Enterprise Resource Planning - Essay Example

Enterprise Resource Planning Find a success story of ERP implementation. Analyze the factors contributed to the success of this implementation. Cisco Systems - A success story Cisco Systems has been widely acclaimed as an early adopter of ERP and being successful at it. Cisco has been credited with timely adoption of the e-mail, Internet and ERP technologies at the perfect opportunities that contributed to its growth and made it a widely acclaimed company. Its ability to harness information technology to streamline its own business made it a leading edge company. Overview Cisco systems was founded by Stanford University Computer Scientists Sandy Lerner and Leonard Bosack, who recognized the need for large scale computer networks based on industry standard technologies. While in college, they found that the inefficiencies of the existing infrastructure led to great difficulties in being compatible with the numerous mail clients in operation and served to go from there. They took their idea with them when left the campus and Cisco Systems was born. The Growth Cisco grew rapidly and to cater to the company and product information distribution, launched an official website in 1991. It had a 50% share of the networking market and struggled to keep up with the calls it was receiving. By 1993, Cisco boasted a growth of an astounding 270%, but its IT department was sorely lacking to cope with a half billion-dollar company growing by 50% each year. The initial budget was for funding IT was 0.75% of sales and this was inadequate. CIO Pete Slovik and Senior Executive, Doug Allred, brought a revolutionary concept that entailed that the IT spending was linked to the business units that in turn necessitated close alignment to the company goals. Cisco's internal network would play a strategic role in providing the connectivity needed for the business units to build applications creatively. The Problem This new concept signified that a major upgrade to the existing infrastructure was needed if Cisco managers were to meet the customer satisfaction goals. Because it was a major decision that would cost millions, cash-strapped Cisco will find it quite complex. In 1994, Cisco's systems broke down unable to cope and Cisco was forced to close down for two days. There were other several minor troubles on the way. The Solution The board went ahead and approved the proposal for a $15 million Oracle ERP system. This would entail a 2.5 percent of the 1993 revenues, thrice the IT budget of the previous year. The total cost of completing the ERP was $100million. It is not an overstatement to say that the Oracle ERP system became the backbone of the Cisco E-Business. It unified all of the Unix Servers and became a source of centralized information. (Complete case study details available from website < http://mba.tuck.dartmouth.edu/pdf/2001-1-0001.pdf>). Why ERP Enterprise resource planning (ERP) is a system that integrates a number of the back office functions of planning, manufacture, distribution, accounting and human resources etc. into a single system ERP is a method of serving each individualized department with minimal redundancies and hence has several customized software applications integrated by a single interface. Being vast and comprehensive, an ERP implementation can cost millions of dollars to create, and may take several years to complete. The advantages of the ERP system when properly implemented are tremendous. The integration of information of the departments allows easy sharing of information. Typical Benefits would include reductions in inventory, material costs, and labor and overhead costs, as well as improvements in customer service and sales, improved customer service and sales and improved accounting controls. It can speed up the manufacturing process by automating processes and workflow, and as a result, it reduces the need to carry large inventories. If implemented properly it will provide the company a major advantage in the competitive market. Contributing Factors to Successful Implementation of ERP at Cisco Systems Cisco represents the classic, accelerated implementation approach. They claim to have implemented ERP in nine months for 15 million dollars. Size Cisco had many advantages as they embarked on their initiative. They were a smaller company then compared to their current size and were easier to integrate. Their business environment was less complicated and relatively simple. Need There was urgency for the change. During that period, they were experiencing exponential growth and failure of their traditional systems not being able to keep up with the demand. Their systems were due for an upgrade anyway and were a prime opportunity to advance a step further and build a better system. Involvement The top management was very in accord with the process and the ERP was a completely involved company wide project. They did many things right to get the system selected, implemented, and stabilized in a relatively short period. There was clarity of thought by the management in the drafting of the business plan and identification of the goals, benefits, risks, timelines and cost. The change was communicated consistently and openly and this set the stage for a successful course. Vision Cisco has been able to gain value for its business processes and reap gains due to its visionary zeal to employ the information technology and advantage on it. Their ability to build off a solid, integrated information technology infrastructure was invaluable. Since 1997, Cisco was among the earliest to adopt Web-enabled software. It had a vision to get the project executed and to steer the company in that direction. IT Savvy Cisco finance collaborated early on with the company's IT department and funded the systems, -all the development, all the applications-that greatly enhanced speed of deployment. They were revolutionary in building business units and relating the IT spending them. Flexibility Cisco Systems was willing to adopt a flexible customer relationship management policy that transferred the onus to the partners to provide tailored support to individual customers. In that way, while it did not have to micro manage it was sure of the customers getting the specialized service they needed. Trust According to the data provided by Cisco Connection Online, customers are referred to a range of pre-qualified service providers. Cisco, while it provides to specify the actual quality of service, does not control them on every level. Instead, it trusts them to succeed within the framework it has set up. In this way, it did have an overload to deal with and that enabled continual focus on the ERP project at hand. Scalability The system chosen needs to grow with the company and be adaptable to the changing needs of Cisco that was assuredly marking strong growth. The Oracle ERP system was tailored to adapt the emerging needs as well to include and wider customer base, vendors and integrate newer modules and capabilities for future needs. Standardization Cisco's great connectivity and worldwide network makes data available anywhere. Standardization is a great asset. Cisco uses just one ERP system worldwide, which it says is a key differentiator. Advantages Cisco reaped enormous benefits from the ERP implementation because of their ability to find new uses out of the current implementation. Supply-chain initiatives such as direct fulfillment and dynamic replenishment were made possible for Cisco only after they had used ERP to implement standard processes and data. Cisco is also widely acclaimed for its e-business, its e-procurement and Supply Chain Management has been a trendsetter in the industry. Cisco's moved to a virtual close, reducing the time it needs to close the monthly books from 14 days to just four hours. According to Rick Timmins, Cisco's vice president of worldwide sales finance, this achievement can be attributed to the business process reengineering. "There's no point in automating bad processes," says Timmins. "You have to reengineer your processes to take out all the inefficiencies. Then you begin to automate some of those activities." At Cisco, they like to say, "You can't improve what you can't measure." Therefore, the company developed metrics around quality, cost, cycle time, and client satisfaction. Then it examined each of those functional areas from a finance perspective. From there, Timmins says, "you measure and improve, measure and improve." (Quoted from source website, http://www.cfo.com/printable/article.cfm/3010355f=options>) Cisco's success can be mainly attributed to being visionary enough to understand that the ERP platform was a sure-fire way to base their infrastructure on. It had sufficient benefits it realized from having a stable transaction platform. Cisco also continued to focus and review relentlessly, and unmistakably proved that continuous assessment and persistence coupled with the right proportion of business process engineering was a great method of successful implementation of ERP and its payback. Find a story of problems encountered with an ERP implementation. Analyze the factors contributed to the obstacles that were encountered. Hershey's Foods - In a jam due to ERP A notorious and well-documented example of a failed ERP implementation is the Hershey Foods', SAPAG's R/3 implementation. The company spent $112 million and 30 months on their ERP project. When they went live in July 1999, the company experienced problems pushing orders through the system, resulting in shipping delays and deliveries of incomplete orders. Overview and growth Hershey's foods name has become synonymous with "Chocolate". Founded in 1894, it is headquartered in Pennsylvania. It is well known for its line of candies including Kisses, Reese Peanut Butter cups, Milk Duds etc. It also has a nutritious product line that includes sugar free candy as well. It has about 3300 candy products and lot of its sales are seasonal. Bulk of its sales, about 40%, is during Halloween and Christmas that translates into the last quarter to turn in profitability. Traditionally the food and beverage industry is characterized by low margins and high volumes on very low priced products. By 1998, Hershey's was recording a record sales turnover of 4.4 billion in sales. The Challenge The challenge was that to record this kind of multibillion-dollar turnover on products costing as low as 50 cents, Hershey's product numbers were immense and needed reliable logistic systems. This industry factored a very low IT spending budget due to the low margins. The typically the budget was between 1% and 1.5% of the total revenues. However, this thrifty budget could not hold with the Y2K problems lurking around the horizon. It was more prudent to replace the legacy systems than retaining them and trying to fix the problems. The Plan According to Hershey's V.P, Rick Bentz, Hershey needed to modernize their systems and a plan was put in place to upgrade all the hardware and software in 1996. The timeline allotted was 4 years for achieving this and scheduled to finish by early 2000. This plan was dubbed Enterprise 21 and had several goals including the moving from a mainframe to a client-server environment. Hershey's IT spending still trailed its other peers and it lagged in its ability to use and share data efficiently, which the suppliers demanded in order to reduce their inventories. To cater to this scenario, the management set a goal to move to an ERP system from SAP, complemented by the software of Manugistics and further supported by Siebel Systems Management believed that at the end of the implementation; it would better their business strategy of its core business. The Glitch Enterprise 21 required bar coding installed in its production plants for better tracking inputs and outputs. This was necessary, and later scheduled to switch over to SAP around April 1999, an annual period of low sales. This meant that the company had 39 months to complete the project than the originally intended 48 months. The project ran behind schedule, and the full system came online in mid-July 3 months behind schedule. What went wrong Lagging behind the timeline, put Hershey in a quandary because, its peak sales orders of Halloween started arriving in July. Pressed for time, the whole system was allowed to go live all the once bypassing the pilot testing phase and adopting a cutover strategy. The project had already cost $112 million dollars. If the system did not have problems, it could have salvaged itself, but unfortunately, for Hershey that was not the case. Several issues arose and orders could not be processed. Typical delivery times went from five to twelve days and due to the pile up there was a 29 per cent increase in inventory costs. The devastating result was that Hershey could not ship orders and retailers' shelves remained empty or in worst scenarios, ended up being stocked by competitor products that was a double blow for Hershey. Loss of shelf space was devastating and letting them sample a rival product spelt disaster for loss of market share and customer relations, for Hershey. If Hershey did not revamp quickly enough, it would lose its Christmas and Valentine's Day sales as well. Hershey recorded a sales drop of 19% in that period. Hershey's stock price went into a sharp slide. By late October, its price had fallen to $47.50, down 35% from $74 one year earlier. During the same period, the Dow Jones Industrial Average had risen by 25 %. Third quarter earnings dropped from $.74 to $.62. (Complete case study can be viewed at website http://wps.prenhall.com/bp_laudon_essmis_5/0,,155354-,00.html) Analysis of the reasons for failure of ERP Implementation Not adhering to timelines was a major catastrophe, especially for a company with seasonal sales. The project was originally scheduled to take four years, but the company forced the implementation to go live in just 30 months. Added to that, they bypassed the critical pilot launch and test phase and adopted the cutover strategy for deployment under duress and that added to the problems. Timelines were not aligned; unrealistic and inappropriate deadlines put undue pressure on the implementation coinciding with peak sales periods. The company went live at their busiest time of the year, just before Halloween, and the resultant delays caused third quarter profits to fall by $151 million compared to the previous year. The whole project was started simply and made more complex by factoring a simultaneously implemented customer-relations package and a logistics package. This increased the complexity of an already intricate integrating system making it a harder employee learning curve. The changes to be embraced were too many at the same time, and to adapt a long array of them involving complex organization cultures and intricate people and change management issues requires more management supervision than was available at Hershey's. In addition, another most important reason cited is that the work forces had not been trained sufficiently to handle the implications of introducing new information technology platforms and infrastructure to support the application software. The system complexity and adapting to new, and perhaps inappropriate, processes and procedures coupled with inadequate education and training of all parties involved was a key feature of why the ERP system failed to deliver. Hershey's paid the price for the lack of critical training and testing by the users. However, Hershey itself did not publicly acknowledge the problem until mid-September when it announced that something was wrong with its new computer systems. Hershey employees were having trouble entering new orders into the system and that order details were not being properly transmitted to the warehouses where they could be filled. Hershey learnt form its experience and solved all of its problems in 2000 and company sales and profits did rebound. Its year 2000 third quarter profits jumped 23% from the previous year. The company also took steps to prevent that type of problem occurring again. Why is business process re-engineering a critical component of the successful implementation of ERP Enterprise Resource Planning is a solution adopted by firms for not only integrating all the functions of an organization and share information across all the organization, but primarily for the purpose of weeding out inefficiencies, reducing redundancies and improving overall efficiencies. ERP is a harbinger of change and hence it requires a revamping of not only the processes involved but also in the mindset of the people who will be involved so that it translates in to the benefits targeted. Business Process Reengineering is a pre-requisite for going ahead with ERP. A comprehensive BPR study has to be done before taking up ERP. Business Process Reengineering brings out deficiencies of the existing system and attempts to maximize productivity through restructuring and re-organizing all the divisions and departments in the organization. By reconfiguring the existing information resources, analyzing and reviewing applications, and involving partners, suppliers, customers and retailers in information-sharing, new potential processes in manufacturing, order processing, and inventory control etc. may evolve and may be implemented. These, by itself, are betterment over the existing processes and have a greater chance of contributing to the success of achieving the goals when absorbed in the system. If ERP is implemented without Business process engineering, all the original deficiencies of the processes that existed earlier in the organization are all integrated into the new ERP system. These would create bottlenecks in the process hindering the functioning of the system smoothly and cumulatively influence profitability. This defeats the whole purpose of improving the overall efficiencies of the organization. Enhancing organization functioning is a central ERP objective. Hence, BPR is a critical component of a successful ERP implementation. Dell wanted a more flexible architecture and the opportunity to select software from various vendors. What were the advantages and disadvantages to using this approach See: D. Slater, "An ERP package for you, and you, and even you, CIO Magazine, Feb. 15, 1999 Jerry Gregoire, who joined Dell at its CIO in 1996, was one of the prime reasons for Dell's policy of adopting a flexible architecture that would allow it the flexibility to use multiple vendors for its software needs. Dell's corporate growth was tremendous to the tune of a billion dollars every six to eight weeks. Until then, SAP was scheduled to rollout the full R/3 suite, but was stopped, after only the HR module was implemented. The CIO felt that a single vendor would not be able to keep pace with this growth rate. (Details from source website http://www.cio.com/archive/021599/erp.html). The main advantage of an open flexible architecture will be the ability to rapidly add or subtract applications from a variety of vendors. Each vendor has their own strengths and superior content in areas of their product line. Being able to bring in multiple players allows more choices in choosing niche software for various departments and their specific needs. For example, Oracle is known for its financials, Peoplesoft is reputed for its HR and SAP excels at Supply Chain Management. Dell, having its own unique business model, the broad functionality of a single ERP system from a single vendor, may not be tailor-made for its needs. Hence, with multiple vendors it can select to provide its needs exactly. It reduces the total dependency on a single vendor for all software needs and narrows down the scale of operation for each vendor allowing them to focus better and deliver customized products in their designated space. An IT application built on an open architecture has a better longevity because it is custom built for the integrated current needs of the customer, partners and company. The main disadvantage would be the effort of integrating the various vendor applications into a single platform. Competing vendors may not be easily pliable to compromise and complete the integration process. When a difficulty does occur, competing vendors may just play the blame game and refuse to accept their part in the problem, prolonging the inefficiencies. The Sales and Marketing module within ERP is regarded as the module with the most interfaces to other modules, including Human Resources, Materials Management, Production Planning, and Financial Accounting. Describe briefly the interfaces between the Sales and Marketing module and each of these other modules. Typically, a sales and marketing ERP module handles information and integrates it starting from identifying prospects, executing selling opportunities, creating proposals, to handling complex quotes and contracts, fulfilling orders and compensation and customer follow-up. These sales applications increase selling effectiveness by using consistent enterprise information in every phase of the sales process. However, a sale is not an isolated occurrence. For a sale to occur there needs to be personnel, sufficient raw materials for production, production and the cost analysis of the entire process. Let us assume that a market research has predicted a certain level of the sales for the holiday season. The Sales and Marketing module interfaces with the Materials management module and the information about targeted sales triggers the need to procure raw materials, update inventory, generate invoices for goods received, create purchase orders, record payment to suppliers, and keep track of reorder levels executed by the module. Sales module interfaces with the Production Planning module to schedule production to the period when sales are predicted. ERP Production module helps consolidate data and provide dynamic information that facilitates decision making in production planning and control. It manages figures of production requirements, inventories, human resources needed etc. Accurate production ensures the availability of the products for sale reduces inventories and allows the process of sales to proceed smoothly. At the same time, the sales personnel know exactly what the status of the product is on the production floor. The availability of the personnel is necessary for working of the organization. When higher sales are expected, the labor force required to meet the need is gauged and the HR department makes sure that adequate personnel are available to carry out the process. Employee data, working hours logged, user authorization information and remuneration offered are all encompassed in the HR module. Payroll and expenses are tracked and this imparts an exact cost to the company analysis. The Sales module interfaces with the Financial Accounting module as it bridges between Sales & Procurement processes. It allows the establishment of cost centers and creates the various input transactions such as Voucher Entry, Credit/Debit entry, Cash/Bank receipts, Cash/Bank Payment, Bank Reconciliation statements, Bill verification etc. and ensures that outstanding are kept to a minimum by attending to collections, thereby ensuring sufficient fund flow for procurement as well as marketing expenses. A cost-benefit analysis helps in setting sale prices and marketing budgets. Sources Anderson, Philip, Govindarajan, Vijay, Trimble, Chris Cisco Systems (A) Evolution to E-Business 2002 [Online] http://mba.tuck.dartmouth.edu/pdf/2001-1-0001.pdf 18th Jan 2006 Krass, Peter Behind the Music 15th Sept 2003 [Online] http://www.cfo.com/printable/article.cfm/3010355f=options 18th Jan 2006 Nah, Fiona Fui-Hoon Lau, Janet Lee-Shang Critical factors for the successful Implementation of ERP systems [Online] http://www.army.mil/aeioo/docs/Critical%20Factors%20-%20EntSys.pdf 18th Jan 2006 Stedman, Craig 29th Oct 1999 Update: Failed gamble Haunts Hershey [Online] http://www.computerworld.com/news/1999/story/0,11280,29314,00.html 18th Jan 2006 Hagel, John, Brown, John Seely, Dec 2001 Cut Loose From Old Business Processes [Online] http://www.optimizemag.com/article/showArticle.jhtmlprintableArticle=true&articleId=17700615 18th Jan 2006 Johnston, Sarah Jane ERP: Payoffs and Pitfalls 14th Oct 2002 [Online] http://hbswk.hbs.edu/item.jhtmlid=3141&t=operations 18th Jan 2006 Slater, Derek An ERP Package for You and You and Even You 15th Feb 1999 [Online] http://www.cio.com/archive/021599/erp.html 18th Jan 2006 Blacharski, Dan What is ERP (Enterprise Resource Planning) [Online] http://www.wisegeek.com/what-is-enterprise-resource-planning.htmreferrer=adwords_campaign=erp_ad=009541&_search_kw=erp%20modules 18th Jan 2006 Hershey's Enterprise System Creates Halloween Tricks [Online] http://wps.prenhall.com/bp_laudon_essmis_5/0,,155354-,00.html 18th Jan 2006 Read More