Ch 3

1. Ch 3 Defining and Understanding ERP Systems

2. Topics:- 3.1 INTRODUCTION 3.2 ENTERPRISE RESOURCE PLANNING (ERP) DEFINED 3.3 AN OVERVIEW AND RATIONALE FOR ERP SYSTEMS 3.4 BENEFITS OF ERP 3.5 COMMERCIAL ERP SYSTEMS 3.6 THE ERP MARKET — TRENDS AND TECHNOLOGIES 3.7 CONCLUSION

3. 3.1 INTRODUCTION • The historical origin of ERP is in inventory management and control software packages that dictated system design during the 1960s. • In the 1970s, we saw the emergence of Material Requirements Planning (MRP)and Distribution Resource Planning (DRP), which focused on automating all aspects of production master scheduling and centralized inventory planning, respectively.

4. During the 1980s, the misnamed MRPII (Manufacturing Resource Planning) systems emerged to extend MRP’s traditional focus on production processes into other business functions, including order processing, manufacturing, and distribution. • In the early 1990s, MRPII was further extended to cover areas of engineering, finance, human resources, project management, etc.

5. MRPII is a misnomer, as it provided automated solutions to a wide range of business processes, not just those found within a company’s manufacturing and distribution functions.

7. An ERP system differs from the MRPII system, • system requirements, • technical requirements, • graphical user interface, • relational database, • use of fourth-generation language, and • computer-aided software engineering tools in development, • client/server architecture, and • open-systems portability

8. Also, while MRP II has traditionally focused on the planning and scheduling of internal resources, ERP strives to plan and schedule supplier resources as well, based on the dynamic customer demands and schedules.

9. 3.2 ENTERPRISE RESOURCE PLANNING (ERP) DEFINED 1. An ERP system can be thought of as a company-wide Information System that tightly integrates all aspects of a business. 2. It promises • one database, • one application, and • a unified interface across the entire enterprise.

10. 2. ERP systems are highly integrated enterprise-wide standard Information Systems (software packages) that automate core corporate activities (business processes) such as • finance, • human resources, • manufacturing, and • supply and distribution.

11. 3. ERP is an integrated package of software applications designed to automate and integrate a company’s business processes throughout its entire supply chain and to provide immediate access to business information. ERP systems can be thought of as wide-ranging, general-purpose management information systems (MIS)for business.

12. 4. ERP systems, a form of Enterprise-Wide Information System (EWIS), represent sets of business applications that allow for an organization-wide management of operations. ERP systems are seen as optimization and integration tools of business processes across the supply chain (within and beyond organizational boundaries) implemented through modern information management systems.

13. 5. ERP is known as a large-scale, cross-functionally integrated, packaged system. 6. ERP is an integrated comprehensive Enterprise-Wide Information System. 7. ERP systems are software packages that integrate information across the entire organization. This integration removes inconsistencies and enables the organization to attain consolidated reports.

14. 8. ERP is a comprehensive Information Technology package built on the promise that all critical information should be totally integrated in a single information database.

15. 9. ERP links all areas of a company with external suppliers and customers into a tightly integrated system with shared data and visibility. ERP systems are designed to solve the problem of the fragmentation of information over many legacy systems in large business organizations.

16. 10. ERP systems are comprehensive, fully integrated software packages that provide automated support for most of the standard business processes within organizations.

17. 11. An ERP system is a packaged business software system that enables a company to manage the efficient and effective use of resources (materials, human resources, finance, etc.) by providing a total, integrated solution for the organization’s information-processing needs. It supports a process-oriented view of the business as well as business processes standardized across the enterprise.

18. 12. ERP systems allow a company to share common data and practices across the enterprise and produce and access information in a real-time environment. These systems are designed to solve the fragmentation of information in large business organizations and to integrate information flow within a company.

19. 13. ERP plays a critical role in • improving or reengineering outdated infrastructures, • gaining tighter control over internal operations, and • driving down costs.

20. 14. ERP consists of massive computer applications that allow a business to manage all of its operations (finance, requirements planning, human resources, and order fulfillment) on the basis of a single, integrated set of corporate data.

21. 15. ERP systems are large and complex integrated software packages that support standard business activities.

22. ERP can be further defined as a strategic business solution that integrates all business functions, including manufacturing, finance, and distribution. • ERP systems are also being referred to as “enterprise systems”and “enterprise-wide Information Systems”.

23. They are customized, packaged software-based systems that handle the majority of an enterprise’s information systems requirements. • They provide a software architecture that facilitates the flow of information among all functions within an enterprise.

24. As a result, ERP systems are traditionally thought of as • transaction-oriented processing systemsor • transactional backbones, • they are continually redefined based on the growing needs of organizations.

25. 3.3 AN OVERVIEW AND RATIONALE FOR ERP SYSTEMS • ERP systems use a modular structure (i.e., multimodule) to support a broad spectrum of key operational areas of the organization. • The multiple core applications comprising an ERP system(a standard ERP framework) are themselves built from smaller software modules that perform specific business processes within a given functional area.

26. For example, a manufacturing application normally includes modules that permit sales and inventory tracking, forecasting raw-material requirements, and planning plant maintenance.

27. Typically, an ERP system is integrated across the enterprise with a common, relational database, storing data on every function. • They are widely acknowledged as having the potential to radically change existing businesses by bringing improvements in efficiency, effectiveness, and the implementation of optimized business processese.

28. One of the key reasons why managers have sought to proceed with difficult ERP projects is to end the fragmentation of current systems, to allow a process of standardization, to give more visibility on data across the entire corporation, and, in some cases, to obtain competitive advantage. • A seamless integration is essential to provide visibility and consistency across the enterprise.

29. ERP, in its embryonic stages, catered specifically for manufacturing and production systems, while providing weak support in “less data-intensive” areas, such as supply chain planning, customer management, marketing, and sales.

30. However, enterprise systems expanded to include “back-office” functions (such as operations, logistics, finance, and human resources) and “nontransaction-based systems” or “front-office” functions (such as sales, marketing, and customer service), as integral components of ERP systems.

31. These inclusions result from the emergence of Supply Chain Optimization (SCO), or SCMand CRM strategies and systems. • “beyond the corporate walls’ integration” as extreme integration • in this approach to integration, “SCM can be viewed as the brain and ERP as the strong body”.

32. While the names and numbers of modules in an ERP system provided by various software vendors may differ, a typical system integrates all these functions by allowing its modules to share and transfer information freely and centralizing all information in a single database accessible by all modules.

34. ERP packages force an organization to implement a proven set of business processes, which means that there is no need for the organization to reinvent the wheel, because ERP packages encapsulate reusable “best practice” business processes. • As state-of-the-art technologies and processes move forward, purchasers of packaged software move with them.

35. ERP packages give the foundation to the business, and thus, management can concentrate on “grabbing market share”. • Kalakota and Robinson (1999) stressed that the popularity of ERP systems stemmed from the fact that they appear to solve the challenges posed by portfolios of “disconnected, uncoordinated applications that have outlived their usefulness.”

36. These legacy systems provide one of the biggest drags on business productivity and performance, because maintaining many different computer systems leads to enormous costs.

37. These include direct costs, such as • rationalization, • redundancy, • rekeying, • reformatting, • updating, • debugging, • deleting, etc., and,

38. more importantly, indirect costs, such as • a company’s purchasing and sales system that cannot communicate with its production/scheduling systems, so that both its manufacturing productivity and customer service suffer.

39. Management may be left to make vital decisions based on information from incompatible systems, thereby relying on instinct rather than on sound business rationale.

40. MacVittie (2001) identified three goals behind the implementation of an ERP system: • Integration of financial data: When managers depend on their function’s or unit’s perspective of financial data, conflicting interpretations will arise (e.g., Finance will have one set of sales figures, while Marketing will have another). • Using an ERP system provides a single version of sales.

41. Standardization of manufacturing processes: • A manufacturing company that has grown through acquisitions is likely to find that different units use different methods to build the same product. • Standardizing processes and using an integrated computer system can save time, increase productivity, and reduce head count. • It may also enable collaborating and scheduling production across different units and sites.

42. Standardization of human resource information: • This is especially useful in a multisite company. • A unified method for tracking employee time and communicating benefits is extremely beneficial, because it promotes a sense of fairness among the workforce as well as streamlines the company as a whole.

44. Some of the core ERP modules found in the successful ERP systems are the following: • • Accounting management • • Financial management • • Manufacturing management • • Production management • • Transportation management • • Sales & distribution management • • Human resources management • • Supply chain management • • Customer relationship management • • E-Business

45. 3.4 BENEFITS OF ERP • Clearly, an ERP system, as defined earlier, and one that is properly implemented, can achieve unprecedented benefits for business computing (Watson & Schneider, 1999). • However, some companies have difficulty in identifying any measurable benefits or business process improvements(James & Wolf, 2000; Donovan, 2001).

46. In a recent product brochure titled “Optimize Your ERP Investment” by Cap Gemini Ernst & Young (CGEY), promoting their E³ solution, CGEY revealed the following: • …most companies have high expectations of their ERP implementations but some of these fail to deliver on all the benefits that were promised. • In fact, these ERP implementations experience high dissatisfaction levels, which is evidenced by many operational glitches and limitations.

47. Furthermore, they state that: • “in effect, the ERP implementation gives you sight of business potential — but may not deliver much of the expected value.” • As a result, they propose that: • “E³ can help you detect and correct ERP-related lost value in your business and deliver those benefits you expected in the first place.”

49. Rutherford (2001) observed that only around 10% to 15% of ERP implementations deliver the anticipated benefits. • According to James and Wolf (2000), companies that were able to identify benefits thought they could have been realized without the implemented ERP system.

50. As stated in James and Wolf (2000): “80 percent of the benefit that we get from our ERP system comes from changes, such as inventory optimization, which we could have achieved without making the IT investment.” • Therefore, ERP systems can be considered catalysts for radical business change that results in significant performance improvement (i.e., business process reengineering) (Watson & Schneider, 1999).