Group Project I Evaluation of an Enterprise Application : ERP Systems of Volkswagen and Nestle Executive Summary Enterprise resource planning integrates internal and external management information across an entire organization, coupling finance/accounting, manufacturing, sales and service. ERP systems automate this activity with an integrated software application, facilitating the flow of information between all business functions inside the boundaries of the organization and managing the connection to outside stakeholders.
Although ERP systems offer a bird’s eye view in the working of the company and allow users to cross-reference business functions, implementing an enterprise resource system (ERP) project in the estimated time, for the estimated cost, and with satisfying results is a rare occurrence.
Most organizations do not understand the costs associated with ERP implementation when they first embark on the project. While the benefits are usually well understood, the costs do not surface until well into the implementation.
When everything goes smoothly with ERP resource planning projects, the ratio of savings to dollars invested typically increases over time.
As the streamlining efforts start and stall and start again, however, resulting in disastrous detours and cost overruns, savings if they come at all, occur many millions of dollars and many months later than planned. Too many executives see ERP solely as a technology project, believing that if they buy a new software system, inefficiencies will magically disappear. Unfortunately, for companies such as Volkswagen and Nestle, a hiccup in ERP implementation in the pursuit to gain a competitive advantage over their rivals can be disastrous in the short and long term.
Volkswagen The Volkswagen Group is Europe’s largest car maker and one of the world’s leading manufacturers of automobiles. In 2009, according to data published by all three companies, Volkswagen was the third biggest motor vehicle manufacturer, with 6. 29 million units delivered to customers, after Toyota Group with 7. 23 million units and General Motors, with 6. 0 million units. Although the company offers a variety of mobility-related services in addition to being a leading carmaker, combining all of these subsidiaries and their individual portfolios, brands, missions, and visions under one umbrella is a big challenge for Volkswagen. Through ERP implementation, Volkswagen reasoned that contributions can be made by all the brands and companies of the VW Group without compromising the individual identity of these brands. .
This would result in added value to the common stream of interest and help the group achieve significant milestones moving forward. Volkswagen Accessories is a VW subsidiary that provides more than 8,000 accessory parts for virtually every model in its parent company’s range of automobiles. These include communication components, car maintenance and fashion products, specially styled rim-and-tire combinations, and other optical enhancements. Until recently, Volkswagen Accessories’ 200 employees analyzed data from the company’s individual SAP ERP modules by hand before entering them into Excel files. Due to the considerable demands of the Volkswagen group’s internal reporting, this involved a tremendous amount of effort and tied up significant resources.
As Project Manager Bjorn Lange states: “Besides taking far too much time, this method simply couldn’t meet our current requirements anymore. Shorter development cycles are constantly demanding new reports that employees need available on an ad hoc basis whenever possible. ” For this reason, Volkswagen Accessories decided to implement a modern business intelligence solution. “Our goal was not only to establish a uniform basis of data, but especially to ensure our ability to distribute information in a flexible, largely automated way,” Lange explains.
From a macroeconomic perspective, the automotive industry has had a number of challenges to overcome in recent years, from surpluses in production and plunging revenues to protectionism. Specifically, this means that the industry needed to get a grip on excess capacity in automobile production and the associated revenue shortfalls. As far as choosing the right ERP system, all automotive companies had to deal with three key issues. First, they needed to look at containing costs through standardization. Second, organizations had to have a clear view of all their stock.
And third, companies needed to strive for innovation and sustainability. SAP Business Suite 7 seemed to be able to achieve all of these demands by improving business processes internally and across company boundaries. To support this approach, upgrades can be performed during production operation in the form of SAP enhancement packages. By implementing a responsive production system, companies could tackle the pressure of competition from increasing globalization. Thanks to flexible and cost-effective production, lead times can be cut and stock levels reduced.
As a result, companies will spend less while increasing their ability to deliver. With an ERP system in place, Volkswagen would be able to efficiently deal with business obstacles and drastically improve service-delivery to end user and business cycle performance among many other areas. SAP was designed to make sure that the critical data, analytical tools and applications are readily available and accessible by the employee while simultaneously supporting the organization’s model for different process of shared services.
From a business cycle standpoint, the complete end-to-end cycle of business processes for procurement and logistics can be managed with the ERP module available for care business operations. Furthermore, in context of the VW Group, the entire life cycle processes of product manufacturing and development in real time can be effectively managed by delivering high quality products, directly increasing customer satisfaction. Unfortunately, although SAP implementation is good in theory, if implemented incorrectly, the platform can be disastrous for the company, as Volkswagen found in 2000.
In 2000, Volkswagen had trouble delivering spare parts to some car dealers in Germany after turning on SAP AG’s R/3 software—enterprise resource planning software produced by SAP AG and designed to coordinate all the resources, information, and activities needed to complete business processes such as order fulfillment or billing—in its central parts warehouse. The error occurred when the ERP vendor had assigned 13 employees to help Volkswagen fix the problems, which were forcing some owners of VW and Audi automobiles to wait several weeks for needed repairs.
One of the main problems in ERP implementation is customization. The R/3 applications being used at the parts warehouse were heavily customized to fit Volkswagen’s business needs. The system was so complex however that what seemed like a benign change, upset operations downstream. In this case, system problems delayed shipments to customers and caused product inventories to build up. With the proper ERP implementation, however, Volkswagen could have realized the benefits of a more integrated, single, low cost system.
The Future Looking ahead, Volkswagen plans to develop a set of ERP systems by 2015 in order to improve the quality and speed of information sharing between its manufacturing and management departments. The IT processes and organization strategy aims to maximize the effectiveness of the ERP system by giving IT departments a greater say in how they are used by the business. The IT function will also have a say in how staff that operate the ERP systems should be organized.
Volkswagen predicts that by 2011 the strategy will allow it to design new ERP systems and integrate them with business processes much more quickly, giving it an edge over its competitors. “The pressure to reduce production costs and complexity by increasing the efficiency of our IT applications is a key driver for our IT function being able to influence business processes,” said CTO Stefan Ostrowski. According to Ostrowski, the IT function would become a “co-designer” of the business processes.
Steering committees, consisting of both business and IT representatives, would be formed to take joint responsibility for IT budgets. Although companies have seen the errors of their ways in managing ERP systems and have taken small, but important corrective actions for the future, the above examples illustrate the impact that ERP mismanagement may have on the organization in both the short and long-term. As Eric Kimberling, president of Panorama consulting, states: “The amount of ERP implementations that are meeting or exceeding corporate expectations is distressingly low.
To best manage implementations, companies need to plan every detail up front, focus on business operations, secure strong project management and ensure that every key staff member is adequately trained and completely committed to the process. ” 2. Case Study 2: Nestle Nestle, headquartered in Vevey, Switzerland is the largest food and beverage company in the world. With 250,000+ employees, stationed in 500 facilities in over 80 countries, its annual revenue is more than $70 billion.
Despite its large operation, Nestle was faced with the task of deciding “how to operate as a single unit on a global scale. ” With an ERP system in place, Nestle would be able to standardize their business processes, resulting in more efficient operations for the company and greater realized benefits for the customer. IT Situation before ERP Before its ERP Implementation, Nestle ran a very inefficient, high cost operation due to the lack of standard business processes in place. Local units throughout the world conducted business operations based on their own conditions and cultures.
To support this decentralized strategy, Nestle has had 80 different information technology units that ran nearly 900 IBM AS/400 midrange computers, 15 mainframes, and 200 UNIX systems, enabling observers to describe its infrastructure as a veritable Tower of Babel. Nestle’s management had found that allowing these local differences created inefficiencies and extra costs that could prevent the company from competing effectively in electronic commerce. The lack of standard business processes prevented Nestle from, for example, leveraging its worldwide buying power to obtain lower prices for its raw materials.
Even though each factory uses the same global suppliers, each negotiated its own deals and prices. For example, Nestle USA’s brands were paying 29 different prices for “vanilla” to the same vendor due to the fact that each of Nestle’s divisions had assigned a different name to “vanilla. ” In order to resolve the aforementioned inefficiencies, Nestle implemented an SAP’s R/3 ERP software which enables a company to standardize and coordinate its information system and business processes.
While not fully realized company-wide, Nestle is working on extending its enterprise systems to all of its facilities to make its 500 facilities act as a single-minded e-business. Once this project is completed Nestle will able to use sales information from retailers on a global basis to measure the effectiveness of its promotional activities and reduce overstocking and spoilage caused by having products sit around too long on grocery shelves. The experience of Nestle USA illustrates some of the challenges Nestle had to face in implementing enterprise systems. In 1991, Nestle USA reorganized itself and brought together the disparate rands under one umbrella with ultimate control to the parent.
However, the Nestle division headquarters were still dispersed, and each division was still free to make its own business decisions, with all reporting to Nestle headquarters in Glendale, California. The arrival of Jeri Dunn in 1997 as vice president and CIO of the American company sparked change. Dunn had been familiar with Nestle due to her prior association with the company, for in 1991, as associate director for application systems at Nestle-owned Stouffer’s Hotels, she was sent to Switzerland to attend meetings whose intentions were to establish a common methodology.
Later, in 1995, Dunn was promoted to assistant vice president of technology and standards for Nestle SA, and it is during that point in her career when she fully grasped the unequivocal value of establishing common systems for Nestle worldwide. Embarking on such a wholesale change would facilitate group buying which would reduce overall costs. In June 2000, Nestle SA contracted with SAP to purchase and roll out the new version of their software: mySAP. com. The new system standardized the company’s information systems and business processes, and extended SAP’s enterprise software to the Web.
In addition, the new system allowed each Nestle employee to log on to a personal web computing space tailored to his job function. The employee’s job is structured to conform to the “best practices” defined by SAP for 300 work roles. Nestle has created up to five computer centers around the world to run mySAP. com enterprise financial, accounts payable, accounts receivable, planning, production management, supply chain management, and business intelligence software.
The SAP contract would cost $200 million, which was the largest software purchase in ERP history at the time, plus an additional $80 million for installing the software system for the global company. The Implementation Processes: Main Difficulties The major problem that Nestle faced in the United States was that both the CEO and most of the key stakeholders failed to realize how much change they had effected with the SAP contract. Their business processes would change and problems mounted atop previous resolutions. The problem began during the early planning stage of the project when the staff that would be irectly affected by changes was not included in the key stakeholders’ team. By the beginning of 2000 it was obvious that no one wanted to engage the new processes, and that there was resistance to change.
There was no preparation or education on the new processes, and the only hope was to call the project help desk. There was frustration at every level and ultimately no one wanted to take the necessary steps to learn. Turnover among the employees who were to use the Manugistics software to forecast product demand reached 77 percent, while those who stayed found it easier to use their familiar spreadsheets.
The project was halted in June 2000 as Nestle removed the project co-leader leaving Dunn as the sole project leader. Results To resolve their problems, the team focused on the technology aspect and decided to start anew by first determining the business requirements and then a new completion date. The focus was to integrate the existing components and to complete the work on the sales and distribution modules. It was all agreed upon that all employees will be briefed as to what, why, when and how during each step of the new plan of action. The project team created a detailed design and project road map by April 2001.
Nestle named Tom James director of process change, giving him complete responsibility for liaison between the divisions and the Best project. The team even took surveys of the effect of the project on employees and looked for ways to better tackle the issues raised. In addition, more meetings were held with division heads and as a result of the information gathered in this way, James and Dunn determined the manufacturing users were not suited for the forecasted changes and delayed the project an additional six months. The new project seems to be a boon as all of Nestle USA are using the same software and standardized data.
The company had already saved $325 million by spring 2002 and Nestle’s global organization benefitted from standardizing its data and business processes as well. By the end of 2004, about ten percent of Nestle’s global food and beverage business was operating with standard processes, data and systems. Within the next few years most of the company’s food and beverage business will undergo system implementations to bring them up to these standards. 3. The ERP Market ERP software companies are part of an extremely competitive and complex market; therefore, constant change and improvements are vital in order to remain competitive.
After two decades, the raison d’etre of successful ERP software companies have been: 1) Meet and exceed consumer demands and expectations; 2) Invent and enact new technologies; 3) Customer Support; and 5) Remain competitive. The Top Five The five largest ERP software companies are, in no particular order: (1) Oracle (2) SAP (3) Microsoft (4) Infor and (5) Epicor. Oracle is considered one of the biggest and priciest ERP companies and is well-known for its database and hardware solutions.
Its solutions are recognized for their great flexibility coupled with the newest technologies as they claim to have the number one share of the CRM market, while holding the number two share of the ERP market. These solutions offer a variety of tasks related to financial management, Supply Chain Management (SCM) and Customer Relationship Management (CRM). SAP currently has the number one share of the ERP market with customers worldwide in over one hundred countries. They also have CRM solutions and SCM solutions esteemed in high quality, which allows SAP to charge prices at the top end of the market.
Their solutions cover a myriad of industries, which was once astutely focused on Fortune 500 companies. Recently, however, SAP has begun to design their solutions packages to fit mid-sized and smaller companies. Microsoft Corp. is better known for its Windows OS but is surprisingly a “normal” player in the ERP market. It has, however, like many of its successful counterparts, managed to acquire smaller ERP companies in order to boost its offerings to customers and has traditionally catered to mid-sized and small companies. Its prices range from the moderately to low-priced end of the ERP market.
Infor is an ERP company with over 70,000 customers in 100 countries offering a bevy of ERP solutions over a broad range of industries. It is considered the third biggest player of the ERP software companies. Infor has products that encompass the public and private sector, CRM, ERP, finances and expenses, HR functions, SCM, and performance management but essentially competes with Microsoft in the moderately to low-priced product range. Epicor, with 20,000 customers in over 150 countries, has had a long and rich history of quality products.
Its primary focus is ERP software and retail software as over 400 of the world’s leading retailers use Epicor’s solutions. It should be noted that Epicor has recently acquired several smaller companies, indicating that it is still in a growth stage. They are also well-known for their moderate to low-priced products as well as excellent after sales support. Market Trends to Watch Tired legacy code-bases and disastrous implementation projects have become standard in the discussion of the ERP software landscape, which suggests that these issues are here to stay.
Recent growth has accelerated in the market, which has allowed for a few predictions for 2011. ERP vendors are faced with the reality that cloud-based computing solutions for CRM, HR and other functional areas are gaining market share. As a result, it is suggested that many ERP prospects will ask why they, too, are not able to employ a cloud-based platform. The current technologies for cloud-based ERP are PaaS (Platform as a Service) and BPM (Business Process Management), which are able to facilitate the extension and customization of cloud software.
Maintenance of ERP systems is big business, as evidenced by SAP’s large dependency on this type of revenue. However, in light of the $1. 3 billion Oracle verdict in its corporate-theft suit against SAP, third-party maintenance will slow as the litigation process unfolds. As a result, ERP vendors should be forewarned of the impending reduction in maintenance spending. As is the case, with most new technologies, the ERP market will inevitably venture into social media. Social-themed ERP products will present a wealth of opportunities for vendors to capitalize on real-time information, group collaboration and sharing.
The research firm, Gartner, released numbers suggesting that 14. 9 percent more will be spent on enterprise social software in 2010 in comparison to 2009. It is suggested that the figure will jump to 15. 7 percent in 2011 to approximately $769. 2 million. As intimated, acquisition of smaller companies has been the modus operandi of the top ERP market vendors. Infor’s current status was achieved through acquisitions and will not stop in 2011, as it is now led by Charles Phillips, who was pivotal in Oracle’s acquisitions in the last decade.
It has been suggested that Lawson Software (LWSN) will be Infor’s latest acquisition target, and that SAP may delve into social media. 4. Case Study Analysis While Volkswagen and Nestle come from very different industries, the former being the automobile industry and the latter being the food and beverage industry, the challenges faced by them both with regards to business processes were very similar. Both are global conglomerates with several subsidiaries. Issues such as cost, inefficiencies and centralized management plagued both companies which ultimately lead them to both utilize ERP systems.
Using Porter’s five force model, it is clear that using ERP to better their systems would assist Volkswagen and Nestle in thwarting the main five threats to their individual industries. Direct Competition Both companies have several competitors in their respective industries that were likely operating at better efficiencies. Volkswagen has to compete with the top American brands like Ford and General Motors and Japanese brands like Honda and Toyota, which are known in the industry for their efficient assembly lines and advanced business processes. Volkswagen lagged behind, to some extent when it came to end-to-end cycle of business processes.
Nestle also has strong competitors in the likes of PepsiCo and Cadbury that are far reaching global companies. However, unlike the auto industry, Nestle might be in a strong position compared to its competitors or at the least in the same position regarding business process efficiencies. The food and beverage industry in general is known for its lack of sophistication in operations when compared to the auto industry. Nestle might actually be in a position to be leader in its industries if it can withstand the costs of ERP implementation and make use of this application in centralizing its operations on a global scale.
New Market Entrants Volkswagen and Nestle are both top companies in their industries, especially Nestle which is the largest food and beverage company in the world. The threat of new market entrants into the industry is minimal due to the command these two companies have over their respective industries. However, a lack of ERP presence could lead both companies to fall behind their competitors. Lack of efficiencies and resource planning could cut profits and could allow other companies in both industries to assume leading positions over Nestle and Volkswagen. Substitute products and services
Both companies’ main needs were centralized planning, which is a natural need since they are both globally based and operate across many continents. ERP systems would help in better managing their procurement and process planning in order to get products to the customer in an efficient manner. While there is no threat of alternative products or services that could arise due to the lack of ERP, there is a the strong possibility that certain subsidiaries that were operating efficiently already, would create their own individual processes, thus resulting in the mushrooming of several mini-business units, with no cohesiveness.
This was already a problem at Nestle; where (as mentioned in the case section) Nestle USA was paying 29 different prices to the same vendor for vanilla. If ERP is not implemented, the companies risk uncontrolled growth of their subsidiaries which is detrimental from a global perspective when unified growth is imperative for success. Suppliers Suppliers stand to gain the most when ERP is absent. As in the Nestle example above, the same supplier received 29 different prices for the same product from the same customer. Such mistakes can add up to large losses for companies.
In addition, bad ERP could also cause suppliers to terminate their relationship with companies as such inefficiencies on a company’s part could also cause large losses to its vendors. Customers From a customer standpoint, proper ERP implementation is extremely important. As noted in the Volkswagen case, ERP was improperly operated resulting in a back-log of customer parts orders. In all industries, servicing the customer is vital. Causing errors or bad enterprise resource planning could damage customer relations that could ultimately result in losses for the company.
Strengths, Weaknesses, Opportunities and Threats (SWOT) surround any important decision made in the business world. SWOT analysis on both cases reveal that ERP ultimately is a very important piece in managing operations, as both company operate on such a large global scale. Strengths Proper ERP planning has great strengths. It leads to greater efficiencies, better production, greater employee satisfaction, increased supplier and customer satisfaction, and most of all could lead to substantial firm profits. Weaknesses As seen in both case, lack of proper ERP can be a great risk to costs and customer relationships.
In addition, implementing ERP alone is not enough. Managers need to have good foresight. Employees need to be trained appropriately. The ERP systems need to be built with intelligent design so that one small glitch doesn’t lead to a domino effect or magnified problems causing disruption in processes that the ERP was meant to aid in, in the first place. Opportunities ERP allows for great business opportunities. Not only can a firm create efficiencies for its own business model, it can emerge as a leader in its industry, setting benchmarks for its competitors and partners.
Innovative ERP can also set benchmarks in areas outside a company’s own industry. Threats While the opportunities are encouraging, the threats are many. Improper use of ERP can cause great damage to processes and incur high costs, ultimately lowering revenue. Bad ERP can also lead to customer dissatisfaction, which is highly cherished in both the automobile as well as the food and beverage industries. As discussed before, both Nestle and Volkswagen are international companies operating on a global scale.
It is very easy for such companies to fall into operational traps where different subsidiaries in different countries operate on different scales as well as different management cultures. It is not uncommon for some subsidiaries to embrace high operational standards, while other might prefer a more traditional approach. Such inconsistencies can be difficult to control, which ultimately could affect the bottom line for firms. Proper ERP can aid in creating the operational processes of a global firm to run more smoothly and efficiently so that the company can focus on its main business – innovating ideas for building its core business.