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Computing Applications in Business

Spring 2015
WEEK 2

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Chapter Two:
The Development of
Enterprise Resource
Planning Systems

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Objectives
After completing this chapter, you will be able to:
Identify the factors that led to the development of
Enterprise Resource Planning (ERP) systems
Describe the distinguishing modular characteristics of ERP
software
Discuss the pros and cons of implementing an ERP system
Summarize ongoing developments in ERP

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Introduction
Efficient, integrated information systems are very
important for companies to be competitive
An Enterprise Resource Planning (ERP) system can help
integrate a companys operations
Acts as a company-wide computing environment
Includes a database that is shared by all functional areas
Can deliver consistent data across all business functions in real
time

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The Evolution of Information Systems

Silos
Information systems configuration used until recently
Companies had unintegrated information systems that
supported only the activities of individual business functional
areas

Current ERP systems evolved as a result of:

Advancement of hardware and software technology
Development of a vision of integrated information systems
Reengineering of companies to shift from a functional focus to
a business process focus

Computer Hardware and Software

Development

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Computer hardware and software developed rapidly in

the 1960s and 1970s
First practical business computers were the mainframe
computers of the 1960s
Over time, computers got faster, smaller, and cheaper
Moores Law
Number of transistors that could be built into a computer chip
doubled every 18 months

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Concepts in Enterprise Resource
Planning, Fourth Edition

Computer Hardware and Software

Development

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Figure 2-1 The actual increase in transistors on a chip approximates Moores Law
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Computer Hardware and Software

Development

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Advancements in computer software

1970s: relational database software developed
Provide businesses the ability to store, retrieve, and analyze large
volumes of data

1980s: spreadsheet software became popular

Managers can easily perform complex business analyses

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Early Attempts to Share Resources

By the mid-1980s, telecommunications developments
allowed users to share data and peripherals on local
networks
Client-server architecture

By the end of the 1980s, the hardware needed to

support development of ERP systems was in place
By the mid-1980s, database management system
(DBMS) required to manage development of complex
ERP software existed

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The Manufacturing Roots of ERP

Manufacturing software developed during the 1960s and
1970s
Evolved from simple inventory-tracking systems to material
requirements planning (MRP) software

Electronic data interchange (EDI)

Direct computer-to-computer exchange of standard business
documents
Allowed companies to handle the purchasing process
electronically

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Managements Impetus to Adopt ERP

Hard economic times of the late 1980s and early 1990s
caused many companies to downsize and reorganize
Stimulus to ERP development

Inefficiencies caused by the functional model of business

organization
Silos of information
Limits the exchange of information between the lower operating
levels

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Managements Impetus to Adopt ERP

(contd.)

Figure 2-2 Information and material flows in a functional business model

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Managements Impetus to Adopt ERP

(contd.)

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Functional model led to top-heavy and overstaffed

organizations incapable of reacting quickly to change
Process business model
Information flows between the operating levels without top
managements involvement

Further impetus for adopting ERP systems has come

from compliance with the Sarbanes-Oxley Act of 2002
Requires companies to substantiate internal controls on all
information

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Managements Impetus to Adopt ERP

(contd.)

Figure 2-3 Information and material flows in a process business model

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ERP Software Emerges: SAP and R/3

1972: five former IBM systems analysts in Mannheim,
Germany formed Systemanalyse und
Programmentwicklung (Systems Analysis and Program
Development, or SAP)
SAPs goals:
Develop a standard software product that could be configured to
meet the needs of each company
Data available in real time
Users working on computer screens, rather than with voluminous
printed output

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SAP Begins Developing Software Modules

During their work for German chemical company ICI, Plattner
and Hopp had developed the idea of modular software
development
Software modules: individual programs that can be purchased,
installed, and run separately, but that all extract data from the
common database
1982: SAP released its R/2 mainframe ERP software package
1980s: sales grew rapidly; SAP extended its softwares
capabilities and expanded into international markets
By 1988, SAP had established subsidiaries in numerous foreign
countries
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SAP R/3
1988: SAP began development of its R/3 system to take
advantage of client-server technology
1992: first version of SAP R/3 released
SAP R/3 system was designed using an open architecture
approach
Open architecture: third-party software companies
encouraged to develop add-on software products that
can be integrated with existing software

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Concepts in Enterprise Resource
Planning, Fourth Edition

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New Directions in ERP

Late 1990s: Year 2000 (or Y2K) problem motivated many
companies to move to ERP systems
By 2000, SAP AG had 22,000 employees in 50 countries
and 10 million users at 30,000 installations around the
world
By 2000, SAPs competition in the ERP market:
Oracle
PeopleSoft

Late 2004: Oracle succeeded in its bid to take over

PeopleSoft
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New Directions in ERP (contd.)

PeopleSoft
Founded by David Duffield, a former IBM employee
Today, PeopleSoft, under Oracle, is a popular software choice for
managing human resources and financial activities at universities

Oracle
SAPs biggest competitor
Began in 1977 as Software Development Laboratories (SDL)
Founders: Larry Ellison, Bob Miner, and Ed Oates

SAP ERP
Latest versions of ERP systems by SAP and other companies allow:
All business areas to access the same database
Elimination of redundant data and communications lags
Data to be entered once and then used throughout the organization
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New Directions in ERP (contd.)

Figure 2-4 Data flow within an integrated information system

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New Directions in ERP (contd.)

Current SAP ERP system: SAP ECC 6.0 (Enterprise
Central Component 6.0)

Sales and Distribution (SD) module

Materials Management (MM) module
Production Planning (PP) module
Quality Management (QM) module
Plant Maintenance (PM) module
Asset Management (AM) module
Human Resources (HR) module
Project System (PS) module
Financial Accounting (FI) module
Controlling (CO) module
Workflow (WF) module

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New Directions in ERP (contd.)

Figure 2-5 Modules within the SAP ERP integrated information systems
environment (Courtesy of SAP AG)

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SAP ERP Software Implementation

Not all companies that use SAP use all of the SAP ERP
modules
Companys level of data integration is highest when
it uses one vendor to supply all of its modules
Configuration options allow the company to
customize the modules it has chosen to fit the
companys needs

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SAP ERP Software Implementation

(contd.)

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Tolerance groups
Specific ranges that define transaction limits
SAP has defined the tolerance group methodology as its method
for placing limits on an employee
Configuration allows the company to further tailor tolerance group
methodology

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SAP ERP Software Implementation

(contd.)

Figure 2-6 A customization example: tolerance groups to set transaction limits

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SAP ERP Software Implementation

(contd.)

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Features of SAP ERP

First software that could deliver real-time ERP integration

Usability by large companies
High cost
Automation of data updates
Applicability of best practices
Best practices: SAPs software designers choose the best, most
efficient ways in which business processes should be handled

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ERP for Midsized Companies

By 1998
Most of the Fortune 500 companies had already installed ERP systems
ERP vendors refocused their marketing efforts on midsized companies

SAP All-in-One
Single package containing specific, preconfigured bundles of SAP ERP
tailored for particular industries
Can be installed more quickly than the standard ERP product

Application hosting
Third-party company provides the hardware and software support
Makes ERP systems like SAP more appealing to midsized companies

SAP and Oracle are facing competition from smaller providers

of ERP software
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Responses of the Software to the Changing

Market
In mid-1990s, many companies complained about the
difficulty of implementing SAP R/3 system
SAP responded by developing Accelerated SAP (ASAP)
implementation methodology
Eases the implementation process

SAP continues to extend capabilities of SAP ERP with

additional, separate products that run on separate
hardware and extract data from the SAP ERP system

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Choosing Consultants and Vendors

One person cannot fully understand a single ERP system
Before choosing a software vendor, most companies:
Study their needs
Hire an external team of software consultants to help choose the
right software vendor(s) and the best approach to implementing
ERP

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The Significance and Benefits of ERP

Software and Systems
More efficient business processes that cost less than
those in unintegrated systems
Easier global integration
Integrates people and data while eliminating the need to
update and repair many separate computer systems
Allows management to manage operations, not just
monitor them
Can dramatically reduce costs and improve operational
efficiency
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Questions About ERP

How much does an ERP system cost?
Should every business buy an ERP package?
Is ERP software inflexible?
What return can a company expect from its ERP investment?
How long does it take to see a return on an ERP investment?
Why do some companies have more success with ERP than
others?

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How Much Does an ERP System Cost?

Size of the ERP software
Corresponds to the size of the company it serves

Need for new hardware that is capable of running

complex ERP software
Consultants and analysts fees
Time for implementation
Causes disruption of business

Training
Costs both time and money
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Should Every Business Buy an ERP

Package?

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Some of a businesss operations, and some segments of

its operations, might not be a good match with the
constraints of ERP
Sometimes, a company is not ready for ERP
ERP implementation difficulties result when management
does not fully understand its current business processes
and cannot make implementation decisions in a timely
manner

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Is ERP Software Inflexible?

Many people claim that ERP systems, especially the
SAP ERP system, are rigid
Options for customization offered by SAP ERP
Numerous configuration options that help businesses
customize the software to fit their needs
Programmers can write specific routines using Advanced
Business Application Programming (ABAP)

Once an ERP system is in place, trying to reconfigure

it while retaining data integrity is expensive and
time-consuming

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What Return Can a Company Expect from

Its ERP Investment?
ERP eliminates redundant efforts and duplicated data;
can generate savings in operations expense
ERP system can help produce goods and services more
quickly
Company that doesnt implement an ERP system might
be forced out of business by competitors that have an
ERP system
Smoothly running ERP system can save a companys
personnel, suppliers, distributors, and customers much
frustration
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What Return Can a Company Expect from

Its ERP Investment? (contd.)
Cost savings and increased revenues occur over many
years
Difficult to put an exact dollar figure to the amount accrued from
the original ERP investment

ERP implementations take time

Other business factors may be affecting the companys costs and
profitability
Difficult to isolate the impact of the ERP system alone

ERP systems provide real-time data

Improve external customer communications

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How Long Does It Take to See a Return on

an ERP Investment?
Return on investment (ROI): assessment of an
investment projects value
Calculated by dividing the value of the projects benefits by the
projects cost

ERP systems ROI can be difficult to calculate

Peerstone Research study
63 percent of companies that performed the calculation reported
a positive ROI for ERP
Most companies felt that nonfinancial goals were the reason
behind their ERP installations

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Why Do Some Companies Have More

Success with ERP Than Others?
Usually, a bumpy rollout and low ROI are caused by
people problems and misguided expectations, not
computer malfunctions
Executives blindly hoping that new software will cure
fundamental business problems that are not curable by any
software
Executives and IT managers not taking enough time for a proper
analysis during planning and implementation phase
Executives and IT managers skimping on employee education
and training

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Why Do Some Companies Have More

Success with ERP Than Others? (contd.)
Usually, a bumpy rollout and low ROI are caused by
people problems and misguided expectations, not
computer malfunctions (contd.)
Companies not placing ownership or accountability for the
implementation project on the personnel who will operate the
system
Unless a large project such as an ERP installation is promoted
from the top down, it is doomed to fail
ERP implementation brings a tremendous amount of change for
users

For many users, it takes years before they can take

advantage of many of an ERP systems capabilities
Most ERP installations do generate returns
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The Continuing Evolution of ERP

Understanding the social and business implications of
new technologies is not easy
ERP systems have been in common use only since the
mid-1990s
ERP vendors are working to solve adaptability problems
that plague customers

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Summary
Speed and power of computing hardware increased
exponentially, while cost and size decreased
Early client-server architecture provided the conceptual
framework for multiple users sharing common data
Increasingly sophisticated software facilitated
integration, especially in two areas: A/F and
manufacturing resource planning

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Summary (contd.)
Growth of business size, complexity, and competition
made business managers demand more efficient and
competitive information systems
SAP AG produced a complex, modular ERP program
called R/3
Could integrate a companys entire business by using a common
database that linked all operations

SAP R/3, now called SAP ERP, is modular software

offering modules for Sales and Distribution, Materials
Management, Production Planning, Quality Management,
and other areas
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Summary (contd.)
ERP software is expensive to purchase and timeconsuming to implement, and it requires significant
employee trainingbut the payoffs can be spectacular
For some companies, ROI may not be immediate or even
calculable

Experts anticipate that ERPs future focus will be on

managing customer relationships, improving planning
and decision making, and linking operations to the
Internet and other applications through service-oriented
architecture

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