Year 033 –Semester

Year Semester 02 - 42015

2 / Year Semester 2

IM3460
Enterprise Resource Planning

Lecture 02

Intangible nature of ERP benefits

By Vandhana Dunuwila
BBA special (Hons) in MIS [SLIIT]
MPhil in BEc [University of Sri Jayewardenepura]
Certificate in Teaching Methodology in Higher Education [SLIIT]
 Learning Outcomes

LO2: Evaluate the risk and benefit of ERP

systems.

ERP - Lecture 01 2
Justifying ERP Investment

ERP - Lecture 02 3
 Common Myths about ERP
• ERP means more work and procedures
• Transition requires new skills
• Employees need to be told what to expect
• ERP will make many employees redundant and jobless
• Automation of jobs
• Change in job descriptions
• ERP is the sole responsibility of the management
• Involves all departments
• Management creates environments for ERP operations
• ERP is just for managers/ decision-makers
• Quality of the decision making is improved
• Every employee in the organization benefit from the solution
ERP - Lecture 02 4
 Common Myths about ERP

• ERP is just for manufacturing organizations

• Historical development
• Addition to Inventory management Finance, HRM, Distribution, etc are
available
• ERP is just for the ERP implementation team
• Consultants, vendor & selected employees
• After implementation its all about employees
• ERP slows down the organization
• System eliminates duplication of work
• Dramatic improvement in response time
• ERP is just to impress customers
• Help serve customers better
• Satisfied customers is only one benefit among others

ERP - Lecture 02 5
 Common Myths about ERP
• ERP package will take care of everything
• ERP is not a silver bullet
• Employee interest matters

• One ERP package will suit everybody

• 100s of ERP packages available for different industry verticals

• ERP is very expensive

• ERPs come in all shapes and sizes
• Customized and scalable

• Organizations can succeed without ERP

• Organizations are becoming larger
• Multi-site production

ERP - Lecture 02 6
 Basic ERP Concepts

• ERP integrates departments and functions

across the organization
• Runs on a single database sharing information
and easy communication
• Introduce reengineering solution
• Making the operation of the organization
efficient and effective

ERP - Lecture 02 7
 Customizing ERP Packages

• Customized to fit the way which the company

does business
– Introduce bugs
– Difficulty in upgrading the system
• Inefficient business processes need changes
– Redefine the roles and responsibilities
– Can create employee resistance

ERP - Lecture 02 8
 Characteristics of ERP

• Affects almost all organizational activities

• Forces competition to change their business
strategies and processes
• Helps the business process reengineering
• Enforce best practices
• Utilize the true potential of client/server
architecture

ERP - Lecture 02 9
 Characteristics of ERP

• Changes IS function and job profiles of IT

professionals
• Changes the nature of jobs in all functional
business areas
• Needs well planned investment
• Implementation is a long and complex process
• Requires the corporation of all in the
organization
ERP - Lecture 02 10
 ERP and Value Creation

• Integrates the organizations’ activities

• Eliminates data redundancy
• Provides accurate, timely, relevant and up-to-
date information
• Provide on-line and real-time information
• Enables better and faster decision-making
• Forces the use of best practices

ERP - Lecture 02 11
 ERP and Value Creation

• Enables organizational standardization

• Eliminates information asymmetries
• Allows simultaneous access to the same data
for planning and control
• Facilitates intra-organizational communication
• Enables inter-organizational collaboration
• Enables the organization to be more agile and
competitive
ERP - Lecture 02 12
Risk and Benefits of ERP

ERP - Lecture 02 13
Costs of Implementing a New ERP

Trainning and
Change
Management, 15

Reengineering,
Data 43
Conversions, 15

Software, 15

Hardware, 12

ERP - Lecture 02 14
 ERP Implementation and ROI

• ROI analysis is an important factor in the decision to

acquire an ERP.
• A demonstrable return on investment (ROI), is a must
for investing scarce capital & HR.

•ROI models fall short in their ability to accurately

measure the total value of an enterprise software
investment

•Focused only on quantifiable (tangible) measures of

return.

ERP - Lecture 02 15
 ERP Implementation and ROI
• The overall payback account both the tangible and
intangible benefits of the ERP systems.
• Intangible benefits include:
• New business opportunities
• Improved customer and customer goodwill
• Better relationships with partners, suppliers and other
business associates
• Improved time to market

Intangible benefits contribute significantly to the success of a

company's enterprise software implementation and use.

ERP - Lecture 02 16
 Payback Parameters
• The major key payback parameters are:
1. Faster time to market
2. Improved business processes
3. Improved customer support
4. Rapid capitalization of new business opportunities
5. Lower implementation costs

The sum of the parameters described by enterprise payback—

tangible as well as intangible—offers a much more complete
picture of the value of the software and services provided by a
given vendor.

ERP - Lecture 02 17
 Quantifiable Benefits from an ERP

1. Reduced inventory costs

2. Reduced inventory carrying costs
3. Reduced manpower costs
4. Reduced material costs
5. Improved sales
6. Improved customer service
7. Efficient financial management

ERP - Lecture 02 18
 The Intangible Effects of ERP
• ERP provides a framework for working effectively
together and devising a consistent plan for action.
• The ERP system improves the efficiency of many
departments and functions including:
1. Accounting
2. Product and Process Design
3. Production and Materials Management
4. Sales
5. MIS Function

ERP - Lecture 02 19
 Other Factors
• Many other factors that should be considered while
justifying ERP investments.
• Some of them are quantifiable while others are
intangible. The major factors are:
1. Lower implementation costs
2. Lower production costs
3. Lower business transaction costs
4. Lower cost of reporting
5. Lower personnel costs
6. Lower business process change
7. Lower enhancement costs
8. Supporting and enhancing the customer experience
9. Supporting and enhancing the partner experience
10. Enabling new business opportunities
ERP - Lecture 02 20
 Risks of ERP
• The implementation of ERP systems has been problematic for
many organizations.
• The implementation of ERP systems can be a monumental
disaster unless the process is handled carefully.
• Some of the well-known failure stories:
– Hershey Foods
– Whirlpool
– Dow Chemical
– Boeing
– Dell Computer
– Apple Computer

ERP - Lecture 02 21
 Risks of ERP

• Implementing an ERP project involves a certain

amount of risk.
• The ERP system cannot be implemented in a totally
risk free environment.
• The only thing that differentiates successful and
flawed or failed implementations is the way in which
the risks were anticipated, handled and mitigated.

ERP - Lecture 02 22
 Minimizing the Risks…

• Prepare well—Meticulously plan each every step of

the implementation.
• Have a contingency plan—There will always be
unexpected problems; you should have a plan for
those situations.
• Use a proven methodology—A methodology will
help ward off risk, but a contingency plan is still
absolutely necessary.

ERP - Lecture 02 23
 Risks of ERP

• ERP implementations are notoriously resource

intensive, highly complex, time consuming and
unpredictable in terms of cost and hence very risky.
• There are really three basic areas where problems
can occur—people, processes and technology.

ERP - Lecture 02 24
 Risks of ERP

• Of the three risk factors, people issues are the most

critical.
• People issues contributed to failed implementations
in 69% of the case compared to process issues (18%)
and technological issues (13%)

Technological
Issues, 13
Process
Issues, 18

People
Issues, 69
ERP - Lecture 02 25
 People Issues
• People—employees, management, implementation team,
consultants and vendors—are the most crucial factor that decides
the success or failure of an ERP system.
• The main people issues are:
1. Change management
2. Internal staff adequacy
3. Project team
4. Training
5. Employee re-location and re-training
6. Staffing (includes turnover)
7. Top management support
8. Consultants
9. Discipline
10.Resistance to change
ERP - Lecture 02 26
 Process Risks
• The ERP system will:
– Introduce hundreds of new business processes
– Eliminate a lot of existing processes

• Managing the implementation of the business processes is a

factor that will decide the success of the ERP
implementation.

• The main areas of concern are:

1. Program Management
2. Business Process Reengineering
3. Stage Transition
4. Benefit Realization
ERP - Lecture 02 27
 Technological Risks

• Keeping pace with the technological advancements

is one of the very important issues that will
determine the success of the ERP systems.
• Some of the technological issues are:
1. Software Functionality
2. Technological Obsolescence
3. Application Portfolio Management
4. Enhancement and Upgrades

ERP - Lecture 02 28
 Implementation Issues
Many ERP implementations fail because they do not consider the
various implementation issues associated with a complex and risky
project.
• Some of these issues are:
1. Project Size
2. Lengthy Implementation Time
3. High Initial Investment
4. Unreasonable Deadlines
5. Insufficient Funding
6. Interface
7. Organizational Politics
8. Scope Creep
9. Unexpected Gaps
10.Configuration Difficulties
ERP - Lecture 02 29
 Managing Risks
• Ensuring a smooth ERP migration is complex and every
implementation involves a certain level of business and
technical risk.
• Managing risk on an ERP project is crucial to its success. A risk
is a potential failure point.
• The 5 steps to managing risk are:
1. Find potential failure points or risks
2. Analyze the potential failure points to determine the damage they
might do
3. Assess the probability of the failure occurring
4. Based on the first three factors, prioritize the risks
5. Mitigate the risks through whatever action is necessary

ERP - Lecture 02 30
 Benefits of ERP

• Installing an ERP system has many advantages—both

direct and indirect.
• The direct advantages include improved efficiency,
information integration for better decision- making,
faster response time to customer queries, etc.
• The indirect benefits include better corporate image,
improved customer goodwill, customer satisfaction and
so on.
• Some of the benefits are quantitative (tangible) while
many others are qualitative (intangible).

ERP - Lecture 02 31
 Tangible Benefits of ERP
1. Cost reduction 11.Maintenance reduction

2. Personnel reduction 12.On-time delivery improvements

3. Cycle time reduction

4. Productivity improvements

5. IT cost reduction

6. Cash management improvements

7. Revenue/profit improvements

8. Reduced quality costs

9. Improved resource utilization

10.Transportation cost reduction

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 Intangible Benefits of ERP

1. Information visibility 10.Improved decision-making capability

2. New and improved business processes 11.Standardization of business processes

3. Customer responsiveness 12.Flexibility and business agility

4. Improved supplier performance 13.Globalization of the organization

5. Better customer satisfaction 14.Better business performance

6. Integration of business functions 15.Supply chain integration

7. Information integration 16.Use of latest technology

8. Better analysis and planning capabilities

9. Improved information accuracy

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 In Summary

• Common Myths about ERP

• Customizing ERP Packages
• Characteristics of ERP
• Value Creation
• Risk and Benefits of ERP

ERP - Lecture 02 34
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