Enterprise resource planning

Enterprise resource planning (ERP) is a term usually used in conjunction with ERP software or an ERP system which is intended to manage all the information and functions of a business or company from shared data stores. It is a commercial software package that promotes seamless integration of all the information flowing through a company.

An ERP system typically has modular hardware and software units and "services" that communicate on a local area network. The modular design allows a business to add or reconfigure modules (perhaps from different vendors) while preserving data integrity in one shared database that may be centralized or distributed.

Origin of the term

The initials ERP originated as an extension of MRP (Material Requirements Planning; later manufacturing resource planning) and CIM (Computer Integrated Manufacturing). It was introduced by research and analysis firm Gartner in 1990. ERP systems now attempt to cover all core functions of an enterprise, regardless of the organization's business or charter. These systems can now be found in non-manufacturing businesses, non-profit organizations and governments.

To be considered an ERP system, a software package must provide the function of at least two systems. For example, a software package that provides both payroll and accounting functions could technically be considered an ERP software package.

Examples of modules in an ERP which formerly would have been stand-alone applications include: Product lifecycle management, Supply chain management (e.g. Purchasing, Manufacturing and Distribution), Warehouse Management, Customer Relationship Management (CRM), Sales Order Processing, Online Sales, Financials, Human Resources, and Decision Support System.

This is common to retailers, where even a mid-sized retailer will have a discrete Point-of-Sale (POS) product and financials application, then a series of specialized applications to handle business requirements such as warehouse management, staff rostering, merchandising and logistics.

Ideally, ERP delivers a single database that contains all data for the various software modules that typically address areas such as:

Manufacturing

Engineering, bills of material, scheduling, capacity, workflow management, quality control, cost management, manufacturing process, manufacturing projects, manufacturing flow

Supply chain management

Order to cash, inventory, order entry, purchasing, product configurator, supply chain planning, supplier scheduling, inspection of goods, claim processing, commission calculation

Financials

General ledger, cash management, accounts payable, accounts receivable, fixed assets

Project management

Costing, billing, time and expense, performance units, activity management

Human resources

Human resources, payroll, training, time and attendance, rostering, benefits

Customer relationship management

Sales and marketing, commissions, service, customer contact and call center support

Data services

various "self-service" interfaces for customers, suppliers, and/or employees

Access control

management of user privileges for various processes

The term "Enterprise resource planning" originally derived from manufacturing resource planning (MRP II) that followed material requirements planning (MRP). MRP evolved into ERP when "routings" became a 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. ERP software can aid in the control of many business activities, including sales, marketing, delivery, billing, production, inventory management, quality management, and human resource management.

ERP systems saw a large boost in sales in the 1990s as companies faced the Y2K problem (real or imagined) in their "legacy" systems. Many companies took this opportunity to replace such information systems with ERP systems. This rapid growth in sales was followed by a slump in 1999, at which time most companies had already implemented their Y2K solution.

ERP systems 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.

ERP systems are cross-functional and enterprise-wide. All functional departments that are involved in operations or production are integrated in one system. In addition to areas such as manufacturing, warehousing, logistics, and information technology, this typically includes accounting, human resources, marketing and strategic management.

ERP II, a term coined in the early 2000s, is often used to describe what would be the next generation of ERP software. This new generation of software is web-based and allows both employees and external resources (such as suppliers and customers) real-time access to the system's data.

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.

Best practices are incorporated into most ERP vendor's software packages. When implementing an ERP system, organizations can choose between customizing the software or modifying their business processes to the "best practice" function delivered in the "out-of-the-box" version of the software.

Prior to ERP, software was developed to fit individual processes of an individual business. Due to the complexities of most ERP systems and the negative consequences of a failed ERP implementation, most vendors have included "Best Practices" into their software. These "Best Practices" are what the Vendor deems as the most efficient way to carry out a particular business process in an Integrated Enterprise-Wide system. A study conducted by Ludwigshafen University of Applied Science surveyed 192 companies and concluded that companies which implemented industry best practices decreased mission-critical project tasks such as configuration, documentation, testing and training. In addition, the use of best practices reduced over risk by 71% when compared to other software implementations.

The use of best practices can make complying with requirements such as IFRS, Sarbanes-Oxley, or Basel II easier. They can also help where the process is a commodity such as electronic funds transfer. This is because the procedure of capturing and reporting legislative or commodity content can be readily codified within the ERP software, and then replicated with confidence across multiple businesses who have the same business requirement.

Implementation

Businesses have a wide scope of applications and processes throughout their functional units; producing ERP software systems that are typically complex and usually impose significant changes on staff work practices. Implementing ERP software is typically too complex for "in-house" skill, so it is desirable and highly advised to hire outside consultants who are professionally trained to implement these systems. This is typically the most cost effective way. There are three types of services that may be employed for - Consulting, Customization, Support. The length of time to implement an ERP system depends on the size of the business, the number of modules, the extent of customization, the scope of the change and the willingness of the customer to take ownership for the project. ERP systems are modular, so they don't all need be implemented at once. It can be divided into various stages, or phase-ins. The typical project is about 14 months and requires around 150 consultants. A small project (e.g., a company of less than 100 staff) can be planned and delivered within 3–9 months; however, a large, multi-site or multi-country implementation can take years. The length of the implementations is closely tied to the amount of customization desired.

To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. These firms typically provide three areas of professional services: consulting; customization; and support. The client organization can also employ independent program management, business analysis, change management, and UAT specialists to ensure their business requirements remain a priority during implementation.

Data migration is one of the most important activities in determining the success of an ERP implementation. Since many decisions must be made before migration, a significant amount of planning must occur. Unfortunately, data migration is the last activity before the production phase of an ERP implementation, and therefore receives minimal attention due to time constraints. The following are steps of a data migration strategy that can help with the success of an ERP implementation:

1. Identifying the data to be migrated
2. Determining the timing of data migration
3. Generating the data templates
4. Freezing the tools for data migration
5. Deciding on migration related setups
6. Deciding on data archiving

Process preparation

ERP vendors have designed their systems around standard business processes, based upon best business practices. Different vendor(s) have different types of processes but they are all of a standard, modular nature. Firms that want to implement ERP systems are consequently forced to adapt their organizations to standardized processes as opposed to adapting the ERP package to the existing processes. Neglecting to map current business processes prior to starting ERP implementation is a main reason for failure of ERP projects. It is therefore crucial that organizations perform a thorough business process analysis before selecting an ERP vendor and setting off on the implementation track. This analysis should map out all present operational processes, enabling selection of an ERP vendor whose standard modules are most closely aligned with the established organization. Redesign can then be implemented to achieve further process congruence. Research indicates that the risk of business process mismatch is decreased by:

• linking each current organizational process to the organization's strategy;
• analyzing the effectiveness of each process in light of its current related business capability;
• understanding the automated solutions currently implemented.

ERP implementation is considerably more difficult (and politically charged) in organizations structured into nearly independent business units, each responsible for their own profit and loss, because they will each have different processes, business rules, data semantics, authorization hierarchies and decision centers. Solutions include requirements coordination negotiated by local change management professionals or, if this is not possible, federated implementation using loosely integrated instances (e.g. linked via Master Data Management) specifically configured and/or customized to meet local needs.

A disadvantage usually attributed to ERP is that business process redesign to fit the standardized ERP modules can lead to a loss of competitive advantage. While documented cases exist where this has indeed materialized, other cases show that following thorough process preparation ERP systems can actually increase sustainable competitive advantage.

Configuration

Configuring an ERP system is largely a matter of balancing the way you want the system to work with the way the system lets you work. Begin by deciding which modules to install, then adjust the system using configuration tables to achieve the best possible fit in working with your company’s processes.

Modules — Most systems are modular simply for the flexibility of implementing some functions but not others. Some common modules, such as finance and accounting are adopted by nearly all companies implementing enterprise systems; others however such as human resource management are not needed by some companies and therefore not adopted. A service company for example will not likely need a module for manufacturing. Other times companies will not adopt a module because they already have their own proprietary system they believe to be superior. Generally speaking the greater number of modules selected, the greater the integration benefits, but also the increase in costs, risks and changes involved.

Configuration Tables – A configuration table enables a company to tailor a particular aspect of the system to the way it chooses to do business. For example, an organization can select the type of inventory accounting – FIFO or LIFO – it will employ or whether it wants to recognize revenue by geographical unit, product line, or distribution channel.

So what happens when the options the system allows just aren't good enough? At this point a company has two choices, both of which are not ideal. It can re-write some of the enterprise system’s code, or it can continue to use an existing system and build interfaces between it and the new enterprise system. Both options will add time and cost to the implementation process. Additionally they can dilute the system’s integration benefits. The more customized the system becomes the less possible seamless communication between suppliers and customers.

Consulting services

Many organizations do not have sufficient internal skills to implement an ERP project. This results in many organizations offering consulting services for ERP implementation. Typically, a consulting team is responsible for the entire ERP implementation including:

1. selecting
2. planning
3. training
4. testing
5. implementation
6. delivery

of any customized modules. Examples of customization includes creating processes and reports for compliance, additional product training; creation of process triggers and workflow; specialist advice to improve how the ERP is used in the business; system optimization; and assistance writing reports, complex data extracts or implementing Business Intelligence.

For most mid-sized companies, the cost of the implementation will range from around the list price of the ERP user licenses to up to twice this amount (depending on the level of customization required). Large companies, and especially those with multiple sites or countries, will often spend considerably more on the implementation than the cost of the user licenses—three to five times more is not uncommon for a multi-site implementation.

Unlike most single-purpose applications, ERP packages have historically included full source code and shipped with vendor-supported team IDEs for customizing and extending the delivered code. During the early years of ERP the guarantee of mature tools and support for extensive customization was an important sales argument when a potential customer was considering developing their own unique solution in-house, or assembling a cross-functional solution by integrating multiple "best of breed" applications.

"Core system" customization vs configuration

Increasingly, ERP vendors have tried to reduce the need for customization by providing built-in "configuration" tools to address most customers' needs for changing how the out-of-the-box core system works. Key differences between customization and configuration include:

• Customization is always optional, whereas some degree of configuration (e.g., setting up cost/profit centre structures, organisational trees, purchase approval rules, etc.) may be needed before the software will work at all.
• Configuration is available to all customers, whereas customization allows individual customer to implement proprietary "market-beating" processes.
• Configuration changes tend to be recorded as entries in vendor-supplied data tables, whereas customization usually requires some element of programming and/or changes to table structures or views.
• The effect of configuration changes on the performance of the system is relatively predictable and is largely the responsibility of the ERP vendor. The effect of customization is unpredictable and may require time-consuming stress testing by the implementation team.
• Configuration changes are almost always guaranteed to survive upgrades to new software versions. Some customizations (e.g. code that uses pre-defined "hooks" that are called before/after displaying data screens) will survive upgrades, though they will still need to be re-tested. More extensive customizations (e.g. those involving changes to fundamental data structures) will be overwritten during upgrades and must be re-implemented manually.

By this analysis, customizing an ERP package can be unexpectedly expensive and complicated, and tends to delay delivery of the obvious benefits of an integrated system. Nevertheless, customizing an ERP suite gives the scope to implement secret recipes for excellence in specific areas while ensuring that industry best practices are achieved in less sensitive areas.

Extensions

In this context, "Extensions" refers to ways that an ERP environment can be "extended" (supplemented) with third-party programs. It is technically easy to expose most ERP transactions to outside programs that do other things, e.g.:

• archiving, reporting and republishing (these are easiest to achieve, because they mainly address static data);
• performing transactional data captures, e.g. using scanners, tills or RFIDs (also relatively easy because they touch existing data);

However, because ERP applications typically contain sophisticated rules that control how data can be created or changed, some such functions can be very difficult to implement.

Advantages

In the absence of an ERP system, a large manufacturer may find itself with many software applications that cannot communicate or interface effectively with one another. Tasks that need to interface with one another may involve:

• ERP systems connect the necessary software in order for accurate forecasting to be done. This allows inventory levels to be kept at maximum efficiency and the company to be more profitable.
• Integration among different functional areas to ensure proper communication, productivity and efficiency
• Design engineering (how to best make the product)
• Order tracking, from acceptance through fulfillment
• The revenue cycle, from invoice through cash receipt
• Managing inter-dependencies of complex processes bill of materials
• Tracking the three-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 at a granular level.

ERP Systems centralize the data in one place. Benefits of this include:

• Eliminates the problem of synchronizing changes between multiple systems - consolidation of finance, marketing and sales, human resource, and manufacturing applications
• Permits control of business processes that cross functional boundaries
• Provides top-down view of the enterprise (no "islands of information"), real time information is available to management anywhere, anytime to make proper decisions.
• Reduces the risk of loss of sensitive data by consolidating multiple permissions and security models into a single structure.
• Shorten production leadtime and delivery time
• Facilitating business learning, empowering, and building common visions

Some security features are included within an ERP system to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data-tampering scenario, for example, might involve a disgruntled employee intentionally modifying prices to below-the-breakeven point in order to attempt to interfere with the company's profit or other sabotage. ERP systems typically provide functionality for implementing internal controls to prevent actions of this kind. ERP vendors are also moving toward better integration with other kinds of information security tools.

Disadvantages

Problems with ERP systems are mainly due to inadequate investment in ongoing training for the involved IT personnel - including those implementing and testing changes - as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and the ways in which it is used.

Disadvantages

• Customization of the ERP software is limited.
• 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 (This has led to a new category of "ERP light" solutions)
• ERPs are often seen as too rigid and too 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.
• 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.
• Some large organizations may have multiple departments with separate, independent resources, missions, chains-of-command, etc, and consolidation into a single enterprise may yield limited benefits.

See also

• List of ERP software packages
• List of ERP vendors
• Accounting software
• Advanced Planning & Scheduling
• APICS
• Bill of materials (BOM)
• Business process management
• Configurable BOM (CBOM)
• Data migration
• Enterprise Feedback Management (EFM)
• Enterprise system
• E-procurement
• ERP modeling
• ERP for IT
• ERP System Selection Methodology
• Information technology management
• List of project management software
• Management information system
• Manufacturing Operations Management
• Material requirements planning (material resource planning)
• Modular BOM (MBOM)
• Order to cash
• Service Management
• Software as a Service
• Supply chain management
• Warehouse management system
• Web management system
• customer relationship management

Further reading

• Grant, David (2006). "The false promise of technological determinism: the case of enterprise resource planning systems". New Technology, Work & Employment. 21 (1): 2–15. doi:10.1111/j.1468-005X.2006.00159.x. {{cite journal}}: Unknown parameter |coauthors= ignored (|author= suggested) (help); Unknown parameter |month= ignored (help)
• Loh, Tee Chiat (2004). "Critical elements for a successful ERP implementation in SMEs". International Journal of Production Research. 42 (17): 3433–3455. doi:10.1080/00207540410001671679. {{cite journal}}: Unknown parameter |coauthors= ignored (|author= suggested) (help); Unknown parameter |month= ignored (help)
• Head, Simon (2005). The New Ruthless Economy. Work and Power in the Digital Age. Oxford UP. ISBN 0-19-517983-8.
• Waldner, Jean-Baptiste (1992). Principles of Computer Integrated Manufacturing. Chichester: John Wiley & Sons Ltd. ISBN 047193450X.
• Waldner, Jean-Baptiste (1990). Les nouvelles perspectives de la production. Paris: DUNOD BORDAS. ISBN 9782040198206.
• Lequeux, Jean-Louis (2008). Manager avec les ERP, Architecture Orientée Services (SOA). Paris: EDITIONS D'ORGANISATION. ISBN 978-2-212-54094-9.
• CIO Magazine's ABCs of ERP
• History Of ERP
• Clemons, E.K. (1986). "IS for Sustainable Competitive Advantage". Information & Management. 11 (3): 131–136. doi:10.1016/0378-7206(86)90010-8. {{cite journal}}: Cite has empty unknown parameter: |month= (help); Unknown parameter |coauthors= ignored (|author= suggested) (help)