Enterprise Resource Planning: Common Myths Versus Evolving Reality.(Statistical Data Included)
Can an ERP system success fully become the backbone of company operations in the new economy?
The myriad challenges faced today by global businesses are expected to grow in intensity and complexity as we move further into this century. Expanded global competition has become the norm rather than the exception, with an unprecedented number and variety of products available to satisfy consumer needs and desires. The dynamics of faster product development, more customized manufacturing, and quicker distribution have benefited the consumer. At the same time, these changes have led to new and very high consumer expectations and standards for companies to meet in the marketplace. Satisfying the customer's desire for high quality and quick service in the current business environment has added pressures not historically present.
To meet these new challenges, companies around the world have invested heavily in Information Technology, taking advantage of IT systems to radically alter the conduct of business in both domestic and global markets. In particular, many firms have implemented company-wide systems called Enterprise Resource Planning (ERP) systems, which are designed to integrate and optimize various business processes such as order entry and production planning across the entire firm. By the late 1990s, companies were spending over $23 billion a year on enterprise software, of which a major portion was ERP software. Out of more than 100 ERP providers worldwide, SAP-AG, Oracle, J.D. Edwards, PeopleSoft, and Baan--collectively called the "Big Five" of ERP software--control approximately 70 percent of the ERP market share.
ERP systems are complex, and implementing one can be a difficult, time-consuming, and expensive project for a company. Implementation can take many years to complete and cost tens of millions of dollars for a medium-sized company and $300 to $500 million for large international corporations. Moreover, even with significant investments in time and money, there is no guarantee of the outcome.
Judging from limited reports in editorials and the popular press, the story of the success of these systems in achieving their stated objectives is mixed at best. Some maintain the failure of ERP implementations can threaten the very existence of a company, as was the case at FoxMeyer Corporation. Other reports emphasize that ERP is a key ingredient for gaining competitive advantage, streamlining the supply chain, contributing to lean manufacturing, and managing customer relationships. Thus, opinions differ on whether ERP systems are an asset that can deliver on the stated promises or a liability with significant cost consequences.
Here we present an objective view of ERP systems as a management tool for coordinating and guiding the activities of a firm. Our observations are based on a set of interviews with operating managers and IT personnel at both large and small corporations that have implemented ERP systems, as well as consultants who have assisted hundreds of corporate clients. To set the stage, we begin by providing background information on the development of and motivation for ERP systems.
For a better understanding of why companies have moved toward ERP systems, it is helpful first to comprehend the evolution of modern corporate information systems. Early applications of batch data processing focused on reporting such tasks as payroll generation and general ledger updating. Then, in the late 1950s, companies began developing homegrown planning systems that determined the what and when of material needs for meeting specific delivery schedules. Knowing the time-phased material plan established the resource requirements for the production plants, which became the basis for material requirement planning (MRP) systems.
The initial MRP systems used inputs of product demand (shipping schedules), inventory balances, and replenishment lead times to develop production schedules for a single plant. As competitive pressures increased and users became more sophisticated, advances in planning systems occurred with the movement toward MRP II, manufacturing resource planning systems that were developed either in-house or by third-party vendors as packaged systems. MRP II incorporated more links to other functions, such as order processing and product costing. Many such systems were designed with "what if" capabilities to evaluate such trade-offs as the balance between workload and manufacturing resource capacity.
Linking the different parts of the firm was a key objective, but there were many stumbling blocks. Most systems were developed for individual functions and probably at different points in time. Accounting processes were served by accounting systems like labor tracking and payroll, financial controls by such systems as asset management and cash management, and so on. There was little or no integration across systems, which were most likely programmed in different versions of COBOL, PL1, ALGOL, or other languages and were apt to be in various phases of development and upgrade maintenance. Data available in one system were often not readily available in another. Often, duplicate data entries were required or very complex interface programs were necessary to share important information. While the individual business units' efforts and processes optimized their plans using such systems, the impact on overall organizational efficiency was questionable and often led to inefficiencies.
Although MRP II was a significant improvement over traditional systems, the changing dynamics of business continued to apply pressure on companies to have more integrated systems. Global distribution channels, numerous international plant sites, and closely integrated sourcing arrangements changed the way companies around the world did business. The new business demands required the next generation of systems to provide instant access to timely information, enabling companies to have better visibility of operational information so they could use their resources better. Software vendors such as those listed in Table 1 responded to these needs by developing more integrated systems.
The Gartner Group coined the term "enterprise resource planning" in the early 1990s to describe the business software systems that evolved as an extension of MEP II-type systems. They stipulated that such software should include integrated modules for accounting, finance, sales and distribution, HRM, material management, and other business functions based on a common architecture that linked the enterprise to both customers and suppliers. This description implies three key properties. First, ERP systems are multifunctional in scope, tracking a range of activities such as financial results, procurement, sales, manufacturing, and human resources. Second, they are integrated in nature, meaning that when data are entered into one of the functions, information in all related functions is also changed immediately. Third, they are modular in structure and usable in any combination of modules. A firm can implement all the modules or a subset of them, as well as connect to other support systems, including "bolt-ons." Bolt-ons are specialized systems that normally provide a customized capability, often taking the form of a decision support system. Many ERP systems also come with industry-specific solutions, or templates, that enhance the standard system by addressing key issues or business processes within an industry group. A chemical company would require a materials planning system designed for a continuous flow process, whereas an aircraft manufacturer would need a discrete part planning system. To help visualize the nature of this complex area, Figure 1 provides a graphical representation of an ERP system and this integrated view. (For a more detailed description of ERP, see the list of Recommended Books below.)
An ERP "solution" can be put together in a number of ways. At one end, a company can install a single-vendor package. At the other end, it can use different modules from various vendors for a "best of breed" solution. The trade-offs of these two approaches are fairly simple. A multi-vendor solution can provide the best functionality for each module, but implementing it becomes more complex because of the interfaces that need to be established. A single-vendor solution may not have all the functionality required, but it will be easier to implement. Although thousands of companies worldwide have put in ERP systems, the vast majority of them have done so over the past five years. Thus, these systems are relatively new, with very little research available concerning their implementation, their operations, or their impact. Because of this, information on ERP often tends to be contradictory and skewed to fit certain points of view.
When one talks to ERP software providers, reads various promotional brochures, or visits either vendor or other commercial ERP Web sites, one gains the impression that ERP is the Holy Grail of information systems for enterprises. Some claim that these systems can link the entire organization together seamlessly, improve productivity, and provide instantaneous information, among other things. On the other side, however, there are cases in which companies have had disastrous or near-disastrous experiences with ERP systems. A number of criticisms have been made about the implementation of these systems: they are prohibitively expensive; they are very inflexible; they are difficult to implement across a large corporation; and so on. Considering the favorable and unfavorable statements such as those summarized in Figure 2, what is the realistic picture of an ERP system and its contribution to a company's success?
The Search for Answers
To better understand the nature, scope, and impact of ERP systems, we conducted a field study in which 15 different ERP implementations were studied extensively through interviews with key business managers and IT professionals. The sample was limited, but it included small to large firms ($30 million to $35 billion annual revenues), diverse industrial and consumer products, and the implementation of packaged software systems from six different vendors. We also interviewed senior ERP consultants from six different consulting firms on their experiences in implementing the systems--discussions that proved very insightful to our study. With both the case studies and the interviews with consultants, our discussions focused on the following questions:
* Why did the company decide on an ERP solution?
* What was the process for selecting the ERP vendor(s)?
* How was ERP implemented?
* What resources were used and what benefits accumulated?
* What were the key success factors?
* Which areas experienced improvements after implementation? Which were disappointed?
* What lessons were learned?
* What does the company plan to do in the future?
Based on these questions, we developed a better vision of the current state of ERP software, its capabilities, and its future potential.
According to industry reports, at least 30,000 companies worldwide have implemented ERP systems. There are more than a hundred ERP vendors, with many of these systems specifically designed for small companies. While larger firms were the first to move to ERP systems in the mid-1990s, smaller firms now view this approach as an important management tool. In our sample, five companies had annual revenues of less than $200 million, with the smallest at $30 million. In addition, one of the consulting firms we interviewed specialized in implementing SSA/BPICS in small companies. Two others had also implemented ERP systems at many companies with revenues under $200 million. In fact, for one of them, the small and medium company market was the fastest growth area of its ERP business. Thus, the notion that ERP belongs only in very large corporations is not true.
Companies adopt ERP systems for a variety of reasons. The popular press often cites Y2K as the crucial reason in the upsurge of ERP systems in the mid-1990s. Now that the Y2K issue is over, many seem to be downplaying the systems. Our research, however, shows a different picture. Although Y2K was often mentioned as a reason for adoption, our sample companies cited several other key reasons before Y2K. The dominant reason for adopting ERP was to simplify and standardize IT systems. Almost all of our sample firms had been operating with a patchwork of legacy systems, so simplifying and standardizing them was a key strategy. Because of this, they also expected future upgrades to be a lot easier--a key priority.
The second most common reason for adoption was to have access to accurate information so that interactions and communications with customers and suppliers could be improved. Most of our sample companies viewed this as a strategic priority.
The third reason was data. Managers expected the availability and quality of data to improve significantly, providing a strategic advantage. Simplification and standardization are factors of IT, but the underlying motivation for ERP is to improve business processes. That is, an ERP system is generally adopted to improve the firm's overall productivity, not just to solve an IT problem such as Y2K. It is viewed as a business solution rather than an IT solution.
Adoption of ERP was generally a top-down decision. Our discussions show that senior-level managers from various user groups were the driving forces for adopting, evaluating, and implementing it. Although IT personnel were closely involved, the size and scope of the systems required senior executive support in allocating resources and setting priorities.
ERP implementations tend to be costly when considered strictly in dollar terms. Even in small firms they can exceed $1 million; larger companies may spend tens of millions of dollars. Measuring the cost of implementation as a percent of revenue provides a convenient way to determine whether the size of the organization has any impact on ERP costs. The cost of implementation among our sample companies ranged between 1.5 percent and 6 percent of annual revenues. Smaller firms spent between 3 and 6 percent of annual revenues, while larger enterprises spent from 1.5 to 2 percent. These results suggest that large companies moving to ERP systems realize some economies of scale. Although these figures represent onetime implementation costs, there are maintenance and operating costs as well, just as in any other system. Our sample companies expected these costs to be lower than those associated with their legacy systems.
For most ERP projects, the software portion, or 15 percent of the total implementation cost, was just the tip of the iceberg. Such areas as hardware, training, and consulting tend to dominate the true cost of moving to an ERP system. Table 2 provides the average and range percentage breakdown for major implementation cost components based on our sample of firms. Note that for some firms the use of consultants was by far the largest component of the cost. This was particularly true during the mid-1990s, when knowledgeable individuals were scarce and consulting fees approached $2,500 per day for experienced personnel. The rates have fallen over time with the advent of other resources in the form of books, templates, and more ERP professionals to assist firms.
Implementation time ranged from 12 months to four years. Larger companies may have enjoyed some cost advantage versus smaller ones, but the reverse occurred with regard to project duration. Smaller firms had operational ERP systems in much shorter time frames, often in less than a year and a half. Their success can be attributed to two reasons. First, coordination is much easier in smaller firms that may have only two or three operating facilities in different locations. Second, smaller firms normally "went live" with the complete system at one time. The larger companies followed a phased implementation program either across many operating Units or by different modules, requiring more time and greater coordination efforts.
Two other factors that may lengthen an ERP project are excessive reengineering up front and modifying the system. Very few major modifications were reported among most of our sample companies. However, a few did modify the base ER]? system to fit some of their processes. One firm, for example, decided to customize its order entry module. In these cases, implementation ran into difficulties, resulting in significant delays and cost overruns.
The return on investment of ERP systems is mixed, with our sample companies reporting ROI in the 5 to 20 percent range. With any new system there is usually a drop-off in productivity right after implementation, then gradual improvement. Several of our sample companies indicated that it would take them upwards of 12 months to get to the point where they could start using their ERP systems more effectively. Two of the companies had gone beyond the 12-month period and reported significant improvements. Thus, in the longer term we can expect these companies to experience operational improvements as a result of ERP.
Companies consider the standardization and integration of processes across the enterprise as a key benefit. One of the executives stated, "ERP is the digital nerve system that connects the processes across the organization and transmits the impact of an event happening in one part of the enterprise to the rest accurately." Three of the large companies in our sample also indicated that process standardization and integration applied to their global operations as well. The availability and quality of data were also cited as positives for adopting an ERP system. In almost every implementation, the system did not lead to any reductions in either the work force or the operational costs in the short term. Of the other tangible benefits, lower inventories, shorter delivery cycles, and shorter financial close cycles were reported most often. Each of our sample companies plans to continue using its ERP system for the foreseeable future. In fact, almost all of them expected the useful life of the system to be more tha n ten years.
Operationally, none of the sample companies reported any performance problems with ERP. Most had ironed out any problems by "stress-testing" realistic volumes of transactions during the test phase. While ERP provides very fast and reliable transaction processing, it lacks decision support capabilities that would enable better decision-making or optimization of processes. Thus, most companies do not view a single-vendor ERP system as one that will provide their entire end-to-end solution. In fact, most of the companies in our sample installed only a subset of the modules, filling the gaps with other systems. As discussed earlier, these bolt-ons or "extension software" may come from either the ERP vendor or a specialty vendor. Typically, they perform such tasks as data analysis, scheduling, and demand planning. A sampling of bolt-on systems is presented in Figure 3.
Many companies are just beginning to install bolt-ons to enhance their business performance by taking advantage of the availability of more accurate and timely data from the base ERP system. One company that has done this successfully is VF Services, a division of apparel maker VF Corp. It uses SAP as its ERP system and various bolt-ons as well: a supply chain management system from i2; a demand-forecasting package from Logility; data mining tools from SAS; and various other specialized apparel systems. As companies like VF use these specialized bolt-ons on top of their ERP systems, implementation moves away from a single integrated system. Some companies are willing to do that to get the functionality they need. For others, such fragmentation may be short-lived as ERP vendors add these decision support bolt-ons as modules within their integrated systems.
Finally, for all the negative press ERP systems have received, our interviews indicated that all our sample companies are pleased with them, even though they may have had some problems along the way. Several companies compared implementation to root canal surgery. The process itself was extremely painful, but things felt much better after it was all done. In spite of the difficulties involved in implementing an ERP system, few instances of major failures have been reported. FoxMeyer Corporation is the only case reported so far that may have gone out of business as a result of ERP implementation. Others, such as Hershey Foods and Whirlpool, had initial operating difficulties, but these have since been straightened out. Still others discontinued their ERP implementation altogether. Most observers believe Hershey's was an implementation problem; it tried to implement three major systems, including SAP and Manugistics, all at the same time, and at the busiest time of year. Dell Computer and Allied Waste are two of a small set of companies that have scrapped ERP. In Dell's case, it implemented the HR module and then decided that SAP's R/3 system would not be able to keep pace with its extraordinary growth rates. Allied Waste claimed the ERP software was too complicated and expensive. Although cost may have been a factor, management style and company structure also played a key role in the decision. In recent years, Allied has gone through major structural changes for a decentralized management model, totally changing the implementation parameters.
So although some companies have faced significant problems with ERP, many others have been very successful. The big question is: What are some of the key factors that influenced that success? An ERP implementation is usually a gigantic undertaking for any firm, so it must be planned very well and managed very efficiently. Failure to do this can easily result in higher costs and longer implementation times. ERP implementations run into problems for a variety of reasons. A few companies, such as Dell and FoxMeyer, cite operational reasons. Hershey's implementation approach was its problem. For a few other firms, like Allied Waste, expanding or changing the project's scope was the most common reason for cost overruns and missed deadlines. Our experiences show that the companies that stayed on track and on budget had several common characteristics:
* Senior management was thoroughly involved in the project from the outset and established clear priorities. Several of our sample companies viewed their ERP project as a major investment on the same order as a new plant or an acquisition. Thus, it was given the same level of commitment.
* A cross-functional implementation team with a more senior management leader was established. In the larger firms, the team members were fully dedicated to the ERP project and were often co-located to improve communications. In the smaller firms, the implementation team members normally retained their traditional assignments and took on extra responsibilities for the ERP implementation.
* The teams spent more time up front to define in great detail exactly how the implementation would be carried out. This included what modules and process options would be implemented and how the senior management priorities would be incorporated in the implementation process. Such a strategy allowed the creation of the "play-book," as it was called in one firm, which then became the implementation "bible" the firm followed throughout the project.
* Clear guidelines were laid out on performance measurement. These metrics were not just technical ones but also included business operations.
* The companies established clear guidelines on how to use outside consultants. They also established a knowledge transfer process from consultants to in-house experts for both system configuration information and long-run maintenance. One firm in our sample forced knowledge transfer by requiring that consulting staff representation on any implementation team be no more than 20 percent. This meant that the consultants had to work with and depend on the company's staff to complete the project, which in turn forced the internal staff to learn more about the implementation, thereby retaining the knowledge in the company.
* All these companies developed detailed plans for training users. This was generally the most underestimated component of the process. ERP systems are very complex and hierarchical; this means training also needs to be hierarchical, with heavy users receiving more intense training early in the process. In fact, the more successful firms involved their heavy end users throughout the implementation process instead of providing training at the very end. Another feature of successful training programs was that the lead users were trained first, in turn becoming trainers for those further down in the hierarchy.
With apologies to Mark Twain, it seems, then, that the reports of the demise of enterprise resource planning are greatly exaggerated. To the contrary, we believe it is alive and well. Some of the common myths about it are true; others are not. Now that companies have been operating with ERP systems for a number of years, we are beginning to see some of the efficiencies and returns for the investment of time and money. Benefits have come in the form of lower inventories, improved delivery schedules, better and more timely information, and quicker service response. The findings from our study point to the following status of ERP:
* ERP systems are being implemented in companies of all sizes, from the very small to the very large.
* The systems have been implemented for a variety of reasons, not solely because of the Y2K problem. ERP is generally viewed as a business solution, not an IT solution.
* An ERP implementation is a major investment that tends to be expensive. However, the costs have to be balanced against the benefits, both tangible and intangible.
* Most companies have been operating with their ERP systems for a short time. While many have realized some benefits, productivity is expected to increase significantly as firms gain more experience with ERP.
* At this point in time, the results on cost reductions for IT operations are mixed.
* A single ERP system does not provide an end-to-end solution as advertised by some vendors. Most companies use other systems for specialized functionalities or decision-making processes.
* ERP simplifies and standardizes systems across the firm, making it easier to upgrade or add additional ones in the future.
* All ERP systems seem to be very stable. In particular, there is no evidence that they cannot handle enterprises' transaction processing, even in very large companies.
* ERP systems significantly improve data availability and quality, making for better decision making. As companies create data warehouses and add decision support systems, additional benefits will be realized.
* Most companies are pleased with their ERP systems. Although many expect the useful life of the system to be in excess of ten years, routine upgrades will be required over time.
The key question now is the future role of ERP, particularly with respect to the emerging e-business economy We believe that ERP systems enable and enhance e-commerce initiatives, primarily by providing accurate, integrated transaction processing capabilities for a firm. Conducting business in an e-commerce environment demands accurate information and the ability to measure impact instantaneously. Thus, ERP provides the digital nerve system or the backbone in an organization to respond swiftly to customers and suppliers. To meet the ever-changing business environment, many ERP vendors have also upgraded their systems to operate on the Web. Thus the future of ERP is very promising.
Vincent A. Mabert is the John and Ester Reese Professor and a professor of operations and decision technologies at the Kelley School of Business, Indiana University, Bloomington. Indiana, where Ashok Soni is an associate professor of ODT and M.A. Venkataramanan is professor and chair of the ODT Department.
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Partial List of ERP System Vendors and
Their 1998 Forecasted Market Shares
ERP Package Market Share
SAP 32 %
Oracle 13 %
PeopleSoft 9 %
JDE 7 %
Baan 7 %
SSA/BPCS 3 %
JBA International 3 %
Intentia 2 %
QAD 2 %
MAPICS [less than]2 %
Ross Systems [less than]2 %
Computer Associates [less than]2 %
IFS International [less than]2 %
Symix Systems Inc [less than]2 %
Source: AMR Research (Laughlin 1999)
Implementation Cost Breakdown
Cost Category Cost Range
Consulting 30% 20-60%
Hardware/Infrastructure 25% 0-50%
Implementation Team 15% 5-20%
Training 15% 10-20%
Software 15% 10-20%
Common ERP Criticisms and SupportingStatements
In support of ERP... Criticizing ERP...
* An ERP system is a solution * The application of an ERP system
panacea for all the IS woes of an is the domain of only the very
enterprise and will be the only large companies.
IS an enterprise need to conduct * ERP systems became popular solely
its business. because of the Y2K problem; with
* The ERP approach simplifies and Y2K a memory, the future of ERP
standardizes systems across the is bleak.
enterprise, making it easier to * An ERP system and its
upgrade Systems in the future. implementation are very
* An ERP system typically reduces expensive. The system needs
the cost of IT operations and modifications, or the company
the number of personnel needed needs to go through a major
to maintain the organizational reengineering process to
IS. use it.
* An ERP system forces all * Installed ERP systems are
processes to be integrated and a typically slow and cannot meet
high level of data integrity to the transaction needs to most
be achieved. companies.
* ERP is an excellent decision * ERP systems have not provided the
support tool that will provide returns on investment that were
a competitive advantage. originally predicted.
* ERP systems embed all the best * Many firms have gone out of
practices for various processes, business primarily because of the
allowing a firm to configure implementation of an ERP system.
the systems quickly and easily * ERP systems increase the IT costs
so as to minimize implementation and staff head counts.
cost. * Multiple additional systems are
* ERP systems allow for better needed for smooth functioning,
global integration. in spite of an ERP
A Sampling of "Bolt-on" Software Vendors
Demand Planning Order Tracking
* Demand Planner (Baan) * Intelliprise[TM] (American
* SCM/Enterprise[TM] (HK Systems, Software, Inc.)
Inc.) * SCM/Enterprise[TM] (HK Systems,
Inventory Management Factory Planning and Scheduling
* Exceed WMS (EXE Technologies, * Capacity Planning (J.D. Edwards)
* Warehouse Management System * Intelliprise[TM] (American
(WMS) (Catalyst) Software, Inc.)
E-Procurement On Line Collaboration
* Ariba Network (Ariba, Inc.) * ActivEra[TM] E-Business (J.D.
* Numetrix [email protected] (J.D. Edwards) * Ariba Network (Ariba, Inc.)
* Oracle Order Management (Oracle) * Aspen OnLine[TM] (Aspen
Business to Business Warehouse Mgmt--inbound/outbound
* ActivEra[TM] E-Business (J.D. * CSW Warehouse Management System
* MANAGE:Mfg (Cincom) * eOperate[TM] (Aspect Development,
* Verano Supply Chain Portal * The EliteSeries (TECSYS)
Integrated Suite Systems (multiple Data Mining Systems
* Manugistics6 (Manugistics, Inc.) * Intelligent Miner for Data (IBM)
* RHYTHM (i2 Technologies, Inc.) * Darwin (Oracle)
* APO (SAP-AG) * Enterprise Miner (SAS Institute)
* PeopleSoft Materials Management * HNC Software Solutions (HNC Inc.)
Can an ERP system success fully become the backbone of company operations in the new economy?
Today's business world is compiled of e-commerce companies. Gone are the days when a trip to the store was necessary to purchase an item, pay a bill, make a deposit or attend a college or a university. ERP systems are in place to bring greater revenues to businesses by streamlining their business practices.
"Enterprise Resource Planning (ERP) software systems are a central component of this 'backstage' restructuring of organizational operations. ERP systems integrate and standardise data across an organisation and its various functional and hierarchical divisions, providing the promise of a single, seamless data system. Driven by software companies, technology
vendors and consultants, ERP has been promoted as a technology that will bring greater coordination and control to organisational processes, reduce operating costs and facilitate improved strategic planning by allowing managers to access more timely and accurate ...
The solution answers the question - Can an ERP system success fully become the backbone of company operations in the new economy?