An Enterprise Resource Planning System

Published Date: 02 Nov 2017

In the current global economy, a large amount of data is stored and processed by large companies. The data is usually distributed across the different business units of the company. Most of these business units have their own information systems to store and process the data. In order for a company to be successful, it should have accurate information to control and coordinate all the distributed resources. But in most cases, the different business units use different types of information systems. For a company to be successful, the different business units need to coordinate with each other. However, the costs involved in this coordination of resources are huge. There are instances where there is replication of data. For example, when a customer orders a product, the information is keyed into each of the business units that are involved in the manufacturing and delivery of the product. In addition, there are many cases of lack of compatibility between the distributed information systems, resulting in expensive interface.

An Enterprise Resource Planning (ERP) System is a software package that is used to solve the fragmentation of a company’s systems. An ERP System discards the old stand-alone information systems such as human resources, finance, sales, production, manufacturing, etc. and replaces them with a single integrated and uniform information systems package divided into different modules that are linked to each other. There is one database, a unified application and a unified interface across all business units. For example, when a customer service representative enters a customer order into the system, the representative has access to all the information regarding the customer. The representative has access to the customer’s credit information like the finance module, the company’s inventory status from the warehouse module and the shipping logistics from the logistics module. As a result, "hand-off" errors due to transfer of data from one business unit to another does not arise. Also, there is significant reduction in the amount of time it takes to process a customer’s request. This results in reduced lead-time in the delivery of a product. By integrating information across the entire organization, ERP systems allow companies to better understand their business. With ERP systems, companies can standardize business processes and more easily enact best practices. By creating more efficient processes, companies can concentrate their efforts on serving their customers and maximizing profit.

With the increasing trend towards globalization and need for accurate real-time information to manage the globally distributed resources, a standard data-format to share information becomes imperative. ERP systems have the capability to provide this standard data-format across a globally distributed organization. As a result, in the past decade many organizations have initiated/implemented ERP projects. Implementing an ERP system raises several important concerns. An ERP system is not a software system implementation alone, but it changes the way a company does business. It must be realized that an ERP system imposes its own logic on a company’s strategy, organization and culture. In deciding to implement an ERP system, companies have been forced to make critical decisions concerning business process reengineering, change management, the role of consultants in the implementation, project costs and time, team structure, employee training, and organizational inertia to change. One company that had to make these decisions regarding ERP implementation is Vandelay Industries, which is the subject of this case study.

BACKGROUND

Vandelay Industries

Vandelay Industries was an $8 billion corporation that manufactured and distributed industrial process equipment used in the production of rubber and latex. The company was headquartered in Minnesota. Vandelay’s offerings were known for their design quality and innovative engineering. Markets for Vandelay products were extremely healthy and the company steadily expanded, partly by building new sites and partly by acquiring smaller firms. Vandelay’s plants were treated as revenue centers and were allowed a high degree of independence as long as they maintained their profits. Vandelay employed 30,000 people and manufactured on four different continents.

By the mid-1980s, Vandelay’s products could no longer command a large price premium due to foreign competition and market shifts. Less expensive alternatives were available in the market. Vandelay’s traditional emphasis on features and customizability found few takers. The firms traditional lead times added to the woes since competitors could fill customer orders much quicker. In order to return to profitability, Vandelay had to reengineer some of its business processes. Vandelay followed lean production methods and rationalized its product lines. Vandelay also had to lay off people reducing its total headcount to 20,000 people. All the efforts paid off and the company returned to profitability in the mid-1990s.

Vandelay conducted an internal investigation to find out the cause for longer lead times. Vandelay realized that actual manufacturing and material movement accounted for less than 5% of total lead times and the remaining time was devoted to information processing and information transfer steps. This was because the information systems in the different business units at Vandelay were poorly integrated and in some cases completely incompatible. The plants dissimilar manufacturing software made integration across sites difficult. In addition, customers orders were taken manually by an inside sales organization in each region (North America, Europe, Asia) and then routed by fax to the appropriate plant. Loss of faxes meant loss of orders. When a Vandelay employee transferred from one business unit to another, his/her employee record had to be reentered in the other business unit, due to incompatible human resources software. The only corporate-wide integrated system was the financial information systems. But again, the critical business units such as forecasting, order management and human resources were not integrated with the financial package, leading to redundancy in data.

Vandelay units’ business practices were as flawed as their information systems. There was no uniformly "best" way to invoice customers, close the accounts at month end, reserve warehouse inventory for a customer’s order or carry out other activities in the production process that involved computer usage.

Vandelay realized the need for a single ERP system to overcome the problems with fragmented systems and lack of uniform best practices. Also, Vandalay believed it could gain visibility in a common format, over data from anywhere in the company. This would enable Vandelay to coordinate the practices of all the business units and manage Vandelay units more tightly than ever before. After a review of major ERP vendors, Vandelay decided to implement SAP’s R/3 system and use the services of the Deloitte and Touche consulting group/ICS to implement it.

SAP

In the last decade, the ERP software market has been one of the fastest growing markets in the software industry. The leading vendors of ERP are SAP AG, Oracle, J.D. Edwards, and Baan. Among the leading players in the ERP market, SAP has the major market share. SAP AG was founded in 1972 in Walldorf, Germany with the goal of producing integrated application software for corporations. These applications were designed to include all activities of a corporation, from purchasing and manufacturing.

SAP’s first major product was the R/2 system, which ran on mainframe computers. Capitalizing on the client server technology, SAP introduced the R/3 system in 1992. R/3 was extremely successful and fuelled rapid growth of SAP, especially in North America, where SAP went from a small presence in 1992 to $710 million in sales in 1995. This success was due to factors such as client-server technology, modularity, functionality, integration and marketing strategy. A full SAP implementation including all standard functions incorporated hundreds of transactions. Transactions included everything from checking the in-stock status of a component to changing an assembly’s estimated cost. Most common business processes included multiple transactions and cut across more than one functional area or software module, but they would all be part of the same system. This eliminated redundant entry and "hand-offs" between applications.

The R/3 system includes approximately 8000 tables that are configurable to meet the requirements of a particular business process. In general, after configuration, an R/3 system could satisfy 80-95% of a company’s specific business needs. The remaining functionality can be obtained by interfacing R/3 to legacy systems, interfacing R/3 to other packaged software, developing custom software that extended R/3’s functionality or modifying the R/3 source code directly.

Deloitte and Touche Consulting Group/ICS

Deloitte & Touch Consulting Group was the consulting division of Deloitte & Touche, one of the ‘Big 6’ audit and tax firms. In 1995, the Consulting group had over $1 billion in revenues and employed 8,000 people. The ICS group was the subsidiary of the Consulting group and specialized in SAP implementations, offering complementary software products, education and training, and also expertise in business process reengineering and change management. ICS had considerable knowledge base in SAP systems with over 50% of its consultants having more than two years of experience. ICS had won SAP’s award of excellence based on customer satisfaction response and also R/3 "Global Logo Partner".

ICS professionals ranged from general management to SAP specialists. An ERP implementation would mean a large-scale change in a firm. ICS had adopted a common set of principles for leading large-scale change.

Vandelay Project

Vandelay estimated the project would take 18 months and require full-time efforts of 50 people including consultants and employees. The project budget was estimated at $20 million. R/3 software was to be implemented at Vandelay’s eight manufacturing sites and four order entry locations. Elaine Kramer, who had been with the ICS consulting group for over five years was to lead the project. From her conversations with George Hall, Vandelay’s Dunbarton plant manager, she realized that Vandelay was pleased about the thought of R/3 system in their sites. She also realized that the different Vandelay sites would like to modify the system at their will, because of their tradition of autonomy of different plants, that has helped Vandelay grow over the years.

Kramer felt the timeline and budget for the project was very aggressive and she wondered whether the key elements were in place to achieve the desired change. According to Kramer,

"Change occurs at several levels in an organization: strategy, process, people, and technology. Depending on the particular client situation, there are two approaches, which can be taken. The first is "clean sheet", where all four dimensions of organizational change are explored without constraints. The second is "technology-enabled change". In this situation, the primary technology is selected early in the process and more strongly influences the other three dimensions of strategy, people, and processors, but still enable significant overall business change. The introduction to powerful, flexible, enterprise-wide solutions such as SAP is driving this approach as clients are looking to concurrently replace mainframe legacy systems and achieve significant operating improvement".

In Vandelay’s case, Kramer felt the technology-enabled change was more appropriate, since Vandelay had already decided to go with SAP. The project would initially establish a model for business change and then the software installation would take place.

Team Structure

Kramer and Vandelay also realized that this project would require teams with project management ability, SAP expertise, business and industry understanding, systems implementation experience, and change leadership talent. Hence, two teams were formed to manage the project. Based on her experience, she envisioned two ways to select teams. One approach would be to present a list of required skills and characteristics for team members to senior-level management and ask them to select the people best for the job. The other approach was to mandate that the team contain at least one representative from each of Vandelay’s implementation units around the world, which would ensure that each site would have a project champion from the outset.

Change Management

From her experience Kramer could envision the challenges in assisting a large organization as it attempted to change and standardize its business practices.

Centralization versus Autonomy

Vandelay had a history of encouraging innovation and autonomy among its employees. But involving all users in the decisions would increase their temptation to second-guess some of the implementation and would alter the system. Kramer had to make sure that the decisions she made were the right decisions throughout Vandelay. She had to make sure that the decisions addressed the following questions with respect to Vandelay:

Should processes be tightly centralized and controlled, so that tinkering and therefore possible innovation strongly discouraged?

How to put the rule "input by many, design by few" into practice?

How to make sure that the implementation process would not hinder the standard business processes and relationships between customers and suppliers of Vandelay?

How to incorporate the externally defined ‘best practices’ into the organization- were they a starting point or the final word?

Software

Since the R/3 system only satisfied 80-95% of an organization’s business needs after setting the configuration tables, Kramer had to choose between three primary alternatives to address the situation.

Change the business processes to match the capabilities of the software

Interface R/3 to another package or custom solution

Extend R/3 system to precisely match the business requirements

INTEGRATION

Dell

As in the Vandelay case, Dell was confronted with the task of managing change. The role of Dell's sales reps was to change dramatically upon full implementation of Dell Online. Management recognized that sales executives must be convinced that the online model was a sales facilitator and that sales were not being taken away from them. It was recognized that there would be a perceived loss of account control and focus changed from less value-added activities that salespeople saw as important to their sales like confirming order status and verifying spec sheets. Vandelay's employees were to be confronted with a significant change in the way they conducted their business for the last fifty years. Vandelay's consultant, Deloitte Touche Consulting Group/ICS, was acutely aware of the existing environment at Vandelay's manufacturing plants that encouraged "tinkering" and seemed to be taking employee perceptions into consideration as Dell did.

Unlike Vandelay, which turned to an outside vendor, SAP AG, Dell turned to its in-house programmers to design an online retail store after interviewing outside vendors because there were very few with the required technology expertise. SAP and its R/3 system had already proven itself across many applications for its ever-growing customer base and was the most logical choice for Vandelay's business.

Kodak

Vandelay Industries and Kodak were both large manufacturing corporations that operated as several different business units. Kodak consisted of 29 separate business units that operated as profit centers, and Vandelay consisted of several business units that operated independently as long as they reached a specified profit margin. Each company knew that success depended on managing the transition of employees.

Team structure was a similarity that both Eastman Kodak and Vandely Industries shared in overhauling their existing information technology programs. Kodak was improving their outsourcing clients, and Vandely was establishing an ERP program.

Kodak and their IT team came up with the slogan "Partnership in the Innovation Process (PIP)." This enabled Kodak to effectively communicate with their outsourcing partners. Each PIP team adopted a code name for their data center. For example, BlueStar represented their telecommunications sector. Teams contained 8 to10 Kodak employees from all areas of Kodak’s business sectors. The PIP teams reported to a steering committee that contained executives from Kodak, and the steering committee offered advice to the PIP teams. PIP teams used a five-step process on how they would identify, select, negotiate, and implement outsourcing alliances (Applegate, Montealegre 5). The implementation of PIP allows Eastman Kodak to effectively choose the best outsourcing alliance and adapt to the constant changes partners undergo. Kodak’s decision to cut businesses that were losing value and outsource the others helped regain some of their competitive advantage. The decision to outsource had been a good one considering there were cost savings of 18% in Kodak’s data services, telecommunications, and personal computer services (Applegate, Montealegre 10).

Vandely’s team structure was comprised of a steering committee and a project team. The steering committee consisted of division VP’s who met on monthly occasions, and were responsible for strategic issues dealing. Project teams handled the bulk of the work and worked full time on the specifics of implementation. The issues addressed by the project team were rules for reserving inventory for a customer order and horizons for planning and scheduling. Both Kodak and Vandely used similar team structures with their steering committees offering guidance to Project and PIP teams handling the majority of the issues.

Springs

Springs Industries is a $2.2 billion textile company that mostly produces home furnishings we know as Springmaid and Wamsutta and has licenses with Disney, Liz at Home and Bill Bass. In the early 1990s, when Springs Industries decided to implement a whole new IT system into their company, they hired someone specifically to do that job. In a sense, they outsourced, which is one of the important guidelines for implementing an ERP system. Vandelay also outsourced by hiring Deloitte & Touch Consulting Group. By outsourcing this part of the implementation, it a company can better focus on its core competency business process, and can save time and money. This was more or less the case with Vandelay and with Springs Industries who both had to retrain over half of their employees to be ready to use the new technology.

Providian Trust Company

Like the Vandelay, Providian Trust is an older company that was very set in the traditional methods of doing business. Each branch independently ran itself causing many repeats, wasted time, and inefficiency. When Vandelay hired a team to install a better IT system, all affected employees had to be completely retrained. Vandelay moved to a much more centralized operating system, and similar to Providian Trust, this move caused many hard feelings and rough edges. Many people lost control and access to information they once had. For example, the individual plant managers could no longer manage their plant just any old way that worked best for them. All the plants now had to be run in the exact same manner. When Providian Trust began rearranging tasks to avoid cross-overs, this caused problems with employees too. The front office employees lost access to accounts they had previously had because of this. They had to learn the new boundaries of their job and how best to perform. Both companies had to deal with the cultural resistance to change that occurred within their organization due to the implementation of the new technology. In the long run, installing, centralizing, and successfully managing the new IT systems will help both companies work more efficiently, save money, and stay competitive in the market.

Proctor &Gamble

Procter & Gamble ("P&G") is another innovative company that took on a large reengineering effort. However, P&G’s reengineering took several years whereas Vandelay’s case notes that ERP implementation is expected to only take 18 months. In P&G’s case, the company found that its promotional dollars were not being forwarded to the consumer because retailers were forward buying to take advantage of discounts. The company had a vision of improving the value of its brands by participating in industry wide improvements and pricing policy changes. P&G went about redesigning the problem points at the industry level by beginning at the company level. P&G worked on integrating many systems across functions and product sectors. A key element to its success was the development of common databases for product pricing and product specifications to eliminate incentives for forward buying. P&G used technology to improve efficiencies in its ordering, shipping and billing system. Strong consumer pull and brand power were leveraged to improve supply logistics and reduce distribution channel inventory through continuous replenishment program (CRP) and Efficient Consumer Response (ECR). Integration and common databases facilitated better management decisions by making more information readily available to decision-makers.

DISCUSSIONS AND RECOMMENDATIONS

Vandelay’s need to implement the ERP project was due to the inefficiency of its current fragmented information systems. By implementing an integrated ERP system, Vandelay intended to end the existing fragmentation of systems and allow process standardization across the corporation. Ideally, Vandelay would like to have an ERP system, which would integrate the information flow across the different business processes, at the same time providing some form of autonomy to their various plants. This is in accordance with the company’s tradition of allowing the different plants to ‘tinker’ with their business processes to increase the overall efficiency of the company.

In order to meet these requirements of Vandelay, the project lead Elaine Kramer has to make some difficult decisions.

If Vandelay is made to accept the basic R/3 implementation, then their business practices should be standardized across the entire length and breadth of the organization. But Vandelay is a global enterprise. Some of its plants across different countries have evolved their own standard business practices. This innovation has helped the company grow over the years. But customizing the software to suit the business needs of individual plants, would lead to increase in implementation cost and implementation time. Since the scope of the project is very aggressive with an implementation time of 18 months and cost of $20 million dollars, Elaine has to let the Vandelay management know that, some of their individual plants could loose their autonomy and also they have to change their business practices to suit the centralized implementation.

In addition, based on her experience Kramer decided that ‘technology-enabled’ change is the best way to go about this implementation. When considering Vandelay’s history for innovation in its business units, forcing technology-enabled change may not be the best option to pursue in this case. The case study further talks about some of the business practices of some of the plants, which are tailored to meet the requirements of the local culture, relationships between customer and suppliers. Kramer and the Vandelay Management have to decide how much uniformity should exist in the organization. Choosing the correct team structure is another critical decision Kramer had to make. Since Kramer has been involved in previous SAP implementations, she had a good understanding of what type of team structure would be successful for a company. She seems to have a bias towards a team structure that is composed of one representative from each of Vandelay’s implementation sites around the world, so that each of the plants has their own project champion. This approach might cost some quality and depth in the team, because some of the best employees may not be in the team. This could possibly result in subsequent delay and rise in implementation cost due to bad decisions. However, this approach helps to ensure that decisions about the project implementation are made with the broadest possible representation and understanding of the different business units. In an organization such as Vandelay, this ensures that the project champions play a crucial role in explaining the system to their respective business units.

Even with change agents in place, Kramer was skeptical about the employees’ willingness to accept change. The true spirit of change management is enabling all employees to express and apply their knowledge in a way that benefits each of them and the organization. Kramer should work with the top management at Vandelay in devising a mechanism for change management that would include change agents who would be in a position to explain to the employees that the their opinions and values are still important to the company. People are motivated by purpose, affiliation and security. All of these attributes need to be part of the change management program.

TAKE AWAYS

ERP systems are revolutionizing the way companies produce goods and services. The essence of an ERP system is the fundamental premise that the whole is greater than the sum of its parts. This case study makes it clear that the implementation of an ERP system is not an implementation of technology alone. Because of its profound business implications, an ERP implementation should be one that is controlled by management, rather than the technology department.

As seen in the case of Vandelay, careful planning should precede the implementation of an ERP system. Since it changes the way a company does business, lack of planning can lead to chaos resulting in a significant dent in a company’s competitive advantage and efficiency of operation.

ERP systems are built on best practices. On average, ERP implementation can only satisfy 80-95% of a company’s needs. If a company wants to conform to the standard best practices of the ERP package some amount of reengineering is needed. Another option is to customize the software to meet some of the specific needs of the business.

Successful ERP implementations always involve full commitment of the management. A number of issues must be addressed before any decision to implement the system is made. Creating the right team structure is another critical factor of implementation.

ERP systems produce large-scale organizational change in a firm. This change can be change in strategy, business process, people, and technology. Hence, it makes it imperative that an ERP system implementation be accompanied with a well-defined policy of change management.