Enterprise resource planning

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, not-for-profit 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 broadbased applications. The introduction of an ERP system to replace two or more independent applications eliminates the need for 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 packages commonly referred to as ERP systems include: SAP, Oracle (with the companies it took over), The Sage Group, and the Microsoft Dynamics suite of ERP products.

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.

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 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. 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 SAP,Oracle,PeopleSoft, or Dynamics 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
CRM: 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 with in 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 customising 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.

External links

ABC's of ERP from CIO
ERP Vendor Survey from CAmagazine
ERP Customer Survey from 180 Systems
Doctoral Thesis about ERP from Seville University (in Spanish)

Information technology management | Supply chain management | Production and manufacturing | ERP software

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