Lecture 4: ERP Options and Selection Methods

Lecture 4:

ERP Options and Selection Methods

1_{Department of Industrial Engineering, Chulalongkorn University}

Outline

1

_{ERP Software development}

2

_{Very broad academic view of ERP Selection}

Stakeholder in IT Project

Company Consultant

System Vendor •requirement •option

•flow process & BPR •vendor selection •implementation •middleware •resources •legacy sys •training •project mgt •exit strategy •customization

•upgrade & support

ERP possible options

Scope (strategic): # functions, # sites, authority & control, expansion rate

ConsultantnoneVS singleVS multiple (modules or functions)

Software development: full system_VSwith modification_VSbest-of-breed

Vendor: singleVSmultiple

Implementations

Strategy: big-bang_VSroll out by site or function

BRP levels: radical (clean slate)_VSincremental (technological embedded)

Evaluation

ERP development method

Pro Con

In-house (1%) Best fit Most expensive & difficult Slowest

In-house with Gain commercial advantage Expensive & difficult

supplement (1%) Slow

Selected vendor modules (5%)

Less risk & cost If expand, long run time and cost higher

Best-of-breed (4%) Theoretically best of all Linking problem Slow

Single vendor with Retain flexible with vender More expensive modification (40%) helps Slow Full vendor system Fast & inexpensive Inflexible (50%) Efficient

Application service Fastest At mercy of provider provider (-) Least risk & cost Subject to price

Relative workload of each party

In-House Vendor Consultant In-house Very painful None May be useful In-house with supplement Painful Moderate May be useful Selected vendor modules Significant++ Moderate Heavy+ Best-of-breed Significant+ Moderate Heavy+ Single vendor with modification Significant+ Heavy+ Heavy+ Full vendor system Significant Heavy Heavy Application service provider Light None To select

Relative features of each option

Time & Budget Main risk High Tech. Security In-house Worst Failed project Very risky High In-house with

supplement

Better than ’in-house’

Very difficult Less risky than ’in-house’

High

Selected vendor modules

Very poor Linkage Very good High

Best-of-breed Poor Interfacing Ideal High Single vendor with

modification

Good Modification Very good High

Full vendor system Very good Organization fit Vendor upgrade High Application service

provider

Can be best Continuity Can be ideal Very low

Selection criteria

Minimizing total costs: maintenance, service term, infrastructure, consultant

Minimizing implementation time:

Having complete functionality: module completeness, function compatibility, security

Having user-friendly interface: easy to learn & to operate

Having system flexibility: easy to upgrade, easy to integrate, & easy to in-house development

Having system reliability: stability, fail safe/recovering ERP vendor:

Having good reputation: financial, size of vendor, market share

Providing good technical capability: technical support capability, implementation

Supplying ongoing service: warranties, consultant, training, service speed

Guideline for ERP selection

Establishselection team, including key users & funders Setup goals and objectives for implementation & expectation Distinguishmust-haveandnice-to havefeatures

Focus oncore functionsand on aproven implementationmethodology Look beyond implementation: upgrade, support, 3-party integration, expansion, international, continuality

Verify end-users’satisfaction: user friendly (cycle time & # screen) Ask forlive demousing a real data

There is noperfectERP software. Hence, listen to yourgut-feeling.

Important screening questions

What are acceptableover-budgetandover-implementation time? Does ERP system fit our requirements or is itoverqualified?

Is the system integrated with those of other partners? If so, how much to integrate?

Does the vendortoo big(→ignore us)? ortoo small(→survive without us)? What are the key market domain of vendor/software?

Does the vendor co-operate with other consultant companies? Does the implementation plan feasible and simple?

What are its currentfinancial forecastsof vendor?

ERP project life cycle

develop initial requirement with consultant (platform & affected jobs) gather vendor proposals

organize project team

select vendor & design system install & test system

hire implement consultant

develop training program & train users

data migration & run system parallel with integration establish help desk & go on-line

How to present ERP project

Capital Mixed Revenue

Training 0% 1% 99%

Marketing 4% 9% 87%

IT/IS 39% 41% 20%

Operation 58% 31% 11%

IS/IT project evaluation technique

Criteria % Companies % Projects Ranking Financial:

Payback 61 51 5

IRR 54 54 2

NPV 48 58 4

Management:

Explicit business objective 88 57 1

Support decision making 88 29 7

Legal/Gov requirements 71 44 13

Implicit business objective 69 24 3

Response to competition 61 63 6

Development:

Techical/System requirements 79 25 12

Probability of completion 31 62 11

Reviews on Engineering Economy

What: monetaryways to justify a project

Concept: time value of money

Cash flow: cost & benefit of investing in a project

Project length: (e.g., typical IT/IS 5-7 years)

Discounted rate: % interest + MARR

Net present value: converting allcash flowsto Year 0 Payback period: year/periodin which NPV = 0

Internal rate of return (IRR): discounted ratethat make NPV = 0

Return of investment (ROI): _{total investment}total benefits

Sensitivity analysis: testing robustness

Percentage: if fraction of benefits is realized Real option: if some benefits does not realize (0-1)

Typical US ERP project

Installation time: average 57% longer than expect <12 months (34%)

13-24 months (45%)

Installation cost: average 54% over-budget <$5 million (42%)

$5-25 million (33%) $26-50 million (10%)

ROI:41% fail to realize more than half of benefits <5% (14%)

5-15% (18%) 16-25% (36%)

Multi-Criteria

Measurement Important score

Criteria Worst Best Most Least

Gain strategic advantage Do nothing Develop unique system

100 100

Keep up with competition Do nothing State-of-art vendor

70 70

Internet connectivity None Modern 60 50 Update systems (BPR) Nothing Complete 50 30 Minimize disruption 7-year

installation

Current system 30 100

Financial implications Risk $r1millions Risk $r2millions 25 200

Gain $g1

millions

Gain $g2

millions

Standardize business process Nothing Complete 10 3

Total 345 283