UNIT I INTRODUCTION
Overview of enterprise systems – Evolution - Risks and benefits - Fundamental technology - Issues to be consider in planning design and implementation of cross functional integrated ERP systems.
1.1.1. Introduction
ERP is an acronym that stands for Enterprise Resource Planning. ERP software saw phenomenal interest from the corporate sector during the period 1995-2000. The ERP market is estimated to be in excess of USD 80 Billion in the year 2000 Many analysts feel that today’s global business environment - products and services customized to suit the individual needs of millions of customers, delivered over multiple timelines in a 24X7 basis - would have been impossible without such enterprise software. Undoubtedly ERP represents one of the most complex and demanding application software in the corporate environment.
1.1.2 What is ERP?
ERP is a package software solution that addresses the enterprise needs of an organization by tightly integrating the various functions of an organization using a process view of the organization.
A. ERP software is ready-made generic software; it is not custom-made for a specific firm. ERP software understands the needs of any organization within a specific industry segment. Many of the processes implemented in an ERP software are core processes such as order processing, order fulfillment, shipping, invoicing, production planning, BOM (Bill of Material), purchase order, general ledger, etc., that are common to all industry segments.
B. ERP does not merely address the needs of a single function such as finance, marketing, production or HR; rather it addresses the entire needs of an enterprise that cuts across these functions to meaningfully execute any of the core processes.
C. ERP integrates the functional modules tightly. It is not merely the import and export of data across the functional modules. The integration ensures that the logic of a process that cuts across the function is captured genuinely. This in turn implies that data once entered in any of the functional modules (whichever of the module owns the data) is made available to every other module that needs this data. This leads to significant improvements by way of improved consistency and integrity of data.
D. ERP uses the process view of the organization in the place of function view, which dominated the enterprise software before the advent of ERP.
1.1.3. Why ERP?
In spite of heavy investments involved in ERP implementation, many organizations around the world have gone in for ERP solutions. A properly implemented ERP solution would pay for the heavy investments handsomely and often reasonably fast. Since ERP solutions address the entire organizational needs, and not selected islands of the organization, ERP introduction brings a new culture, cohesion and vigor to the organization. After ERP introduction the line managers would no longer have to chase information, check compliance to rules or conformance to budget. What is striking is that a well-implemented ERP can guarantee these benefits even if the organization is a multi-plant, multi- location global operation spanning the continents.
In a sense ERP systems can be compared to the “fly-by-wire” operation of an aircraft. ERP systems similarly would relieve operating managers of routine decisions and leave them with lots of time to think, plan and execute vital long-term decisions of an organization. Just as “fly-by-wire” operation brings in amazing fuel efficiency to the aircraft operation by continuous monitoring of the airplane operation, ERP systems lead to significant cost savings by continuously monitoring the organizational health. The seemingly high initial investments become insignificant in the face of hefty long-term returns.
At another level, organizations today face the twin challenges of globalization and shortened product life cycle. Globalization has led to unprecedented levels of competition. To face such a competition successful corporations should follow the best business practices in the industry. Shortened life cycles call for continuous design improvement, manufacturing flexibility and super efficient logistics control; in short a better management of the entire supply chain. This in turn presupposes faster access to accurate information both inside the organization and from the entire supply chain outside. The organizational units such as Finance, Marketing, Production and HRD need to operate with a very high level of integration without losing flexibility. ERP systems with an organizational wide view of business processes, business needs of information and flexibility meet these demands admirably.
1.1.4 Need for Enterprise Resource Planning
Organizations today face twin challenges of globalization and shortened product life cycle. Globalization has led to unprecedented levels of competition. To face such competitions, successful corporations should follow the best business practices in the industry. Shortened life cycles call for continuous design improvements, manufacturing flexibility, super-efficient logistics control and better management of the entire supply chain. All these need faster access to accurate information, both inside the organization and the entire supply chain outside. The organizational units such as finance, marketing,
production, human resource development etc. need to operate with a very high level of integration without losing flexibility. ERP system with an organization-wide view of business processes, business need of information and flexibility meet these demands admirably. One of the developments in computing and communication channels is providing tighter integration among them.
1.1.5 Definition of ERP
Researchers and practitioners have defined ERP in many different ways.
Minahan (1998) defines ERP as a complex software system that ties together and automates the basic processes of a business. ERP has been defined by various authors but with few differences.
Kumar et al. (2000) define enterprise resource planning (ERP) systems as “configurable information systems packages that integrate information and information-based processes within and across functional areas in an organization”
Al-Mashari and Zairi (2000) states that ERP represent an optimal enterprise-wide technology infrastructure. The basic architecture of an ERP system builds on one database, one application, and a unified interface across the entire enterprise.
Nah et al. (2001) defines ERP as “An enterprise resource planning (ERP) system is typically defined as a packaged business software system that facilitates a corporation 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 requests, through a process-oriented view consistent across the company.”
1.4 Evolution of Enterprise Resource Planning
Enterprise resource planning (ERP) has evolved as a strategic tool, an outcome of over four decades. This is because of continuous improvements done to the then available techniques to manage business more efficiently and also with developments and inventions in information technology field.
1.2.1 Pre Material Requirement Planning (MRP) stage
Prior to 1960s businesses generally relied on traditional ways of managing inventories to ensure smooth functioning of the organizations. These theories are popularly known as ‘Classical Inventory Management or Scientific Inventory Control Methods’. Most
ERP system has evolved from the Material Planning System of 1980’s. There are various phases through which this evolution process has gone through. The various phases of development of resource planning system in relation to time and evolution of concept of ERP
STAGES OF ERP EVOLUTION
1.2.2. Material Requirement Planning (MRP)
MRP was the fundamental concept of production management and control in the mid1970s and considered as the first stage in evolution of ERP. Assembly operations
involving thousands of parts such as automobile manufacture led to large inventories.
The need to bring down the large inventory levels associated with these industries led to
the early MRP systems that planned the order releases. Such planned order releases
ensured proper time phrasing and accurate planning of the sub-assembly items, taking
into account complex sub-assembly to assembly relationships characterized by the Bill of
Materials.
Example:
A typical example is a bicycle manufacture. To manufacture 100 units of bicycles, one needs 200 wheels, 100 foot-pedals, and several thousands of spokes. On a given day, a plant may have 40 units of complete bicycles in stock, 57 units of wheels, 43 units of foot-pedals and 879 units of spokes. If the plant is to assemble 20 units of bicycles for the next 4 days of production, wheels and spokes-is a non trivial problem. If the independent demand of the spare parts is also to be taken into account, one can visualize the complexity of it.
A typical automobile plant with hundreds, if not thousands of parts, has to face problems that are in order of magnitude even more difficult. MRP systems address this need. Using the processing power of computers, databases to store lead-times and order quantities and algorithms to implement Bill-of-Material (BOM) explosion, MRP systems brought considerable order into the chaotic process of material planning in a discrete manufacturing operation.
Essentially MRP addresses a single task in manufacturing alone. Material requirement planning (MRP) system was adopted by firms for creation and maintenance of master data and bill of material across all products and part within an organization. MRP on the other hand was an outgrowth of bill of material (BOM) processing, which is purchase order management that utilizes parts list management and parts development.
1.2.3 Manufacturing Resources Planning II (MRP- II)
A natural evolution from the first generation MRP systems was the manufacturing planning systems MRP II that addressed the entire manufacturing function and not just a single task within the manufacturing function. MRP II went beyond computations of the materials requirement to include loading and scheduling. MRP II systems could determine whether a given schedule of production was feasible, not merely from material availability but also from other resource point of view.
Typically, the resources considered from MRP II systems would include production facilities, machine capacities and precedence sequences. The increased functionality enabled MRP II systems provided a way to run the system in a loop. First it was used to check the feasibility of a production schedule taking into account the constraints; second to adjust the loading of the resources, if possible, to meet the production schedules; third
1.2.4 Enterprise Resource Planning (ERP)
The nineties saw unprecedented global competition, customer focus and shortened product life cycles. To respond to these demands corporations had to move towards agile (quick moving) manufacturing of products, continuous improvements of process and business process reengineering. This called for integration of manufacturing with other functional areas including accounting, marketing, finance and human resource development.
Activity-based costing would not be possible without the integration of manufacturing and accounting. Mass customization of manufacturing needed integration of marketing and manufacturing. Flexible manufacturing with people empowerment necessitated integration of manufacturing with the HRD function. In a sense the 1990s truly called integration of all the functions of management. ERP systems are such integrated information systems build to meet the information and decision needs of an enterprise spanning all the functions of management4.
1.2.5 Extended ERP (E-ERP)
Further developments in the enterprise resource planning system concept have led to evolution of extended ERP (E- ERP) or web - enabled ERP. With globalization on one hand and massive development in the internet technology on the other, need for web based IT solution was felt. Thus E- ERP is development in the field of ERP which involves the technology of Internet and World Wide Web (WWW) to facilitate the functions of an organization around the web.
1.2.6 Enterprise Resource Planning II (ERP- II)
ERP II is the advanced step of E-ERP. It is the software package which has strengthened the original ERP package by included capabilities like customer relationship management, knowledge management, workflow management and human resource management. It is a web friendly application and thus addresses the issue of multiple office locations.
1.2.7 ERP – A Manufacturing Perspective
ERP systems evolved out of MRP and MRP II systems. MRP systems addressed the single task of materials requirements planning. MRP II extended the scope to the entire manufacturing function. The manufacturing industry traditionally had a better climate to use computers. First of all the manufacturing community being dominated by engineers had no computer phobia. Second the extensive use of Computer Aided Drafting (CAD), Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) had prepared the manufacturing function to use computers well, in fact exceptionally well. In fact manufacturing engineers contributed significantly to the theoretical computer science by way of contributions in the areas of graphics, computational geometry, significant visualization, feature recognition etc.
Large corporations like General Motors (GM), Ford, Hewlett Packard (HP), and Digital primarily viewed themselves as manufacturing companies until the 1980s. Naturally complex MRP systems were considered the ultimate in enterprise information systems. The investments in hardware and software to manage such complex manufacturing solutions gave these systems a visibility unparalleled in the industry. Compared to these systems accounting systems, financial systems or personnel information systems were relatively inconsequential to the organization.
With the globalization of operations and the proliferation of computer networks, it was important that the manufacturing organizations extend their information system across the supply chain. The supplier’s information system spread across continents with complex combinations of hardware and software need to be integrated. Similarly the dealer-distributor network had to be integrated with the manufacturing information systems. The reduction in product life cycle necessitated a quick response manufacturing system that had its ears tuned to the market.
This forced manufacturing information systems to have a tighter integration with marketing information systems. The manufacturing flexibility had translated into mass customization calling for further integration of information systems. The opening up of several world economies including that of the Asian giants like China and India, the emergence of trade blocks and consolidated markets such as European Union paved the need for accounting and finance functions to be tightly integrated with manufacturing functions. It was not sufficient anymore just to manufacture and sell but organizations had to arrange for finance, comply with complex trade restrictions, barriers, and quotas.
The balance sheets needed to account for multiple currencies, multiple export import rules and regulations, multiple accounting codes, practices, accounting periods. This necessitated further
Suddenly the need was for an Enterprise Information System that looks beyond the manufacturing function to address inbound logistics, outbound logistics, manufacturing, materials managements, project management, quality management, accounting, finance, sales and personnel management. It was nearly impossible to integrate individual modules of information systems. What was necessary was a system that addressed the enterprise needs from the design stage. ERP systems were the natural choice in this changed scenario.
1.3 Benefits of ERP:
(a) Business integration: The first and the most important advantage lie in the promotion of integration. The reason ERP packages are called integrated is the automatic data up gradation between related business components, since conventional company information systems were aimed at the optimization of independent business functions in business units, almost all were weak in terms of the communication and integration of information that transcended the different business functions in the case of large companies in particular, the timing of system structure and directives differs from each product and department / functions and sometimes they are disconnected.
For this reason, it has become an obstacle in the shift to new product and business classification. In the case of ERP packages the data of related business functions is also automatically updated at the time a transaction occurs. For this reason, one is able to grasp business details in real time, and carry out various types of management decisions in a timely manner based o that information.
(b) Flexibility: The second advantage of ERP packages is their flexibility. Diverse multi functional environments such as language, currency, accounting standards and so on are covered in one system and functions that comprehensively managed multiple locations that span a company are packaged and can be implemented automatically. To cope with company globalization and system unification, this flexibility is essential, and one could say that it has major advantages, not simply for development and maintenance, but also in terms of management.
(c) Better analysis and planning capabilities: Yet another advantage is the boosting of planning type functions. By enabling the comprehensive and unified management of related business and its data, it becomes possible to fully utilize many types of decision support
(d) Use of latest technology: The fourth advantage is the utilization of latest developments in information technology (IT). The ERP vendors were very quick to realize that in order to grow and to sustain that growth: they have to embrace the latest developments in the field of information technology. So they quickly adopted their systems to take advantages of the latest technologies like open systems, client server technology, internet/ intranet, computer aided acquisition and logistics support, electronic commerce etc. It is this quick adaptation to the latest changes in information technology that makes the flexible adaptation to changes to future business environments possible. It is this flexibility that makes the incorporation of the latest technology possible during the system customization, maintenance and expansion phases.
(e) Reduced inventory and inventory carrying cost: The manufacturing nature of many ERP users makes the issue of process and material costs savings paramount. The main factor behind these savings is that implementation of the ERP system allows customers to obtain information on cost, revenues and margins, which allow it to better, manage its overall material cost structure. This ability to manage costs is best seen in savings that organizations can obtain in their inventory systems. Customers can perform a more complete inventory planning and status checking with the ERP system.
These checks and plans reveal existing surpluses or shortages in supplies. Improved planning and scheduling practices typically lead to inventory reductions to the order of 20 per cent or better. This provides not only a one time reduction in assets (cost of the material stocked), but also provides ongoing savings of the inventory carrying costs. The cost of carrying inventory includes not only interest but also the costs of warehousing, handling, obsolescence, insurance, taxes, damage and shrinkage.
(f) Reduced manpower cost: Improved manufacturing practices lead to fever shortages and interruptions and to less rework and overtime. Typical labor savings from a successful ERP system are a 10 per cent reduction in direct and indirect labor costs. By minimizing rush jobs and parts shortages, less time is needed for expediting, material handling, extra setups, disruptions and tracking splits lots odd jobs that have been set aside. Production supervisors have better visibility of required work and can adjust capacity or loads to meet schedules. Supervisors have more time for managing, directing and training people. Production personnel have more time to develop better methods and improve quality.
(g) Reduced material costs: Improves procurement practices lead to better vendor negotiations
for prices, typically resulting in cost reductions of 5 per cent or better. Valid schedules permit purchasing people to focus on vendor negotiations and quality improvements rather than spending their time on shortages and getting material at premium prices. ERP systems provide negotiation information, such as projected material requirements by commodity group and vendor performance statistics. Giving suppliers better visibility of future requirements help them achieve efficiencies that can be passed on as lower material costs.
(h) Improves sales and customer service: Improved coordination of sales and production leads to better customer service and increased sales. Improvements in managing customer contacts, making and meeting delivery promises, and shorter order to ship lead times, lead to higher customer satisfaction, goodwill and repeat orders. Sales people can focus on selling instead of verifying or apologizing for late deliveries. In custom product environment, configurations can be quickly identified and prices, often by sales personnel or even the customer rather than the technical staff.
Taken together, these improvements in customer service can lead to fewer lost sales and actual increase in sales, typically 10 per cent or more. ERP systems also provide the ability to react to changes in demand and to diagnose delivery problems. Corrective actions can be taken early such as determining shipment priorities, notifying customers of changes to promise delivery dates, or altering production schedules to satisfy demand.
(i) Efficient financial management: Improves collection procedures can reduce the number of days of outstanding receivables, thereby providing additional available cash. Underlying these improvements is fast, accurate invoice creation directly from shipment transactions, timely customer statements and follows through on delinquent accounts. Credit checking during order entry and improved handling of customer inquires further reduces the number of problem accounts. Improved credit management and receivable practices typically reduce the days of outstanding receivables by 18 per cent or better. Trade credit can also be maximized by taking advantage by supplier discounts and cash planning, and paying only those invoices with matching recipients. This can lead to lower requirements for cash-on-hand.
The benefits from ERP come in three different forms i.e. in the short-term, medium-term and long-term. When initially implemented, in a year of the organization going live with ERP, it helps in streamlining the operational areas such as purchase, production, inventory control, finance and accounts, maintenance, quality control, sales and distribution, etc. This benefit is in form of ‘automating’ the transactions which promises accuracy, reliability, availability and consistency of data.
1.4 Fundamental Technology of ERP:
When it comes time for your organization to evaluate ERP systems, whether you are replacing a small business accounting package or an aging ERP, It is important to clarify the components. Each piece (often called module) of the ERP system delivers different value for your organization. To get the most from the full system, make sure your evaluation team understands the fundamentals.
Financial Management
At the core of ERP are the financial modules, including general ledger, accounts receivable, accounts payable, billing and fixed asset management. If your organization is considering the move to an ERP system to support expansion into global markets, make sure that multiple currencies and languages are supported.
Other functionality in the financial management modules will include budgets, cash-flow, expense and tax reporting. The evaluation team should focus on areas that are most important to support the strategic plans for your organization.
Business Intelligence
Business Intelligence (BI) has become a standard component of most ERP packages. In general, BI tools allow users to share and analyze the data collected across the enterprise and centralized in the ERP database. BI can come in the form of dashboards, automated reporting and analysis tools used to monitor the organization business performance. BI supports informed decision making by everyone, from executives to line managers and accountants.
Supply Chain Management
Supply Chain Management (SCM), sometimes referred to as logistics, improves the flow of materials through an organization by managing planning, scheduling, procurement, and fulfillment, to maximize customer satisfaction and profitability. Sub modules in SCM often include production scheduling, demand management, distribution management, inventory management, warehouse management, and procurement and order management.
Any company dealing with products, from manufacturers to distributors, needs to clearly define their SCM requirements to properly evaluate an ERP solution.
Human Resource Management
Human resource management ERP modules should enhance the employee experience – from initial recruitment to time tracking. Â Sub modules can include payroll, performance management, time tracking, benefits, compensation and workforce planning. Self-service tools that allow managers and employees to enter time and attendance, choose benefits and manage PTO are available in many ERP solutions.
Manufacturing Operations
Manufacturing modules make manufacturing operations more efficient through product configuration, job costing and bill of materials management. ERP manufacturing modules often
Integration
Key to the value of an ERP package is the integration between modules, so that all of the core business functions are connected. Information should flow across the organization so that BI reports on organization-wide results.
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