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Enterprise resource planning (ERP) is a business management software—usually a suite of integrated applications—that a company can use to store and manage data from every stage of business, including:
ERP provides an integrated real-time view of core business processes, using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across the various departments (manufacturing, purchasing, sales, accounting, etc.) that entered the data. ERP facilitates information flow between all business functions, and manages connections to outside stakeholders.
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. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.
Organizations consider the ERP system a vital organizational tool because it integrates varied organizational systems and facilitates error-free transactions and production. However, ERP system development is different from traditional systems development. ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository.
In 1990, Gartner Group first used the acronym ERP as an extension of material requirements planning (MRP), later manufacturing resource planning and computer-integrated manufacturing. Without replacing these terms, ERP came to represent a larger whole that reflects the evolution of application integration beyond manufacturing.
Not all ERP packages developed from a manufacturing core. Vendors variously began with accounting, maintenance, and human resources. By the mid–1990s ERP systems addressed all core enterprise functions. Governments and non–profit organizations also began to use ERP systems.
ERP systems experienced rapid growth in the 1990s, because the year 2000 problem and introduction of the euro disrupted legacy systems. Many companies took the opportunity to replace their old systems with ERP.
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.
"ERP II" was coined in 2000 in an article by Gartner Publications entitled ERP Is Dead — Long Live ERP II. It describes web–based software that provides real–time access to ERP systems to employees and partners (such as suppliers and customers). The ERP II role expands traditional ERP 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. 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 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. 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.
Factors that affect enterprises adoption of two-tier ERP systems include:
Organizations perceive ERP as a vital tool for organizational competition, as it integrates dispersed organizational systems and facilitates error-free transactions and production. ERP vendors traditionally offer a single ERP system. ERP systems suffer from limitations in coping with the integration challenges of changing requirements. However, many companies prefer to implement an ERP suite from one vendor that incorporates stand-alone point solutions (that once filled feature gaps in older ERP releases) to achieve higher levels of integration and improve customer relationships and overall supply chain efficiency.
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 acquire products, or develop new features comparable to or better than many top applications. This helps companies, via single source, maintain or create a competitive advantage based on customized 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. Over 80% of U.S. companies budgeted for some type of integration in 2002, and roughly one-third of U.S. companies listed 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 make more 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.
ERP (Enterprise Resource Planning) systems typically include the following characteristics:
An ERP system covers the following common functional areas. In many ERP systems these are called and grouped together as ERP modules:
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. 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% compared to other software implementations.
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.
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 that the vendors offer specific support for the plant floor equipment their customers operate. ERP vendors must be experts in their own products and connectivity to other vendor products, including those of their 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). An EATM offers the benefit of being 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.
ERP's scope usually implies significant changes to staff work processes and practices. Generally, three types of services are available to help implement such changes—consulting, customization, and support. 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 takes about 14 months and requires around 150 consultants. Small projects can require months; multinational and other large implementations can take years. Customization can substantially increase implementation times.
Besides that, information processing influences various business functions—due to severe competitions, taking control of logistics efficiently is significant for manufacturers. Therefore, large corporations like Wal-Mart use a 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.
Implementing ERP typically requires changes in existing business processes. Poor understanding of needed process changes prior to starting implementation is a main reason for project failure. The problems could be related to the system, business process, infrastructure, training, or lack of motivation.
It is therefore crucial that organizations thoroughly analyze business processes before they implement ERP software. 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 risk of business process mismatch is decreased by:
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. 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.
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.
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.
ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them as is. 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. 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 advantages include that it:
Customization disadvantages include that it:
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:
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:
ERP systems centralize business data, which:
Recognized ERP limitations have sparked new trends in ERP application development. Development is taking place in four significant areas: more flexible ERP, Web-enabled ERP, inter-enterprise ERP, and e-business suites.