ENTERPRISE RESOURCE PLANNING

DEFINITION: Enterprise Resource Planning or ERP, in short, is a software system which

integrates all the functions of an organization in a modular system, scalable with a centralized
database (data will be entered only once) and secured.

WHY ERP IS REQUIRED

Figure 1: ERP solutions required by some Senior Management & all Middle-Level Management

Figure 1 shows that ERP solutions are required by all the levels of management,
especially, the Top and Middle level management. Because of the wide variety of functions and
the interactions among them, there is a need to integrate these functions altogether. This
integration must be flexible enough so as to adjust to the various needs of different organizations,
that is, the integrated system must be scalable to the needs of the organizations.
Besides, in order to take decisions, managers must have right and accurate information at
the right time and at the right cost.

ERP packages, in general, satisfy all these requirements.

 Figure2: ERP system with five major components

FEATURES OF ERP

Figure 3¨ERP systems Concept

1. Modular design comprising many distinct business modules such as financial,

manufacturing, accounting, distribution etc.

2. The modules are integrated and provide seamless dataflow among the modules increasing
operational transparency through standard interfaces.

3. Use of centralized common Database Management System (DBMS).

4. ERP systems are generally complex systems involving high cost.

5. ERP packages are scalable so that they can fit to the organization’s functional needs.

6. ERPs are flexible and offer best business practices.

7. ERP requires time-consuming tailoring and configuration setups for integrating with the
organization’s business functions.

The modules work in real-time with on-line and batch processing capabilities.

EVOLUTION OF ERP

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Figure 4: Evolution of ERP

The evolution of ERP systems closely followed the spectacular developments in the field of
computer hardware and software systems. During the 1960s most organizations designed,
developed and implemented centralized computing systems mostly automating their inventory
control systems using inventory control packages (IC). These were legacy systems based on
programming languages such as COBOL, ALGOL and FORTRAN. Material Requirements
Planning (MRP) systems were developed in the 1970s which involved mainly planning the
product or parts requirements according to the master production schedule. The logic of MRP
asks the following questions

** What are we going to make?

** What does it take to make it?
** What do we have?
** What do we have to get?

MRP quickly evolved, however, into something more than merely a better way to order. Early
users soon found that Material Requirements Planning contained capabilities far greater than
merely giving better signals for reordering. They learned this technique could help to keep order
due dates valid after the orders had been released to production or to suppliers. New techniques
for helping plan capacity requirements were tied in with Material Requirements Planning.
Further, tools were developed to support the planning of aggregate sales and production levels
(Sales & Operations Planning); the development of the specific build schedule (master
scheduling); forecasting, sales planning, and customer-order promising (demand management);
and high-level resource analysis (Rough-Cut Capacity Planning). Systems to aid in executing the
plan were tied in: various plant scheduling techniques for the inside factory and supplier
scheduling for the outside factory — the suppliers. These developments resulted in the second
step in this evolution: closed-loop MRP. Closed-loop MRP has a number of important
characteristics:

** It’s a series of functions, not merely material requirements planning.

** It contains tools to address both priority and capacity, and to support both planning and
execution.

** It has provisions for feedback from the execution functions back to the planning functions.
Plans can then be altered when necessary, thereby keeping priorities valid as conditions
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 change.

Figure 5: Closed Loop MRP

Following this route new software systems called Manufacturing Resources Planning (MRP II)
were introduced in the 1980s with an emphasis on optimizing manufacturing processes by
synchronizing the materials with production requirements. MRP II included areas such as shop
floor and distribution management, Project management, Finance, Human Resource and
Engineering. ERP systems first appeared in the late 1980s and the beginning of 1990s with the
power of enterprise-wide inter-functional coordination and integration. Based on the
technological foundations of MRP and MRP II, ERP systems integrate business processes
including manufacturing, distribution, accounting, financial, human resource management,
project management, inventory management, service and maintenance, transportation providing
accessibility, visibility and consistency across the enterprise.

Figure 6: Enterprise Resource Planning

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During the 1990s ERP vendors added more modules and functions as "add-ons" to the core
modules giving birth to the "extended ERPs". These ERP extensions include advanced planning
and scheduling (APS), e-business solutions such as customer relationship management (CRM)
and supply chain management (SCM). The following figure summarizes the historical events
related with ERP.

Figure 7: Evolution of ERP

PROBLEMS FACED IN ERP IMPLEMENTATION

1. ERP packages cost large amounts of money,

2. Processes to implement those systems often run over budget because of hidden costs,

3. Failure to redesign business processes to fit those set out by the software,

4. Lack of top management support

5. Insufficient training and inclusion of the end-users during and after implementation

6. Inability to recruit and train qualified ERP systems developers

7. Insufficient data standardization,

8. Lack of proper integration across all functional areas of a business

9. Failing to obtain and keep expert knowledge of the system.

BENEFITS OF ERP SYSTEM

What Benefit How

Reliable information access Common DBMS, Consistent and accurate data,

improved reports.

Avoid data and operations redundancy Modules access same data from the central database,
avoids multiple data input and update operations.

Delivery and Cycle time reduction Minimizes retrieving and reporting delays.

Cost reduction Time savings, improved control by enterprise-wide

analysis of organizational decisions.

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Easy adaptability Changes in business processes easy to adapt and
restructure.

Improved scalability Structured and modular design with "add-ons"

Improved maintenance Vendor supported long term contract as part of the

system procurement.

Global Outreach Extended modules such as CRM and SCM.

E-Commerce, E-Business Internet Commerce, Collaborative culture.

DISADVANTAGES OF ERP SYSTEM

DISADVANTAGES HOW TO OVERCOME

Time consuming Minimize sensitive issues, internal politics and raise general
consensus.

Expensive Cost may vary from thousands of dollars to millions. Business

process re-engineering cost may be extremely high.

Conformity of the modules The architecture and components of the selected system
should conform to the business processes, culture and
strategic goals of the organization.

Vendor dependence Single vendor vs. multi-vendor consideration, options for "best of
breeds", long term committed support.

Feature and complexity System may have too many features and modules that
the user needs to consider carefully and implement the
needful only.

Scalability and global Look for vendor investment in R&D, long term commitment to
outreach product and services, consider Internet-enabled systems.

Extended ERP capability Consider middle-ware "add-on" facilities and extended

modules such as CRM and SCM

MODULES OF ERP

Different ERP vendors provide ERP systems with some degree of specialty but the core modules
are almost the same for all of them. Some of the core ERP modules found in the successful ERP
systems are the following:

1. Accounting management

2. Financial management

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3. Manufacturing management

4. Production management

5. Transportation management

6. Sales & Distribution management

7. Human resources management

8. Supply chain management

9. Customer relationship management

10. E-Business

The modules of an ERP system can either work as stand-alone units or several modules can be
combined together to form an integrated system. The systems are usually designed to operate
under several operating platforms such as UNIX, MS Windows NT, Windows 2000, IBM AIX,
HP UX systems.

Figure 8: some of the modules of SAP

Figure 9: Modules of Internet version

ERP SYSTEM ARCHITECTURE

Figure 10: Three-tier ERP system architecture

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 Enterprise systems employ thin client/server (C/S) technology or client/fat server (C/FS)
architecture creating a decentralized computing environment. In a C/S system a number of client
devices operated by end users such as desktop PCs, request services from application servers
which in turn gets the requested service-related information from the database servers. The
requests may be simple data files, data values, communication services, transaction processing or
master file updates. The general practice is to have three-tier architecture such as in the figure
above.

In this three-tier system the user interface runs on the client. To run ERP systems relatively
powerful PCs (clients) and powerful servers are required where most of the hundreds of
thousands of operations are performed. The client/server system functions are performed
following three layers of logic:

Presentation Layer: Graphical User Interface (GUI) or browser for data entry or accessing
system functions.

Application Layer: Business rules, functions, logic, programs acting on data received /
transferred From / to the database servers.

Database Layer: Management of the organizations' operational or transactional data including

metadata. Mostly employs industry standard RDBMS with structured query language (SQL)
provisions.

This logical arrangement helps the ERP user interface to run on the clients, the processing
modules to run on the middle-tier application servers and the database system to run on the
database servers.

EXISTING COMMERCIAL ERP SUPPLIERS

SAP
ORACLE
Microsoft Navision
PeopleSoft
Baan
J. D. Edwards and Co.

PHASES OF ERP IMPLEMENTATION

Adoption decision phase: During this phase managers examine the need for a new
ERP system. While selecting the general information system approach that will best address the
critical business challenges and improve the organizational strategy. This decision phase includes
the definition of system requirements, its goals and benefits, and an analysis of the impact of
adoption at a business and organizational level.

Acquisition phase: This phase consists on the selection of an ERP product that best fits
the requirements of the organization, thus minimizing the need for customization. A consulting
company is also selected to help in the next phases of the ERP life-cycle especially in the
implementation phase. Factors such as price, training and maintenance services are analyzed and,
the contractual agreement is defined. In this phase, it is also important to make an analysis of the
return on investment of the selected product.
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Implementation phase: This phase include the customization or parameterization and
adaptation of the ERP package to the needs of the organization. Usually this task is made with
the help of consultants who provide implementation methodologies, know-how and training.

Use and maintenance phase: This phase covers the personal of time where the ERP
product is selected in a way that returns benefits and minimizes disruption. During this phase,
one must be aware of the aspects related to functionality, usability and adequacy to the
organizational and business processes. Once a system is implemented, it must be maintained,
because malfunctions have to be corrected, special optimization requests have to be met, and
general systems improvements have to be made.

Evolution phase: This phase corresponds to the integration of more capabilities into the
ERP system, providing new benefits, such as advanced planning and scheduling, supply-chain
management, customer relationship management, workflow, and expanding the frontiers to
external collaboration with other partners.

Retirement phase: This phase corresponds to the stage when, with the appearance of new
technologies or the inadequacy of the ERP system or approach to the business needs, managers
decide if they will substitute the ERP software with other information system approach more
adequate to the organizational needs of the moment.

Establishing the costs and benefits of an ERP implementation project is essential. The following
figure gives an overview of costs related to different phases of ERP implementation.

Figure 11: Costs related to relevant ERP implementation phases

Example:

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Figure 12: Costs of adoption of SAP R/3 system in a Portuguese enterprise.

The cost-benefit analysis is required to be carried out due to the following reasons:

It’s very difficult to keep ERP pegged as a very high priority if the relevant costs and benefits
have not been established and bought into. If ERP doesn’t carry this high priority, the chances
for success decrease.

Implementing ERP means changing the way the business is run. Consequently, top
management and operating management must be committed to making it happen. Without a solid
projection of costs and benefits, the necessary degree of dedication may not be attained, and the
chances for success will decrease sharply.

By identifying costs thoroughly and completely before implementation, the company has to
process only one spending authorization. This avoids repeated “trips to the well” (the board of
directors, the corporate office, the executive committee) and their attendant delays during the life
of the project.

The following key-points must be kept in mind while implementing ERP solutions.

It’s a lot of work.

It’s a do-it-yourself project.

It’s not priority number one.

It’s people-intensive.

It requires top management leadership and participation.

It involves virtually every department within the company.

It requires people to do their jobs differently.

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