Enterprise resource planning (ERP) is a company-wide computer software system used to manage and coordinate all the resources, information, and functions of a business from shared data stores [1, p. 2–54].
An ERP system has a service-oriented architecture with modular hardware and software units or «services» that communicate on a local area network. The modular design allows a business to add or reconfigure modules (perhaps from different vendors) while preserving data integrity in one shared database that may be centralized or distributed.
Manufacturing management systems have evolved in stages over the past 50 years from a simple means of calculating materials requirements to the automation of an entire enterprise. Around 1980, over-frequent changes in sales forecasts, entailing continual readjustments in production, as well as inflexible fixed system parameters, led MRP (Material Requirement Planning) to evolve into a new concept: Manufacturing Resource Planning (or MRP3) and finally the generic concept Enterprise Resource Planning (ERP) .
The initials ERP originated as an extension of MRP (material requirements planning; later manufacturing resource planning) and CIM (Computer Integrated Manufacturing). It was introduced by research and analysis firm Gartner in 1990. ERP systems now attempt to cover all core functions of an enterprise, regardless of the organization's business or charter. These systems can now be found in non-manufacturing businesses, non-profit organizations and governments.
To be considered an ERP system, a software package must provide the function of at least two systems. For example, a software package that provides both payroll and accounting functions could technically be considered an ERP software package
Examples of modules in an ERP which formerly would have been stand-alone applications include: Product lifecycle management, Supply chain management (e.g. Purchasing, Manufacturing and Distribution), Warehouse Management, Customer Relationship Management (CRM), Sales Order Processing, Online Sales, Financials, Human Resources, and Decision Support System.
Some organizations — typically those with sufficient in-house IT skills to integrate multiple software products — choose to implement only portions of an ERP system and develop an external interface to other ERP or stand-alone systems for their other application needs. For example, one may choose to use human resource management system from one vendor, and the financial systems from another, and perform the integration between the systems themselves.
This is common to retailers, where even a mid-sized retailer will have a discrete Point-of-Sale (POS) product and financials application, then a series of specialized applications to handle business requirements such as warehouse management, staff rostering, merchandising and logistics.
Ideally, ERP delivers a single database that contains all data for the software modules, which would include:
- Manufacturing — engineering, bills of material, scheduling, capacity, workflow management, quality control, cost management, manufacturing process, manufacturing projects, manufacturing flow;
- Supply chain management — order to cash, inventory, order entry, purchasing, product configurator, supply chain planning, supplier scheduling, inspection of goods, claim processing, commission calculation;
- Financials — general ledger, cash management, accounts payable, accounts receivable, fixed assets.
- Project management — costing, billing, time and expense, performance units, activity management.
- Human resources — human resources, payroll, training, time and attendance, rostering, benefits.
Enterprise resource planning is a term originally derived from manufacturing resource planning (MRP II) that followed material requirements planning (MRP) . MRP evolved into ERP when «routings» became a major part of the software architecture and a company's capacity planning activity also became a part of the standard software activity. ERP systems saw a large boost in sales in the 1990s as companies faced the Y2K problem in their legacy systems. Many companies took this opportunity to replace their legacy information systems with ERP systems. This rapid growth in sales was followed by a slump in 1999, at which time most companies had already implemented their Y2K solution .
ERPs are often incorrectly 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 (CRM) systems that deal directly with the customers, or the eBusiness systems such as eCommerce, eGovernment, eTelecom, and eFinance, or supplier relationship management (SRM) systems.
ERP II means open ERP architecture of components. The older, monolithic ERP systems became component oriented.
EAS — Enterprise Application Suite is a new name for formerly developed ERP systems which include (almost) all segments of business, using ordinary Internet browsers as thin clients.
Businesses have a wide scope of applications and processes throughout their functional units; producing ERP software systems that are typically complex and usually impose significant changes on staff work practices. Implementing ERP software is typically too complex for «in-house» skill, so it is desirable and highly advised to hire outside consultants who are professionally trained to implement these systems. This is typically the most cost effective way. There are three types of services that may be employed for — Consulting, Customization, Support. The length of time to implement an ERP system depends on the size of the business, the number of modules, the extent of customization, the scope of the change and the willingness of the customer to take ownership for the project. ERP systems are modular, so they don't all need be implemented at once. It can be divided into various stages, or phase-ins. The typical project is about 14 months and requires around 150 consultants. A small project (e.g., a company of less than 100 staff) may be planned and delivered within 3–9 months; however, a large, multi-site or multi-country implementation may take years. The length of the implementations is closely tied to the amount of customization desired .
To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. These firms typically provide three areas of professional services: consulting, customization and support. The client organisation may also employ independent program management, business analysis, change management and UAT specialists to ensure their business requirements remain a priority during implementation.
Data migration is one of the most important activities in determining the success of an ERP implementation. Since many decisions must be made before migration, a significant amount of planning must occur. Unfortunately, data migration is the last activity before the production phase of an ERP implementation, and therefore receives minimal attention due to time constraints. The following are steps of a data migration strategy that can help with the success of an ERP implementation :
1. Identifying the data to be migrated;
2. Determining the timing of data migration;
3. Generating the data templates;
4. Freezing the tools for data migration;
5. Deciding on migration related setups;
ERP vendors have designed their systems around standard business processes, based upon best business practices. Different vendor(s) have different types of processes but they are all of a standard, modular nature. Firms that want to implement ERP systems are consequently forced to adapt their organizations to standardized processes as opposed to adapting the ERP package to the existing processes. Neglecting to map current business processes prior to starting ERP implementation is a main reason for failure of ERP projects. It is therefore crucial that organizations perform a thorough business process analysis before selecting an ERP vendor and setting off on the implementation track. This analysis should map out all present operational processes, enabling selection of an ERP vendor whose standard modules are most closely aligned with the established organization. Redesign can then be implemented to achieve further process congruence. Research indicates that the risk of business process mismatch is decreased by:
- linking each current organizational process to the organization's strategy;
- analyzing the effectiveness of each process in light of its current related business capability;
- understanding the automated solutions currently implemented.
ERP implementation is considerably more difficult (and politically charged) in organizations structured into nearly independent business units, each responsible for their own profit and loss, because they will each have different processes, business rules, data semantics, authorization hierarchies and decision centers . Solutions include requirements coordination negotiated by local change management professionals or, if this is not possible, federated implementation using loosely integrated instances (e.g. linked via Master Data Management) specifically configured and/or customized to meet local needs.
A disadvantage usually attributed to ERP is that business process redesign to fit the standardized ERP modules can lead to a loss of competitive advantage. While documented cases exist where this has indeed materialized, other cases show that following thorough process preparation ERP systems can actually increase sustainable competitive advantage.
In the absence of an ERP system, a large manufacturer may find itself with many software applications that cannot communicate or interface effectively with one another. Tasks that need to interface with one another may involve:
- Integration among different functional areas to ensure proper communication, productivity and efficiency;
- Design engineering (how to best make the product);
- Order tracking, from acceptance through fulfillment;
- The revenue cycle, from invoice through cash receipt;
- Managing inter-dependencies of complex processes bill of materials;
- Tracking the three-way match between purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced);
- The accounting for all of these tasks: tracking the revenue, cost and profit at a granular level;
- ERP Systems centralize the data in one place. This eliminates the problem of synchronizing changes and can reduce the risk of loss of sensitive data by consolidating multiple permissions and security models into a single structure.
Some security features are included within an ERP system to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data-tampering scenario, for example, might involve a disgruntled employee intentionally modifying prices to below-the-breakeven point in order to attempt to interfere with the company's profit or other sabotage. ERP systems typically provide functionality for implementing internal controls to prevent actions of this kind. ERP vendors are also moving toward better integration with other kinds of information security tools .
Problems with ERP systems are mainly due to inadequate investment in ongoing training for the involved IT personnel — including those implementing and testing changes — as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and the ways in which it is used.
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