Enterprise resource planning (
ERP) systems integrate internal and external management information across an entire organization, embracing
finance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
/accounting,
manufacturingManufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
, sales and service,
customer relationship managementCustomer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
, etc. ERP systems automate this activity with an integrated software application. Their 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.
ERP systems can run on a variety of
hardwareHardware is a general term for equipment such as keys, locks, hinges, latches, handles, wire, chains, plumbing supplies, tools, utensils, cutlery and machine parts. Household hardware is typically sold in hardware stores....
and
networkA computer network, often simply referred to as a network, is a collection of hardware components and computers interconnected by communication channels that allow sharing of resources and information....
configurations, typically employing a
databaseA database is an organized collection of data for one or more purposes, usually in digital form. The data are typically organized to model relevant aspects of reality , in a way that supports processes requiring this information...
as a repository for information.
Characteristics
ERP(Enterprise Resource Planning ) systems typically include the following characteristics:
- An integrated system that operates in real time (or next to real time), without relying on periodic updates.
- A common database, which 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.
Finance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
/Accounting:
General ledgerThe main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into debits and credits sections. The left hand...
,
payablesAccounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet , sometimes referred as trade payables. When an invoice is received, it is added to the file, and then removed when it is paid...
,
cash managementIn United States banking, cash management, or treasury management, is a marketing term for certain services offered primarily to larger business customers...
, fixed assets,
receivablesAccounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
, budgeting,
consolidationConsolidation may refer to:* Consolidation , the mergers or acquisitions of many smaller companies into much larger ones* Consolidation , a geological process whereby a soil decreases in volume...
Human resourcesHuman resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
:
payrollIn a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
,
trainingThe term training refers to the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or practical skills and knowledge that relate to specific useful competencies. It forms the core of apprenticeships and provides the backbone of content at institutes of...
,
benefitsEmployee benefits and benefits in kind are various non-wage compensations provided to employees in addition to their normal wages or salaries...
, 401K, recruiting,
diversity managementThe "business case for diversity" stems from the progression of the models of diversity within the workplace since the 1960's. The original model for diversity was situated around affirmative action drawing strength from the law and a need to comply with equal employment opportunity objectives...
ManufacturingManufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
:
EngineeringEngineering is the discipline, art, skill and profession of acquiring and applying scientific, mathematical, economic, social, and practical knowledge, in order to design and build structures, machines, devices, systems, materials and processes that safely realize improvements to the lives of...
,
bill of materialsA bill of materials is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture an end product...
, work orders, scheduling, capacity, workflow management,
quality controlQuality control, or QC for short, is a process by which entities review the quality of all factors involved in production. This approach places an emphasis on three aspects:...
, cost management, manufacturing process, manufacturing projects, manufacturing flow, activity based costing,
product lifecycle managementIn industry, product lifecycle management is the process of managing the entire lifecycle of a product from its conception, through design and manufacture, to service and disposal...
Supply chain managementSupply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
:
Order to cash"Order to cash" normally refers to the business process for receiving and processing customer sales. It follows "Opportunity to Order" and covers business-to-business and business-to-consumer sales...
,
inventoryInventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
, order entry,
purchasingPurchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations...
, product configurator, supply chain planning, supplier scheduling, inspection of goods, claim processing, commissions
Project managementProject management is the discipline of planning, organizing, securing, and managing resources to achieve specific goals. A project is a temporary endeavor with a defined beginning and end , undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value...
: Costing,
billingBilling may refer to:*The process of sending a bill to customers for goods or services is called billing...
, time and expense, performance units, activity management
Customer relationship managementCustomer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
: Sales and marketing, commissions, service, customer contact, call center support
Data services : Various "self–service" interfaces for customers, suppliers and/or employees
Access controlAccess control refers to exerting control over who can interact with a resource. Often but not always, this involves an authority, who does the controlling. The resource can be a given building, group of buildings, or computer-based information system...
: Management of user privileges for various processes
Origin of "ERP"
In 1990 Gartner Group first employed the
acronymAcronyms and initialisms are abbreviations formed from the initial components in a phrase or a word. These components may be individual letters or parts of words . There is no universal agreement on the precise definition of the various terms , nor on written usage...
ERP as an extension of
material requirements planningMaterial requirements planning is a production planning and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well....
(MRP), later
manufacturing resource planningManufacturing resource planning is defined by APICS as a method for the effective planning of all resources of a manufacturing company...
and computer-integrated manufacturing. Without supplanting these terms, ERP came to represent a larger whole, reflecting the evolution of application integration beyond manufacturing. 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.
Expansion
ERP systems experienced rapid growth in the 1990s because of the
year 2000 problemThe Year 2000 problem was a problem for both digital and non-digital documentation and data storage situations which resulted from the practice of abbreviating a four-digit year to two digits.In computer programs, the practice of representing the year with two...
and introduction of the
EuroThe euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
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.
ERP systems initially focused on automating
back officeA back office is a part of most corporations where tasks dedicated to running the company itself takes place. The term "Back office" comes from the building layout of early companies where the front office would contain the sales and other customer-facing staff and the back office would be those...
functions that did not directly affect
customerA customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
s and the general public.
Front officeFront office is a business term that refers to a company's departments that come in contact with clients, including the marketing, sales, and service departments...
functions such as customer relationship management (CRM) dealt directly with customers, or
e–businessElectronic business, commonly referred to as "eBusiness" or "e-business", or an internet business, may be defined as the application of information and communication technologies in support of all the activities of business...
systems such as e–commerce, e–government, e–telecom, and e–finance, or
supplier relationship managementSupply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
(SRM) became integrated later, when the Internet simplified communicating with external parties.
"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 for such systems.
Components
- Transactional database
- Management portal/dashboard
A dashboard is a control panel placed in front of the driver of an automobile, housing instrumentation and controls for operation of the vehicle....
- Business intelligence
Business intelligence mainly refers to computer-based techniques used in identifying, extracting, and analyzing business data, such as sales revenue by products and/or departments, or by associated costs and incomes....
system
- Customizable reporting
- External access via technology such as web services
- Search
- Document management
- Messaging/chat/wiki
A wiki is a website that allows the creation and editing of any number of interlinked web pages via a web browser using a simplified markup language or a WYSIWYG text editor. Wikis are typically powered by wiki software and are often used collaboratively by multiple users. Examples include...
- Workflow management
Best practices
Best practiceA best practice is a method or technique that has consistently shown results superior to those achieved with other means, and that is used as a benchmark...
s 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. 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% when compared to other software implementations.
The use of best practices eases compliance with requirements such as IFRS, Sarbanes-Oxley, or
Basel IIBasel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
. They can also help comply with de facto industry standards, such as
electronic funds transferElectronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
. 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.
Modularity
Most systems are modular to permit automating some functions but not others. Some common modules, such as finance and accounting, are adopted by nearly all users; others such as human resource management are not. For example, a service company probably has no need for a manufacturing module. Other companies already have a system that they believe to be adequate. Generally speaking, the greater the number of modules selected, the greater the integration benefits, but also the greater the costs, risks and changes involved.
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 connectivity (communications to plant floor equipment) as part of their product offering. This requires the vendors to offer specific support for the plant floor equipment that their customers operate. ERP vendors must be expert in their own products, and connectivity to other vendor products, including competitors.
DatabaseA database is an organized collection of data for one or more purposes, usually in digital form. The data are typically organized to model relevant aspects of reality , in a way that supports processes requiring this information...
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 moduleAn enterprise appliance transaction module is a device, typically used in the manufacturing automation marketplace, for the transfer of plant floor equipment and product status to manufacturing execution systems , enterprise resource planning systems and the like.Solutions that deliver...
s (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). The benefit of an EATM is that it offers 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. 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 consumes 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.
Process preparation
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. It is therefore crucial that organizations thoroughly analyze business processes before implementation. 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:
- linking current processes to the organization's strategy;
- analyzing the effectiveness of each process;
- understanding existing automated solutions.
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 managementIn computing, master data management comprises a set of processes and tools that consistently defines and manages the non-transactional data entities of an organization...
) 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 often offset by gains in other areas, increasing overall competitive advantage.
Configuration
Configuring an ERP system is largely a matter of balancing the way the customer wants the system to work with the way it was designed to work. ERP systems typically build many changeable parameters that modify system operation. For example, an organization can select the type of inventory accounting—
FIFO or LIFOFIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks....
—to 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.
Customization
ERP systems are theoretically based on industry best practices and are intended to be deployed "as is". ERP vendors do offer customers configuration options that allow organizations to incorporate their own business rules but there are often functionality gaps remaining even after the configuration is complete. ERP customers have several options to reconcile functionality gaps, each with their own pros/cons. Technical solutions include rewriting part of the delivered functionality, writing a homegrown bolt-on/add-on module within the ERP system, or interfacing to an external system. All three of these options are 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 and/or organizational policies to better match the delivered ERP functionality.
Key differences between customization and configuration include:
- 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 in any allowed configuration.
- 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 less predictable, 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 require retesting. Other customizations (e.g. those involving changes to fundamental data structures) are overwritten during upgrades and must be reimplemented.
Customization Advantages:
- Improves user acceptance
- Offers the potential to obtain competitive advantage vis-à-vis companies using only standard features.
Customization Disadvantages:
- Increases time and resources required to both implement and maintain.
- Inhibits seamless communication between suppliers and customers who use the same ERP system uncustomized.
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:
- archiving, reporting and republishing;
- capturing transactional data, e.g. using scanner
Scanner may refer to:* WikiScanner, a tool that provides a searchable database of anonymous Wikipedia edits* A personality type described by self-help author Barbara Sher-Technology:* Scanner , for searching for and receiving radio broadcasts...
s, tills or RFID
- access to specialized data/capabilities, such as syndicated marketing data and associated trend analytics.
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:
- Identify the data to be migrated
- Determine migration timing
- Generate the data templates
- Freeze the toolset
- Decide on migration-related setups
- Define data archiving policies and procedures.
Advantages
The fundamental advantage of ERP is that integrating the myriad processes by which businesses operate saves time and expense. Decisions can be made more quickly and with fewer errors. Data becomes visible across the organization. Tasks that benefit from this integration include:
- Sales forecasting, which allows inventory optimization
- Order tracking, from acceptance through fulfillment
- Revenue tracking, from invoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
through cash receipt
- Matching purchase order
A purchase order is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services...
s (what was ordered), inventory receipts (what arrived), and costIn production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
ing (what the vendor invoiced)
ERP systems centralize business data, bringing the following benefits:
- They eliminate the need to synchronize changes between multiple systems—consolidation of finance, marketing and sales, human resource, and manufacturing applications
- They enable standard product naming/coding
-Introduction:A product naming convention is a process of product or good description or titling. Consistent use of alphanumeric characters and separating devices defines a Naming convention...
.
- They provide a comprehensive enterprise view (no "islands of information"). They make real–time information available to management anywhere, any time to make proper decisions.
- They protect sensitive data by consolidating multiple security systems into a single structure.
Disadvantages
- Customization is problematic.
- Re–engineering business processes to fit the ERP system may damage competitiveness and/or divert focus from other critical activities
- ERP 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 divert management attention.
- Integration of truly independent businesses can create unnecessary dependencies.
- Extensive training requirements take resources from daily operations.
The limitations of ERP have been recognized sparking new trends in ERP application development, the four significant developments being made in ERP are, creating a more flexible ERP, Web-Enable ERP, Interenterprise ERP and e-Business Suites, each of which will potential address the fallbacks of the current ERP.
See also
- List of ERP software packages
- List of ERP vendors
- Accounting software
Accounting software is application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, payroll, and trial balance. It functions as an accounting information system...
- Advanced planning and scheduling
- APICS
APICS The Association for Operations Management, is a not-for-profit international education organization, offering certification programs, training tools and networking opportunities to increase workplace performance...
- Bill of materials
A bill of materials is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture an end product...
(BOM)
- Business process management
Business process management is a holistic management approach focused on aligning all aspects of an organization with the wants and needs of clients. It promotes business effectiveness and efficiency while striving for innovation, flexibility, and integration with technology. BPM attempts to...
- Configurable BOM
A configurable bill of materials is a form of bill of materials used by industries that have multiple options and highly configurable products...
(CBOM)
- CEMLI
CEMLI is an ERP software extension framework provided in Oracle Applications by Oracle Corporation. CEMLI is Oracle’s published guidelines for developing and implementing custom extensions to Oracle Applications....
- Document automation
Document automation is the design of systems and workflow that assist in the creation of electronic documents. These include logic based systems that use segments of pre-existing text and/or data to assemble a new document. This process is increasingly used within certain industries to assemble...
- Data migration
Data migration is the process of transferring data between storage types, formats, or computer systems. Data migration is usually performed programmatically to achieve an automated migration, freeing up human resources from tedious tasks...
- Enterprise feedback management
Enterprise feedback management is a system of processes and software that enables organizations to centrally manage deployment of surveys while dispersing authoring and analysis throughout an organization...
(EFM)
- Enterprise planning systems
- Enterprise system
Enterprise systems are large-scale, integrated application-software packages that use the computational, data storage, and data transmission power of modern information technology to support business processes, information flows, reporting, and data analytics within and between complex...
- E-procurement
E-procurement is the business-to-business or business-to-consumer or Business-to-government purchase and sale of supplies, Work and services through the Internet as well as other informations and networking systems, such as Electronic Data Interchange and Enterprise Resource Planning.E-procurement...
- ERP modeling
ERP modeling, abbreviated to ERP, is the process of reverse engineering an Enterprise Resource Planning software package in order to align it to an organizational structure.-Usage:...
- ERP for IT
- ERP system selection methodology
An ERP system selection methodology is a formal process for selecting an enterprise resource planning system. Existing methodologies include:* SpecIT Independent Vendor Selection Management* Kuiper's funnel method* Dobrin's 3D decision support tool...
- Information technology management
IT management is the discipline whereby all of the technology resources of a firm are managed in accordance with its needs and priorities. These resources may include tangible investments like computer hardware, software, data, networks and data centre facilities, as well as the staffs who are...
- List of project management software
- Management information system
A management information system provides information needed to manage organizations efficiently and effectively. Management information systems involve three primary resources: people, technology, and information. Management information systems are distinct from other information systems in that...
- Manufacturing operations management
Manufacturing operations management is a methodology for viewing an end-to-end manufacturing process with a view to optimizing efficiency....
- Modular BOM
A modular bill of materials is type of bill of materials and a critical element in defining the product structure of an end-item....
(MBOM)
- Order to cash
"Order to cash" normally refers to the business process for receiving and processing customer sales. It follows "Opportunity to Order" and covers business-to-business and business-to-consumer sales...
- Service management
Service management is integrated into supply chain management as the joint between the actual sales and the customer. The aim of high performance service management is to optimize the service-intensive supply chains, which are usually more complex than the typical finished-goods supply chain...
- Software as a service
Software as a service , sometimes referred to as "on-demand software," is a software delivery model in which software and its associated data are hosted centrally and are typically accessed by users using a thin client, normally using a web browser over the Internet.SaaS has become a common...
- Supply chain management
Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
- Warehouse management system
A warehouse management system, or WMS, is a key part of the supply chain and primarily aims to control the movement and storage of materials within a warehouse and process the associated transactions, including shipping, receiving, putaway and picking...
Further reading