The Development of

Enterprise Resource Planning

Systems

Objectives

After completing this chapter, you will be able to:

1. Identify the factors that led to the development of Enterprise Resource
Planning (ERP) systems
2. Describe the distinguishing modular characteristics of ERP software
3. Discuss the pros and cons of implementing an ERP system
4. Summarize ongoing developments in ERP

1
 Introduction

• Efficient, integrated information systems are very

important for companies to be competitive

• An Enterprise Resource Planning (ERP) system can help

integrate a company’s operations
– Acts as a company-wide computing environment
– Includes a database that is shared by all functional areas
– Can deliver consistent data across all business functions in
real time

The Evolution of Information Systems

• Silos
– Information systems configuration used until recently
– Companies had unintegrated information systems that
supported only the activities of individual business functional
areas
• Current ERP systems evolved as a result of:
– Advancement of hardware and software technology
– Development of a vision of integrated information systems
– Reengineering of companies to shift from a functional focus
to a business process focus

2
 Computer Hardware and
Software Development
• Computer hardware and software developed rapidly in the
1960s and 1970s

• First practical business computers were the mainframe

computers of the 1960s

• Over time, computers got faster, smaller, and cheaper

• Moore’s Law
– Number of transistors that could be built into a computer chip
doubled every 18 months

Figure 2-1 The actual increase in transistors on a chip

approximates Moore’s Law

3
 Computer Hardware and (cont’d.)

Software Development
• Advancements in computer software
– 1970s: relational database software developed
• Provide businesses the ability to store, retrieve, and analyze large
volumes of data
– 1980s: spreadsheet software became popular
• Managers can easily perform complex business analyses

Early Attempts to Share Resources

• By the mid-1980s, telecommunications developments

allowed users to share data and peripherals on local
networks
– Client-server architecture
• By the end of the 1980s, the hardware needed to support
development of ERP systems was in place

• By the mid-1980s, database management system

(DBMS) required to manage development of complex ERP
software existed

4
 The Manufacturing Roots of ERP

• Manufacturing software developed during the 1960s and

1970s
– Evolved from simple inventory-tracking systems to material
requirements planning (MRP) software
• Electronic data interchange (EDI)
– Direct computer-to-computer exchange of standard business
documents
– Allowed companies to handle the purchasing process
electronically

Management’s Impetus to Adopt ERP

• Hard economic times of the late 1980s and early 1990s

caused many companies to downsize and reorganize
– Stimulus to ERP development
• Inefficiencies caused by the functional model of business
organization
– Silos of information
– Limits the exchange of information between the lower
operating levels

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5
 Figure 2-2 Information and material flows in a
functional business model

11

(cont’d.)
Management’s Impetus to Adopt ERP

• Functional model led to top-heavy and overstaffed

organizations incapable of reacting quickly to change

• Process business model

– Information flows between the operating levels without top
management’s involvement
• Further impetus for adopting ERP systems has come from
compliance with the Sarbanes-Oxley Act of 2002
– Requires companies to substantiate internal controls on all
information

12

6
 Figure 2-3 Information and material flows in a process
business model

13

ERP Software Emerges: SAP and R/3

• 1972: five former IBM systems analysts in Mannheim,

Germany formed Systemanalyse und
Programmentwicklung (Systems Analysis and Program
Development, or SAP)

• SAP’s goals:
– Develop a standard software product that could be configured
to meet the needs of each company
– Data available in real time
– Users working on computer screens, rather than with
voluminous printed output

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7
SAP Begins Developing Software Modules

• During their work for German chemical company ICI,

Plattner and Hopp had developed the idea of modular
software development
• Software modules: individual programs that can be
purchased, installed, and run separately, but that all extract
data from the common database
• 1982: SAP released its R/2 mainframe ERP software
package

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(cont’d.)
SAP Begins Developing Software Modules

• 1980s: sales grew rapidly; SAP extended its software’s

capabilities and expanded into international markets
• By 1988, SAP had established subsidiaries in numerous
foreign countries

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8
 SAP R/3

• 1988: SAP began development of its R/3 system to take

advantage of client-server technology
• 1992: first version of SAP R/3 released
• SAP R/3 system was designed using an open architecture
approach
• Open architecture: third-party software companies
encouraged to develop add-on software products that can
be integrated with existing software

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New Directions in ERP

• Late 1990s: Year 2000 (or Y2K) problem motivated many

companies to move to ERP systems
• By 2000, SAP AG had 22,000 employees in 50 countries
and 10 million users at 30,000 installations around the
world
• By 2000, SAP’s competition in the ERP market:
– Oracle
– PeopleSoft
• Late 2004: Oracle succeeded in its bid to take over
PeopleSoft

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9
 (cont’d.)
New Directions in ERP

• PeopleSoft
– Founded by David Duffield, a former IBM employee
– Today, PeopleSoft, under Oracle, is a popular software
choice for managing human resources and financial activities
at universities
• Oracle
– SAP’s biggest competitor
– Began in 1977 as Software Development Laboratories (SDL)
– Founders: Larry Ellison, Bob Miner, and Ed Oates

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(cont’d.)
New Directions in ERP

• SAP ERP
– Latest versions of ERP systems by SAP and other companies
allow:
• All business areas to access the same database
• Elimination of redundant data and communications lags
• Data to be entered once and then used throughout the organization

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10
 Figure 2-4 Data flow within
an integrated information system

21

(cont’d.)
New Directions in ERP

• Current SAP ERP system: SAP ECC 6.0 (Enterprise

Central Component 6.0)
– Sales and Distribution (SD) module
– Materials Management (MM) module
– Production Planning (PP) module
– Quality Management (QM) module
– Plant Maintenance (PM) module
– Asset Management (AM) module

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11
 (cont’d.)
New Directions in ERP

• Current SAP ERP system: SAP ECC 6.0 (Enterprise

Central Component 6.0) (cont’d.)
– Human Resources (HR) module
– Project System (PS) module
– Financial Accounting (FI) module
– Controlling (CO) module
– Workflow (WF) module

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Figure 2-5 Modules within the SAP ERP integrated

information systems environment

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12
 SAP ERP Software Implementation

• Not all companies that use SAP use all of the SAP ERP
modules
• Company’s level of data integration is highest when it uses
one vendor to supply all of its modules
• Configuration options allow the company to customize the
modules it has chosen to fit the company’s needs

25

(cont’d.)
SAP ERP Software Implementation

• Tolerance groups
– Specific ranges that define transaction limits
– SAP has defined the tolerance group methodology as its
method for placing limits on an employee
– Configuration allows the company to further tailor tolerance
group methodology

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13
 Figure 2-6 A customization example: tolerance groups
to set transaction limits

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(cont’d.)
SAP ERP Software Implementation

• Features of SAP ERP

– First software that could deliver real-time ERP integration
– Usability by large companies
– High cost
– Automation of data updates
– Applicability of best practices
• Best practices: SAP’s software designers choose the best, most
efficient ways in which business processes should be handled

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14
 ERP for Midsized Companies

• By 1998
– Most of the Fortune 500 companies had already installed
ERP systems
– ERP vendors refocused their marketing efforts on midsized
companies
• SAP All-in-One
– Single package containing specific, preconfigured bundles of
SAP ERP tailored for particular industries
– Can be installed more quickly than the standard ERP product

29

(cont’d.)
ERP for Midsized Companies

• Application hosting
– Third-party company provides the hardware and software
support
– Makes ERP systems like SAP more appealing to midsized
companies
• SAP and Oracle are facing competition from smaller
providers of ERP software

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15
 Responses of the Software to
the Changing Market
• In mid-1990s, many companies complained about the
difficulty of implementing SAP R/3 system
• SAP responded by developing Accelerated SAP (ASAP)
implementation methodology
– Eases the implementation process
• SAP continues to extend capabilities of SAP ERP with
additional, separate products that run on separate hardware
and extract data from the SAP ERP system

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Choosing Consultants and Vendors

• One person cannot fully understand a single ERP system

• Before choosing a software vendor, most companies:

– Study their needs
– Hire an external team of software consultants to help choose
the right software vendor(s) and the best approach to
implementing ERP

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16
 The Significance and Benefits of
ERP Software and Systems
• More efficient business processes that cost less than those
in unintegrated systems
• Easier global integration
• Integrates people and data while eliminating the need to
update and repair many separate computer systems
• Allows management to manage operations, not just
monitor them
• Can dramatically reduce costs and improve operational
efficiency

33

Questions About ERP

• How much does an ERP system cost?

• Should every business buy an ERP package?
• Is ERP software inflexible?
• What return can a company expect from its ERP
investment?
• How long does it take to see a return on an ERP
investment?
• Why do some companies have more success with ERP
than others?

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17
 How Much Does an ERP System Cost?

• Size of the ERP software

– Corresponds to the size of the company it serves
• Need for new hardware that is capable of running complex
ERP software
• Consultants’ and analysts’ fees
• Time for implementation
– Causes disruption of business
• Training
– Costs both time and money

35

Should Every Business Buy an ERP Package?

• Some of a business’s operations, and some segments of its

operations, might not be a good match with the constraints
of ERP
• Sometimes, a company is not ready for ERP
• ERP implementation difficulties result when management
does not fully understand its current business processes
and cannot make implementation decisions in a timely
manner

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18
 Is ERP Software Inflexible?

• Many people claim that ERP systems, especially the SAP

ERP system, are rigid
• Options for customization offered by SAP ERP
– Numerous configuration options that help businesses
customize the software to fit their needs
– Programmers can write specific routines using Advanced
Business Application Programming (ABAP)
• Once an ERP system is in place, trying to reconfigure it
while retaining data integrity is expensive and time-
consuming

37

What Return Can a Company Expect from

Its ERP Investment?
• ERP eliminates redundant efforts and duplicated data; can
generate savings in operations expense
• ERP system can help produce goods and services more
quickly
• Company that doesn’t implement an ERP system might be
forced out of business by competitors that have an ERP
system
• Smoothly running ERP system can save a company’s
personnel, suppliers, distributors, and customers much
frustration

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19
 What Return Can a Company Expect from (cont’d.)
Its ERP Investment?
• Cost savings and increased revenues occur over many
years
– Difficult to put an exact dollar figure to the amount accrued
from the original ERP investment
• ERP implementations take time
– Other business factors may be affecting the company’s costs
and profitability
– Difficult to isolate the impact of the ERP system alone
• ERP systems provide real-time data
– Improve external customer communications

39

How Long Does It Take to See

a Return on an ERP Investment?
• Return on investment (ROI): assessment of an
investment project’s value
– Calculated by dividing the value of the project’s benefits by
the project’s cost
• ERP system’s ROI can be difficult to calculate
• Peerstone Research study
– 63 percent of companies that performed the calculation
reported a positive ROI for ERP
– Most companies felt that nonfinancial goals were the reason
behind their ERP installations

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20
 Why Do Some Companies Have More Success
with ERP Than Others?
• Usually, a bumpy rollout and low ROI are caused by
people problems and misguided expectations, not
computer malfunctions
– Executives blindly hoping that new software will cure
fundamental business problems that are not curable by any
software
– Executives and IT managers not taking enough time for a
proper analysis during planning and implementation phase
– Executives and IT managers skimping on employee education
and training

41

(cont’d.)
Why Do Some Companies
Have More Success with ERP Than Others?

• Usually, a bumpy rollout and low ROI are caused by

people problems and misguided expectations, not
computer malfunctions (cont’d.)
– Companies not placing ownership or accountability for the
implementation project on the personnel who will operate
the system
– Unless a large project such as an ERP installation is
promoted from the top down, it is doomed to fail
– ERP implementation brings a tremendous amount of
change for users

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21
 Why Do Some Companies (cont’d.)

Have More Success with ERP Than Others?

• For many users, it takes years before they can take
advantage of many of an ERP system’s capabilities
• Most ERP installations do generate returns

43

The Continuing Evolution of ERP

• Understanding the social and business implications of new

technologies is not easy
• ERP systems have been in common use only since the
mid-1990s
• ERP vendors are working to solve adaptability problems
that plague customers

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 Summary

• Speed and power of computing hardware increased

exponentially, while cost and size decreased
• Early client-server architecture provided the conceptual
framework for multiple users sharing common data
• Increasingly sophisticated software facilitated integration,
especially in two areas: A/F and manufacturing resource
planning

45

(cont’d.)
Summary

• Growth of business size, complexity, and competition

made business managers demand more efficient and
competitive information systems
• SAP AG produced a complex, modular ERP program
called R/3
– Could integrate a company’s entire business by using a
common database that linked all operations
• SAP R/3, now called SAP ERP, is modular software
offering modules for Sales and Distribution, Materials
Management, Production Planning, Quality Management,
and other areas

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23
 (cont’d.)
Summary

• ERP software is expensive to purchase and time-

consuming to implement, and it requires significant
employee training—but the payoffs can be spectacular
– For some companies, ROI may not be immediate or even
calculable
• Experts anticipate that ERP’s future focus will be on
managing customer relationships, improving planning and
decision making, and linking operations to the Internet and
other applications through service-oriented architecture

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