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OSOE - ERP 101

OSOE - ERP 101

ERPs are usually considered as a difficult matter to learn or to teach. ERP classes can be so general, that nothing is really learned. Or they can be based on case studies, and thus lack of any strong teaching in terms of theoretical principles. Or they can be so much linked to a given product that what people learn is the product, rather than universal and permanent principles. ERPs are also considered to be such a huge, complex pipe factory, that many people even believe that they can not be taught. In this class, we are going to change the way that ERPs were taught.

Agenda

  • Class requirements
  • ERP facts
  • What is an ERP

Requirements

Requirements

The main requirement for this class is to find an implementation field. The best way to understand ERPs is to learn how to configure an ERP. And the best way to learn the configuration of ERPs is to actually configure it on a real case. We therefore require each student of this class to find a small business, a non profit organisation, a public administration, etc. which will serve as a implementation field.

The configuration process will happen after the 6th session. It will only require to fill a spreadsheet, which means that it is quite straightforward from a technical point of view. However, from the user point of view, this simple configuration will completely change the way the ERP is perceived. At the end ERP will match the business environment of the implementation field and become usable and very useful.

Students of this class are therefore offered the unique possibility to make a major gift to a small company or a non profit organisation, by providing lean organisation and order for better productivity and better information sharing.

It is now time to think about who you are going to help in the next few days. Do not wait. Start searching for someone immediately because many organisations will hesitate adopting ERPs. In case they worry, just tell them that 3500 organisations in 140 countries are using it, mostly small businesses, that it is easy, compatible with any operating system and completely free. It is also based on the same technology as ERP5, a major ERP used inside EADS, a central bank and various governments and industries.

ERP Facts

ERP FactsGartner, 2013.

Enterprise sales of ERP systems will grow to $32.9B in 2016, attaining a 6.7% CAGR in the forecast period of 2011 to 2016. CRM is projected to be an $18.6B global market by 2016, attaining a CAGR of 9.1% from 2011 to 2016.

Who needs an ERP, who are the market leaders, how much does it cost, how long does it take to implement, is it risky and is there an alternative. These are some questions which we are going to try to answer before defining what is an ERP.

Who needs an ERP ?

Who needs an ERP

Every business, every government, every non-profit organisation needs an ERP.

Usually, most people believe that they need an ERP in order to track what is going on from a financial point of view. This is what usually happens in large companies which use the ERP mostly as a large accounting software capable of consolidating accountings from various branches and subsidiaries. However, this is a very partial view.

Businesses, NGOs and governments need an ERP because they need to manage staff, materials, purchases and sales, and it can become a nightmare to relate all of these pieces of information if they are handled by using paper or using separate applications.

Of course, companies which are small and issue just a few invoices with big amounts can live without an ERP. In such case, the ERP is probably the brain of the CEO.

However, as soon as the business activity grows, that colleagues need to work together, that some traceability is required between departments or that some automation between sales, delivery and finance must be put in place, people end up using an ERP or disappearing.

That being said, the ERP can take the form of a "Common Off the Shelve Package" or a custom software. It can take the form of a centralised piece of software or of a collection of components with interfaces. This is after all a matter of implementation. What remains as a common is the fact that as soon as the business activity grows, people need a common place to share and relate business documents: the ERP.

Who does not need an ERP ?

Who dont need an ERP

Some people do not need an ERP.

Families probably do not need, right?

Individual businesses who do not need to share information with partners probably do not need an ERP, as long as the number of business documents they handle remains small. For example, a consultant who sells alone 5 contracts per year with 3 clients does not really need an ERP. His own brain is faster.

Small businesses which can be organised using simple tools such as a cash register and a physical inventory can live without an ERP. Very often, physical tools are more efficient than software, as long as people trust each other. The "Kanban" system which was introduced in Japan is a perfect example of a management system based on tangible tools which beats an approach based on software and mathematics.

Having these examples in mind is essential when considering the implementation of an ERP. Not everything needs to be put into the ERP. Some parts of a business can be kept outside the ERP, using paper, binders, drawers or, simply, human brain. The more features an ERP configuration has, the more time it takes to teach it and to make users adopt it. Keeping an ERP configuration lean and simple, using only parts of an ERP can sometimes be more efficient than trying to do everything with it.

Our advice for ERP implementation is simple: first implement what the organisation could not survive without, and make it used fully (a.k.a. "Less is More"). Once this is achieved, consider extending the ERP configuration with new features based on a R.O.I. rationale.

Key Players

Key PlayersGartner, 2014.

The leader of ERPs is SAP. It is a German company and it is considered as the 2nd or 3rd software company in the world after Microsoft. The challenger of SAP is Oracle, which is also considered the 2nd or 3rd software company in the world after Microsoft.

SAP is definitely the reference ERP. It is used in most large corporations. However, that does not mean that corporations which use SAP do not use another ERP. EADS for example is an SAP shop. However, Infoterra, a subsidiary of EADS uses ERP5, an open source ERP, for part of its business. In reality, implementing the same single ERP for all business units and subsidiaries of a large company is nearly impossible due to the perpetual changes of the corporate structure and business processes. The common case in large companies is the existence of “plurality of ERPs”, sometimes of the same brand and sometimes of different brands. Only the financial part of the ERP is usually consolidated in the same ERP instance across business units and subsidiaries.

In the case of small and medium size companies, things are different. Because there is more consistency in a middle sized business than in a large multinationals, it is possible to unify all business activities within the same ERP and make the company more efficient through that unification.

How much does an ERP cost?

The Cost

An ERP software is anything between 0 EUR / seat for open source software to 2,000 EUR / seat or more for proprietary ERPs. The license must be often renewed every year for a cost which amounts between 10% and 25% of the initial license cost.

How much is an implementation?

The Implementation

Most of the costs of an ERP actually lie in the implementation.

Implementing an ERP requires to do some configuration, which is what we are going to learn later on. It requires teaching users how to use it and how to organise their business with the ERP. It also requires sometimes to develop some custom scripts and interfaces so that the ERP matches the technical or business environment of the customer.

The total implementation cost of an ERP is usually estimated between 2 man days and 6 man days per employee in a company. This is usually equivalent to 1% to 3% of the company turnover or to 1,000 EUR to 3,000 EUR per employee.

If we translate these figures to a small company (6 people), we will find that implementing an ERP costs about 10,000 EUR in a small company or 20 man days. In a large organisation with 1,000 employees, an ERP will implementation will quickly reach 2,000 man days or 1,000,000 EUR. In a large multinational with 100,000 employees, an ERP implementation can quickly surpass 100,000 man days and 100,000,000 EUR.

At the same time, the cost of selling an ERP, which is mostly the time spent in convincing prospects to adopt a given ERP, does not change so much between a small company and a mid size company.

As a result, ERPs are not used very often by small companies, only because nobody is willing to spend time convincing them to adopt them and make no profit out that.

What is the success rate?

What is the success rate?
mourlon-neyer.pdf

The “Mourlon Neyer” report is one of the best sources to understand the risk of ERPs. As a rule of thumb, 50% ERP projects fail, they cost 3 times as much as expected and take twice longer than planned.

The reasons for failure are very seldom related to the ERP software itself, but rather to the abnormal behavior of clients of consultants. However, because clients and consultants seldom accept to recognize their own mistakes, the ERP software is often blamed for the failure of the project by either the client or the consultant.

In this environment, where the one which is not to blame is blamed and those who should be blamed are not, only those ERPs with a strong brand can survive a 50% failure rate, together with ERP software which implementation is strictly controlled by the software publisher.

The reasons of failure are diverse. But they mostly relate to the fact that the clients do not know and can not know what they want precisely and the consultants do not know and can not know precisely what the ERP can do. This problem is well known in management under the name “Limited Rationality”, a decision theory which explains how and why organisations do not take the most rational decisions.

One of the most striking aspects of this “Limited Rationality” happens whenever a company, which knows its own business perfectly, outsources the ERP requirement specification to a junior consultant who knows little about their business if not about business. The requirement specification is then used to select an ERP vendor. The ERP is implemented according to that document and, obviously, is unusable. Then comes the moment of truth... which leads to triple budget and double time.

Are there alternatives?

ERP5 alternatives

The reasons which lead to ERP project failure are fundamental-failure related to human nature rather than to technology. ERP failures make some managers so afraid that they reject the adoption of any ERP at all, and instead they build an information system out of independent components which are then integrated in a way or another. Each component works usually very well but interfaces are always a cause of trouble (and a source of turnover for service companies). The SOA approach (or fashion?) can be considered as one of the examples of interfacing components rather than implementing an integrated ERP.

However, what we get in the end is an integrated system made of independent components. After all, many ERPs, including SAP itself, originate from the aggregation of independent components. Adopting the SOA approach is thus not really an alternative, since it is only a technical answer and the problem of ERP failure is actually not technical.

In short: whatever the way, there is no alternative in a company to the implementation of an integrated management system, whether integration is achieved through interfaces or through a common data model, through web services or through database tables.

However, there is an alternative nowadays to closed source ERPs: open source ERPs . They can help certain project succeed by providing more flexibility. They can also lead to failure whenever this flexibility is abused by unskilled consultants. Open Source ERPs are also an excellent way to create a simple prototype in short time at low cost, because there are no license costs. Using an Open Source ERP to create a “Less is More” prototype is therefore probably the safest way to adopt an ERP.

What is an ERP?

What is an ERP?

The definition of an ERP is quite vague. For some people, it is only a matter of using the same database. So, what happens if an ERP is based on distributed web services, is it still an ERP? For others, it is a matter of using only a single data model. So what happens for ERPs which share the same database yet use 100 different data models for the same thing.

For some people, MRP is the key criteria. However MRP is only for production usually. Is an ERP used in trade still an ERP? Is CRM part of ERP? What about knowledge management and e-commerce?

As we can see, the definition of an ERP is very vague. So let us analyse one by one the different approaches to characterize an ERP.

A Unified Database

Unified Database

Some people consider that a software is an ERP as soon as it hosts inside a single database all the different kinds of business informations of an organisation.

However, that does not say how many tables are used and how they are used.

If we follow this definition, the combination of an online shop, of an accounting software and of a HR software which all use the same MySQL database is an ERP. The combination of 100 independent software, all of which use 100 tables, is also an ERP in that sense. Well, this definition is at least consistent with the way leading “legacy” ERPs are built: a collection of independent software, relying on more than 22,000 tables in a database with an integration system based in a batch technology which copies information between tables.

However, any computer architect is hoping probably for more integration, if not the use of database technologies which are not necessary based on tables. Just as a reminder, an ERP like ERP5 uses less than 10 tables, yet can do the same as those which are using 22,000 tables. The only difference is in the level of integration. And some management systems are not based on relational database but on object database (ex. ZODB) or even on distributed object databases (ex. Erlang based systems).

We could therefore claim that “a unified access to business data” is a required characteristic of an ERP, without saying how data is accessed.

Single Software / Wide Coverage

Single Software / Wide Coverage

Some people consider that an ERP is an integrated business software which combines at least accounting, purchase, sales, invoicing, inventory and possibly human resources, project management, production management, customer relation management, document management, etc.

In short, an ERP is a software which can be used to “do everything in the same place”.

This definition is in line with the kind of integration which is provided by leading ERPs and ERP brands. It excludes however integrated business systems which are made of the collection of various components from different suppliers.

At the same time, it is not because we “do everything in the same place”, with a common appearance and a common user interface that the software is well integrated. Some business systems, made of the collection of independent software, can be better integrated than single brand ERPs and provide better productivity thanks to better automation of workflows.

We could therefore claim that “a wide functional coverage” is a required characteristic of an ERP, without saying how this coverage is achieved.

Everyone Must Use it

Everyonce <u>Must</u> Use it

Accounting software is used by accountants. Sales software is used by sales. And shipping software is used by warehouse people.

On the other hand, an ERP is used by many different kinds of people with different functions in the company. This is another characteristics of ERP vs. specialised business software.

Business Workflow

Business Workflow

The term workflow is a key term in ERP land. It has different meanings, although all meanings are represented mostly in the same way: a state diagram.

Some work-flows, a.k.a. “activity work-flows” or “business process models” are related to the sequence of activities which can start for example with an order, then the delivery of goods, the invoicing, the payment.

Some work-flows, a.k.a. “supply chain work-flows”, define how materials circulate in a production workshop, between a company and its suppliers or partners, how components are assembled and where.

Some work-flows, a.k.a. as “Document work-flows” are used to track the decision process related to a given business document such as an order or an invoice.

All ERPs implement the 3 different types of work-flows, either in an implicit and hard coded way, or in an explicit and configurable way.

We could therefore claim that “providing work-flows for BPM, Supply Chain and Decision Making” is a required characteristic of an ERP, without saying whether such work-flow is implicit or explicit. Obviously, explicit and configurable work-flows are much more flexible.

Past, Present and Future

Past, Present and Future

ERPs are supposed to report to the head of the company the current state of everything and possibly help the management to predict the future based on the current state. Incidentally, this is probably why CEOs of large companies are so much interested in implementing a group-wide ERP which sppreads across all subsidiaries and business units. ERP vendors are well aware of this “interest” and often sell ERPs as an enabling tool for big brother wannabes. If ERP could satisfy the same “interest” of governments, ERP vendors would probably try to craft of version of their product for e-governement...

Besides providing a unified access to business data, ERP usually offer various reporting features which can synthesize the current status of a corporation and provide an overview of the future based on various business rules. The first part (present) provided by ERP is usually well implemented but is available always a bit too late. The second part (future) provided by ERP is seldom reliable because the data which is stored in the ERP is not reliable enough.

We could therefore claim that “providing synthetic reports on the past, present and future” is a required characteristic of an ERP. The reality is that only the past is usually provided by ERP. If the present is available by ERP, it is the sign of a successful implementation. If the future is provided by ERP, we are the realm of exceptional implementations.

MRP: What Makes ERP So Different

MRP: What Makes ERP So Different

What makes an ERP so different from anything else is that is has been originally built around a management theory know as “MRP”, which means Material Resource Planning.

In 50s and 60s, industry was booming and was always looking for new ways of organising production. It was a time when mathematics in general, operational research in particular, were expected to solve all management problems.

MRP was one of the simple, yet mathematical, models which was adopted and implemented using software in the field of production management. It is at the core of any ERP software nowadays.

Other more complex models, such as constraint programming, operation research, linear programming are not as widely used and often failed. Nowadays, management of companies is increasingly based on more ad-hoc lean management techniques, such as “kan ban” and “just in time”, created and implemented by the Japanese industry, rather than on pure mathematical approaches which were initiated in Europe and US.

Yes, MRP is the one remaining mathematical model which is widely accepted.

We could therefore claim that “implemented a kind of MRP” is a required characteristic of an ERP.

MRP1: Materials

MRP1: Materials

The first kind of MRP is also called “MRP1”. M stands for Material.

The idea is simple. If we know that clients will order 100 goods, we have to produce 100 goods. If producing 1 good requires 10 components of type A and 20 components of type B, then producing 100 goods requires 1000 of A and 2000 of B.

If the inventory of A is 500 and if we know that we must produce 100 goods, we must at least order 500 items of A.

Things become a bit more complex whenever we already have a planning of purchase orders, parallel productions. But the principles are the same. The MRP calculation can be used to know how much must be purchased and when so that production can happen on time.

The MRP calculation can be based on different assumptions. One way is to try to optimise the cash, by ordering as late as possible. This is the “just in time” way. Another way is to try to issue large purchase orders to get reduced price. This is more the way MRP was created in the 60s, at a time when cash was not a problem in US and Europe, at a time when price and profit mattered more than cash.

MRP2: Resources at Large

MRP2: Resources at Large

The idea MRP2 was introduced later. Some say that the meaning of “M” changed from “Material” to “Management” or “Manufacturing”.

Rather than only considering materials, MRP2 takes into account cash, machines, workers, etc. It also provides a framework to optimise resources based on numerous management goals.

With MRP2, it is for example possible to consider that if a company orders 500 items of A, then it will need to pay those 500 items 8 weeks after ordering them. If a client purchases 10 goods, payment for the 10 goods will be received 12 weeks after the order. Knowing sales orders, purchase orders, prediction orders and the current state of the bank account, a company can predict not only its inventory but also the future of its cash.

The combination of MRP2 with global optimisation can be useful for example to take decisions whether to order big batches soon or small batches later. Constraints, such as cash constraints, workforce constraints are introduced in the equation to help making better decisions. This is what is is called “finite resource planification” in ERPs. It is considered as the most advanced planning tool and, sadly, is rarely usable or used. The reasons are the same: too much mathematics, too far from reality.

This is why another approach is often considered: user interface tools which represent with graphs and colors the different constraints which apply to production.

ERP Extension: CRM

We have now finished to review the core characteristics of an ERP. Modern ERPs include however much more than unified database, wide functional coverage, work-flows, predictions and MRP. They also extended functional scope which is known with different acronyms: CRM, KM, etc.

CRM means “Customer Relation Management”. The idea of CRM is quite simple: making sure that all information related to a client are present at the same place.

In a pure ERP, such information are the person contact, orders and invoices. CRM extends this view of the customer with events and tickets. Events represent each contact made with a customer: a phone call, a visit, an email, etc. Tickets represent the interaction with a customer. After a customer orders some products, a problem can happen. The customer requests some support. A support ticket is opened in the CRM. All events which may happen after that (email, phone, etc.) are attached to that support ticket. Once the problem is solved the ticket is closed.

Obviously, it is quite natural to host such information in the same location as orders, packing lists and invoices because human relations with the customer (events & tickets) are directly related to trade relations with the customer (order, packing list, invoice). What is also interesting is that CRM can be used for many other things than customers: it can be used for purchase, for public relations, for sales management, etc.

We could therefore claim that “keeping track of the relation history with people” is a frequent characteristic of a modern ERP.

ERP Extension: KM

ERP Extension: KM

KM means knowledge management. One definition of KM, which many consider as a creation of IBM, is “the right information to the right person at the right time”. Since the ERP is the central piece of software which is used to manage a business, it is quite obvious to help users reach the right information at the right time in order to make the appropriate decisions.

Moreover, many pure documentary informations, such as PDF files, office files, images, videos, are needed to support certain activities such as the creation of a catalog of products to be sold, or to track the tasks in a project in relation with customer specification of committee reports. Documents are nowadays an essential part in the management of companies, and in particular in the management of the relation with customers or suppliers.

Many ERPs nowadays include a document management module, a.k.a. Knowledge Management. The difference between “Document Management” and “Knowledge Management” is subtle: the first one means that documentary information is “available or archived somewhere” while the second means that it was “provided to the right person at the right time”. This is commonly achieved by integrating the ERP work-flows with the human resource management subsystem and the document management system. In short: display relevant documents at the relevant time (ex. a link to the operation manual of a machine tool on the production order which requires that machine).

We could therefore claim that “handling multimedia documents in relation with people and work-flows” is a frequent characteristic of a modern ERP.

ERP + Web = e-business

ERP + Web = e-business

E-commerce is in 2010 one of the very few fast growing businesses in IT and in industry. More than 1000 different solutions of e-commerce are available, with fantastic open source packages available.

However, e-commerce integration is still a dream: people get orders from one place (ex. Ebay), follow clients on another place (ex. SalesForce CRM) and keep their accounting with Quickbooks. Integration between the different aspects of business, on the Web or offline, is made by human beings, possibly with low wages in distant countries.

E-commerce tool are therefore trying to do more and more: CRM, accounting, etc. and are evolving towards ERPs. However, their architecture and design was not really made for that and, 10 years after the raise of e-commerce, the fully integrated solution which combines ERP, CMS, CRM and e-commerce is still far away (ERP5 does it for example with a few others).

If one notices that e-commerce is after all sales on the Web, that e-procurement is after all purchase on the Web, e-recruitment is HR on the Web, one can foresee what the combination of Web and an ERP could be: e-business, which is opening through the Web the corporate ERP to all partners of a company. Since business are increasingly distributed and relying on outsourcing and outside partners, it is a natural tendency for ERPs to become e-business tools.

We could therefore claim that “support of e-business” is a frequent characteristic of a modern ERP.

One ERP per student programme

One ERP per student programme

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