Enterprise Resource Planning (ERP)
Enterprise Resource Planning systems (ERPs) integrate (or
attempt to integrate) all data and processes of an organization into a
single unified system. A typical ERP system will use multiple components
of computer software and hardware to achieve the integration. A key
ingredient of most ERP systems is the use of a single, unified database
to store data for the various system modules.
The term ERP originally implied systems designed to plan the utilization
of enterprise-wide resources. Although the acronym ERP originated in the
manufacturing environment, today's use of the term ERP systems has much
broader scope. ERP systems typically attempt to cover all basic
functions of an organization, regardless of the organization's business
or charter. Business, non-profit organizations, non governmental
organizations, governments, and other large entities utilize ERP
systems.
Additionally, it may be noted that to be considered an ERP system, a
software package generally would only need to provide functionality in a
single package that would normally be covered by two or more systems.
Technically, a software package that provides both Payroll and
Accounting functions (such as QuickBooks) would be considered an ERP
software package.
However, the term is typically reserved for larger, more broadly based
applications. The introduction of an ERP system to replace two or more
independent applications eliminates the need for external interfaces
previously required between systems, and provides additional benefits
that range from standardization and lower maintenance (one system
instead of two or more) to easier and/or greater reporting capabilities
(as all data is typically kept in one database).
Examples of modules in an ERP which formerly would have been stand-alone
applications include: Manufacturing, Supply Chain, Financials, CRM,
Human Resources, and Warehouse Management.
ERP Overview
Overview
Looking more closely at ERP systems, a key factor is the integration of data
from all aspects of an organization. To accomplish this, an ERP system typically
runs on a single database instance with multiple software modules providing the
various business functions of an organization.
Notably, some organizations choose to only implement portions of an ERP system
and develop an external interface to other ERP or stand-alone systems for their
other application needs. For instance, the PeopleSoft HRMS and Financials
systems are generally considered better than SAP's HRMS solution. And SAP's
manufacturing and CRM systems are generally considered better than PeopleSoft's
equivalents[citation needed]. So an organization large enough to justify the
purchase of an ERP system, may choose to purchase the PeopleSoft HRMS and
Financials modules from Oracle, and their remaining applications from SAP.
An example of a complete ERP implementation is very rare indeed. Organizations
large enough to justify ERP purchases typically have specialized needs that are
not met by any one ERP software vendor. This requires either heavy
customization, use of different modules from different vendors, or extensive
re-engineering. In an ideal world, an example of a complete ERP implementation
would be a manufacturing company running the same package for all relevant
systems. A single database would contain all data for the software modules,
which would include:
Manufacturing
Engineering, Bills of Material, Scheduling, Capacity, Workflow Management,
Quality Control, Cost Management, Manufacturing Process, Manufacturing Projects,
Manufacturing Flow
Supply Chain Management
Inventory, Order Entry, Purchasing, Product Configurator, Supply Chain Planning,
Supplier Scheduling
Financials
General Ledger, Cash Management, Accounts Payable, Accounts Receivable, Fixed
Assets
Projects
Costing, Billing, Time and Expense, Activity Management
Human Resources
Human Resources, Payroll, Training, Time & Attendance, Benefits
Customer Relationship Management
Sales and Marketing, Commissions, Service, Customer Contact and Call Center
support
Data Warehouse
and various Self-Service interfaces for Customers, Suppliers, and Employees
Enterprise Resource Planning is a term originally derived from manufacturing
resource planning (MRP II) that followed material requirements planning (MRP).
MRP evolved into ERP when "routings" became major part of the software
architecture and a company's capacity planning activity also became a part of
the standard software activity. ERP systems typically handle the manufacturing,
logistics, distribution, inventory, shipping, invoicing, and accounting for a
company. Enterprise Resource Planning or ERP software can aid in the control of
many business activities, like sales, marketing, delivery, billing, production,
inventory management, quality management, and human resources management.
ERPs are often incorrectly called back office systems indicating that customers
and the general public are not directly involved. This is contrasted with front
office systems like customer relationship management (CRM) systems that deal
directly with the customers, or the eBusiness systems such as eCommerce,
eGovernment, eTelecom, and eFinance, or supplier relationship management (SRM)
systems.
ERPs are cross-functional and enterprise wide. All functional departments that
are involved in operations or production are integrated in one system. In
addition to manufacturing, warehousing, logistics, and Information Technology,
this would include accounting, human resources, marketing, and strategic
management.
ERP II means open ERP architecture of components. The older, monolithic ERP
systems became component oriented.
EAS - Enterprise Application Suite is a new name for formerly developed ERP
systems which include (almost) all segments of business, using ordinary Internet
browsers as thin clients.
Before
Prior to the concept of ERP systems, departments within an organization would
have their own computer systems. For example, the Human Resources (HR)
department, the Payroll (PR) department, and the Financials department. The HR
computer system (Often called HRMS or HRIS) would typically contain information
on the department, reporting structure, and personal details of employees. The
PR department would typically calculate and store paycheck information. The
Financials department would typically store financial transactions for the
organization. Each system would have to rely on a set of common data to
communicate with each other. For the HRIS to send salary information to the PR
system, an employee number would need to be assigned and remain static between
the two systems to accurately identify an employee. The Financials system was
not interested in the employee level data, but only the payouts made by the PR
systems, such as the Tax payments to various authorities, payments for employee
benefits to providers, and so on. This provided complications. For instance, a
person could not be paid in the Payroll system without an employee number.
After
ERP software, among other things, combined the data of formerly disparate
applications. This made the worry of keeping employee numbers in synchronization
across multiple systems disappear. It standardised and reduced the number of
software specialties required within larger organizations. It enabled reporting
that spanned multiple systems much easier. And it allowed for the development of
higher level analysis functions enabling larger organizations to identify trends
within the organization and make appropriate adjustments more quickly.
Best Practices
Best Practices were also a benefit of implementing an ERP system. When
implementing an ERP system, organizations essentially had to choose between
customizing the software or modifying their business processes to the "Best
Practice" functionality delivered in the vanilla version of the software.
Implementation
Because of their wide scope of application within the firm, ERP software systems
rely on some of the largest bodies of software ever written. Implementing such a
large and complex software system in a company used to involve an army of
analysts, programmers, and users. This was, at least, until the development of
the Internet allowed outside consultants to gain access to company computers in
order to install standard updates. ERP implementation, without professional
help, can be a very expensive project for bigger companies, especially
transnationals. Companies specializing in ERP implementation, however, can
expedite this process and can complete the task in under six months with solid
pilot testing.
Enterprise resource planning systems are often closely tied to supply chain
management and logistics automation systems. Supply chain management software
can extend the ERP system to include links with suppliers.
To implement ERP systems, companies often seek the help of an ERP vendor or of
third-party consulting companies. Consulting in ERP involves three levels,
namely top level systems architecture, business process consulting (primarily
re-engineering) and technical consulting (primarily programming and tool
configuration activity). A systems architect designs the overall dataflow for
the enterprise including the future dataflow plan. A business consultant studies
an organization's current business processes and matches them to the
corresponding processes in the ERP system, thus 'configuring' the ERP system to
the organization's needs. Technical consulting often involves programming. Most
ERP vendors allow modification of their software to suit the business needs of
their customer.
Customizing an ERP package can be very expensive and complicated, because many
ERP packages are not designed to support customization, so most businesses
implement the best practices embedded in the acquired ERP system. Some ERP
packages are very generic in their reports and inquiries, such that
customization is expected in every implementation. It is important to recognize
that for these packages, it makes more sense to buy third party reporting
packages that interface well to particular ERP, than to reinvent what tens of
thousands of other clients of that same ERP have needed to develop.
Today there are also web-based ERP systems. Companies would deploy web-based ERP
because it requires no client side installation, and is cross-platform and
maintained centrally. As long as you have an Internet connection, or a network
connection to a system installed on the LAN, you can access web-based ERPs
through typical web browsers.
Advantages
In the absence of an ERP system, a large manufacturer may find itself with many
software applications that do not talk to each other and do not effectively
interface. Tasks that need to interface with one another may involve:
* design engineering (how best to make the product)
* order tracking from acceptance through fulfillment
* the revenue cycle from invoice through cash receipt
* managing interdependencies of complex Bill of Materials
* tracking the 3-way match between Purchase orders (what was ordered), Inventory
receipts (what arrived), and Costing (what the vendor invoiced)
* the Accounting for all of these tasks, tracking the Revenue, Cost and Profit
on a granular level.
Change how a product is made, in the engineering details, and that is how it
will now be made. Effectivity dates can be used to control when the switch over
will occur from an old version to the next one, both the date that some
ingredients go into effect, and date that some are discontinued.Part of the
change can include labeling to identify version numbers.
Computer security is included within an ERP, to protect against both outsider
crime, such as industrial espionage and insider crime, such as embezzlement. A
data tampering scenario might involve a terrorist altering a Bill of Materials
so as to put poison in food products, or other sabotage. ERP security helps to
prevent abuse as well.
There are concepts of Front office (how the company interacts with customers),
which includes CRM or Customer relationship management; Back end (internal
workings of the company to fulfill customer needs), which includes quality
control, to make sure there are no problems not fixed, in the end products;
Supply chain (interacting with suppliers and transportation infrastructure). All
of these can be integrated through an ERP, although some systems have gaps in
comprehensiveness and effectiveness. Without an ERP that integrates all these,
it can be quite complicated for a manufacturer to handle.
Disadvantages
Many of the problems that organizations have with ERP systems are due to the
inadequate level of investment in ongoing training for all personnel involved,
including those implementing and testing changes, as well as a lack of corporate
policies protecting the integrity of the data held in the ERP systems and how it
is used.
Limitations of ERP include:
* Success depends on the skill and experience of the workforce, including
training about how to make the system work correctly. Many companies cut costs
by cutting training budgets. Privately owned small enterprises are often
undercapitalized, meaning their ERP system is often operated by personnel with
inadequate education in ERP in general, such as APICS foundations, and in the
particular ERP vendor package being used.
* Personnel turnover; companies can employ new managers lacking education in the
company's ERP system, proposing changes in business practices that are out of
synchronization with the best utilization of the company's selected ERP.
* Customization of the ERP software is limited. Some customization may involve
changing of the ERP software structure which is usually not allowed.
* Re-engineering of business processes to fit the "industry standard" prescribed
by the ERP system may lead to a loss of competitive advantage.
* ERP systems can be very expensive to install.
* ERP vendors can charge sums of money for annual license renewal that is
unrelated to the size of the company using the ERP or its profitability.
* Technical support personnel often give replies to callers that are
inappropriate for the caller's corporate structure. Computer security concerns
arise, for example when telling a non-programmer how to change a database on the
fly, at a company that requires an audit trail of changes so as to meet some
regulatory standards.
* ERPs are often seen as too rigid, and difficult to adapt to the specific
workflow and business process of some companies - this is cited as one of the
main causes of their failure.
* Systems can be difficult to use.
* The system can suffer from the "weakest link" problem - an inefficiency in one
department or at one of the partners may affect other participants.
* Many of the integrated links need high accuracy in other applications to work
effectively. A company can achieve minimum standards, then over time "dirty
data" will reduce the reliability of some applications.
* Once a system is established, switching costs are very high for any one of the
partners (reducing flexibility and strategic control at the corporate level).
* The blurring of company boundaries can cause problems in accountability, lines
of responsibility, and employee morale.
* Resistance in sharing sensitive internal information between departments can
reduce the effectiveness of the software.
* There are frequent compatibility problems with the various legacy systems of
the partners.
* The system may be over-engineered relative to the actual needs of the
customer.