Enterprise Resource Planning (ERP)

Overview

The initials ERP originated as an extension of MRP (Material Requirements Planning and later Manufacturing Resource Planning) and CIM (Computer Integrated Manufacturing). It was introduced by research and analysis firm Gartner in 1990. ERP systems now attempt to cover all core functions of an enterprise, regardless of the organization's business or charter. ERP software can aid in the control of many business activities, including sales, marketing, delivery, billing, production, inventory management, quality management, and human resource management. These systems can now be found in non-manufacturing businesses, non-profit organizations and governments.

ERP II, a term coined in the early 2000s, is often used to describe what would be the next generation of ERP software. This new generation of software is web-based and allows both employees and external resources (such as suppliers and customers) real-time access to the system's data.

An ERP system typically has modular hardware and software units and "services" that communicate on a local area network. The modular design allows a business to add or reconfigure modules (perhaps from different vendors) while preserving data integrity in one shared database that may be centralized or distributed.

Businesses have a wide scope of applications and processes throughout their functional units; producing ERP software systems that are typically complex and usually impose significant changes on staff work practices. Implementing ERP software is typically too complex for "in-house" skill, so it is desirable and highly advised to hire outside consultants who are professionally trained to implement these systems. This is typically the most cost effective way.

Advantages

ERP Systems centralize the data in one place.
  • Eliminates the problem of synchronizing changes between multiple systems
  • Permits control of business processes that cross functional boundaries
  • Provides top-down view of the enterprise (no "islands of information")
  • Reduces the risk of loss of sensitive data by consolidating multiple permissions and security models into a single structure

Disadvantages

  • Customization of the ERP software is limited
  • Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage
  • ERP systems can be very expensive
  • ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companies—this is cited as one of the main causes of their failure

ERP outsourcing?

In many cases it has been found that companies would experience a higher rate of success if ERP operations were vested to an external third party person. Hence the need of ERP outsourcing arose. Many of them have resorted to outsourcing ERP to do away with the headache of self-proclaimed ERP systems for many reasons like costs, burden of training and doing everything right from business process reengineering to undergoing the hilarious procedures in choosing an ERP vendor.

Companies are known to choose ERP outsourcing for these reasons:

Manpower deficiencies

IT professionals are always in great demand all over the globe. It becomes very difficult to retain IT talent pool. The case of an ERP professional is in no way different. It will be difficult for the company to train new people on their systems. Such training will take long time for the person to be acclimatized to the process. Companies therefore prefer to outsource ERP rather thank relying on the undependable human factor which exhibits a very high rate of attrition.

Vague understanding of ERP

The level of expertise required for ERP during the stages of ERP training, implementation has to be at par with industry standards. Unfortunately this does not happen in many companies for reasons like poor training or apprehension to change or other practical difficulties.

Companies find themselves strayed with the half-baked knowledge on ERP. Since this is bound to do more harm than good a large number of they are keen on ERP outsourcing. The company could also face the dilemma of choosing developer ERP outsourcing or consultant ERP outsourcing.

Vagaries of IT Department

The IT departments (comprising of both ERP and non ERP professionals) are either unable to meet the demands of the ERP process in the company or not competent enough to carry on the same. Another issue is that the company does not necessarily heed to their advice and modifications in every stage. All these could affect their autonomy which in turn will reflect on the progress of ERP in the company.

When the company is outsourcings ERP services they are not going to have any say unless explicitly agreed upon. Moreover the tendency of the human mind accepts the view of an external person's in the right sense even if it is a criticism. The company should make a choice between developer ERP outsourcing and consultant ERP outsourcing.

Conclusion

The above parameters should not be taken as the guiding factor for ERP outsourcing. It all depends on the needs and circumstances of the company. ERP outsourcing is not the only solution to ERP. Rather it is one among the solution to tackle ERP problem. Similarly ERP outsourcing need not necessarily bring fortunes to the company. ERP outsourcing is not free from limitations or flaws like leaking of the company's confidential information and inflexibility of the third party. However other benefits outplay the aforesaid and thereby strongly advocate ERP outsourcing.

Functional Modules

ERP software is made up of many software modules. Each ERP software module mimics a major functional area of an organization. Common ERP modules include modules for product planning, parts and material purchasing, inventory control, product distribution, order tracking, finance, accounting, marketing, and HR. Organizations often selectively implement the ERP modules that are both economically and technically feasible.

Production Planning Module

In the process of evolution of manufacturing requirements planning (MRP) II into ERP, while vendors have developed more robust software for production planning, consulting firms have accumulated vast knowledge of implementing production planning module. Production planning optimizes the utilization of manufacturing capacity, parts, components and material resources using historical production data and sales forecasting.

Purchasing Module

Purchase module streamline procurement of required raw materials. It automates the processes of identifying potential suppliers, negotiating price, awarding purchase order to the supplier, and billing processes. Purchase module is tightly integrated with the inventory control and production planning modules. Purchasing module is often integrated with supply chain management software.

Inventory Control Module

Inventory module facilitates processes of maintaining the appropriate level of stock in a warehouse. The activities of inventory control involves in identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status. Integration of inventory control module with sales, purchase, finance modules allows ERP systems to generate vigilant executive level reports.

Sales Module

Revenues from sales are live blood for commercial organizations. Sales module implements functions of order placement, order scheduling, shipping and invoicing. Sales module is closely integrated with organizations' ecommerce websites. Many ERP vendors offer online storefront as part of the sales module.

Financial Module

Both for-profit organizations and non-profit organizations benefit from the implementation of ERP financial module. The financial module is the core of many ERP software systems. It can gather financial data from various functional departments, and generates valuable financial reports such balance sheet, general ledger, trail balance, and quarterly financial statements.

HR Module

HR (Human Resources) is another widely implemented ERP module. HR module streamlines the management of human resources and human capitals. HR modules routinely maintain a complete employee database including contact information, salary details, attendance, performance evaluation and promotion of all employees. Advanced HR module is integrated with knowledge management systems to optimally utilize the expertise of all employees.

Customization vs Configuration

Increasingly, ERP vendors have tried to reduce the need for customization by providing built-in "configuration" tools to address most customers' needs for changing how the out-of-the-box core system works. Key differences between customization and configuration include:
  • Customization is always optional, whereas some degree of configuration (e.g., setting up cost/profit centre structures, organisational trees, purchase approval rules, etc.) may be needed before the software will work at all.
  • Configuration is available to all customers, whereas customization allows individual customer to implement proprietary "market-beating" processes.
  • Configuration changes tend to be recorded as entries in vendor-supplied data tables, whereas customization usually requires some element of programming and/or changes to table structures or views.
  • The effect of configuration changes on the performance of the system is relatively predictable and is largely the responsibility of the ERP vendor. The effect of customization is unpredictable and may require time-consuming stress testing by the implementation team.
  • Configuration changes are almost always guaranteed to survive upgrades to new software versions. Some customizations (e.g. code that uses pre-defined "hooks" that are called before/after displaying data screens) will survive upgrades, though they will still need to be re-tested. More extensive customizations (e.g. those involving changes to fundamental data structures) will be overwritten during upgrades and must be re-implemented manually.
By this analysis, customizing an ERP package can be unexpectedly expensive and complicated, and tends to delay delivery of the obvious benefits of an integrated system.