Enterprise resource planning

Diagram showing some typical ERP modules

Enterprise resource planning (ERP) is the integrated management of core business processes, often in real-time and mediated by software and technology. These business activities can include:

ERP is usually referred to as category of business-management software—typically a suite of integrated applications—that an organization can use to collect, store, manage and interpret data from these many business activities.

ERP provides an integrated and continuously updated view of core business processes using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data.[1] ERP facilitates information flow between all business functions and manages connections to outside stakeholders.[2]

Enterprise system software is a multi-billion-dollar industry that produces components supporting a variety of business functions. IT investments have become the largest category of capital expenditure in United States-based businesses over the past decade. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.[3]

The ERP system integrates varied organizational systems and facilitates error-free transactions and production, thereby enhancing the organization's efficiency. However, developing an ERP system differs from traditional system development.[4] ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository.[5]

Origin

The Gartner Group first used the acronym ERP in the 1990s,[6][7] where it was seen to extend the capabilities of material requirements planning (MRP), and the later manufacturing resource planning (MRP II),[8][9] as well as computer-integrated manufacturing. Without replacing these terms, ERP came to represent a larger whole that reflected the evolution of application integration beyond manufacturing.[10]

Not all ERP packages developed from a manufacturing core; ERP vendors variously began assembling their packages with accounting, maintenance, and human-resource components. By the mid-1990s ERP systems addressed all core enterprise functions. Governments and non–profit organizations also began to use ERP systems.[11]

Expansion

ERP systems experienced rapid growth in the 1990s. Because of the year 2000 problem and the introduction of the euro that disrupted legacy systems, many companies took the opportunity to replace their old systems with ERP.[12]

ERP systems initially focused on automating back office functions that did not directly affect customers and the public. Front office functions, such as customer relationship management (CRM), dealt directly with customers, or e-business systems such as e-commerce, e-government, e-telecom, and e-finance—or supplier relationship management (SRM) became integrated later, when the Internet simplified communicating with external parties.

"ERP II" was coined in 2000 in an article by Gartner Publications entitled ERP Is Dead—Long Live ERP II.[13] It describes web–based software that provides real–time access to ERP systems to employees and partners (such as suppliers and customers). The ERP II role expands traditional ERP resource optimization and transaction processing. Rather than just manage buying, selling, etc.—ERP II leverages information in the resources under its management to help the enterprise collaborate with other enterprises.[14] ERP II is more flexible than the first generation ERP. Rather than confine ERP system capabilities within the organization, it goes beyond the corporate walls to interact with other systems. Enterprise application suite is an alternate name for such systems. ERP II systems are typically used to enable collaborative initiatives such as supply chain management (SCM), customer relationship management (CRM), and business intelligence (BI) among business partner organizations through the use of various e-business technologies.[15][16]

Developers now make more effort to integrate mobile devices with the ERP system. ERP vendors are extending ERP to these devices, along with other business applications. Technical stakes of modern ERP concern integration—hardware, applications, networking, supply chains. ERP now covers more functions and roles—including decision making, stakeholders' relationships, standardization, transparency, globalization, etc.[17]

Characteristics

ERP systems typically include the following characteristics:

Functional areas

An ERP system covers the following common functional areas. In many ERP systems these are called and grouped together as ERP modules:

GRP

(Government resource planning) (GRP) is ERP for public sector, and an integrated office automation system for government bodies.[19] The software structure, modularization, core algorithms and main interfaces do not differ from other ERPs, and ERP software suppliers manage to adapt its systems to government agencies.[20][21][22]

Both system implementations, in private and public organizations, are adopted to improve productivity and overall business performance in organizations, but comparisons (private vs public) of implementations shows that the main factors influencing ERP implementation success in the public sector are cultural.[23][24][25]

Components

Best practices

Most ERP systems incorporate best practices. This means the software reflects the vendor's interpretation of the most effective way to perform each business process. Systems vary in how conveniently the customer can modify these practices.[26] Companies that implemented industry best practices reduced time–consuming project tasks such as configuration, documentation, testing, and training.[27] In addition, best practices reduced risk by 71% compared to other software implementations.[28]

Use of best practices eases compliance with requirements such as IFRS, Sarbanes-Oxley, or Basel II. They can also help comply with de facto industry standards, such as electronic funds transfer. This is because the procedure can be readily codified within the ERP software, and replicated with confidence across multiple businesses who share that business requirement.

Connectivity to plant floor information

ERP systems connect to real–time data and transaction data in a variety of ways. These systems are typically configured by systems integrators, who bring unique knowledge on process, equipment, and vendor solutions.

Direct integration—ERP systems have connectivity (communications to plant floor equipment) as part of their product offering. This requires that the vendors offer specific support for the plant floor equipment their customers operate. ERP vendors must be experts in their own products and connectivity to other vendor products, including those of their competitors.

Database integration—ERP systems connect to plant floor data sources through staging tables in a database. Plant floor systems deposit the necessary information into the database. The ERP system reads the information in the table. The benefit of staging is that ERP vendors do not need to master the complexities of equipment integration. Connectivity becomes the responsibility of the systems integrator.

Enterprise appliance transaction modules (EATM)—These devices communicate directly with plant floor equipment and with the ERP system via methods supported by the ERP system. EATM can employ a staging table, web services, or system–specific program interfaces (APIs). An EATM offers the benefit of being an off–the–shelf solution.

Custom–integration solutions—Many system integrators offer custom solutions. These systems tend to have the highest level of initial integration cost, and can have a higher long term maintenance and reliability costs. Long term costs can be minimized through careful system testing and thorough documentation. Custom–integrated solutions typically run on workstation or server-class computers.

Implementation

ERP's scope usually implies significant changes to staff work processes and practices.[29] Generally, three types of services are available to help implement such changes—consulting, customization, and support.[29] Implementation time depends on business size, number of modules, customization, the scope of process changes, and the readiness of the customer to take ownership for the project. Modular ERP systems can be implemented in stages. The typical project for a large enterprise takes about 14 months and requires around 150 consultants.[30] Small projects can require months; multinational and other large implementations can take years. Customization can substantially increase implementation times.[30]

Besides that, information processing influences various business functions e.g. some large corporations like Wal-Mart use a just in time inventory system. This reduces inventory storage and increases delivery efficiency, and requires up-to-date data. Before 2014, Walmart used a system called Inforem developed by IBM to manage replenishment.[31]

Process preparation

Implementing ERP typically requires changes in existing business processes.[32] Poor understanding of needed process changes prior to starting implementation is a main reason for project failure.[33] The difficulties could be related to the system, business process, infrastructure, training, or lack of motivation.

It is therefore crucial that organizations thoroughly analyze business processes before they implement ERP software. Analysis can identify opportunities for process modernization. It also enables an assessment of the alignment of current processes with those provided by the ERP system. Research indicates that risk of business process mismatch is decreased by:

ERP implementation is considerably more difficult (and politically charged) in decentralized organizations, because they often have different processes, business rules, data semantics, authorization hierarchies, and decision centers.[36] This may require migrating some business units before others, delaying implementation to work through the necessary changes for each unit, possibly reducing integration (e.g., linking via Master data management) or customizing the system to meet specific needs.[37]

A potential disadvantage is that adopting "standard" processes can lead to a loss of competitive advantage. While this has happened, losses in one area are often offset by gains in other areas, increasing overall competitive advantage.[38][39]

Configuration

Configuring an ERP system is largely a matter of balancing the way the organization wants the system to work with the way it was designed to work. ERP systems typically include many settings that modify system operations. For example, an organization can select the type of inventory accounting—FIFO or LIFO—to use; whether to recognize revenue by geographical unit, product line, or distribution channel; and whether to pay for shipping costs on customer returns.[37]

Two tier enterprise resource planning

Two-tier ERP software and hardware lets companies run the equivalent of two ERP systems at once: one at the corporate level and one at the division or subsidiary level. For example, a manufacturing company uses an ERP system to manage across the organization. This company uses independent global or regional distribution, production or sales centers, and service providers to support the main company’s customers. Each independent center or subsidiary may have its own business models, workflows, and business processes.

Given the realities of globalization, enterprises continuously evaluate how to optimize their regional, divisional, and product or manufacturing strategies to support strategic goals and reduce time-to-market while increasing profitability and delivering value.[40] With two-tier ERP, the regional distribution, production, or sales centers and service providers continue operating under their own business model—separate from the main company, using their own ERP systems. Since these smaller companies' processes and workflows are not tied to main company's processes and workflows, they can respond to local business requirements in multiple locations.[41]

Factors that affect enterprises' adoption of two-tier ERP systems include:

Customization

ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them as is.[45][46] ERP vendors do offer customers configuration options that let organizations incorporate their own business rules, but gaps in features often remain even after configuration is complete.

ERP customers have several options to reconcile feature gaps, each with their own pros/cons. Technical solutions include rewriting part of the delivered software, writing a homegrown module to work within the ERP system, or interfacing to an external system. These three options constitute varying degrees of system customization—with the first being the most invasive and costly to maintain.[47] Alternatively, there are non-technical options such as changing business practices or organizational policies to better match the delivered ERP feature set. Key differences between customization and configuration include:

Customization advantages include that it:

Customization disadvantages include that it:

Extensions

ERP systems can be extended with third–party software.[50] ERP vendors typically provide access to data and features through published interfaces. Extensions offer features such as:

Data migration

Data migration is the process of moving, copying, and restructuring data from an existing system to the ERP system. Migration is critical to implementation success and requires significant planning. Unfortunately, since migration is one of the final activities before the production phase, it often receives insufficient attention. The following steps can structure migration planning:[51]

Advantages

The fundamental advantage of ERP is that the integration of myriad business processes saves time and expense. Management can make decisions faster and with fewer errors. Data becomes visible across the organization. Tasks that benefit from this integration include:

ERP systems centralize business data, which:

Benefits

Disadvantages

Postmodern ERP

The term "postmodern ERP" was coined by Gartner in 2013, when it first appeared in the paper series "Predicts 2014".[56] According to Gartner's definition of the postmodern ERP strategy, legacy, monolithic and highly customized ERP suites, in which all parts are heavily reliant on each other, should sooner or later be replaced by a mixture of both cloud-based and on-premises applications, which are more loosely coupled and can be easily exchanged if needed.

The basic idea is that there should still be a core ERP solution that would cover most important business functions, while other functions will be covered by specialist software solutions that merely extend the core ERP. This concept is similar to the so-called best-of-breed approach[57] to software implementation, but it shouldn't be confused with it. While in both cases, applications that make up the whole are relatively loosely connected and quite easily interchangeable, in the case of the latter there is no ERP solution whatsoever. Instead, every business function is covered by a separate software solution.

There is, however, no golden rule as to what business functions should be part of the core ERP, and what should be covered by supplementary solutions. According to Gartner, every company must define their own postmodern ERP strategy, based on company's internal and external needs, operations and processes. For example, a company may define that the core ERP solution should cover those business processes that must stay behind the firewall, and therefore, choose to leave their core ERP on-premises. At the same time, another company may decide to host the core ERP solution in the cloud and move only a few ERP modules as supplementary solutions to on-premises.

The main benefits that companies will gain from implementing postmodern ERP strategy is speed and flexibility when reacting to unexpected changes in business processes or on the organizational level.[58] With the majority of applications having a relatively loose connection, it is fairly easy to replace or upgrade them whenever necessary. In addition to that, following the examples above, companies can select and combine cloud-based and on-premises solutions that are most suited for their ERP needs. The downside of postmodern ERP is that it will most likely lead to an increased number of software vendors that companies will have to manage, as well as pose additional integration challenges for the central IT.

See also

References

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Bibliography

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