Introduction to ERP OBJECTIVE EXPECTED OUTCOME

Transcription

1 1 Introduction to ERP OBJECTIVE To introduce the concept of Enterprise Resource Planning (ERP). To describe benefits of ERP. To describe the limitations of ERP. To describe What an integrated system is. EXPECTED OUTCOME The readers will be able to: Understand the concepts behind an ERP system. Visualize ERP as packaged software. Understand the information integration through the ERP system. Enterprise Resource Planning Software or ERP doesn't live up to its acronym. Forget about planningit doesn't do much of that-and forget about resource, a throwaway term. But remember the enterprise part. This is ERP's true ambition. It attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different departments' particular needs. That is a tall order, building a single software program that serves the needs of people in finance as well as answering the needs of the people in human resources and in the warehouse. Each of those departments typically has its own computer system optimized for the particular ways in which the department does its work. But ERP combines them all together into a single, integrated software program that runs off a single database so that the various departments can more easily share information and communicate with one another. That integrated approach can have a tremendous payback if companies install the correct software. Enterprise Resource Planning (ERP) covers the techniques and concepts employed for the integrated management of businesses as a whole, from the viewpoint of the effective use of management resources, to improve the efficiency of an enterprise. ERP packages are integrated software packages that support these ERP concepts. In the beginning, they were targeted at the manufacturing industry, and consisted mainly of functions for planning and managing core businesses such as sales management, production management, accounting and financial

2 2 Enterprise Resource Planning affairs, etc. However, in recent years, adaptation not only to the manufacturing industry, but also to diverse types of industry has become possible and the expansion of implementation and use has been progressing on a global level. ERP software standardizes an enterprise's business processes and data. The software converts transactional data into useful information and collates the data so that they can be analyzed. In this way, all of the collected transactional data become information that companies can use to support business decisions. The perspective that ERP software is simply a means of cutting cost is still prevalent. As a result, organizational resistance to ERP implementation has often been high, and not all ERP implementation programs delivered the promised enterprise improvements. 1.1 BENEFITS OF AN ERP SYSTEM Installing an ERP system has many direct and indirect advantages. The direct advantages include improved efficiency, information integration for better decision making, faster response time to customer queries, etc. The indirect benefits include a better corporate image, improved customer goodwill, customer satisfaction, and so on. The following are some of the direct benefits of an ERP system: Business Integration Flexibility Better Analysis and Planning Capabilities Use of Latest Technology Integration is the first and most important advantage of implementing ERP. The reason why ERP packages are considered to be integrated is the automatic data updation that is possible among the related business components. Since conventional company information systems were aimed at the optimization of independent business functions in business units, almost all of them were weak in terms of the communication and integration of information that transcended the different business functions. In the case of large companies in particular, the timing of system construction and directives differs for each product and department/function and sometimes, they are disconnected. For this reason, it has become an obstacle in the shift to new product and business classification. In the case of ERP packages, the data of related business functions are also automatically updated at the time a transaction occurs. For this reason, one is able to grasp business details in real time, and carry out various types of management decisions in a timely manner, based on that information. The second advantage of ERP packages is their flexibility within the business functions. Different languages, currencies, accounting standards and so on can be covered in one system, and functions that comprehensively manage multiple locations of a company can be packaged and implemented automatically. To cope with company globalization and system unification, this flexibility is essential, and one can say that it has major advantages, not simply for development and maintenance, but also in terms of management. Another advantage is the boost to the planning functions. By enabling the comprehensive and unified management of related business and its data, it becomes possible to fully utilize many types of decision support systems and simulation functions. Furthermore, since it becomes possible to carry out, flexibly and in real time, the filing and analysis of data from a variety of dimensions, one is able to give the decision makers the information they want, thus enabling them to make better and informed decisions. The fourth advantage is the utilization of the latest developments in Information Technology (IT). The ERP vendors were very quick to realize that in order to grow and to sustain that growth, they

3 Introduction to ERP 3 had to embrace the latest developments in the field of Information Technology. Therefore, they quickly adapted their systems to take advantage of the latest technologies like open systems, client/server technology, Internet/Intranet, electronic-commerce, etc. It is this quick adaptation to the latest changes in Information Technology that makes the flexible adaptation to changes in future business environments possible. It is this flexibility that makes the incorporation of the latest technology possible during system customization, maintenance and expansion phases. ERP includes many of the functions that will be necessary for future systems. However, undertaking reforms to company structures and business processes, so as to enable the full use of these major features, is the greatest task for companies that will use them. It is necessary to take note that casually proceeding with the implementation of ERP merely for reasons of system reconstruction is likely to result in turning the advantages into disadvantages. The most important aspect to consider when installing an ERP system in a company is the attitude to reform of the employees at all levels of the company. How managers use information systems and information technology as strategic management methods is likely to become the turning point of the change. Other benefits of an ERP system include reduction of lead-time, on-time shipment, reduction in cycle time, better customer satisfaction, improved supplier performance, increased flexibility, reduction in quality costs, improved resource utility, improved information accuracy and enhanced decisionmaking capability. The elapsed time between placing an order and receiving it is known as the lead-time. It plays a significant role in purchasing and inventory control. In order to reduce the lead-time, the organization should have an efficient inventory management system, which is integrated with the purchasing, production planning and production departments. In this era of just-in-time manufacturing, the knowledge of the exact lead-time for each and every item is of paramount importance for uninterrupted production. For a company dealing with hundreds and thousands of raw materials and components, keeping track manually of the lead-time for each and every individual item is practically an impossible task. Companies must be able to deliver customer-specific products (make-to-order). The ERP systems provide the freedom to change manufacturing and planning methods as needs change, without modifying or reconfiguring the workplace or plant layouts. With ERP systems, businesses are not limited to a single manufacturing method, such as make-to-stock or make-to-order. Cycle time is the time between receipt of the order and delivery of the product. It can be reduced by the ERP systems, but the reduction will be more in the case of make-to-order systems. In the case of make-to-stock, the items are already manufactured and kept in warehouses or with distributors for sale. Here, the cycle time is reduced not on shop floor, but during order fulfillment. In earlier days, even for the make-to-stock items, the cycle time used to be high. This was because the process was manual and if computerized, not integrated. In the case of make-to-order items, the ERP systems save time by integrating with CAD/CAM systems. The creation of an accurate, achievable production schedule requires the availability of both material and capacity. It is useless, and indeed wasteful, to have financial resources tied up in material, if the capacity is insufficient or improperly planned. Waste not only raises costs, it also affects customer service levels and customer good will. The capacity planning features of most ERP systems offer both rough-cut and detailed capacity planning. The system loads each resource with production requirements from Master Production Scheduling, Material Requirements Planning, and Shop Floor Control (detailed capacity planning). The ERP systems also have simulation capabilities that help the capacity and resource planners to simulate the various capacity and resource utilization scenarios and choose the best option.

4 4 Enterprise Resource Planning ERP systems have proved that they can produce goods at the flexibility of make-to-order approach without losing the cost and time benefits of make-to-order operations. This means that the customer will get individual attention and the features that he/she wants, without spending more money or waiting for long periods. Also, with the introduction of the web-enabled ERP systems, customers can place the order, track the status of the order and make the payment sitting at home. The customer could get technical support by either accessing the company's technical support knowledge base (help desk) or by calling the technical support. Since all the details of the product and the customers are available to the person at the technical support department, the company is able to provide better support to the customer. All this is possible because of the use of the latest developments in Information Technology by the ERP systems, and this will go a long way in improving customer satisfaction. ERP systems provide vendor management and procurement support tools designed to coordinate all aspects of the procurement process. They support the organization in its efforts to effectively negotiate, monitor, and control procurement costs and schedules while assuring superior product quality. The supplier management and control processes comprise of features that will help the organization in managing the supplier relations, monitoring the vendor activities and managing the supplier quality. Flexibility is a key issue in the formulation of strategic plans in companies. Sometimes, flexibility means quickly changing something that is being done, or completely changing to adjust to new product designs. At other times, flexibility is the ability to produce in small quantities, in order to produce a product mix that may better approximate actual demands and reduce work-in-progress inventories. Quality is defined in many different ways--excellence, conformance to specifications, fitness for use, value for the price, and so on. ERP packages support the benchmarking and use of optimal product design, process engineering, and quality assurance data by all functional departments within the manufacturing enterprise, thereby facilitating definition of repeatable processes, root cause analysis, and the continuous improvement of manufacturing methods. This documentation supports the job functions of the quality assurance and production managers in validating the manufacturer's conformance to ISO 9000, Good Manufacturing Practices (GMP) worldwide, and a variety of country specific standards of quality assurance. We have seen that in today's competitive business environment, the key resource of every organization is information. If the organization does not have an efficient and effective mechanism that enables it to give the decision-makers the right information at the right time, then the chances of that organization succeeding in the next millennium are very remote. ERP relates to the software infrastructure that holds the entire company together internally, on the one hand, and supports the external business processes the company engages in, on the other. ERP solutions are designed to grow with the company. Unlike some stand-alone applications, they do not "top out" without transition paths to other solutions, leaving us to start over from scratch with a new and different application. And there are some key traits in ERP solutions: Scalability. Vendor management. Functionality. Reliable service and support. Integrated modules. The beauty of an ERP application is that it is a suite in which all work together--without this capability, we can't have seamless business processes. Modularity comes to play mainly in how we purchase and implement our ERP system. We may not need all applications at once, or we may want to

5 Introduction to ERP 5 deploy one application at a time. They are different from separate applications in that when more than one is implemented, they fit together and work automatically. 1.2 LIMITATIONS OF THE ERP SYSTEM ERP applications have succeeded in integrating data from multiple functional areas, resulting in an incremental addition of value over previous "legacy" point solutions. However, their scope is limited to the single enterprise, they are typically slow and they are transaction-based, not intelligence based, so they fail to encapsulate the complexity required in cases where multiple courses of action are available. In contrast to ERP systems, APS (Advanced Planning & Scheduling) systems are intelligent (that is, they provide modeling and analysis capabilities for intelligent decision support). Some of the shortcomings of the ERP software are given below: ERP systems are basically meant for recording what has already happened, rather than planning for what will be. These systems can process orders, but they do not analyze business situations to provide insight into future courses of action. ERP systems allow an enterprise to design complex and sophisticated workflows, but are far too rigid in their ability to continually reshape and restructure workflows as business challenges and opportunities arise. While ERP systems integrate multiple business functions, they lack the ability to expand their scope to multiple enterprises. This gap has to be filled. Some risks to watch out for in implementing an ERP system include: User Resistance/Revolt - Users who fear being downsized may sabotage the system. Mismatch between ERP system and Organizational Culture--If a system attempts to implement best practices inappropriate to the organization, the system may suffer from "culture clash" consequences. Inability to manage technology. Illogical processing. Inability to stop processing quickly. Cascading errors. Repetition of Errors. Concentration of data. The limitations and pitfalls of the Enterprise Resource Planning are as follows. The systems can be too expensive to install and maintain. ERP is often seen as too rigid and difficult to adapt to the specific Workflow and Business process of some companies. This is cited as one of the main cause of their failure. 1.3 WHAT DO ERP SYSTEMS COVER? A fully integrated ERP system will satisfy the following features: Reduces the complexity in the business processes. Delivers requirements satisfactorily. Has common ways of working (uses standard processes for transactions). Adheres to a common set of financial standards and product coding.

6 6 Enterprise Resource Planning Integrated across a large portion of the organizations internal procedures, i.e. covers the main internal functions such as finance, distribution, manufacturing, sales and HR. ERP is a packaged software solution that addresses the enterprise needs taking the process view of an organization to meet the organizational goals, tightly integrating all functions of an enterprise. It is a set of application software that integrates manufacturing, finance, sales, distribution, HR and other business functions with a single comprehensive database that collects data from and feeds data into modular applications supporting all the company's business activities, across these functions, across business units, across the world. An information system is an open, purposive system that produces information using the 'inputprocess-output' cycle. The minimal information system consists of three elements--people, procedures and data. People follow procedures to manipulate data to produce information. In today's computer world, the definition of information systems has undergone a slight change. Today, an information system is an organized combination of people, hardware, software, and communication networks and data resources. 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 information system. 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 cost-effective alternatives to custom software. Thus some ERP software cater to a wide range of industries from service sectors like software vendors and hospitals to manufacturing industries and even to government departments.

7 Introduction to ERP 7 ERP vanquishes the old standalone computer systems in finance, HR, manufacturing and the warehouse, and replaces them with a single unified software program divided into software modules that roughly approximate the old standalone systems. Finance, manufacturing and the warehouse all still get their own software, except that now the software is linked together so that someone in finance can look into the warehouse software to see if an order has been shipped. Most vendors' ERP software is flexible enough for us to install some modules without buying the whole package. Many companies, for example, will just install an ERP finance or HR module and leave the rest of the functions for another day. 1.4 CHALLENGES FOR SMALL AND MIDSIZE BUSINESSES TODAY Smaller enterprises ducked the ERP wave of the mid--1990s and did not succumb to the cost structures or the risks that their larger brethren undertook. Now, these firms often have outdated or overloaded applications and need to invest in new technology to achieve or retain competitiveness in their markets. Today, many small and midsize businesses are in need of upgrades, more or different software applications, more current or robust technology, and often more sophisticated business solutions. SUMMARY At its simplest level, ERP is a set of best practices for performing different duties in a company, including finance, manufacturing and the warehouse. To get the most from the software, we have to get people inside our company to adopt the work methods outlined in the software. If the people in the different departments which will be using ERP don't agree that the work methods embedded in the software are better than the ones they currently use, they will resist using the software or will want IT to change the software to match the ways they currently do things. This is where ERP projects break down. Customizations make the software more unstable and harder to maintain when it finally does come to life. The horror stories we hear everyday about ERP can usually be traced to the changes the company made in the core ERP software to fit its own work methods. Because ERP covers so much of what a business does, a failure in the software can bring a company to a halt, literally. REVIEW QUESTIONS 1. What is ERP? 2. Carefully examine the technological and nontechnological limitations of ERP software. 3. Is ERP packaged software? 4. ERP software is meant for manufacturing industries. - Comment. 5. Distinguish between conventional application packages and ERP packages. 6. How does ERP software standardize the existing business processes? 7. Why do ERP projects fail so often? 8. ERP has got nothing to do with planning. - Justify. 9. ERP is known for information integration. Explain.

8 8 Enterprise Resource Planning 10. What are the issues to consider when we go for an integrated system? 11. How will you ensure that ERP software purchased will fit into your organization? 12. What are the gaps in the development of packaged software? 13. Will ERP software eliminate clerical jobs? If so, how can the existing man power be effectively utilized? 14. How will you measure the performance of an organization before and after ERP implementation? Propose suitable metrics. 15. ERP is a catalyst of fundamental changes in organizations. - Comment. 16. What are the salient features of an integrated system like ERP? 17. Select an organization of your choice (say a school, college, software company, etc) and identify their major functions. Classify their functions into various modules. Now, develop a diagram that shows the information integration of the organization and propose an ERP solution.