ERP provides an integrated view of core business processes, often in real-time, 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 provide the data.
[1] ERP facilitates information flow between all business functions, and manages connections to outside stakeholders.
[2]
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.
[citation needed]
"ERP II" was coined in 2000 in an article by Gartner Publications entitled
ERP Is Dead — Long Live ERP II.
[12] 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.
[13] 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 (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:
Implementation
ERP's scope usually implies significant changes to staff work processes and practices.
[18] Generally, three types of services are available to help implement such changes—consulting, customization, and support.
[18] 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.
[19] Small projects can require months; multinational and other large implementations can take years.
[citation needed] Customization can substantially increase implementation times.
[19]
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.
[20]
Process preparation
Implementing ERP typically requires changes in existing business processes.
[21] Poor understanding of needed process changes prior to starting implementation is a main reason for project failure.
[22] The problems could be related to the system, business process, infrastructure, training, or lack of motivation.
[23]
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:
- Linking current processes to the organization's strategy
- Analyzing the effectiveness of each process
- Understanding existing automated solutions[24][25]
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.
[26] 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.
[27]
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.
[28][29]
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 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.
[27]
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
[who?] 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 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.
[30] 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.
[31]
Factors that affect enterprises adoption of two-tier ERP systems include:
- Manufacturing globalization, the economics of sourcing in emerging economies
- Potential for quicker, less costly ERP implementations at subsidiaries, based on selecting software more suited to smaller companies
- Extra effort, (often involving the use of Enterprise application integration[32]) is required where data must pass between two ERP systems[33] Two-tier ERP strategies give enterprises agility in responding to market demands and in aligning IT systems at a corporate level while inevitably resulting in more systems as compared to one ERP system used throughout the organization.[34]
Customization
ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them
as is.
[35][36] 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.
[37] 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 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 is 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. It 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.[38]
Customization advantages include that it:
- Improves user acceptance[39]
- Offers the potential to obtain competitive advantage vis-à-vis companies using only standard features
Customization disadvantages include that it:
- Increases time and resources required to implement and maintain[37]
- Inhibits seamless communication between suppliers and customers who use the same ERP system uncustomized[citation needed]
- Can create over reliance on customization, undermining the principles of ERP as a standardizing software platform
Extensions
ERP systems can be extended with third–party software.
[40] ERP vendors typically provide access to data and features through published interfaces. Extensions offer features such as:
[citation needed]
- Archiving, reporting, and republishing
- Capturing transactional data, e.g., using scanners, tills or RFID
- Access to specialized data and capabilities, such as syndicated marketing data and associated trend analytics
- Advanced planning and scheduling (APS)
- Managing resources, facilities, and transmission in real-time
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:
[41]
Comparison to special–purpose applications
Advantages
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:
[citation needed]
- Sales forecasting, which allows inventory optimization.
- Chronological history of every transaction through relevant data compilation in every area of operation.
- Order tracking, from acceptance through fulfillment
- Revenue tracking, from invoice through cash receipt
- Matching purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced)
ERP systems centralize business data, which:
- Eliminates the need to synchronize changes between multiple systems—consolidation of finance, marketing, sales, human resource, and manufacturing applications
- Brings legitimacy and transparency to each bit of statistical data
- Facilitates standard product naming/coding
- Provides a comprehensive enterprise view (no "islands of information"), making real–time information available to management anywhere, any time to make proper decisions
- Protects sensitive data by consolidating multiple security systems into a single structure[42]
Benefits
- ERP can improve quality and efficiency of the business. By keeping a company's internal business processes running smoothly, ERP can lead to better outputs that may benefit the company, such as in customer service and manufacturing.
- ERP supports upper level management by providing information for decision making.
- ERP creates a more agile company that adapts better to change. ERP makes a company more flexible and less rigidly structured so organization components operate more cohesively, enhancing the business—internally and externally.[43]
- ERP can improve data security. A common control system, such as the kind offered by ERP systems, allows organizations the ability to more easily ensure key company data is not compromised.[citation needed]
- ERP provides increased opportunities for collaboration. Data takes many forms in the modern enterprise. Documents, files, forms, audio and video, emails. Often, each data medium has its own mechanism for allowing collaboration. ERP provides a collaborative platform that lets employees spend more time collaborating on content rather than mastering the learning curve of communicating in various formats across distributed systems.[citation needed]
Disadvantages
- Customization is problematic.
- Re-engineering business processes to fit the ERP system may damage competitiveness or divert focus from other critical activities.
- ERP can cost more than less integrated or less comprehensive solutions.
- High ERP switching costs can increase the ERP vendor's negotiating power, which can increase 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.
- Due to ERP's architecture (OLTP, On-Line Transaction Processing) ERP systems are not well suited for production planning and supply chain management (SCM).
- Harmonization of ERP systems can be a mammoth task (especially for big companies) and requires a lot of time, planning, and money.[44]
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.
