 5, 7, 9, 11, 15, 46system, 1-4, 8-13, 15-16, 17-19, 22, 26-28, 33, 35-37,

39-54, 56, 60-62, 65, 67, 69, 71-72, 77-78,80, 85-90, 92, 94-98, 100-105, 108-117,120-122, 124-125, 127-128, 131-132,134-139

System design, 42systems analysis, 25, 40

feasibility study, 40Systems approach, 3systems development, 39-42, 51-52, 57, 138

planning, 39-42, 51-52, 57, 138Systems development life cycle, 40-41, 52systems implementation, 41, 47, 51

testing, 41

TTables, 50teams, 19, 24, 34, 52, 55-56, 68, 125, 127, 134

advantages of, 52disadvantages of, 52effective, 125, 127

Teamwork, 34Technical skills, 130Technological advances, 19Technology, 14-16, 17-19, 21-22, 24, 31-32, 36, 42-44,

68, 72-73, 88-89, 100-101, 105, 112, 114,117, 121-128, 130, 132, 134-135, 138-139

advances in, 15information technology, 14-16, 17, 22, 24, 31-32,

36, 88, 114, 123, 126-127, 139Telemarketing, 62, 69Telesales, 70templates, 45, 68Territory, 62-64, 68, 84Territory management, 68throughput, 4, 7, 137time sheets, 116Time value of money, 11Timing, 21, 95-96Total cost, 102Total costs, 12Total quality management, 94

TQM, 94Total quality management (TQM), 94Trade, 14, 39, 43, 52, 55-56, 71, 87, 101, 116, 132Trade-offs, 39, 43Training, 11-12, 31, 34-35, 40, 51, 54-55, 72, 108,

110-111, 113-114, 116, 121, 125-127,129-130, 132

Transactions, 2, 5, 27, 48-50, 77-78, 80-83, 85, 88-89,100, 131, 135

consistent, 81isolated, 5

Transportation, 10, 100costs, 100

Transportation planning, 100Trends, 14, 22, 62, 64, 69, 114trial balance, 36TRIPS, 31Trucks, 137Trustee, 134, 136Turnover, 108-109, 114, 116

UUnderwriting, 22, 24

principles, 22, 24steps, 22

United States, 7, 9, 11, 14Universities, 114U.S, 4-5, 7, 9, 11, 14-15, 57, 72, 105U.S., 4-5, 7, 9, 11, 14-15, 57, 72, 105

VValue, 11-12, 16, 17-18, 41, 54, 70, 72, 79, 81, 86, 89,

100, 110, 132, 135, 137, 139building, 41, 72defined, 86, 89

Value chain, 17-18, 41, 89definition of, 17organizational structure, 18

Value-added, 18

144

Product, 18Variables, 125, 135vendor selection, 99Vision, 44, 89visual aids, 55Vocational Rehabilitation Act, 116Volume, 3, 22, 65, 72, 92, 135-136Volumes, 67, 136-137

WWages, 112Wall Street Journal, 135War, 120-121Warehousing, 18, 69, 90Warranty, 6, 61Weaknesses, 44, 52Web, 5, 7, 11, 15, 52-56, 71-72, 87, 89, 101, 108,

111-112, 114, 116-117Web site, 15Web sites, 52, 55-56, 114websites, 8Won, 72, 136Work, 2, 6, 16, 19-20, 24-25, 27, 31-32, 34-35, 37-38,

40, 42-43, 45, 50, 56, 72, 86, 88, 90, 95-96,100, 111, 114, 117, 122, 134-135, 137, 139

Workers, 19, 22, 35, 95, 117, 132, 137workforce, 93, 109-110, 113-115, 117, 124, 127Workforce Management, 117World, 35, 88, 100WWW, 15

145