ERP: What They Are, Where They Come From, and How They Support Process Improvement PDF

TrEC - Accounting, Finance and Information Systems Organization and Information System Prof. Diego Campagnolo - Prof. Massimiliano Oleotto ERP: what they are, where do they come from and how do they support process improvement Chapter 6 Materials - a.y. 2023-2024 2 Learning Objectives Q1. What...

TrEC - Accounting, Finance and Information Systems Organization and Information System Prof. Diego Campagnolo - Prof. Massimiliano Oleotto ERP: what they are, where do they come from and how do they support process improvement Chapter 6 Materials - a.y. 2023-2024 2 Learning Objectives Q1. What problem does an ERP system solve? Q2. What are the elements of an ERP system? Q3. What are the benefits of an ERP system? Q4. What are the challenges of implementing an ERP system? Q5. What types of organizations use ERP? Q6. Who are the major ERP vendors? Q7. What makes SAP different from other ERP products? Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 3 Functional Structure: Advantages and Disadvantages nProvides people with the opportunity to learn from one another and become more specialized and productive nPeople who are grouped together by common skills can supervise one another and control each other’s behavior nPeople develop norms and values that allow them to become more effective at what they do Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto nCommunication Problems: as more organizational functions develop, each with their own hierarchy, they become increasingly distant from one another nMeasurement Problems: information needed to measure the profitability of any functional group is difficult to obtain nLocation Problems: centralized control hinders ability to satisfy the special needs in different geographic regions nCustomer Problems: servicing the needs of new kinds of customers and tailoring products to suit them is relatively difficult nStrategic Problems: top managers spend too much time finding ways to improve coordination 4 Advantages and disadvanges of functional organizational structure Functional specialization allows the development of managerial competences, but it can also promote the development of functional specific languages and orientations that make horizontal integration difficult, up to make it real the risk of «transposition of objectives» and of conflicts among functions SO WHAT? It is essential enhancing organizational integration capabilities Organization and Information Systems | a.y. 2022-2023 | Diego Campagnolo – Massimiliano Oleotto HOW? Integration units are not the only solution… Advantages and Disadvantages of a (multi)didivisional structure 5 nIncreased organizational effectiveness: clear division of labor between corporate and divisional managers generally increases organizational effectiveness nIncreased control: extra control provided by nManaging the corporate-divisional relationship: finding the balance between centralization and decentralization nCoordination problems between divisions: divisions start competing for resources and coordination problems arise between divisions the corporate office can encourage the stronger pursuit of internal organizational efficiency by divisional managers nTransfer pricing: problems between divisions often revolve around the nProfitable growth: when each division is its own nBureaucratic costs: multidivisional structures are very expensive to profit center, individual profitability can be clearly evaluated nInternal labor market: the most able divisional managers are promoted to become corporate managers Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto transfer price, i.e., the price at which one division sells a product or information about innovations to another division operate nCommunication problems: tall hierarchies tend to have communication problems, particularly the distortion of information Advantages and disadvanges of divsional organizational structure 6 Caratteristiche Vantaggi Difficoltà Diminuzione della complessità e della dimensione delle unità con autonoma responsabilità di risultato Moltiplicazione delle funzioni ed elevati costi di struttura Ciascuna divisione ha al suo interno le competenze necessarie; migliore coordinamento funzionale Perdita delle economie di scala consentite dalla concentrazione funzionale Migliore capacità di soddisfare i bisogni del cliente e di cogliere i potenziali di innovazione Difficoltà di coordinamento tra linee di prodotto e potenziali conflitti Coordinamento attraverso la standardizzazione degli output Migliore allocazione delle risorse Riduzione della perdita di controllo della direzione centrale Possibile incapacità di cogliere le sinergie interdivisionali Sviluppo di posizioni con visione imprenditoriale e della linea intermedia Riserva di competenze manageriali Spinta alla crescita dimensionale Opportunismo manageriale La struttura viene articolata in divisioni autonome Specializzazione per linee di prodotto o per segmenti di clientela Correttivi Accentramento a livello corporate delle funzioni in cui le economie di scala e le interazioni tra prodotti sono rilevanti (per esempio, ricerca e sviluppo, comunicazione, finanza) Divisional specialization allows the reduction of complexity, increases coordination among functions (within divisions), increases the ability to satisfy customers, improves resource allocation, but it can also promote inefficiency, coordination issues among divisions and poor synergies SO WHAT? Organization and Information Systems | a.y. 2022-2023 | Diego Campagnolo – Massimiliano Oleotto Meccanismi di coordinamento (comitati, task force, gruppi di lavoro) Sistemi di remunerazione e incentivazione sul residuo It is essential balancing centralization and decentralization and improving coordination among divisions HOW? Deciding what is centralized and what is decentralized, improving integration mechanisms Advantages and disadvantages of a Matrix Structure 7 nThe use of cross-functional teams reduces functional barriers and subunit orientation. nMatrix lacks a control structure that leads employees to develop stable expectations of one another nThe lack of a clearly defined hierarchy of authority can also nOpens communication between functional specialists lead to conflict between functions and product teams over the use of resources nPeople are likely to experience a vacuum of authority and nThe matrix enables an organization to maximize its use of skilled professionals, who move from product to product as needed nThe dual functional and product focus promotes concern for both cost and quality Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto responsibility n People then create their own informal organization to provide themselves with some sense of structure and stability 8 Advantages and disadvantages of matrix structures Matrix structure allows simultaneous focus on efficiency and effectiveness, but it can also promote conflicts and ambiguity SO WHAT? It is essential to give some stability to employees making as clear as possible authority relationships and responsibility, keeping the balance between functional and product team needs to promote cooperation and flexibility HOW? Organizational culture is not the only solution… Organization and Information Systems | a.y. 2022-2023 | Diego Campagnolo – Massimiliano Oleotto (from the last class) How Can an IS Hinder a Process? 9 •Information Silos – Data exists in isolated functional IS •Why Information Silos Exist – Data stored in separate databases To control data – Variety of objectives – Sensitive data not to be shared – Departmental systems purchased and implemented quickly – Less expensive – Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Problem Does an ERP System Solve? 15 Information Silo Problem § Data isolated in separate information systems Solutions § Enterprise Application Integration (EAI) § Enterprise Resource Planning (ERP) Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Problem Does an ERP System Solve? 16 EAI § Connects information silos via a new layer of software § Enables existing applications to communicate and share data § Provides integrated data § Leverages existing systems, leaving departmental information systems as is, but providing an integration layer over the top § Enables a gradual move to ERP Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto Any «drawbacks» from the adoption of this approach? How often is an EAI still adopted? What Problem Does an ERP System Solve? 17 ERP Characteristics § Consolidation of data for real-time sharing of data ü “Source or truth” § Integrated processes ü “left hand of the organization to know what the right hand is doing” ERP emerged around 30 years ago… why? Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto Brief history of ERP: business and IS co-evolve 18 The focus of manufacturing systems in the 1960s was on inventory control. Companies could afford to keep lots of ‘‘just-in-case’’ inventory on hand to satisfy customer demand and still stay competitive. Consequently, techniques of the day focused on the most efficient way to manage large volumes of inventory. Most software packages (usually customized)were designed to handle inventory based on traditional inventory concepts. In the 1970 s, it became increasingly clear that companies could no longer afford the luxury of maintaining large quantities of inventory. This led to the introduction of material requirements planning (MRP) systems. MRP represented a huge step forward in the materials planning process. For the first time, using a master production schedule, supported by bill of material files that identified the specific materials needed to produce each finished item, a computer could be used to calculate gross material requirements. Using accurate inventory record files, the available quantity of on-hand or scheduled-to-arrive materials could then be used to determine net material requirements. This then prompted an activity such as placing an order, canceling an existing order, or modifying the timing of existing orders. For the first time in manufacturing, there was a formal mechanism for keeping priorities valid in a changing manufacturing environment. The ability of the planning system to systematically and efficiently schedule all parts was a tremendous step forward for productivity and quality. Yet, in manufacturing, production priorities and materials planning are only part of the problem. Capacity planning represents an equal challenge. In response, techniques for capacity planning were added to the basic MRP system capabilities. Tools were developed to support the planning of aggregate sales and production levels (sales and operations planning), the development of the specific build schedule (master production scheduling), forecasting, sales planning and customer order promising (demand management), and high-level resource analysis (rough-cut capacity planning). Scheduling techniques for the factory floor and supplier scheduling were incorporated into the MRP systems. When this occurred, users began to consider their systems as company-wide systems. These developments resulted in the next evolutionary stage that became known as closed loop MRP. In the 1980 s, companies began to take advantage of the increased power and affordability of available technology and were able to couple the movement of inventory with the coincident financial activity. Manufacturing resources planning (MRP II) systems evolved to incorporate the financial accounting system and the financial management system along with the manufacturing and materials management systems. This allowed companies to have a more integrated business system that derived the material and capacity requirements associated with a desired operations plan, allowed input of detailed activities, translated all this to a financial statement, and suggested a course of action to address those items that were not in balance with the desired plan. By the early 1990s, continuing improvements in technology allowed MRP II to be expanded to incorporate all resource planning for the entire enterprise. Areas such as product design, information warehousing, materials planning, capacity planning, communication systems, human resources, finance, and project management could now be included in the plan. Hence, the term, ERP was coined. And ERP can be used not only in manufacturing companies, but in any company that wants to enhance competitiveness by most effectively using all its assets, including information. Source: Umble et al., Enterprise resource planning: Implementation procedures and critical success factors, European Journal of Operational Research 146 (2003)241–257 Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 19 Effects of introducing ERP for a single process What positive effects does the introduction of an ERP make possible? List disadvantages and advantages of each solution Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto Effects of introducing ERP for a single process 20 What positive effects does the introduction of an ERP make possible? After: • Standardized purchasing process • Effective management of purchasing process • Higher bargaining power Any drawbacks? Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 21 What Problem Does an ERP System Solve at the single process level? Before and After ERP With the university purchasing office now orchestrating the process, specific and clear objectives and measures have been developed for the process and shared with all purchasing agents. Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 22 What Problem Does an ERP System Solve at the organization level? Compare the pre-ERP and the post-ERP situation if the sales department has the unexpected opportunity to sell 1,000 bicycles Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Are the Elements of an ERP System? 23 Manufacturing Software § MRP § MRPII ERP includes applications that integrate the processes for the following functions: SCM (e.g. procurement, sales order processing, inventory management, etc) Manufacturing (e.g. capacity planning, quality control, bill of materials, etc) CRM (e.g. sales prospecting, customer management, marketing, call center, etc) Human Resources (e.g. payroll, time and attendance, HR management, benefits administration, etc) § Accounting (e.g. accounts receivable, accounts payable, cash management, fixed-asset, etc) § § § § Frequently an organizational will purchase and implement just parts of the total ERP package. Why? Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Are the Elements of an ERP System? 24 Five Components of an ERP System § § § § § Software Hardware Data Procedures People Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Are the Elements of an ERP System? 25 ERP Software § Configuration: how many configuration decisions to customize? Is there a limit? If a customer requirement cannot be met? Adapt business or the software? (write application code - customization? For example to create company-unique reports) ERP Data § Transactional Data: related to events § Master Data: do not change with every transaction § Organizational Data: about the organization Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Are the Elements of an ERP System? 26 Hardware § Variety of hardware (servers, clients, printers, scanners…) § Cloud implications: what are they? Procedures § Select ERP processes and specify how they will be executed on the ERP software § Procedures improve control: limit behavior and provide consistent results. Any drawbacks? § First step: crafting procedure – Second step: training employees to use the procedure. Training is expensive. People Users: employees of the firm implementing the system Systems Analysts: employees that support, maintain and adapt the system after implementation Consultants: work for the ERP vendor Success in ERP position is based less on technical skills and more on process understanding and ability to work with people. Why? § When using ERP each individual plays a specific role and have access to screens and data based on that role. § § § § Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto CLOUD IMPLICATIONS 27 1. 2. 3. 4. 5. 6. Lower costs: limited investments in hardware, software, and configurations global scalability: right amount of IT resources only when necessary performances: worldwide network of secure, up-to-date data-center security: flexibility reliability: more simple and lower cost of backing up data Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto What Are the Elements of an ERP System? 28 ERP systems are more than an IS Inherent Business Processes in ERP § System specified business processes § Process blueprints Implementing ERP implies adapting to the predefined inherent processes or design new ones. What are the implications of designing new ones? Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 29 What Are the Benefits of an ERP System? 1. 2. 3. 4. 5. Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto Trends as they occurs and appropriate responses Processes converted into bestpractices Better control: dashboards No silos problem Easier to exchange data with partners What Are the Challenges of Implementing an ERP System? 30 •Decision-Making Challenges – Details What decisions need to be made? What are people-related challenges? •People Challenges – Changes What issues an upgrade is likely to imply? •ERP Upgrades © Pearson Education Limited 2015 Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 6-30 31 What Are the Challenges of Implementing an ERP System? 1. 2. 3. 4. 5. Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto Selecting the right vendor: long-term relationship Gap between business requirements and the capabilities of the chosen ERP: Focused, well-understood, short list of “likes” Configuration: up to thousands of decisions: suitability of configurations offered vs customization Format of data Transition: gradual or “one big step”? 32 What Are the Challenges of Implementing an ERP System? •Top management need to stay involved, ensure implementation is monitored, resources are committed, good procedures, training •Oversells: risk of buying more features than needed •Cultural change associated to ERP •Collaboration: each of the roles involved masters a piece of knowledge •Extra inducements might be needed to promote the change Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto 33 What Are the Challenges of Implementing an ERP System? •If people believe the upgrade will be as disruptive •More challenges justifying the upgrade compared to the initial implementation •Customization can lock into the original customized version •No Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto long-term orientation What Types of Organizations Use ERP? 34 •ERP by Industry Type •ERP by Organization Size: large vs small. Is it different? •International Firms and ERP: multi language and multi currencies. Any issue? Organization and Information Systems | a.y. 2023-2024 | Diego Campagnolo – Massimiliano Oleotto