What is ERP?
Enterprise resource planning (ERP) is business management software, typically a suite of integrated applications that a company can use to collect, store, manage and interpret data from many business activities, including: Product planning, Manufacturing or Service Delivery, Marketing and Sales, Inventory Management, Shipping and Payment
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. ERP facilitates information flow between all business functions, and manages connections to outside stakeholders.
Characteristics of an ERP System:
ERP (Enterprise Resource Planning) systems typically include the following characteristics:
- An integrated system that operates in (or near) real time without relying on periodic updates
- A common database that supports all applications
- A consistent look and feel across modules
- Installation of the system with elaborate application/data integration by the Information Technology (IT) department, provided the implementation is not done in small steps
An ERP system covers the following common functional areas. In many ERP systems these are called and grouped together as ERP modules:
Management Accounting: Budgeting, costing, cost management, activity based costing
Project Management: Project Planning, resource planning, project costing, work breakdown structure, billing, time and expense, performance unity, activity management
Manufacturing: Engineering, bill of materials, work orders, scheduling, capacity, workflow management, quality control, manufacturing process, manufacturing projects, manufacturing flow, product life cycle management
Order Processing: Order to cash, order entry, credit checking, pricing, available to promise, inventory, shipping, sales analysis and reporting, sales commissioning
Financial Accounting: General ledger, fixed asset, payables (including vouchering, matching and payment) payment, receivables cash application and collections, cash management, financial consolidation
Supply Chain Management: Supply chain planning, supplier scheduling, product configurator, order to cash, purchasing, inventory, claim processing, warehousing (receiving, storage, picking and packing)
Customer Relationship Management: Sales and marketing, commissions, service, customer contact, call centre support – CRM systems are not always considered part of ERP systems, but rather Business Support Systems (BSS)
Human Resources: Recruiting, training, rostering, payroll, benefits, diversity management, retirement, separation
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. ERP vendors must be experts in their own products and connectivity to other vendor products, including those of their competitors.
Database integration: ERP systems connect to plant floor data sources through staging tables in a database. Plant floor systems deposit the necessary information into the database. The ERP system reads the information in the table. The benefit of staging is that ERP vendors do not need to master the complexities of equipment integration. Connectivity becomes the responsibility of the systems integrator.
Enterprise Appliance Transaction Modules (EATM): These devices communicate directly with plant floor equipment and with the ERP system via methods supported by the ERP system. EATM can employ a staging table, Web Services, or system–specific program interfaces. 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.
Generally, three types of services are available to help implement an ERP system: 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.
Process Preparation: It is crucial that organizations thoroughly analyse 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
- Analysing the effectiveness of each process
- Understanding existing automated solutions
ERP implementations 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.
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 to use; whether to recognize revenue by geographical unit, product line, or distribution channel; and whether to pay for shipping costs on customer returns.
Customisation: ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them as such, however ERP vendors do offer customers configuration options that let organisations incorporate their own business rules.
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 home grown module to work within the ERP system, or interfacing to an external system. These three options constitute varying degrees of system customisation—with the first being the most invasive and costly to maintain. Alternatively, there are non-technical options such as changing business practices or organisational policies to better match the delivered ERP feature set. Key differences between customisation and configuration include:
- Customization is always optional, whereas the software must always be configured before use (e.g., setting up cost/profit centre 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 behaviour 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.
Customization advantages include:
- That it improves user acceptance
- Offers the potential to obtain competitive advantage vis-à-vis companies using only standard features
Customization disadvantages include:
- Ii increases time and resources required to implement and maintain
- Customisation can inhibit seamless communication between suppliers and customers who use the same ERP system straight out of the box
- It can create over reliance on customization, undermining the principles of ERP as a standardizing software platform
ERP systems can be extended with third–party software. ERP vendors typically provide access to data and features through published interfaces. Extensions offer features such as:
- 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 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 data to migrate
- Determine migration timing
- Generate data templates
- Freeze the toolset
- Decide on migration-related setups
- Define data archiving policies and procedures
The fundamental advantage of ERP is that integrated myriad businesses processes saves time and expense. Management can make decisions faster and with fewer errors. Data becomes visible across the organisation. Tasks that benefit from this integration include:
- Sales forecasting, which allows inventory optimisation
- 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
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.
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.
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.
Thank you to the brilliant minds at Compusoft Australia and Wikipedia for help with this article.