Enterprise resource planning

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Enterprise resource planning (ERP) systems integrate internal and external management of information across an entire organization—embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application. ERP facilitates information flow between all business functions inside the organization, and manages connections to outside stakeholders.^[1]

Enterprise system software is a multi-billion dollar industry that produces components that support a variety of business functions. IT investments have become the largest category of capital expenditure in United States-based businesses over the past decade. Enterprise systems are complex software packages that offer the potential of integrating data and processes across functions in an enterprise.

The main example is ERP systems. Organizations consider the ERP system their backbone, and a vital organizational tool because it integrates varied organizational systems, and enables flawless transactions and production. However, an ERP system is radically different from traditional systems development.^[2] ERP systems can run on a variety of computer hardware and network configurations, typically employing a database as a repository for information.^[3]

History [edit]

Origin of "ERP" [edit]

In 1990 Gartner Group first employed the acronym ERP^[4] as an extension of material requirements planning (MRP), later manufacturing resource planning^[5]^[6] and computer-integrated manufacturing. Without supplanting these terms, ERP came to represent a larger whole, reflecting the evolution of application integration beyond manufacturing.^[7] Not all ERP packages were developed from a manufacturing core. Vendors variously began with accounting, maintenance, and human resources. By the mid–1990s ERP systems addressed all core functions of an enterprise. Beyond corporations, governments and non–profit organizations also began to use ERP systems.^[8]

Expansion [edit]

ERP systems experienced rapid growth in the 1990s because the year 2000 problem and introduction of the euro disrupted legacy systems. Many companies took this opportunity to replace such systems with ERP.^[9]

ERP systems initially focused on automating back office functions that did not directly affect customers and the general 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.^{[citation needed]}

"ERP II" was coined in the early 2000s.^{[by whom?]} It describes web–based software that provides employees and partners (such as suppliers and customers) with real–time access to ERP systems. The ERP II role expands traditional ERP's 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.^[10] 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.

Two-tier enterprise resource planning [edit]

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 their own business model, 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.^[11] 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.^[12]

Factors affecting enterprises adopting two-tier ERP systems are the globalization of manufacturing or the economics of sourcing in emerging economies, the potential for quicker and less costly ERP implementations at subsidiaries based on selecting a software product more suited to smaller companies, and any extra effort required where data must pass between the two ERP systems.^[13] Two-tier ERP strategies give enterprises agility in responding to market demands and in aligning IT systems at a corporate level while inevitably resulting in more systems as compared to one ERP system used throughout the entire organization.^[14]

Integration [edit]

Organizations perceive ERP as a vital tool for organizational competition, as it integrates dispersed organizational systems and enables flawless transactions and production. ERP vendors traditionally offered a single ERP system. ERP systems suffered from limitations in coping with integration challenges dealing with changing requirements. However, companies preferred to implement an ERP suite from one vendor that incorporated stand-alone point solutions (that once filled feature gaps in older ERP releases) to achieve higher levels of integration and improve customer relationships and the supply chain's overall efficiency. Many companies preferred implementing an ERP suite from one vendor that incorporated stand-alone point solutions.

However, though most companies still follow the single source approach, a significant number of firms employ a strategy of “best of breed” ERP to strive for a competitive advantage. ERP vendors began to acquire products, or develop new features comparable to or better than many of the top applications. This helped companies, via single source, maintain or create a competitive advantage based on unique business processes, rather than adopt the same business processes as their competitors.

In the following years, integration was a leading investment due to a feature gap and the need to extend and integrate the ERP system to other enterprises or "best of breed" applications. Integration was ranked as one of the leading investments for 2003. Well over 80% of U.S. companies budgeted for some type of integration in 2002, and roughly one-third of U.S. companies defined application integration as one of their top three IT investments in 2003. ERP license revenue remained steady as companies continued their efforts to broadly deploy core applications, and then add complementary features in later phases.

Developers now take greater 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.^[15]

Characteristics [edit]

ERP (Enterprise Resource Planning) systems typically include the following characteristics:

An integrated system that operates in real time (or next to real-time), without relying on periodic updates^{[citation needed]}
A common database, which supports all applications
A consistent look and feel throughout each module
Installation of the system without elaborate application/data integration by the Information Technology (IT) department, provided the implementation is not done in small steps^[16]

Functional areas [edit]

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

Financial accounting: General ledger, fixed asset, payables, receivables, cash management, financial consolidation
Management accounting: Budgeting, costing, cost management, activity based costing
Human resources: Recruiting, training, payroll, benefits, 401K, diversity management, retirement, separation
Manufacturing: Engineering, bill of materials, work orders, scheduling, capacity, workflow management, quality control, manufacturing process, manufacturing projects, manufacturing flow, product life cycle management
Supply chain management: Supply chain planning, supplier scheduling, order to cash, purchasing, inventory, product configurator, claim processing
Project management: Project planning, resource planning, project costing, work break down structure, billing, time and expense, performance units, activity management
Customer relationship management: Sales and marketing, commissions, service, customer contact, call center support - CRM systems are not always considered part of ERP systems but rather BSS systems . Specifically in telecom scenario
Data services: Various "self–service" interfaces for customers, suppliers and/or employees

Components [edit]

Transactional database
Management portal/dashboard
Business intelligence system
Customizable reporting
Analysing the product
External access via technology such as web services
Search
Document management
Messaging/chat/wiki
Workflow management

Best practices [edit]

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.^[17] Companies that implemented industry best practices reduced time–consuming project tasks such as configuration, documentation, testing, and training. In addition, best practices reduced risk by 71% when compared to other software implementations.^[18]

The 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.^{[citation needed]}

Modularity [edit]

Most systems are modular, to permit automating some functions but not others. Some common modules, such as finance and accounting, are adopted by nearly all users; others such as human resource management are not. For example, a service company probably has no need for a manufacturing module. Other companies already have a system they believe is adequate. Generally speaking, the greater the number of modules selected, the greater the integration benefits, but also the greater the costs, risks, and changes involved.^{[citation needed]}

Connectivity to plant floor information [edit]

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 the vendors to offer specific support for the plant floor equipment that their customers operate. ERP vendors must be expert in their own products, and connectivity to other vendor products, including 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). The benefit of an EATM is that it offers 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 [edit]

ERP's scope usually implies significant changes to staff work processes and practices.^[19] Generally, three types of services are available to help implement such changes—consulting, customization, and support.^[19] 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 consumes about 14 months and requires around 150 consultants.^[20] Small projects can require months; multinational and other large implementations can take years.^{[citation needed]} Customization can substantially increase implementation times.^[20]

Besides that, information processing actually has influential effects on various business functional activities—due to severe competitions, taking control of logistics efficiently would be significant for manufacturers. Therefore, large corporations like Wal-Mart use a [[Just in time (business)}just in time]] inventory system. This increases inventory storage and delivery efficiency, since it helps avoid wasteful storage days and lack of supply to satisfy customer demand.

Moreover, many companies realize that increasing market share requires that they be sensitive to marketing changes and make appropriate adjustments. Lots of information processing applications could meet these requirements, and ERP covers almost every essential functional unit of a firm’s operations—including accounting, financing, procurement, marketing, and sales.

This information processing tool becomes the bridge that helps different isolated functional units share and update their data immediately, so managers can continually revise strategies based on data from all departments. However, information tools like ERP are expensive, and not a practical method for medium or small business owners. To address this issue, some software firms develop simpler, cheaper information processing tools specifically for smaller companies.

Process preparation [edit]

Implementing ERP typically requires changes in existing business processes.^[21] Poor understanding of needed process changes prior to starting implementation is a main reason for project failure.^[22]

It is therefore crucial that organizations thoroughly analyze business processes before implementation. This 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 the risk of business process mismatch is decreased by:

Linking current processes to the organization's strategy
Analyzing the effectiveness of each process
Understanding existing automated solutions^[23]^[24]

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.^[25] 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.^[26]

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.^[27]^[28]

Configuration [edit]

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 operation. 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.^[26]

Customization [edit]

ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them as is.^[29]^[30] ERP vendors do offer customers configuration options that let organizations incorporate their own business rules, but often feature gaps 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.^[31] 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 is always optional, whereas the software must always be configured before use (e.g., setting up cost/profit center structures, organisational trees, purchase approval rules, etc.).
The software is designed to handle various configurations, and behaves predictably in any allowed configuration.
The effect of configuration changes on system behavior and performance is predictable and is the responsibility of the ERP vendor. The effect of customization is less predictable. It is the customer's responsibility, and increases testing activities.
Configuration changes survive upgrades to new software versions. Some customizations (e.g., code that uses pre–defined "hooks" that are called before/after displaying data screens) survive upgrades, though they require retesting. Other customizations (e.g., those involving changes to fundamental data structures) are overwritten during upgrades and must be reimplemented.^[32]

Customization advantages include that it:

Improves user acceptance^[33]
Offers the potential to obtain competitive advantage vis-à-vis companies using only standard features

Customization disadvantages include that it:

Increases time and resources required to implement and maintain^[31]
Inhibits seamless communication between suppliers and customers who use the same ERP system uncustomized^{[citation needed]}
Can create over reliance on customization, undermining the principles of ERP as a standardizing software platform

Extensions [edit]

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

Archiving, reporting, and republishing
Capturing transactional data, e.g., using scanners, tills or RFID
Access to specialized data and capabilities, such as syndicated marketing data and associated trend analytics
Advanced planning and scheduling (APS)
Managing resources, facilities, and transmission in real-time

Data migration [edit]

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:^[34]

Identify data to migrate
Determine migration timing
Generate data templates^{[clarification needed]}
Freeze the toolset
Decide on migration-related setups^{[clarification needed]}
Define data archiving policies and procedures

Comparison to special–purpose applications [edit]

Advantages [edit]

The fundamental advantage of ERP is that integrating myriad businesses 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:^{[citation needed]}

Sales forecasting, which allows inventory optimization
Chronological history of every transaction through relevant data compilation in every area of operation.
Order tracking, from acceptance through fulfillment
Revenue tracking, from invoice through cash receipt
Matching purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced)

ERP systems centralize business data, which:

Eliminates the need to synchronize changes between multiple systems—consolidation of finance, marketing, sales, human resource, and manufacturing applications
Brings legitimacy and transparency to each bit of statistical data
Facilitates standard product naming/coding
Provides a comprehensive enterprise view (no "islands of information"), making real–time information available to management anywhere, any time to make proper decisions
Protects sensitive data by consolidating multiple security systems into a single structure^[35]

Benefits [edit]

ERP can greatly improve the quality and efficiency of a business. By keeping a company's internal business process running smoothly, ERP can lead to better outputs that benefit the company such as customer service, and manufacturing.
ERP provides support to upper level management to provide them with critical decision making information. This decision support allows the upper level management to make managerial choices that enhance the business down the road.
ERP also creates a more agile company that better adapts to change. ERP makes a company more flexible and less rigidly structured so organization components operate more cohesively, enhancing the business—internally and externally.^[36]

Disadvantages [edit]

Customization is problematic.
Re-engineering business processes to fit the ERP system may damage competitiveness or divert focus from other critical activities.
ERP can cost more than less integrated or less comprehensive solutions.
High ERP switching costs can increase the ERP vendor's negotiating power, which can increase support, maintenance, and upgrade expenses.
Overcoming resistance to sharing sensitive information between departments can divert management attention.
Integration of truly independent businesses can create unnecessary dependencies.
Extensive training requirements take resources from daily operations.
Due to ERP's architecture (OLTP, On-Line Transaction Processing) ERP systems are not well suited for production planning and supply chain management (SCM).
Harmonization of ERP systems can be a mammoth task (especially for big companies) and requires a lot of time, planning, and money.^[37]

Recognized ERP limitations have sparked new trends in ERP application development. Development is taking place in four significant areas: more flexible ERP, Web-enable ERP, inter-enterprise ERP, and e-business suites.

References [edit]

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