Enterprise resource planning

From Wikipedia, the free encyclopedia Jump to: navigation, search This article needs additional citations for verification.
Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (January 2011)

Enterprise resource planning (ERP) integrates internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, etc. ERP systems automate this activity with an integrated computer-based application. Its purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders.[1] ERP systems can run on a variety of hardware and network configurations, typically employing a database to store its data.[2] ERP systems typically include the following characteristics:
y y y y

An integrated system that operates in (next to) real time, without relying on periodic updates.[citation needed] A common database, that 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.[3]

Contents
[hide]
y y

y y y y y

1 Functional areas 2 History o 2.1 Origin of "ERP" o 2.2 Materials requirements planning o 2.3 Expansion 3 Components 4 Best practices 5 Modularity 6 Connectivity to plant floor information 7 Implementation o 7.1 Process preparation o 7.2 Configuration o 7.3 Customization o 7.4 Extensions o 7.5 Data migration

y y y

o 7.6 Consultants 8 Comparison to special-purpose applications o 8.1 Advantages o 8.2 Disadvantages 9 See also 10 References 11 Further reading

[edit] Functional areas

Finance/Accounting General ledger, payables,cash management, fixed assets, receivables, budgeting, consolidation Human resources payroll,training, benefits, 401K, recruiting, diversity management Manufacturing Engineering, bill of materials, work orders, scheduling, capacity, workflow management, quality control, cost management, manufacturing process, manufacturing projects, manufacturing flow, activity based costing, Product lifecycle management Supply chain management Order to cash, inventory, order entry, purchasing, product configurator, supply chain planning, supplier scheduling, inspection of goods, claim processing, commissions Project management Costing, billing, time and expense, performance units, activity management Customer relationship management Sales and marketing, commissions, service, customer contact, call center support Data services Various "self-service" interfaces for customers, suppliers and/or employees Access control Management of user privileges for various processes

[edit] History
[edit] Origin of "ERP"
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 computerintegrated 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 employ ERP systems.[8]

[edit] Materials requirements planning

MRP was the precursor to ERP. Large companies found great value in creating a common foundation for automating information management for their manufacturing processes. Success with MRP projects led companies and vendors to consider expanding to other functional areas.[citation needed]

[edit] Expansion
ERP systems experienced rapid growth in the 1990s because the year 2000 and the Euro disrupted legacy systems. Many companies took this opportunity to replace such systems with ERP. This rapid growth in sales was followed by a slump in 1999 after these issues had been addressed.[9] ERP systems initially focused on automating back office functions, indicating that customers and the general public were not directly involved. Front office functions such as customer relationship management (CRM) dealt directly with customers, or e-business systems such as ecommerce, 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. It describes web-based software that allows both employees and partners (such as suppliers and customers) real-time access to the systems. "Enterprise application suite" is an alternate name such systems.[citation needed]

[edit] Components
y y y y y y y y y

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

[edit] Best practices

Best practices are incorporated into most ERP systems. This means that the software reflects the vendor's interpretation of the most effective way to perform each business process. Systems vary in the convenience with which the customer can modify these practices.[10] Companies that implemented industry best practices decreased mission-critical project tasks such as

configuration, documentation, testing and training. In addition, best practices reduced risk by 71% when compared to other software implementations.[11] The use of best practices eases compliance with requirements such as IFRS, Sarbanes-Oxley, or Basel II. They can also help industry standard functions such as electronic funds transfer. This is because the procedure can be readily codified within the ERP software, and then replicated with confidence across multiple businesses who share that business requirement.[citation needed]

[edit] Modularity
Most systems are modular simply for the flexibility of implementing some functions but not others. Some common modules, such as finance and accounting are adopted by nearly all companies implementing enterprise systems; others however such as human resource management are not needed by some companies and therefore not adopted. A service company for example will not likely need a module for manufacturing. Other times companies will not adopt a module because they already have a system they believe to be superior. Generally speaking, the greater the number of modules selected, the greater the integration benefits, but also the increase in costs, risks and changes involved.[citation needed]

[edit] 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 are able to bring in their unique knowledge on process, equipment, and vendor solutions. Direct integrationERP systems connectivity (communications to plant floor equipment) as part of their product offering. This requires the ERP system developers to offer specific support for the variety of plant floor equipment that they want to interface with. ERP Vendors must be expert in their own products, and connectivity to other vendor products, often those offered by competitors. Database integrationERP systems connect to plant floor data sources through a staging table in a database. Plant floor systems deposit the necessary information into the database. The ERP system takes the information from 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 systemspecific program interfaces (APIs). The benefit of an EATM is that it offers an offtheshelf solution. Customintegration solutionsMany system integrators offer custom solutions. These systems tend to have the highest level of initial integration cost, and can have a higher long term cost in terms on maintenance and reliability. Long term costs can be minimized through careful system

testing and thorough documentation. Custom-integrated solutions typically run on workstation or server class computers. Standard protocolsCommunications drivers are available for plant floor equipment and separate products have the ability to log data to relational database tables. Standards exist within the industry to support interoperability between software products, the most widely known being OPC, managed by the OPC Foundation.

[edit] Implementation
ERP's scope usually implies significant changes to staff work practices.[12] Generally, three types of services are availableconsulting, customization, and support.[12] Implementation time depends on the size of the business, the number of modules, the extent of customization, the scope of the changes to business processes, and the willingness of the customer to take ownership for the project. ERP systems are modular, so they can be implemented in stages. The typical project consumes about 14 months and requires around 150 consultants.[13] Small p can require months; multinational and other large implementations can take years.[citation needed] Extensive customization can substantially increase implementation times.[13] Implementing ERP software can overwhelm technicians who lack explicit experience with it. As a result, hiring professionally trained consultants to implement these systems is common.[citation needed] Consulting firms typically provide three areas of professional services: consulting, customization, and support. The client organization can also employ independent program management, business analysis, change management, and UAT specialists to ensure their business requirements remain a priority during implementation.[citation needed]

[edit] Process preparation

Implementing ERP can require changing existing business processes to the "best practice" approach that the software embodies.[14] Neglecting to understand the needed process changes prior to starting implementation is a main reason for project failure.[15] It is therefore crucial that organizations thoroughly analyze business processes before selecting a vendor. 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:
y y y

linking current processes to the organization's strategy; analyzing the effectiveness of each process; understanding exising automated solutions.[16][17]

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.[18] This may require that some business units remain outside the ERP system, delaying implementation to work through the necessary changes

for each unit, reducing integration (e.g. linking via Master data management) or customization to meet each unit's needs.[citation needed] A potential disadvantage is that adopting "standard" processes can lead to a loss of competitive advantage. While this has happened, losses in one area often offset by gains in other areas, increasing overall competitive advantage.[19][20]

[edit] Configuration
Configuring an ERP system is largely a matter of balancing the way you want the system to work with the way the system lets you work. ERP systems typically build many changeable parameters that modify the operation of the system. For example, an organization can select the type of inventory accountingFIFO or LIFOto employ, whether to recognize revenue by geographical unit, product line, or distribution channel and whether to pay for shipping costs when a customer returns a purchase.[citation needed]

[edit] Customization
When the system doesn't offer a particular feature, the customer can re-write part of the code, or interface to an existing system. Both options add time and cost to the implementation process and can dilute system benefits. Customization inhibits seamless communication between suppliers and customers who use the same ERP system uncustomized.[citation needed] Key differences between customization and configuration include:
y

y y

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 was designed to handle various configurations, and behaves predictably 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 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 will still need to be retested. Others (e.g. those involving changes to fundamental data structures) are overwritten during upgrades and must be reimplemented.

Customization can be expensive and complicated, and can delay implementation. Nevertheless, customization offers the potential to obtain competitive advantage vis a vis companies using only standard features.

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

y y y

archiving, reporting and republishing; capturing transactional data, e.g. using scanners, tills or RFID access to specialized data/capabilities, such as syndicated marketing data and associated trend analytics.

[edit] Data migration

Data 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:[21] 1. 2. 3. 4. 5. 6. Identify the data to be migrated Determine the timing of data migration Generate the data templates Freeze the tools for data migration Decide on migration-related setups Decide on data archiving

[edit] Consultants
Many organizations do not have sufficient internal skills to implement ERP. Typically, an outside consulting team is responsible for the ERP implementation including:[citation needed] 1. 2. 3. 4. 5. 6. 7. selecting planning training configuring/customizing testing implementation delivery

Examples of other services include writing process triggers and custom workflows; specialist advice to improve how the ERP is used in the business; system optimization; custom reports; complex data extracts or implementingBusiness Intelligence.[citation needed] For mid-sized companies, the cost of the implementation typically ranges from 1-2x the software's list price. Large companies, and especially those with multiple sites or countries, may spend 3-5x.[citation needed] Unlike most single-purpose applications, ERP packages typically include source code and a vendor-supporteddevelopment environment for customizing and extending the delivered code.[citation needed]

[edit] Comparison to special-purpose applications

[edit] Advantages
The fundamental benefit of ERP is that by integrating the myriad processes by which businesses operate, it saves time and expense. Decisions can be quicker and with fewer errors. Data is visible across the organization. Tasks that benefit from this integration include:[citation needed]
y y y y

Sales forecasting, which allows inventory optimization 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 data. Benefits of this include:

y y y y

No synchronizing changes between multiple systems - consolidation of finance, marketing and sales, human resource, and manufacturing applications Enables standard product naming/coding. Provides comprehensive view of the enterprise (no "islands of information"). Makes real time information available to management anywhere, anytime to make proper decisions. Protects sensitive data by consolidating multiple security systems into a single structure.[22]

[edit] Disadvantages
y y y y y y y

Customization is problematic. Re-engineering of business processes to fit the ERP system may damage competitiveness and/or divert focus from other critical activities Can cost more than less integrated and/or less comprehensive solutions High switching costs increase vendor negotiating power vis a vis support, maintenance and upgrade expenses Overcoming resistance to sharing sensitive information between departments can be a diversion. Integration of truly independent businesses can create unnecessary dependencies. Extensive training requirements take resources from daily operations.

It integrates key business and management processes to provide a skylevel view of much of whats going on in your organization. ERP tracks company financials, human resources data and if applicable all the manufacturing information such as where you put your inventory and when it needs to be taken from the parts warehouse to the shop floor. ; MORE COMPUTING INTELLIGENCEnIDG.net home pagenCIO home page nMake your PC work harder with these tipsnReviews indepth info at IDG.net nIDG.nets personal news page nIDG.nets products pages nYear 2000 WorldnQuestions about computers Let IDG.nets editors help you nSubscribe to IDG.nets free daily newslettersnSearch IDG.net in 12 languagesnNews RadionCIO radionFusion audio primersnComputerworld Minute nnn; The leader in ERP market share, and the one that invented the market to an extent, is the German company SAP AG with its R3 software. Other big players include PeopleSoft Inc., Oracle Corp., Baan Co. NV and J.D. Edwards Co. Big whoop. Weve always had software for those processes. Yes, but each piece of the puzzle was provided by a different software vendor, and those pieces typically didnt talk to one another. The accounting system didnt exchange data with the manufacturing system, for example. At least not without a great deal of poking and prodding and rewriting from the techies in IS. The idea behind ERP is that the software needs to communicate across functions. With an ERP system, the financial software can cut an accounts payable check as soon as the loading dock clerk confirms that the goods have been received in inventory. Similarly the accounts receivable module can generate an invoice as soon as the shipping clerk says the finished goods are on the truck to the customer. All this is done with a minimum of human intervention and paperwork. ERP aims to replicate business processes how do we record a sale, how do we verify hourly workers paychecks in software, guide the employees responsible for those processes through them step by step and automate as many procedures as desired. Sounds great. Is there a downside Only if you consider multimilliondollar project failures a downside. The promise of ERP is great but so is the expense in terms of time, effort and money. Implementing the software in a company usually involves changing business processes, that is, the way people do their jobs. So employee resistance to these changes can be a major thorn in a companys side and usually requires that executives hone their change management skills. With careful planning and lots of elbow grease, though, ERP can work and make many an enterprise work better. Buzzwords ERM enterprise resource management Some analysts prefer this term and make a subtle distinction between ERM and ERP. ERM encompasses accounting, HR and materials management ERP is ERM plus applications.

ERP stands for Enterprise Resource Planning and is a combination of Accounting software (think Quickbooks - not Quicken), Sales Order Processingorder entry, shipping, invoicing, Inventory Control, Manufacturing Resource Planning, Manufacturing Scheduling, Shop Floor Control (work order) software and often CRM Customer Relationship Management.

For Process driven companies it would have 'recipe' and 'batch' controls and for Project companies like Construction, it would be 'project' control rather than 'shop floor' control. It can be monolithic or modular, client/server or web based. Companies use it to keep track of their business. The bigger the company, the more they need to manage it with such software as it give them all of the views into what is happening in the business. It keeps track of gross margin, how long it takes to collect an invoice, etc. With its typical love of jargon and buzzwords, Wikipedia describes ERP thusly: Enterprise resource planning is a term derived from material resource planning. ERP systems typically handle the manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting for a company. Enterprise Resource Planning or ERP software can aid in the control of many business activities, like sales, delivery, billing, production, inventory management, and human resources management. ERPs are often called back office systems indicating that customers and the general public are not directly involved. This is contrasted with front office systems like customer relationship management systems that deal directly with the customer. ERPs are cross-functional and enterprise wide. All functional departments that are involved in operations or production are integrated in one system. In addition to manufacturing, warehousing, and shipping, this would include accounting, human resources, marketing, and strategic management. In the early days of business computing, companies used to write their own software to control their business processes. This is an expensive approach. Since many of these processes occur in common across various types of businesses, common reusable software may provide costeffective alternatives to custom software. Thus some ERP software caters to a wide range of industries from service sectors like software vendors and hospitals to manufacturing industries and even to government departments.
Benefits of ERP 1. Breaks down communication barriers between departments 2. All company transaction are stored in one database 3. Provides company management with 100% of corporate data for better decision making 4. Provides employees with the ability to gather information more effectively and efficiently. 5. Increased productivity per employee / department / organization 6. Improved customer response times 7. Eliminates multiple data entry points 8. Improves supply chain flow

9. Improved monitoring capabilities 10. Provides a true representation of the overall health of the organization 11. Highlights specific problem areas within the organization 12. Complete paper trail of all transactions within the organization. 13. Instant P&L by customer, product, sales rep, product line, branch, warehouse, etc. 14. Decreased time spent with month end / quarter end / year end reporting. 15. Cash collection time increases. 16. AR aging decrease. 17. Increased inventory management capabilities.