Concepts in Enterprise

Resource Planning

Chapter Two
The Development of Enterprise
Resource Planning Systems
 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

Concepts in Enterprise Resource Planning, Fourth Edition 2

 Introduction
• Efficient, integrated information systems are very
important for companies to be competitive
• An Enterprise Resource Planning (ERP) system
can help integrate a company’s 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

Concepts in Enterprise Resource Planning, Fourth Edition 3

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
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 Computer Hardware and Software
Development
• 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
• Moore’s Law
– Number of transistors that could be built into a
computer chip doubled every 18 months

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 Computer Hardware and Software
Development

Figure 2-1 The actual increase in transistors on a chip approximates Moore’s Law

Concepts in Enterprise Resource Planning, Fourth Edition 6

 Computer Hardware and Software
Development (cont’d.)
• 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

Concepts in Enterprise Resource Planning, Fourth Edition 9

 Management’s 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

Concepts in Enterprise Resource Planning, Fourth Edition 10

 Management’s Impetus to Adopt ERP
(cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition 11

 Management’s Impetus to Adopt ERP
(cont’d.)
• 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 management’s 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
Concepts in Enterprise Resource Planning, Fourth Edition 12
 Management’s Impetus to Adopt ERP
(cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition 13

 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)
• SAP’s 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

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 SAP Begins Developing Software
Modules (cont’d.)
• 1980s: sales grew rapidly; SAP extended its
software’s 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

Concepts in Enterprise Resource Planning, Fourth Edition 17

 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, SAP’s competition in the ERP market:
– Oracle
– PeopleSoft
• Late 2004: Oracle succeeded in its bid to take over
PeopleSoft
Concepts in Enterprise Resource Planning, Fourth Edition 18
 New Directions in ERP (cont’d.)
• 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
– SAP’s biggest competitor
– Began in 1977 as Software Development
Laboratories (SDL)
– Founders: Larry Ellison, Bob Miner, and Ed Oates

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 New Directions in ERP (cont’d.)
• 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 (cont’d.)

Figure 2-4 Data flow within an integrated information system

Concepts in Enterprise Resource Planning, Fourth Edition 21

 New Directions in ERP (cont’d.)
• 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

Concepts in Enterprise Resource Planning, Fourth Edition 22

 New Directions in ERP (cont’d.)
• Current SAP ERP system: SAP ECC 6.0
(Enterprise Central Component 6.0) (cont’d.)
– Human Resources (HR) module
– Project System (PS) module
– Financial Accounting (FI) module
– Controlling (CO) module
– Workflow (WF) module

Concepts in Enterprise Resource Planning, Fourth Edition 23

 New Directions in ERP (cont’d.)

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
• Company’s 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
company’s needs

Concepts in Enterprise Resource Planning, Fourth Edition 25

 SAP ERP Software Implementation
(cont’d.)
• 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

Concepts in Enterprise Resource Planning, Fourth Edition 26

 SAP ERP Software Implementation
(cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition 27

 SAP ERP Software Implementation
(cont’d.)
• 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: SAP’s 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

Concepts in Enterprise Resource Planning, Fourth Edition 29

ERP for Midsized Companies (cont’d.)
• 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

Concepts in Enterprise Resource Planning, Fourth Edition 31

 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
Concepts in Enterprise Resource Planning, Fourth Edition 33
 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?

Concepts in Enterprise Resource Planning, Fourth Edition 34

 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

Concepts in Enterprise Resource Planning, Fourth Edition 35

 Should Every Business Buy an ERP
Package?
• Some of a business’s 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
Concepts in Enterprise Resource Planning, Fourth Edition 37
 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 doesn’t implement an ERP system
might be forced out of business by competitors that
have an ERP system
• Smoothly running ERP system can save a
company’s personnel, suppliers, distributors, and
customers much frustration

Concepts in Enterprise Resource Planning, Fourth Edition 38

 What Return Can a Company Expect
from Its ERP Investment? (cont’d.)
• 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
company’s costs and profitability
– Difficult to isolate the impact of the ERP system
alone
• ERP systems provide real-time data
– Improve external customer communications
Concepts in Enterprise Resource Planning, Fourth Edition 39
 How Long Does It Take to See a
Return on an ERP Investment?
• Return on investment (ROI): assessment of an
investment project’s value
– Calculated by dividing the value of the project’s
benefits by the project’s cost
• ERP system’s 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
Concepts in Enterprise Resource Planning, Fourth Edition 41
Why Do Some Companies Have More
Success with ERP Than Others?
(cont’d.)
• Usually, a bumpy rollout and low ROI are caused
by people problems and misguided expectations,
not computer malfunctions (cont’d.)
– 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

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Why Do Some Companies Have More
Success with ERP Than Others?
(cont’d.)
• For many users, it takes years before they can take
advantage of many of an ERP system’s capabilities
• Most ERP installations do generate returns

Concepts in Enterprise Resource Planning, Fourth Edition 43

 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

Concepts in Enterprise Resource Planning, Fourth Edition 44

 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

Concepts in Enterprise Resource Planning, Fourth Edition 45

 Summary (cont’d.)
• 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 company’s 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
Concepts in Enterprise Resource Planning, Fourth Edition 46
 Summary (cont’d.)
• ERP software is expensive to purchase and time-
consuming to implement, and it requires significant
employee training—but the payoffs can be
spectacular
– For some companies, ROI may not be immediate or
even calculable
• Experts anticipate that ERP’s 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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