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Preface 2
1. The Evolution of Production Management Systems 3
1.1The need for manufacturing planning 3
1.2The pre-MRP era 4
1.3Material Requirements Planning 5
1.4Manufacturing Resource Planning 7
1.5Enterprise Resource Planning 7
1.6From Extended ERP to ERP II 10
2. ERP: The thin line between a successful and an unsuccessful
implementation 12
2.1The Hersey Case 12
2.2The Lussile Case 13
2.3The ERP-Related expenses 14
3. ERP Implementation Process 16
3.1Selecting an ERP system 16
3.2General Implementation Process 16
4. Downsized ERP – A new trend in the Market 20
4.1The TEC Experiment 22
4.2The Panorama Consulting Group’s Surveys 23
5. ERP in the Services Sector 29
5.1ERP systems in Hospitals 31
5.2ERP in the commercial restaurant business 32
6. ERP in the Greek Market 33
7. Future Trends 37
8. Conclusion 38
References 39
1
Preface
This paper has its origins in the Industrial Systems and Management
Module of the Msc in Advanced Industrial and Management
Systems, undertaken at the Technological Educational Institute of
Piraeus in cooperation with the Kingston University, under the aegis
of Dr. Emilia Kondyli.
I hope that this paper’s readers will find its recordings interesting
and that its reading will be a pleasant experience.
Georgios Rokos
2
1. The Evolution of Production Management
Systems
3
Figure 1: The essence of Manufacturing
Source: Plossl (1994), Orlicky’s Material Requirements Planning, p 5
Time is a resource that is equally available to all parties, but it can not be
stored. An eventual leeway, no matter which point of the manufacturing
process causes it, affects all parties and cannot be made up.
1. What is to be made?
2. When is it to be made and in what quantity?
3. What is required to do this?
4. What is already available?
5. What will be available in time?
6. What more is needed and when?
Business and marketing functions respond to the first two questions while
internal company planning and control systems, the subject of this paper,
to the rest.
4
particularly quoted for their pioneer thinking to relate productivity with
financial motivation to employees, were later adopted by Henry Gantt,
Franc and Lilian Gilbreth and Harrington Emerson (Sapru, 2006)
In 1915, Ford Harris gave birth to the Economic Order Quantity (EOQ)
technique by calculating the first formula to minimize the total cost of
ordering and carrying costs (Buglear, 2005). The EOQ system
predominated in the pre-MRP era. Through this method, a company was
trying to apply scale economy by placing massive orders of components
while keeping in mind the point on which inventory cost exceeded the
financial benefits of scale economy. The goal was to define the ideal
quantity of components that the company should order to achieve the
lowest possible cost. This technique was in fact a tactical reaction to
fluctuations of demand and is still used by a notable number of companies
(Bingham, 1998).
During the 2nd World War, the lack of resources made British scientists
apply mathematical and scientific methods in an attempt to find alternate
uses for the existent products in warehouses. For more than 20 years,
European and American scientists were struggling to apply Operations
Research, in particular linear programming as well as queuing theory, to
manufacturing logistics (Plossl, 1994). However, the dearth of computer
systems turned such attempts unsuccessful.
5
1.3 The Material Requirements Planning (MRP)
MRP started as a simple idea. Using three tools, the Bill of Materials (BOM),
the Master Production Schedule (MPS) and the Inventory Status File (ISF),
a closed loop information system called MRP would predict the
requirements for component materials needed in the production process
of the final products. MRP is a dependent demand technique, meaning
that the demand for one product is related to the demand for another
product (Swamidass, 2000). For instance, Black & Decker, a
manufacturing company which produces electronic devices, can
accurately predict how many screws it takes to produce one piece of
electronic dustbuster. Thus, since the relationship between screws and
dustbusters is fixed, it is also dependent.
The Master Production Schedule provides a plan for the quantity and the
timing of orders. It combines both existing orders and a forecast of future
orders, based on experience. The more accurate the MPS is, the more
efficient the MRP will be.
Mishra and Soota (2005) identify the following benefits in MRP systems:
1. Increased Productivity
2. Reduction in inventory (raw materials, end products, components,
subassemblies, work-in-process)
6
3. Reduction in Lead Time
4. Better utilization of resources
5. Faster response to demand fluctuations
According to Plossl (1994), in 1971, 150 MRP systems were already at use
in US. By 1975, 700 companies were using an MRP system and by the mid-
80s thousands more.
Can be No Yes
replanned?
7
1.4 Manufacturing Resource Planning (MRP II)
In the early 80s, interest rates were exploding and global competition was
reflecting on prices, exerting pressure on businesses. In an effort to
reduce costs, manufacturing companies concluded that a short of MRP
implementation could expand to additional types of recourses, other than
strictly the product components (Sheldon, 2005). Such resources
comprehend labor-hours, machine-hours and cost (accounts payable).
MRP II was a Trial and Error Scenario Analysis planning system that
differentiates depending on the unit it treats (Kondyli, 2010).
8
(Total Quality Management), JIT (Just In Time), Lean Manufacturing and
ISO (International Organization for Standardization) affected this evolution.
• Identify which products do not create value for the end customer
and cease their production
9
The above-mentioned practices, which concentrated on process design,
management systems and results, obviously affected behaviors and aided
in process control. An irrebuttable indication of their radical impact was
that although MRP II systems were getting more and more complex and
demanding, their average implementation time was declining. Top
Managers were more involved in the Resources Planning, conducting root
cause analysis and participating in actions (Sheldon, 2005).
The term ERP was coined by the Gartner Group in 1990, although the
philosophy of ERP pre-existed in many MRP II implementation cases. The
first synthetic “E” stems from the word Enterprise to underline that this
new kind of software applies to all the departments of a company, thus it
is an enterprise-wide solution.
Sheldon (2005) states that in the late 90s, the Resources Planning
software solutions were dealing not only with scheduling and planning but
also with:
• Inventory Strategy
• Plan Execution
• Demand Anticipation
• Project Management
10
ERP Management System had, at that point, different levels of
expectations.
In the early 2000s, due to the technological breakthrough, new topics such
as transaction design emerged. Moreover, supply chain management
became more important than MRP.
ERP II was Extended ERP’s next step. The scope of the enterprise
extended to customers and suppliers outside the enterprise. The strongest
characteristics of ERP II are its web-centricity and designed-to-integrate
structure. ERP initially used Internet as a supportive means. ERP II made
Internet access a part of the integrated system. Leon (2008) emphasizes
the difference between using technology, as ERP systems did before the
year 2000, and possessing technology, as they do today.
12
Table 3: The Evolution of ERP systems
Adapted from Vaman (2007), ERP in Practice, p 165; Leon (2008), ERP Demystified, 2/E p 532
Integrated Financials
Analytics-Sales, Financial, HR
13
ERP systems can not promise success and Return On Investment (ROI) in
advance. History shows a number of disastrous ERP implementations.
From the two following examples, it appears that cost is not among the
decisive factors.
Hershey chose SAP and some modules of Manugistics and Siebel. IBM
Global Services took the responsibility to integrate the software on one
platform. The plan was to implement the platform within 30 months,
although such a venture would normally take 4 years. Hershey wanted to
have the implementation completed by April 1999, a lean period, in order
to respond to market needs which would augment the following months
due to the Halloween and the Christmas approach, the period which
averages 40% of the total annual sales. Besides, the Y2K threat was
drawing close.
14
the staff involved in the implementation group led to a decisive omission;
they forgot to insert data to the system concerning some warehouses that
the company used other than their main distribution center and the
central warehouse. Subsequently, although there was available production
stock, the system could not track it to transmit orders to the distribution
centers.
Hershey lost credibility over its clients, market share and, of course,
profits. It is indicative that the company’s stock price dropped by 35% by
late October while the Dow Jones Industrial Average had risen during the
same period by 25%.
It took more than a year to stabilize the ERP system and the intake of
George Davis, a well-waged CIO. However, the lesson was later taken and
when the process was redesigned, in July 2001, the implementation cost
20% less than expected and lasted only 11 months. Finally, Hershey
managed to get back on track.
External Threats:
Over the last 15 years, the clothing industry in Greece has come up
against a great challenge, since companies from eastern countries entered
the market, offering products at very low prices. Lussile, like most
manufacturing companies of its kind in Greece, was forced to find a way to
compete the newcomers by lowering its costs while maintaining its high
quality. The clothing market is a seasonal market. Thus, success is closely
related to flexibility.
Internal Weaknesses:
• Apart from market changes Lussile had to face its internal muck-
ups:
• Scrappy technological background
• Fragmentation of information in different databases
• Constant problems in the operation of retail shops because of
telecommunication problems that interrupted their online
connection
• Time-consuming costing of the production process
• Difficulty in communication between the company’s departments
15
• Strenuousness in the collection of information for decision making
The Solution:
The benefits:
Hershey’s ERP project cost $110 million. This sum seems frightening and
prohibitive for the majority of enterprises. However, not all ERP
16
implementations cost that much. Lussile vindicates the above. ERP cost
estimation is not an easy task. Scientists still struggle to develop a single-
dimensional or multidimensional cost relationship model (Davena and
Wieringa, 2008). Nonetheless, Hamilton (2003) identifies the main cost
sources of ERP systems and divides them into two classes: the one-time
costs and the ongoing annual costs.
Software: Its cost varies depending on (a) the vendor, (b) the number of
predestined users, the extent of (c) customization and (d) integration with
other solutions.
Internal staff: The implementation group does not complete its task once
the system is “live”. Upgrades and new employments will ask for its
participation again. Moreover, when a company implements an ERP
system it usually takes on one expert or more (whose salaries are ongoing
costs) to handle it.
17
3. ERP Implementation Process
From the case studies above, one may easily deduce that the success of
an ERP system screens behind its selection and implementation process.
When a company buys ERP software, it also buys its developer philosophy
on business processes. That is why it is crucial to discuss with the vendor
before the purchase and determine what should be restructured within the
company so that implementation succeeds. After all, the primary goal is to
help the company progress and not just to implement a system. (Vaman,
2007)
The first alternative implies that the system will automate the new
restructured processes (customization of the product), whereas the
second alternative implies that process restructure will be based on the
practices which the selected ERP system preconceives (Leon, 2008). Diaz,
Lorenzo and Claes identify the first alternative as “Modeling choice” and
the second alternative as “Blueprinting choice” or “Vanilla” (Barjis, 2010).
O’Leary (2000) states that more than one third of the companies that
implement an ERP system apply BRP prior to the implementation.
18
3.2 General Implementation Process
After selecting which ERP system Philosophy best suites the company’s
objectives and how any internal restructure procedures will take place, the
implementation process commences. At this point, adherence is
indispensable from all parties concerned.
Movex Implex
An ERP implementation varies depending not only on the vendor but also
on the country of origin of the company (Kwank & Ahn, 2010) on the
industry – sector of the company (Barjis, 2010) and on the largeness of the
company (Koh et al, 2009).
Those groups often shoulder the evaluation and the software selection
processes as well. The structure of an implementation group depends on
the needs of a project. The following scheme unveils a typical structure.
Those who are responsible for training the company’s staff and for
supporting it later on constitute the Support Team.
Project teams are small groups which execute the basic tasks an ERP
system. Each project team is headed by a manager.
There are two methods to transfer/insert Data to the new ERP system;
directly from the company’s older system and manually. If the first
method is preferred, the implementation group controls the migration
process. If the second method is preferred, the implementation group
shoulders the insertion of data with the support of a Program Logic that
locates eventual vacancies.
20
After training is over, a pilot implementation takes places so as to detect
and correct probable errors before full implementation.
21
Once the pilot implementation succeeds, the group accepts the system
and proceeds to full implementation. However, for some time both the old
Steps Elements
Phase 1. Form ERP selection and implementation team
Improve continually
22
and the new system operate simultaneously for security reasons. An ERP
system should never be abandoned by its provider. Support should be
constantly offered to its users. Additionally, changes in company’s
environment impose frequent upgrades.
In the early 1990’s, when ERP was introduced, its vendors focused
exclusively on large fortune 500 companies. That was mainly due to the
high costs associated with the implementation of such a system at that
time and, secondarily, due to the small amount of ERP vendors.
23
Some Figures showing why ERP Vendors turned to SM
MEs using ERP are manufacturing companies (Ashcroft J., 2009, source: http://www.supplychainnetwork.com/erp-study-suggests
de more than 50% of ERP vendors’ profits in 2009 (Hoffman K., source: http://www.erp.com/erp-archive/324-erp-archive/7210-sm
anufacturing companies in the U.S.A. have less than 250 employees (source: http://www2.isye.gatech.edu/~jswann/teaching/620
SMBs participation in economic growth did not affect solely the demand
for ERP. Traditional ERP Vendors such as Oracle and Sap saw an increasing
number of competitors popping up, offering competitive solutions at lower
prices. Tier II (medium) and Tier III (small) companies entered ERP
Suppliers’ market and differentiated radically ERP’s orientation. In an
attempt to antagonize their renowned competitors, smaller vendors
introduced business field specialization as a new factor in clients’ decision
portfolio, mo functionalities on instances (Martinez R., 2010, source:
http://www.erp.com/section-layout/51-erp-success-stories/6630-three-
reasons-why-erp-vendors-should-target-erp-for-small-business.html,
accessed on 3/12/2010)
Sap saw its big clients’ IT budgets moving down after the millennium turn.
As a result, the leader of ERP Vendors had to adjust to the new
circumstances by seeking for new, smaller clients (source: IT Analysis,
9/12/2003,
24
http://www.theregister.co.uk/2003/12/09/sap_hones_midmarket_message/
, accessed on 3/12/2010).
25
4.1 The TEC Experiment
http://blog.technologyevaluation.com/blog/2010/08/26/big-erp-vs-
tier-2-erp-%E2%80%93-is-the-gap-in-functionality-as-big-as-it-
appears/, accessed on 3/12/2010).
The findings revealed that users do not rate Tier I’s functionalities
significantly higher than Tier II’s functionalities.
26
Sap post-sale
and turned out
service.
to be the
After
market’s
all, support
leader
may bybeoccupying
more profitable
35% offor
the
a
smaller vendors
market, Oracle followed
that the system
with 28%,itself.
Tier II vendors came third with
23% and, finally, Microsoft occupied 14% of the market at the time
of PCG’s survey.
SAP Oracle
27
Microsoft Tier II
In the field of credibility, SAP was ranked 1st, since it averaged 50%
in post-implementation problems (operational stoppages and
disruptions). Oracle followed with 56,9%, Microsoft Dynamics
averaged 57,7% and Tier II Vendors’ solution were placed fourth
with a 61,8% average.
28
SAP Oracle Microsoft Tier II Average
Duration
(Months)
20,0 18,6 18,0 17,8 19,8
Cost of
Implementatio
n $16,8 m $12,6 m $2,6 m $3,5 m $8,5 m
Overall
Satisfaction
73% 62% 69% 70% 67%
Business Risk
Factor
50% 56,9% 57,7% 61,8% 54%
The most surprising finding was that within 2 years, Tier II vendors
increased their market share by 7%. Sap and Oracle lost 4 and 3%
of the market respectively, while Microsoft recorded a slight
increase (1%).
29
Oracle Peoplesoft IFS Compiere
Lawson NetsSuite
HansaWord
Consona
The survey also calculated what was the average payback time
(years taken to recover the ERP investment) and ended up with a
rather expected result. A Tier-I-vendor ERP takes about twice the
time it takes a Tier-III-vendor ERP (3
30
Vendors tend to customize their products to the client’s needs more
than Tier II and III ERP Vendors do. The latter boast about their
products’ high customization level but if that is true, then it has to
be made before implementation, since Panorama’s survey shows
the opposite. Perhaps smaller ERPs do not need customization
during implementation because they already are specialized.
Last but not least, the new survey occupied with the customer
satisfaction level by vendor’s Tier by measuring how many
companies state that more than half of the expected benefits came
true. The results revealed that Tier II vendors seem to satisfy their
clients more than Tier I and Tier III vendors do. Yet, none of the
three Tiers is found to satisfy on average at least half of the clients’
expected benefits.
Source: Panorama Consulting Group, 2010 ERP Report, ERP Vendor Analysis p 9
31
5. ERP in the services sector
Due to their nature, MRP and MRP II were both systems uniquely
destined to manufacturing companies. However, their evolution,
ERP, because of its extended orientation, seemed as an ideal
solution for services suppliers as well. ERP vendors were also
temped by the possibility to extend the use of their products
beyond the Manufacturing Industry. After all, the services industry
is by far more “crowded”, especially in western countries, while
economic analysts predict that the tertiary sector will continue to
grow at the secondary sector’s expense.
32
5. Achieve real time data-processing.
6. Diminish administrative workload.
7. Grow without further information needs. ERP supports actions
such as business amalgamations and acquisitions.
Before 2000, the hardest task that service companies and ERP
Vendors had to face in order to make their collaboration possible
was the adjustment either of the company to the software or of the
software to the company.
High Tech
Media Utilities
33
Professional services
The healthcare sector is, after the manufacturing one, the most
frequent user of ERP Systems (Khosrow-pour, 2002). Hospitals
combine both capacity (doctors, nurses) and material (facilities,
drugs, equipment) requirements.
34
ng to Microsoft Hellas , there are 5000 companies, out of a total of 850000 enterprises, in Greece that can implement an ER
possible. In addition, information on resource usage was provided to
management, allowing better planning for the future.
Ansel and Dyer suggest that the dining sector was a late adopter of
ERP systems because of the high implementation costs and the
small profit margin of the sector (Botta-Genoulaz and Millet, 2006).
35
P system. That is because the rest of the domestic companies are too small to turn to such solutions. However, only 15% of
(Netweek Magazine, 20/09/2010)
1.ERP in the Greek Market
This can be explained by the fact that ERP is not so abroach across
Greek companies, thus there is still a great deal of potential
customers.
36
ERP-compatible companies have already implemented such a solution.
(http://www.imegsevee.gr/index.php?
option=com_content&view=article&id=177:02-09-2010-
&catid=95:oikonomia&Itemid=234&limitstart=1, accessed on
15/12/10). As aforementioned, ERP vendors have only recently
decided to address to this type of companies. In addition, the
manufacturing sector, which was ERP’s initial target, occupies
20,7% of the GDA, that is 4,5% below the E.U. average and 10%
below the global average (see table 7). Finally, while the average
annual IT spending of European SMEs constitute more than 1% of
their turnover and of American SMEs more than 2%, in Greece it
they constitute only 0,6% (Manolitsakis, 2010).
Greek ERP solutions are usually more frugal. They comprise less
functionalities and this is why they tend to be less expensive and
require less people involved in the implementation process.
However, Greek ERP developers have been investing important
amounts in the deployment and integration of “enhanced” logistics
and production modules over the past few years (Konomi, n.d.).
37
Architecture, which assures rapid communication with remote sites,
an indispensable element for companies with branches.
Vendor No of Vendor No of
Imple Imple
m. m.
2 Altec 4 1 in-house 2
38
7
4 Caterpillar 1 1 Intersoft 1
9 International
5 Computec 1 2 Iris 2
0
7 DIS 3 2 Logicdis 7
2
1 DD Synergy 1 2 Sap 7
0 5
1 Entersoft 2 2 Softcom 1
2 7
1 Galacom 1 2 Unifox 1
4 9
Source: Varahidis, A., (2007), Χρήση των E.R.P. συστημάτων από τις ελληνικές επιχειρήσεις, p
70
39
Software No of Software No of
Imple Imple
m. m.
1 Armonia 1 1 Oracle 1
4
2 Artemis 1 1 Megatron 3
5
5 Compackwin 1 1 Orama 4
8
8 EBS 1 2 Solution 3
1
1 Entersoft 1 2 Unixfor 1
0 3
1 Epicor 1 2 Αθηνά 1
1 4
1 LB Edwards 1 2 Payroll 1
2 5
1 Global 2000 1
3
40
ERP Selection Criteria
Criteria No of Ratio
choic of
es choic
es
Source: Varahidis, A., (2007), Χρήση των E.R.P. συστημάτων από τις ελληνικές επιχειρήσεις, p 73
1. Future Trends
ERP has not reached its final form. It continues to evolve. Vendors
keep an eye on developments and prepare their responses to
market dictations.
Bigdoli (2004) states his belief that ERP will continue to integrate e-
commerce solutions, tools and applications while an open
architecture environment will dominate, allowing a company’s
system to connect with suppliers’ and customers’ applications.
41
In addition, the expansion of mobile internet makes ERP vendors
turn to the development of software for mobile phones (Red, 2007).
An ERP-compatible cell phone offers the possibility of incessant
“digital” presence of its user to the company. Such software
solutions are baptized Enterprise Mobile Solutions (EMS).
2.Conclusion
42
The case of Hershey underlines the importance of a cautious
implementation. Possessing the technology must be accompanied with the
“savoir faire”, otherwise it may be preferable for an organization to remain
manual operated.
ERP market is far from saturated. Vendors can count not only in new
businesses but also in businesses that have not implemented such
systems yet for one reason or another. Especially the SMEs sector globally
can continue to absorb the technology of Enterprise Resource Planning
since vendors offer approachable and specialized solutions.
References
43
4. “Πολλά τα περιθώρια ανάπτυξης του ERP” , Netweek Magazine,
20/09/2010
44
17.Ghiani G., Laporte G., & Musmanno R., (2004), Introduction to
logistics systems planning and control, Wiley, pp 48-50
22.http://en.wikipedia.org/wiki/List_of_countries_by_GDP_sector_co
mposition, accessed on 4/12/2010
24.http://www.erp.com/erp-archive/324-erp-archive/7210-small-
businesses-are-becoming-big-business-for-erp-vendors.html,
accessed on 3/12/2010
25.http://www.sap.com/industries/index.epx, accessed on
12/12/2010
26.http://www2.isye.gatech.edu/~jswann/teaching/6201/6201erp_6
.pdf, accessed on 3/12/2010
45
30.Kiakis, N., (2006), moduled by Georgopoulos, N., & Sfakianakis,
M., Συστήματα Διαχείρισης Επιχειρησιακών Πόρων (ERP): Το
Microsoft Business Solution Navision και Μελέτη Περιπτώσεως
για την υλοποίησή του, University of Piraeus, Department of
Business Administration, Msc Thesis, pp 24-36,
46
43.Osintsev, Aleksey, 26/08/2010, source:
http://blog.technologyevaluation.com/ blog/2010/08/26/big-erp-
vs-tier-2-erp-%E2%80%93-is-the-gap-in-functionality-as-big-as-
it-appears/, accessed on 3/12/2010).
47
56.Varahidis, A., (2007), moduled by Panayiotou N., Χρήση των
E.R.P. συστημάτων από τις ελληνικές επιχειρήσεις, Thesis,
School of Mechanical Engineering of NTUA, Industrial
Management and Operational Research Department, pp 61-92
48