Hour 5: ERP System Installation

Special IS Project

In-house: massive IS project, heavy system design features

ERP Implementation Project

• If vendor system– Much less system design than otherwise– Vendor software already programmed

• Only need interfaces

– Have help from vendor, consultants– Opportunities to outsource

ERP as an IS Project

• At least 7 optional ways to implement ERP• Outsourcing (ASP) the easiest

– But risky

• Next easiest is single vendor source without modifications– Not necessarily least expensive, nor greatest

benefits

• All others involve significant IS project

Relative Use of ERP Implementation StrategiesMabert et al. [2000]

Strategy %

Single vendor package-internal modifications 50

Single vendor package 40

Vendor packages-internal modifications 5

Best-of-Breed 4

In-house plus special packages 1

Total in-house development 0.5

Implementation Strategy Use

• Dominant strategy in manufacturing:– Single vendor– Over half added internal modifications

• Very few best-of-breed

• Almost none developed totally in-house

IS/IT Project Management Results

• Conventional IS/IT projects have trouble with time, budget, functionality

• ERP projects have slightly more structure, but still face problems– Underestimation of required time common– Vendors have made easier & faster– Enhancement of systems another trend

• Reintroduces time problem

Systems Failure Method

• systematic method for analysis of failure• successfully applied - wide variety of situations• by reviewing past failures, avoid future failure• as organizations rely more on computers, there

is a corresponding increase in significant business interruptions

• yet of 300,000 large & mid-sized computer system installations, <3% had disaster recovery plans

Failures in Planning

• negative disasters: decision culminating in physical result, later substantially modified, reversed or abandoned after heavy resource commitment– power generation facility on campus

• positive disasters: decision culminating in physical results implemented despite heavy criticism, subsequently felt by many informed people to have been a mistake– Anglo-French SST; BART in San Francisco

Failures of Projects

• information technology• 1992 - London Ambulance Service

– 1.5 million pound system on line 26 Oct 1992– immediately lost ambulances– <20% of dispatched ambulances reached

destinations within 15 minutes of summons– (before system, 65% met 15 minute standard)

Failures of Projects

• Some never work• others over budget, very late, or both• others perform less than design• others meet design specifications, but

maintenance & enhancement nightmares

System Failure Method

• failure is regarded as an outputof transformation processed from system

• place trial system boundaries around situation– experiment with various configurations– reach conclusion about system– need to model system in some detail

• at different levels• be careful not to make too fine, lose important inter-

relationships

common results

failure commonly a result of• organizational structure deficiencies

– lack of performance-measuring, control• no clear statements of purpose• subsystem deficiencies• lack of effective communication between subsystems• inadequate design• insufficient consideration of environment; insufficient resources• imbalance of resources production quantity; test quality

FoxMeyer Drug

Large drug distributor

Wanted to implement ERP

FoxMeyer Corp

• Holding company in health care services• wholesale distribution of drugs & beauty aids

• served drug stores, chains, hospitals, care facilities

• US: 23 distribution centers

• Sought market niches, such as home health care

FoxMeyer

• Due to aging population & growth in health care, expected high growth

• Market had extreme price competition, threatening margins

• Long-term strategies: – efficiently manage inventory

– lower operating expenses

– strengthen sales & marketing

– expand services

Prior FoxMeyer IS

• 3 data processing centers, linked

• included electronic order entry, invoice preparation, inventory tracking

• 1992 began migration of core systems

• Benefits not realized until system fully integrated

FoxMeyer Process

• Customer fills out electronic order• Order sent to 1 of the 3 data processing centers• Orders sent to the appropriate distribution center

(within 24 hours)• Orders filled manually and packaged• Had just completed national distribution center

with multiple carousels & automated picking• Could track inventory to secondary locations

New System

• Needed new distribution processes & IS to capitalize on growth

• Wanted to be able to undercut competitors• Replacing aging IS key

• PROJECT: 1994 - hoped to save $40 million annually (estimated cost $65 million)– complete ERP installation & warehouse

automation system (another $18 million)

FoxMeyer Project

• Select ERP– hundreds of thousands of transactions– meet DEA & FDA regulations– benchmarked & tested for months– picked SAP R/3– hired Andersen Consulting to integrate– hired Pinnacle Automation for warehouse

automation system

Operations

• FoxMeyer expected the new systems to improve operational efficiency

• Signed several giant contracts– counted on savings, underbid competitors

• Counted on being up and running in 18 months

Problems

• SAP & warehouse automation system integration– two sources, two installers - coordination

problems

• New contracts forced change in system requirements after testing & development underway

• Late, Over budget– SAP successfully implemented

Outcomes

• Lost key customer - 15% of sales• To recoup, signed new customer, expected $40 million

benefit from ERP immediately - pushed ERP project deadline ahead 90 days, no time to reengineer

• Warehouse system consistently failed– late orders, incorrect shipment, lost shipments– losses of over $15 million

• August 1996 filed for Chapter 11– McKesson bought

McKesson Followup

• Mid-1990s started implementation of SAP R/3– Cancelled project in 1996 after spending $15 million

• 1997 acquired FoxMeyer– Carefully designed new R/3 implementation

– Dropped a number of modules

– Implemented modules one at a time

– Cautious rollout schedule, rigorously followed

– Separate testing group formed

– At last report $50 million system on time, in budget

McKesson

• Massive changes in 3,000 end user jobs

• Careful analysis of changes– Surveys– Focus groups– Demonstrations– Computer-based training

Lesson

• Implementing ERP a major undertaking

• Can easily bankrupt a company

• However, it can also be done– Opportunity for great benefits

System Architecture & ERP

• System architecture displays computer systems used to support organization

• Open systems architecture allows greater integration possibilities– Important in supply chains, e-business

• ERP systems initially quite closed

Open Architecture

• Many external systems being added to ERP– CRM– Supply chain– Internet for e-business

• Need to integrate independent ERPs across organizations– Messaging services used

Analysis & Design Control Frameworks

• Traditional standards for application development• ERP implementation usually involves installation

of vendor software– Still need for treatment as installation project

• Early in project, extensive customization needed– The more system flexibility, the more difficulties in

implementation

– Object-oriented framework benefits extension, tailorability, customizability

Application Service Providers

• Outsource ERP• Popular

– Unocal pared IT staff 40% in two years– Focus on core competencies, shed cost centers

• Many specific functions can be outsourced• Outsourcing benefits

– Speed– Organization lacks IT skills

• ASP the most popular way to outsource

ASP Risks

• Your applications and data are controlled by others

• Service failures out of your control

• Confidentiality failure a possibility

• Performance issues possible

Relative Implementation Effort

Method In-House Vendor Consultant

Single vendor package-internal modifications

Significant Heavy Heavy

Single vendor package Significant+ Heavy Heavy +

Vendor packages-internal modifications

Significant+ Moderate Heavy +

Best-of-Breed Significant ++ Moderate Heavy +

In-house plus special packages Excruciating None Maybe

Total in-house development Painful Moderate Maybe

Application Service Provider Light None To select

Implementation Effort

• Implementing ERP places strain on in-house information systems groups

• Consultants are expensive– Sometimes need special expertise

• Tradeoff: control vs. time & cost

Summary

• ERP driven by idea of quality software support

• Software quality has long been important

• Many ERP implementation strategies available

• Tradeoff in control vs. time & cost