Enterprise Resource Planning in the IT Field- an Opportunity for System Development and Innovation

through the use of Business Process Reengineering

By: Aaron Varrone

ABSTRACT

ERP systems are excellent opportunities for organizations to gain a competitive edge, reduce waste and redundancy, analyze and streamline current business processes. However with this being said, many organizations fail to understand fully the processes behind each department within an organization and how these processes interrelate to one another. For ERP systems to be successful, organizations must take time to examine and evaluate its current processes and look for opportunities for improvement. If done correctly; hundreds of man hours can be saved, resulting in huge financial gains for a company.

The aim of this paper is to examine how business processes and other uses of information technology (IT), connected with ERP, can not only aid to increase efficiency for the company, but in addition, aid to increase the effectiveness of future IT projects for the organization. This paper will first look at the tangible, intangible, and unexpected benefits of an ERP system, outside from the obvious. Then the paper will shift gears and focus on system development and innovation, and how these opportunities can be found in an ERP system by reengineering existing business processes. Several theories and laws are taken into consideration to help better understand where opportunity exists.

INTRO

Many organizations today consider Enterprise Resource Planning (ERP) systems as necessary information systems infrastructure to survive and thrive in today’s global marketplace. In fact, a Deloitte Consulting survey found that of eight-hundred U.S. companies, almost half of these companies had installed an ERP system and that these systems were commanding forty-three percent of a company’s application budget (Hawking, Stein, & Foster, 2004). While ERP systems are not cheap by all means, companies today are realizing that it’s more essential than ever before to have some type of system in place, and they know where to invest their capital in: where automation is generated, redundancy is eliminated, and efficiency is achieved. An ERP system is not just a tool that provides a single output, however rather an infrastructure that supports the capabilities of all other information processes and tools utilized by an organization (Bendoly & Schoenherr, 2005).

HISTORY

Most of today’s integrated systems are known as ERP systems. However, ERP evolved from the terminology, MRP (Material Requirements Planning), which was indeed the original effort made in the early 1960s (O'Leary, 2004). J.I. Case, a manufacturer of tractors and construction machinery, partnered with IBM during this time to create a software application which would serve as a system for planning and scheduling materials for various complex manufactured products (O'Leary, 2004). Although these initial MRP solutions were rather large and expensive requiring a large technical staff to support the computers on which they ran, manufacturing companies started believing that they indeed could save costs by automating some processes.

In 1972, these five engineers who worked for IBM believed the future of computing for business was at the “enterprise level” (Vogel & Kimbell, 2005). This led them to start a company of their own based in Heidelberg, Germany known as SAP (Systemanalyse and Programmentwicklung), which later on became the world’s largest business software company and third-largest independent software provider (SAP: The World's Largest Business Software Company, 2009). The company’s first effort in ERP consisted of producing a basic financial and logistic system called the R/1 system (Vogel & Kimbell, 2005). Although this application was implemented on an enterprise-wide basis, this system was only the predecessor of what ERP would become. Nine years later in 1981, the company produced SAP R/2 which became the first ERP system (Vogel & Kimbell, 2005). This system automated an organization’s accounting, finances, human resources, sales, procurement, and manufacturing functions, which became critical functions for a company to survive in the marketplace.

SAP continued to make improvements to its suite of applications. After the release of SAP R/3 in 1992, many believed that this latest edition set the standard for many ERP solutions that soon followed thereafter. With the extensive embracing of ERP systems in the 1990s, many organizations demanded more functionality for specific areas. Even though most ERP systems covered the basic functions, SAP differed in developing new functions and bringing them together such as: stand-alone applications, Customer Resource Management (CRM) software, Logistics and Production Planning, and Supply Chain Management (SCM) (Vogel & Kimbell, 2005).

LITERATURE REVIEW

The ultimate goal of an ERP system is to integrate the data required to manage an enterprise and provide seamless transaction automation across all enterprise functions. Once implemented, the system will have better information integration and will provide a competitive advantage to the organization (Bendoly & Schoenherr, 2005). There are many benefits to using an ERP system and even stock holders can attest to this. According to Stratman and Roth, historic studies have shown that companies who use an ERP system have reported abnormal stock returns (Stratman & Roth, 2002). In fact, there has been significant evidence in improved financial performance immediately following an ERP implementation.

Tangible Benefits

People understand that ERP systems are built for a company’s future, meaning that executives look at their return on investment (ROI) when implementing an ERP, expecting to see considerable results usually in a five year span. However, this does not mean companies will only begin to see results after five years. According to O’Leary, nineteen percent of executives saw a reduction in: financial close cycle, IT cost, procurement cost, transportation and logistics cost, and maintenance. Executives claim that many of their existing processes were streamlined through improved automation and collaboration within several months of using an ERP system (O'Leary, 2004).

While main benefits of an ERP system are quite obvious and include: to automate all processes, reduce waste, and improve efficiency; many organizations fail to realize outside of the obvious how else an ERP system can help. According to James Connolly, a journalist for CNN; Connolly claims that inventory management and just better management overall is also a big benefit that most tend to overlook (Connolly, 1999). In fact, he claims that managers are saving millions already just after implementing their ERP system only a few months prior (Connolly, 1999). Wally Hayes, a manager at Kinetico, claims that “sales increased two and a half times from the time we started the study through implementation. If we had remained on the legacy system, we would have needed to add at least 20 people in manufacturing, order entry, and shipping to support that sales growth” (Connolly, 1999). Frank Holland, corporate VP of Operations at Microsoft, claims that his organization implemented a new business model by bringing in an ERP system prior to the year 2000. He stated that Microsoft brought in an ERP System because their legacy systems would’ve had to been updated anyways, and that it would actually cost more to do the upgrade than to actually start a new business stream (Connolly, 1999).

Intangible Benefits

While the majority benefits of an ERP system are viewed upon as tangible, there are many intangible benefits as well. Executives and organizational leaders agreed that information and visibility are the most intangible benefits realized after implementation, according to a Deloitte Consulting survey (Hawking, Stein, & Foster, 2004). Since ERP systems are designed to streamline business processes and connect all the inner functions that make up a company, all of this integration has vastly improved the flow of information, and make it that much easier to see data and results of these other departments within the organization. In a case study conducted by Palaniswamy and Tyler, they emphasized that ERP systems provide critical functionality by integrating information technologies and their departments together throughout the enterprise (Palaniswamy & Frank, 2000). Thus, during the implementation phase, organizations are forced to understand their core capabilities and make necessary changes to their business processes that they may otherwise have ignored.

Additional Benefits

Many executives and organizational leaders, in addition to the benefits mentioned above, found other benefits that they’ve discovered after implementing an ERP system. These benefits include: new reports/ reporting capability, a changed business model, better managerial and project management decisions, more time for analysis, and improved training (O'Leary, 2004). Such benefits were never “thought of” during the decision to implement ERP and only came upon more of a realization after the thought. AMR Research Inc. has found that more consistent data is being discovered which can provide an organization with a global view of the business, in which they can then drive continuous improvement strategies by helping to establish consistent performance metrics and measures to best judge the business (AMR Research Inc, 2007).

PROPOSAL

While organizations are able to garner considerable benefits from an ERP system: such as an increase in the knowledge base of its personnel, to automation and efficient processes, to lowering costs, and from the overall corporate awareness of information and visibility; ERP also tends to generate the ability to recognize opportunities for further enhanced system development and innovation. In the past, ERP systems have determined what road organizations take; either the road to success and victory, or the road to epic failure. For instance, Hershey, a leading manufacturer of chocolates, confectionaries, and beverages in the US decided to take the path of the latter. In 1999, Hershey experienced this when their ERP implementation was delayed during the busiest time of the year, Halloween season (Koch, 2002). Former CEO and Chairman Kenneth Wolfe told Wall Street analysts during a conference call in September 1999 that the company was experiencing problems with its new order-taking and distribution computer system and that the problem was going to keep the company from delivering well over $100 million worth of Kisses and Jolly Rangers for Halloween that year (Koch, 2002). Many were terrified and pondered the question: could a failed ERP system take down a Fortune 500 company? Hershey’s stock price fell more than eight percent during the day and twenty-seven percent down from its year high in a booming stock market, leaving many investors with losing faith in the company (Netessence E-Business Management Consultants, 2004).

While the Hershey case is a rare example of how a system can break or make a company, implementing an ERP system is no easy task and does take time. But with time, these systems have also evolved economically and matured technically over the years. Consultants, developers, and even users have become increasingly more familiar with ERP systems and their siblings, such as supply chain management (SCM) and customer relationship management (CRM) systems, in the end positively affecting the overall financial burden of a company (Bendoly & Schoenherr, 2005). In addition, both hardware and software technology has evolved to add to the reliability of today’s systems.

Shortcomings and Limitations

Although ERP has many benefits for an organization, it does tend to have several shortcomings. These shortcomings include: the insufficient support of business functions and processes, increased complexity of business processes, increased overall system complexity, deficient standard processes , unsatisfactory support of supply chain management and other forms of inter-organizational collaboration, as well as the potential requirements for future systems, and how future developments can be made to accurately interconnect multiple systems together (Bendoly & Schoenherr, 2005). However at the same time, many system vendors have proposed new technologies to solve these shortcomings and any other future limitations. These proposed solutions include: enterprise application integration (EAI) and service-oriented architectures (SOA), which emphasize the technical concepts for developing software systems.

Overcoming Shortcomings and Limitations

EAI is the sharing of data and business rules across hetero and homogeneous software application instances through message-oriented-middleware (MOM) (Enterprise Integration Incorporated, 2008). Applications that cannot communicate with one another, such as: SCM, CRM, business intelligence, HR, health care, and internal communications are referred to as “islands of automation”. Meaning that these technologies are functional on an independent basis, however, are not able to provide the benefits being associated with each other, resulting in redundant, inconsistent data, and inefficiency (Data Warehouse Glossary).

While EAI focuses on sharing business data and business processes between applications, SOA focuses on linking and sharing resources as a collection of services. SOA provides the ability to reuse existing services and the rapid deployment of new business capabilities based on existing assets (Federal Enterprise Architecture Program Management Office, 2005) The services, although diverse, work seamlessly together with each other and can be accessed without knowledge of the underlying platform implementation (Tech Terms, 2009).

Business Process Re-engineering

The ultimate goal of these two technical concepts is to bring together ERP’s siblings and eliminate any limitations that ERP may have for an organization. However in order to do this, one must carefully examine and evaluate the processes that exist within the organization. Authors Schmenner and Swink define The Law of Variability, which states: “The greater the random variability, either demanded of the process or inherent in the process itself or in the items processed, the less productive the process is.” (Schmenner & Swink, 1998). With this being said, organizations look at their ability to improve on these existing processes and effectively allocate the company’s resources in a timely manner. When viewing a broad perspective of ERP, people look for the total number of processes used and the diversity of employee interpretations of corporate goals and operational requirements, which in turn help with the reduction of variance in processing time, such as non-value added elements (Bendoly & Schoenherr, 2005).

Another law described by Schmenner and Swink: The Law of Bottlenecks, an alternative to Goldratt’s Theory of Constraints, states: “An operation’s productivity is improved by eliminating or by better managing its bottlenecks. If a bottleneck cannot be eliminated in some way, say by adding capacity, productivity can be augmented by maintaining consistent production through it, if need be with long runs and few changeovers.” (Schmenner & Swink, 1998). Put simply, ERP produces these reductions in processing time and eliminates wasted bottlenecks, however this theory must be adopted on a consistent basis, and not just during the implementation phase of ERP. Business process reengineering must be taken into consideration after implementation to reexamine and evaluate the needs, wants, and expectations of the organization.

Merging these two laws together, the authors come up with the Theory of Swift, Even Flow, which is described as: “the more swift and even the flow of the materials through a process, the more productive that process is . Thus productivity for any process… rises with the speed by which materials flow through the process, and it fails with increases in the variability associated with the flow, be that variability associated with the demand on the process or with steps in the process itself.” (Schmenner & Swink, 1998). In order to understand this theory, perception is required of the previous two laws mentioned above. However, a third conception involves the distinction between value-added and non-value-added processing time (Bendoly & Schoenherr, 2005). For instance, non-value-added time from a production standpoint include: moving time and waiting time, where these steps can be eliminated or perhaps at the very least, be reduced to improve efficiency on some level. These non-value-added steps create waste and hence the reason why its considered non-value-added. According to this theory, the reduction and elimination of such waste allows processes to flow more swiftly, resulting into higher productivity levels.

CONCLUSION

Although ERP does not guarantee a recipe for success and does not guarantee immediate impact to financial gains, it still must be looked upon as a valuable asset for an organization if they are looking to maintain that competitive edge for the future. Additionally, lessons that can be learned in the process of constructing an ERP, can provide a valuable path for future technological innovations to come for an organization. Specifically, in the IT field where system development and innovation is achieved on a daily-basis, future IT projects can be interconnected with an ERP system. As mentioned above, many vendors are slanting beyond ERP and are overcoming today’s limitations, however in doing so, organizations must go through a reengineering of their existing business processes to achieve the full benefits of an ERP system today and in the near future to expand on future endeavors. However, it must be noted that most Information Technology systems are designed to extend and/or support their existing infrastructure, and not replace them. Hence the reason why it’s essential to encourage system development and innovation (through the use of Business Process Reengineering) to an ERP system.

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