Enterprise resource planning

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Diagram showing some typical ERP modules ERP Modules.png
Diagram showing some typical ERP modules

Enterprise resource planning (ERP) is the integrated management of main business processes, often in real time and mediated by software and technology.

Contents

ERP is usually referred to as a category of business management software—typically a suite of integrated applications—that an organization can use to collect, store, manage, and interpret data from many business activities.

ERP provides an integrated and continuously updated 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 various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data. [1] ERP facilitates information flow between all business functions and manages connections to outside stakeholders. [2]

Enterprise system software is a multibillion-dollar industry that produces components supporting a variety of business functions. IT investments have, as of 2011, become one of the largest categories of capital expenditure in United States-based businesses. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems. [3]

The ERP system integrates varied organizational systems and facilitates error-free transactions and production, thereby enhancing the organization's efficiency. However, developing an ERP system differs from traditional system development. [4] ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository. [5]

Origin

The Gartner Group first used the acronym ERP in the 1990s [6] [7] to include the capabilities of material requirements planning (MRP), and the later manufacturing resource planning (MRP II), [8] [9] as well as computer-integrated manufacturing. Without replacing these terms, ERP came to represent a larger whole that reflected the evolution of application integration beyond manufacturing. [10]

Not all ERP packages are developed from a manufacturing core; ERP vendors variously began assembling their packages with finance-and-accounting, maintenance, and human-resource components. By the mid-1990s ERP systems addressed all core enterprise functions. Governments and non–profit organizations also began to use ERP systems. [11]

Expansion

ERP systems experienced rapid growth in the 1990s. Because of the year 2000 problem many companies took the opportunity to replace their old systems with ERP. [12]

ERP systems initially focused on automating back office functions that did not directly affect customers and the 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. [13]

"ERP II" was coined in 2000 in an article by Gartner Publications entitled ERP Is Dead—Long Live ERP II. [14] [15] 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. [16] 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. ERP II systems are typically used to enable collaborative initiatives such as supply chain management (SCM), customer relationship management (CRM), and business intelligence (BI) among business partner organizations through the use of various e-business technologies. [17] [18]

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. [19]

Characteristics

ERP systems typically include the following characteristics:

Functional areas

An ERP system covers the following common functional areas. In many ERP systems, these are called and grouped together as ERP modules:

GRP

Government resource planning (GRP) is the equivalent of an ERP for the public sector and an integrated office automation system for government bodies. [21] The software structure, modularization, core algorithms and main interfaces do not differ from other ERPs, and ERP software suppliers manage to adapt their systems to government agencies. [22] [23] [24]

Both system implementations, in private and public organizations, are adopted to improve productivity and overall business performance in organizations, but comparisons (private vs. public) of implementations shows that the main factors influencing ERP implementation success in the public sector are cultural. [25] [26] [27]

Best practices

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. [28] In addition, best practices reduced risk by 71% compared to other software implementations. [29]

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 that share that business requirement. [30] [31]

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 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.

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.

Implementation

ERP's scope usually implies significant changes to staff work processes and practices. [32] Generally, three types of services are available to help implement such changes: consulting, customization, and support. [32] 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. [33] Small projects can require months; multinational and other large implementations can take years. [34] [35] Customization can substantially increase implementation times. [33]

Besides that, information processing influences various business functions e.g. some large corporations like Wal-Mart use a just in time inventory system. This reduces inventory storage and increases delivery efficiency, and requires up-to-date data. Before 2014, Walmart used a system called Inforem developed by IBM to manage replenishment. [36]

Process preparation

Implementing ERP typically requires changes in existing business processes. [37] Poor understanding of needed process changes prior to starting implementation is a main reason for project failure. [38] The difficulties 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 deploy an 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. [41] 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. [42]

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. [43] [44]

Configuration

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 operations. 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. [42]

Two-tier enterprise resource planning

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 could use an ERP system to manage across the organization using 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 its own business models, 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. [45] 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. [46]

Factors that affect enterprises' adoption of two-tier ERP systems include:

Customization

ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them "as is". [49] [50] ERP vendors do offer customers configuration options that let organizations incorporate their own business rules, but gaps in features often 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. [51] 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 may:

Extensions

ERP systems can be extended with third–party software, often via vendor-supplied interfaces. [55] [56] Extensions offer features such as: [56]

Data migration

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: [57]

Often, data migration is incomplete because some of the data in the existing system is either incompatible or not needed in the new system. As such, the existing system may need to be kept as an archived database to refer back to once the new ERP system is in place. [57]

Advantages

The most fundamental advantage of ERP is that the integration of a myriad of business 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: [58]

ERP systems centralize business data, which:

Benefits

Disadvantages

Postmodern ERP

The term "postmodern ERP" was coined by Gartner in 2013, when it first appeared in the paper series "Predicts 2014". [66] According to Gartner's definition of the postmodern ERP strategy, legacy, monolithic and highly customized ERP suites, in which all parts are heavily reliant on each other, should sooner or later be replaced by a mixture of both cloud-based and on-premises applications, which are more loosely coupled and can be easily exchanged if needed.

The basic idea is that there should still be a core ERP solution that would cover most important business functions, while other functions will be covered by specialist software solutions that merely extend the core ERP. This concept is similar to the so-called best-of-breed approach [67] to software execution, but it shouldn't be confused with it. While in both cases, applications that make up the whole are relatively loosely connected and quite easily interchangeable, in the case of the latter there is no ERP solution whatsoever. Instead, every business function is covered by a separate software solution. [68]

There is, however, no golden rule as to what business functions should be part of the core ERP, and what should be covered by supplementary solutions. According to Gartner, every company must define their own postmodern ERP strategy, based on company's internal and external needs, operations and processes. For example, a company may define that the core ERP solution should cover those business processes that must stay behind the firewall, and therefore, choose to leave their core ERP on-premises. At the same time, another company may decide to host the core ERP solution in the cloud and move only a few ERP modules as supplementary solutions to on-premises. [68]

The main benefits that companies will gain from implementing postmodern ERP strategy are speed and flexibility when reacting to unexpected changes in business processes or on the organizational level. [69] With the majority of applications having a relatively loose connection, it is fairly easy to replace or upgrade them whenever necessary. In addition to that, following the examples above, companies can select and combine cloud-based and on-premises solutions that are most suited for their ERP needs. The downside of postmodern ERP is that it will most likely lead to an increased number of software vendors that companies will have to manage, as well as pose additional integration challenges for the central IT. [68] [70]

See also

Related Research Articles

Customer relationship management (CRM) is the process of managing interactions with existing as well as past and potential customers. It is one of many different approaches that allow a company to manage and analyse its own interactions with its past, current and potential customers. It uses data analysis about customers' history with a company to improve business relationships with customers, specifically focusing on customer retention and ultimately driving sales growth.

A Management Information System (MIS) is an information system used for decision-making, and for the coordination, control, analysis, and visualization of information in an organization.

Business performance management is a set of performance management and analytic processes that enables the management of an organization's performance to achieve one or more pre-selected goals. Gartner retired the concept of "CPM" and reclassified it as "financial planning and analysis (FP&A)," and "financial close" to reflect two concepts: increased focus on planning and the emergence of a new category of solutions supporting the management of the financial close.

Enterprise application integration (EAI) is the use of software and computer systems' architectural principles to integrate a set of enterprise computer applications.

Manufacturing resource planning

Manufacturingresource planning is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer "what-if" questions and extension of closed-loop MRP.

Computer-integrated manufacturing

Computer-integrated manufacturing (CIM) is the manufacturing approach of using computers to control entire production process. This integration allows individual processes to exchange information with each part. Manufacturing can be faster and less error-prone by the integration of computers. Typically CIM relies on closed-loop control processes based on real-time input from sensors. It is also known as flexible design and manufacturing.

Software as a service is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted. It is sometimes referred to as "on-demand software", and was formerly referred to as "software plus services" by Microsoft. SaaS applications are also known as on-demand software and Web-based/Web-hosted software.

Enterprise software, also known as enterprise application software (EAS), is computer software used to satisfy the needs of an organization rather than individual users. Such organizations include businesses, schools, interest-based user groups, clubs, charities, and governments. Enterprise software is an integral part of a (computer-based) information system; a collection of such software is called an enterprise system. These systems handle a chunk of operations in an organization with the aim of enhancing the business and management reporting tasks. The systems must process the information at a relatively high speed and can be deployed across a variety of networks.

SAP ERP is an enterprise resource planning software developed by the German company SAP SE. SAP ERP incorporates the key business functions of an organization. The latest version of SAP ERP (V.6.0) was made available in 2006. The most recent Enhancement Package (EHP8) for SAP ERP 6.0 was released in 2016.

An integrated workplace management system (IWMS) is a software platform that helps organizations optimize the use of workplace resources, including the management of a company's real estate portfolio, infrastructure and facilities assets. IWMS solutions are commonly packaged as a fully integrated suite or as individual modules that can be scaled over time. They are used by corporate occupiers, real estate services firms, facilities services providers, landlords and managing agents. Traditionally focused on supporting real estate and facilities professionals, IWMS solutions are becoming more employee-centric, expanding their touchpoints to include all building occupants and visitors.

On-premises software

On-premises software is installed and runs on computers on the premises of the person or organization using the software, rather than at a remote facility such as a server farm or cloud. On-premises software is sometimes referred to as “shrinkwrap” software, and off-premises software is commonly called “software as a service” ("SaaS") or “cloud computing”.

Accounting software

Accounting software describes a type of application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, journal, general ledger, payroll, and trial balance. It functions as an accounting information system. It may be developed in-house by the organization using it, may be purchased from a third party, or may be a combination of a third-party application software package with local modifications. Accounting software may be on-line based, accessed anywhere at any time with any device which is Internet enabled, or may be desktop based. It varies greatly in its complexity and cost.

A talent management system (TMS) is an integrated software suite that addresses the "four pillars" of talent management: recruitment; performance management; learning and development; and compensation management.

An ERP system selection methodology is a formal process for selecting an enterprise resource planning (ERP) system. Existing methodologies include:

WorkPLAN

WorkPLAN is a range of Enterprise Resource Planning (ERP) software products developed by Sescoi for custom manufacturers or departments who work project-based and need specialized ERP software for project management.

An enterprise appliance transaction module (EATM) is a device, typically used in the manufacturing automation marketplace, for the transfer of plant floor equipment and product status to manufacturing execution systems (MES), enterprise resource planning (ERP) systems and the like.


Adaxa Suite is a fully integrated Open Source Enterprise Resource Planning (ERP) Suite.

abas ERP is an enterprise resource planning (ERP) & e-business application for manufacturers in the Assemble-to-Order, Make-to-Order and Engineer-to-Order environment. Manufacturer is ABAS Software AG, since 1980 based in Karlsruhe, Germany and interests in national and international companies that distribute the software.

SAP implementation refers to the name of the German company SAP SE, and is the whole of processes that defines a method to implement the SAP ERP enterprise resource planning software in an organization. The SAP implementation method described in this entry is a generic method and not a specific implementation method as such. It is based on best practices and case studies from various literature sources and presents a collection of processes and products that make up a complete implementation method to allow any organization to plan and execute the implementation of SAP software.

Business Information Technology Institute

The BIT – Business Information Technology Institute in Mannheim, Germany is a computer science and information systems research institute and affiliated with University of Mannheim. Under the leadership of Franz Steffens, president of the Institute, BIT employs a staff of about 20 researchers. The BIT was established in Mannheim in 2007 and is still headquartered there. BIT is organized as a research group within the University of Mannheim and belongs to the Mannheim School of Computer Science and Mathematics. The institute addresses standard business application software and perceives itself as a mediator between science and enterprise practice.

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