Putting the Enterprise into

the Enterprise System

How Enterprise Systems Work

• Enterprise Software: Set of integrated software modules for finance and accounting, human resources, manufacturing and production, and sales and marketing that allows data to be used by multiple functions and business processes

Anatomy of an ES (Enterprise Systems)

Employees

Customers SuppliersSales force

and customerservice reps

Back-officeadministratorsand workers

Managers andstakeholders

Reportingapplications

Human resource

management applications

Sales and delivery

applications

Service applications

Financial applications

Manufacturing applications

Inventoryand supply applications

Centraldatabase

If you're not careful, the dream of information integration can turn

into a nightmare.

Enterprise SystemsA Dream Come True?

• Commercial software packages promise the seamless integration of all the information flowing through a company– financial and accounting information– human resource information– supply chain information– customer information

The Allure of ES• Problems an ES is designed to solve?

– Data is spread across dozens or even hundreds of separate computer systems

– Storing and rationalizing redundant data– Re-keying and reformatting data from one system

for use in another– Updating and debugging obsolete software code– Programming communication links between

systems to automate the transfer of data– Incompatibility between systems

• Autodesk Two weeks to deliver an order Ships 98% of its orders within 24 hours• IBM's Storage Systems Division

– Time to re-price products from 5 days to 5 min– Time to ship a replacement part from 22 days to

3 days– Time to complete a credit check from 20 min to

3 sec• Fujitsu Microelectronics

– Time for filling orders from 18 days to 1 ½ day– Time to close financial books from 8 days to 4

days

ES Success Stories (cycle time)

Horror Stories• FoxMeyer Drug: ERP helped drive it into

bankruptcy• Mobil Europe: Hundreds of millions of dollars on

ERP only to abandon it when its merger partner objected

• Dell Computer: ERP would not fit its new, decentralized management model

• Applied Materials: Overwhelmed by the organizational changes and gave it up.

• Dow Chemical: Seven years and half a billion dollars on a mainframe-based enterprise system. Started over later on a client-server version.

• Many failures unreported. Many succeeded after false starts.

Radical Change in ES Deployment

• Traditional way --

-- Decide how you want to do business– Develop your own (or buy) a software system

that would support the existing processes– Often, large portions of the purchased

software is re-written to ensure a tight fit

• With ERP the sequence is reversed– “Best practices” are built in, and your

processes must be modified to fit the system

ES Customization

• Systems are modular– Company can install only those modules it needs

• ES too complex to make major modifications practical. Major modification to ERP codes is not advised.

• Most companies installing enterprise systems will need to adapt or even completely rework their processes to fit the requirements of the system

An ES is a General Solution• Design reflects a series of assumptions

about the way companies operate in general

• In many cases, the system will enable a company to operate more efficiently than it did before

• In some cases, the system's assumptions will run counter to a company's best interests

Who’s to Blame?

• Technical challenges – problems– Extremely complex pieces of software– Installing them requires large investments of

money, time, and expertise

• Business challenges – bigger problems

-- Strategic

-- Organizational

-- Implementation

Business Challenges (1) -- Strategic• Imposes its own logic on a company's

strategy, organization, and culture. The logic of the system may conflict with the logic of the business

• Pushes a company toward full integration even when a certain degree of business unit segregation may be in its best interests

• Pushes a company toward generic processes even when customized processes may be a source of competitive advantage (weaken important sources of competitive advantage)

Competitive Advantage?• It is common for a single ES package to be

used by many companies in an industry

• Will similarity in business processes undermine your sources of differentiation in the market?

• Compaq Computer used ERP, but wrote its own proprietary applications for forecasting demand and processing orders.

• Price = competitive advantage, but expensive ERP forces higher price. Air Products and Chemicals decided not to install ERP.

Business Challenges (2)-- Organizational

• On the one hand

– Real-time operating and financial data

– Streamlined management structures

– Creates a flatter, less hierarchical organization

• On the other hand

– Centralization of control over information

– Standardization of processes

– Creates a rigid hierarchical organization

More Rigid Organization

• More discipline in organizations• Exert more management control• Imposing more-uniform processes on highly

entrepreneurial cultures – at some high-tech companies

• Consistent operating practices and tight coordination throughout business – at global firms like Dow Chemical and Owens Corning (ERP replaced 211 legacy systems)

More Flexible Organization: Union Carbide

• Break down hierarchical structures

• Allow employee innovation and flexibility

• Broader access to operating information– For managers, workers, suppliers, & customers

Strike a Balance (at global firms)• Determine what should be common

throughout the company (a core of common information), and what should be allowed to vary

• Allows tailoring operations to local customer requirements and regulatory strictures -- Roll out different versions of the same system in each regional unit

• Monsanto standardized 85% of the ERP data• HP has a separate ERP for each division

The worst thing a company can do is to make decisions about a system based on technical criteria alone.

Business Challenge (3) -- Implementation

• Elf Atochem -- Doing it Right– Hampered by the fragmentation of critical

information systems across 12 business units– Ordering systems were not integrated with

production systems – Sales forecasts were not tied to budgeting systems

or performance-measurement systems– Operating data were not flowing smoothly through

the organization– Each unit was tracking and reporting its financial

data independently – Top management not getting the information needed

to make sound and timely business decisions

Elf Atochem – Bad Old Days

• Customer's perspective– Lack of continuity among units made doing

business with the company a trial– To place a single order, a customer would

frequently have to make many different phone calls to many different units

– To pay for the order, the customer would have to process a series of invoices

Elf Atochem– Bad Old Days• Internal Perspective

– It took four days and seven handoffs between departments-to process an order, even though only four hours of actual work were involved

– Each unit managed inventory and scheduled production independently

– Unable to consolidate inventory or coordinate manufacturing at the corporate level

– More than $6 million in inventory was written off every year

– Plants had to be shut down frequently for unplanned production-line changes

– Sales representatives couldn't promise firm delivery dates, which translated into lost customers.

Elf Atochem – Implement ERP Wisely• Focused on four key processes

– Materials management– Production planning– Order management– Financial reporting

• Install only those modules required to support the four targeted processes– Did not install the modules for human resource

management or plant maintenance, for example• Did not have a direct impact on customers• Existing information systems that supported them were

considered adequate

Elf Atochem – Doing it Right

• Made fundamental changes to its organizational structure

• Accounts-receivable and credit departments were combined into a single corporate function – Enabled Consolidation of a customer's orders into a

single account and issue a single invoice– Allowed monitoring and management over all customer

profitability

• Combined all of its unit customer-service departments into one department– Provided customer with a single point of contact for

checking on orders and resolving problems

Elf Atochem: New Structure

• Established new position - demand manager– Focal point for the integrated sales and

production-planning process– Creates the initial sales forecast– Updates forecast with each new order– Assesses plant capacity and account

profitability– Develops detailed production plans– Schedules a customer's order and promises

a delivery date up to six weeks ahead of production

Elf Atochem: Change Process

• Managing the implementation

• 60-person core implementation team– Reports to a member of the company's

executive committee– Includes both business analysts and

information technologists– Assisted by a set of “super users”

• Implementing one unit at a time – Keeps implementation manageable– Helps refine the system and the processes as

implementation proceeds

Elf Atochem: Gain Expertise

• Staffed the effort mainly with its own people–Only nine outside consultants–Reduces the cost of the implementation–Helps ensure that Elf Atochem's

employees will understand how the system works after the consultants leave

• Rollout ahead of schedule and under budget

• Customer satisfaction increased

Elf Atochem: Success

• Confirming 95 % of all orders with one call – used to take 5 calls.

• Company is operating more efficiently

• Inventory levels, receivables, and labor and distribution expenditures have all been cut

• Ultimately reduce annual operating costs by tens of millions of dollars

Challenge of ERP Implementation

• Managers want to move fast– Struggled for years with incompatible IS and may

view an ES as a silver bullet– May be trying to keep pace with a competitor that

has already implemented an ES

• Executives view the installation of an ES as primarily a technological challenge– They push responsibility for it down to their

information technology departments.

Ask questions before making a decision

• How might an ES strengthen our competitive advantages?

• How might it erode them?• What will be the system's effect on our

organization and culture?• Do we need to extend the system across all our

functions, or should we implement only certain modules?

• Would it be better to roll the system out globally or to restrict it to certain regional units?

• Are there other alternatives for information management that might actually suit us better than an ES?

Role of Management

If the development of an enterprise system is not carefully controlled by

management, management may soon find itself under the

control of the system.

Factors in System Success or Failure

How Can Systems be Implemented Successfully?

• Type of people involved in a change project

– Sponsor: the person or group that legitimizes the change

– Change agent: the person or group who causes the change to happen

– Target: the person or group who is being expected to change and at whom the change is aimed

Methodology to manage technological change

Conduct surveys to all three groups to determine:– Whether the scope of the project is

manageable. Is the organization trying to change too much at one time

– Whether the sponsors are committed enough to push the change through, or whether they are sitting back expecting the organization to change on its own

– Whether the change agents have the skills to implement the change, or whether they are not adept at rallying support

– Which groups are receptive to the change and which are resistant