OPENING CASE

HAPTER

CASE 3-1 OPENING CASE

NES TL E 'S ERP IMP L E M E N TA TION

SO URCE: Adapted from 1. Worthen, B. (2002) Nestle's ERP Odyssey. CIO Magazine. May 75.; 2. by Aberdeen GrollP (2005) Center-Led Procllrement Organizing Resollrces and Technology for SlIstained SlIpply Vallie.

Novembel;' Weis5; T. (2002) Nestle Shifts From HP to IBM ill Data Center Pac/. Complltenvorld, March 11.

Since market leader SAP introduced R3, the fil'st ERP system with client-server architecture in 1 992, thousands of companies worldwide have implemented this software. Many have been suc­

cessful, but none has been without problems.

Nestle USA was one of them. Nestle USA has seven business divisions: beverage, confections and snacks, food services, foreign trade, nutrition, prepared foods, and sales. Some of the popular brands sold in United States by Nestle are Alpo, Baby Ruth, Carnation Instant Breakfast, Coffee­

Mate, Nescafe, Nestle Carnation Baby Formulas, Nestle Tol l House, PowerBar, Stouffer's Lean Cuisine, SweeTarts, and Taster's Choice. Its annual revenue is around $8.1 billion with 16,000 employees.

The ERP implementation at Nestle, code­

named B EST ( Business Excellence through Systems Technology), had an estimated cost of

$210 million with an IT staff (including outside consultants) of 250, began in 1 997 and was due to be completed i n 2003. The project's main goal was to use common business processes, systems, and organizational structures across the autonomous divisions within the United States. These common systems across Nestle USA would create savings through group buying power and facilitate data sharing between the subsidiaries.

Jeri Dunn, CIO of Nestle USA, joined with executives in charge of finance, supply chain, distri­

bution, and purchasing to form a key stakeholder's team for implementing the SAP. The stakeholder team made it clear to the top management that the SAP implementation would require business process reorganization and couldn't be done with­

out changing the way Nestle USA did business.

The stakeholder team, however, did not include any members from the groups that would

be directly affected by the new business process.

This caused a rebellion in the ranks and the employees resisted. Nobody wanted to learn the new way of doing things. Divisional executives were confused and angry. Morale sank and employee turnover reached 77 percent. Help desk calls reached 300 per day. The project team had overlooked the integration points between mod­

ules to account for the Y2K deadline. By the beginning of 2000, the rollout had collapsed into chaos and the project was halted. In its haste to unify the company's separate brands, the project team had essentially replaced divisional silos with process silos.

The company reconvened the stakeholder team and started the SAP implementation process from scratch. The group members eventually decided that to finish the project, they would need to start with the business requirements and then reach an end-date, rather than trying to fit the pro­

ject into a mold shaped by the predetermined end­

dates. They also made sure that they had support from the key divisional heads and that a l l the employees knew exactly what changes were tak­

ing place.

With SAP in place, Nestle USA has already achieved a significant return on investment (ROI). The common databases and business protesses led to more trustworthy demand fore­

casts for the various Nestle products. This also allowed the company to reduce inventory and reduce redistribution expenses. In 2003, Nestle signed a $500 million, 5-year deal with IBM for server hardware, software, and IT services, and integration of its mySAP.com e-business software system, giving its workers access to mySAP.com via an internal portal customized for their indi­

vidual j obs. Nestle is attempting to solve the

60 CHAPT E R 3 ENTE RPRISE SYSTEMS ARCHITECTURE

information management and systems challenge by standardizing on a common ERP system glob­

ally. As part of this initiative, they are rolling out a common e-procurement solution across its major regions and markets. Adoption of the solu­

tion, which is being licensed from SAP, has been accelerated by initially implementing (f hosted model that ensures that Nestle's e-procurement rollout does not conflict with its global ERP and

data center consolidation efforts. (Nestle will begin transitioning e-procurement system man­

agement to its own data centers in 2007-2008.) This approach also allows Nestle to handle imple­

mentation and change management issues during the initial rollout, enabling simplified system set­

up and configuration when e-procurement system management moves inhouse . •

PREVIEW

Once ERP systems are integrated and implemented in a company, they become the cor­

nerstone of the organization. Every single transaction will now be processed through this system, if the implementation was successful . The SAP-ERP implementation experi­

ence at Nestle USA provides very important lessons. In addition to the systems inte­

gration it is also necessary to focus on business process architecture, business requirements, budget, project management, commitments from top management, and continuous communication with employees informing them about future changes. If the ERP software is installed with a focus only on the system architecture, you may have a successful installation of software, but an unsuccessful implementation. ERP imple­

mentation isn't j ust about the software. It's easy to install a new system. The hard part is changing the business processes of the people who will use the system. Nobody likes process change, particularly when they don't know what is coming. Include the people in planning whose processes you are changing. Keep the communication lines open while the project is in the works, and measure the level of acceptance before, during, and after the rollout. Remember the integration points. It isn't enough simply to install new systems; you need to make sure that they can talk to each other. Update your budget pro­

jection at regular intervals to stay on target for the project.

WHY STU DY ENTERPRISE SYSTE M ARC HITECTURE ?

ERP system architecture should provide a foundation for both the functional and t he technical needs of the organization and adapt to future business challenges. It articulates the relationships among the complex information technology components, which include hardware, software, and data with such complex organization components as company structures, business rules, and people. For example, ERP hardware can range from multi­

million dollar mainframe computer systems to complex networking and security equip­

ment. ERP software similarly requires operating systems, a database, and other software in place for them to function properly. As mentioned in the Nestle case, ERP systems require current and historical data and business rules from all parts of the organization to be embedded into the system during the implementation phase for a successful solu­

tion to business problems. This is a complex undertaking for any organization because it requires a good understanding of the enterprise systems structures, characteristics, behavior, and business operations.

Understanding the enterprise system architecture is important for several reasons.

First, it helps management and the impleni.entation teams understand in detail the fea­

tures and components of the enterprise system. Second, it provides a visual representa­

tion of the complex system interfaces among the ERP application and databases,

CHAPT E R 3 ENTERPRISE SYSTEMS ARCHITECTURE

ERP modules

ERP architecture

Network

Database Hardware

Software

FIGU R E 3-1 Enterprise S),stems Architecture (ESA) Model ______ ..1

6 1

operating systems, legacy applications, and networking. Finally, understanding the enter­

prise systems architecture, by clarifying the system infrastructure requirements, training requirements, change management requirements, and business process reengineering requirements, among others, can help management in developing a better IT plan.

The enterprise systems architecture (Figure 3-1 ) can be viewed from two different angles: ( 1 ) the functional angle that defines the ERP modules that support the various business functions of the organization and (2) the system angle that defines the ERP architecture through the physical components of hardware, software, and networking. I n this chapter, you will learn more about the typical ERP modules, the system architec­

ture and components, types of ERP architecture, and, finally, the role of architecture and its impact on the implementation stage of the project.

E R P MO D UL E S

The key role of an ERP system i s to provide support for such business functions as accounting, sales, i nventory control, and production for the various stakeholders of the organization. Organizations often selectively implement the ERP modules that are both economically and technically feasible. ERP provides the same functionality to the users (e.g., the silo systems of the past ), but the data is integrated or shareable across all the ERP modules. This means the data needs to be entered into the system

62 CHAPT E R 3 ENTERPRISE SYSTEMS ARCHITECTU RE

MRP/CRP

BOM (Bill of Materials)

Purchasing

Sales &

Marketing

ERP

Logistics

FIGU R E 3-2 'Typical ERP Modules

Master Scheduling

Shop Floor Control

Accounts Payable/Re

once, and, depending on the organization's business rules, it is made available to users either inside or outside the organization . In today's organization, teams are not lim­

ited to employees of the company; teams can include employees from various func­

tional areas as well as employees of business partners and even customers. ERP systems, therefore, provide access to the data as defined by the organizations' busi­

ness rules.

ERP vendors, including SAP, Oracle, and Microsoft provide modules that support the major functional areas of the business (e.g.,. accounting, production, financial man­

agement, human resources, sales order processing, and procurement). These modules provide the functionality to implement business policy and processes in accounting, production, finance, human resources, and so on. The ERP software embeds the best business practices which implement the organization's policy and procedure via busi­

ness rules. ERP vendors often claim that these business practices will help improve an organizations' productivity and performance. For example, a procurement module includes the best practices on purchasing (e.g. , forms, routing, and methods of inte­

grating with e-commerce application). Although the vendor claims are generally true, some b usiness rules may conflict with the organization's policy. Customization or changes are therefore often necessary when implementing the ERP modules. A lthough this issue will be debated in more detail elsewhere in the book, suffice it to say that management needs to evaluate carefully when and how much modification is essen­

tial. ERP software provides differen� level of flexibility in modifying the system dur­

ing implementation. Careful evaluation is therefore necessary when selecting the software to avoid problems later.

In general, ERP vendors provide a comprehensive range of enterprise software applications and business solutions to empower every aspect of business operations, identify new business opportunities, and the ability to respond to changing business real­

ities. In addition, they include functionality to optimize business operations and resources to extend best practices to the entire value chain. Table 3-1 provides a high-level overview of the usual modules provided by major ERP vendors.

....

CHAPT E R 3 ENTERPRISE SYSTEMS ARCHITECTURE

TAB LE 3-1 ERP Modules From Three Vendors

OraclelPeopleSoft

FUI/ction SAP Modules Enterprise Modules

Sales Sales and Distribution, Marketing and Sales,

63

Microsoft Dynamics Modules

Retail POS, Field Sales Opportunity Supply Chain Service Management

Management

Procurement Purchasing, Supplier Procurement and Supply Chain Relationship Supplier Relationship Management Management Management

Production MRP, Product Life Manufacturing M anufacturing Cycle Management

Accounting Financial Accounting Financial Management Financial Management Distribution Warehouse Supply Chain Distribution

Management Management Management

Customer Services CRM CRM CRM

Corporate Governance, Risk, and Corporate Performance Analytics Performance & Compliance Management

Governance Management

Human Resources Human Capital Human Capital HR Management Management, Management

Miscellaneous Banking Campus Solutions e-Commerce, Portals

Adapted from: Web sites of SAP Global, Oracle Applicatiol/s, al/d !I'licrosoft Dyl/amics.

www.sapfalls.com/sapfans/sapfmod.htm; www.oracle.com/applicatiolls/home.html &

wlVlV.microsoft.com/ell/us/default.aspx. (accessed January 15, 2007).

The functional and module list is not exhaustive and does not include all the enter­

prise software applications provided by these vendors. The following is a brief overview of some of these ERP modules.

PRODUCTION MODULE

The production module helps in the planning and optimizing of the manufacturing capacity, parts, components, and material resources using historical production data and sales forecasting. Production modules have evolved from manufacturing require­

ments planning (MRP) II i nto ERP systems with the help of consulting firms who have accumulated vast knowledge of implementing a production planning module.

PURCHASING MODULE

The purchase module streamlines the procurement process of required raw materials and other supplies. It automates the processes of identifying potential suppliers, negotiating price, awarding purchase orders to the supplier, and billing processes. The purchase module is tightly integrated with the inventory control and production planning modules.

The purchasing module is often integrated with supply chain management software and is integrated with business-to-business (B2B) web software.

64 CHAPTER 3 ENTERPRISE SYSTEMS ARCHITECTU RE

INVENTORY MANAGEMENT MODULE

The inventory module facilitates the processes of maintaining the appropriate level of stock in a warehouse. Inventory control identifies inventory requirements, sets targets, provides replenishment techniques and options, monitors item usages, reconciles the inventory balances, and reports inventory status. Integration of the inventory control module with sales, purchase, and finance modules allows ERP systems to generate vigilant executive level reports.

SALES AND M AR KETING MODULE

Revenues from sales are life blood for commercial organizations. The sales module implements functions of order placement, order scheduling, shipping, and invoicing. The sales module is closely integrated with an organizations' ecommerce Web sites. Many ERP vendors offer an online storefront as part of the sales module. On the other hand, the marketing module supports lead generation, direct mailing campaigns, and more.

FINANCE MODULE

The financial module benefits both for-profit organizations and nonprofit organizations.

The financial module is the core of many ERP software systems. It can gather financial data from various functional departments and generate valuable financial reports (e.g., budgets, balance sheet, general ledger, traIl balance, and quarterly financial statements).

HUM AN RESOURCE MODULE

The human resources (HR) module is usually the first model implemented by many companies. The HR module streamlines the management of human resources and human capitals. The HR modules routinely maintain a complete employee database, including contact information, salary details, attendance, performance evaluation, and promotion.

An advanced HR module is integrated with knowledge management systems to opti­

mally utilize the expertise of all employees.

MISCELLANEOUS MODULES

Some vendors have started offering such nontraditional modules as business intelli­

gence, self-service, project management, and e-commerce. For example, the business intelligence module offers tools and data warehousing capabilities to display real-time information through reports and to monitor historical trends. Furthermore, these reports can be viewed through the enterprise portal for decision making with executives who can be located around the globe and can collaboratively make decisions based on the same live data. Self-service is similarly an important module for present-day consumers because it satisfies their need for "instant gratification" for their everyday activities. I t allows them t o have more control over their purchasing, tracking, and research. Self­

service also has many benefits for employees to include access to a company's intranet, 401Ks, leave and earnings statements, and so on. Employers are also discovering that there is cost savings associated with letting customers and employees take ownership of their inquiries and processing. In order for a company to take advantage of the cost sav­

ings, or for consumers and employees to take advantage of the freedom associated with

CHAPT E R 3 ENTERPRISE SYSTEMS ARCH ITECTURE 65 self-service, an organization must focus on keeping the self-service capability as user­

friendly as possible. This can be done by providing accurate information and a relatively easy method of database interaction.

BENEFITS OF KEY ER P MODULES

The following details some of the key benefits touted by such ERP vendors as SAP and Oracle for the various application modules:

S E L F - S E RV I C E S

• Enable flexible support for employees' business functions with views of informa­

tion tailored to their needs

• Empower employees and managers through simplified access to relevant infor­

mation for HR management, financials, operations, and analytics, while boosting motivation, productivity, and efficiency

P E R F O R M A N C E M A N AG E M E N T

• Improve business insight and productivity by delivering real-time, personalized measurements and metrics

• Provide executives, managers, and business workers with access to such informa­

tion as business statistics and key performance measurements presented in the context of business tasks

F I N A N C I A L S

• Ensure compliance and predictability of business performance

• Gain deeper financial insight across the enterprise and tighten control of finances

• Automate financial and managerial accounting and financial supply chain management

• Provide rigorous support for financial reporting and such corporate governance mandates as the Sarbanes-Oxley Act and B asel I I

HR M A N AG E M E N T

• Attract the right people, develop and leverage their talents, align their efforts with corporate objectives, and retain top performers

• Increase efficiency and help ensure compliance with changing global and local regulations by using standardized and automated workforce processes

• Enable creation of project teams based on skills and availability, monitor progress on projects, track time, and analyze results

• Manage human capital investments by analyzing business outcomes, workforce trends and demographics, and workforce planning

P R O C U R E M E N T A N D LOG I S T I C S E X E C U T I O N

• Sustain cost savings for all spending categories by automating such routine tasks as determining sources and converting requisitions into purchase orders, and by allowing employees to use electronic catalogs to order products and services

66 CHAPT E R 3 ENTERPRISE SYSTEMS ARCHITECTU R E

• Reduce costs through process automation, integration of suppliers, and better collaboration

• Improve resource utilization with support for cross-docking processes and data col lection technologies such as radio frequency identification (RFID) and bar codes

• Enhance productivity of all activities related to incoming and outgoing physical goods movements

• Reduce transportation costs through better consolidation and collaboration

P R O D U C T D E V E L O P M E N T A N D M A N U FA C T U R I NG

• Shorten time to market through streamlined new-product development and introduction processes

• Deliver higher quality products and ensure delivery of promised orders through optimal planning, scheduling, and sequencing on the factory floor

• Improve visibility and transparency in real time across all shop-floor processes, including availability checking and costing

S A L E S A N D S E R V I C E

• I ncrease the number of sales orders processed and reduce administrative costs through automation of sales order management and the use of such profitable Internet-based solutions as e-commerce

• Deliver greater customer satisfaction by providing easy access to accurate, timely information

• Streamline processes that facilitate cost-effective mobile access for field employees

• Improve the management of incentives and commissions to maximize productiv­

ity and boost sales

• Reduce travel costs by using online functions for planning, booking, and expense accounting while ensuring that company policies are applied to all processes

• Realize more effective real estate management, supported by tools that stream­

line and manage every stage of the real estate life cycle

• Adhere to environmental, health, and safety reporting requirements

ER P ARCH ITECTURE

In today's business environment, ERP applications are most commonly deployed in a dis­

tributed and often widely dispersed manner. While the servers may be centralized, the clients are usually spread to multiple locations throughout the enterprise. ERP system architecture is organized in layers or tiers to manage system complexity in order to provide scalability and flexibility via a plug-n-play systems capability that is highly essential in an enterprise level system. For example, if a server is capable of handling 10 users (or nodes) simultaneously on a simple two-layer client-server architecture, your network will be lim­

ited to only 10 users. By adding one more layer of a server in the middle (assuming this server can handle 10 nodes) you can scale the number of users from 10 to 100 without replacing your original server or client. This is one example of simple hardware layering that has a