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Unit 1
Unit 1
Introduction to ERP
Structure: 1.1 Introduction Objectives 1.2 Evolution of ERP 1.3 What is ERP 1.4 Reasons for the Growth of the ERP Market 1.5 The Advantages of ERP Business integration Flexibility Better analysis and planning capabilities Use of latest technology 1.6 Why Do ERPs fail? 1.7 What is the ERP Packages Used Now? 1.8 Summary 1.9 Terminal Questions 1.10 Answers 1.11 Case Study 1.12 Glossary
1.1 Introduction
This unit familiarises you with Enterprise Resource Planning (ERP) and its history. Information handling and sharing has become a vital process for efficient and effective working of any organisation. The digital revolution has given us the ability to treat information with mathematical precision, to transmit it with very high accuracy, and to manipulate it at will. This Information Technology (IT) has revolutionised the way we live and work. It is changing all aspects of our life and lifestyle, and transforming the world we live into one small global village. The amount of calculation power that is available to us is increasing at an exponential rate. Communication and computers are becoming integral parts of our lives. However, we need to manage the future not just to survive but also to succeed and to beat the competition in today's highly competitive world. Managing the future means managing information. Organisations have to
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make IT an ally, harness its full potential, and use it in the best possible way in order to: Manage information. Render high quality information to the decision-makers at the right time. Automate the method of data collection, collation, and refinement.
All organisations have certain objectives and goals to achieve. For any organisation to succeed, all business units or departments should work towards this common goal. However, in an organisation, each department or business function has its own goals and procedures. The departmental objectives can sometimes be conflicting. For example, the finance department might want to cut down the advertising budget, whereas the marketing department might want more money. Similarly the productionplanning department might want to reduce the stock level in stores, but the production people might want to have more stocks. Here, information becomes critical not only for resolving the conflicts but, also to make them collectively work for the company as one unit, to meet the companys objectives and goals. Each department managing its activities efficiently is not enough; it should also help other departments to manage their functions efficiently. This can be achieved only if departments in an organisation stop functioning as discrete units and working in isolation. Every employee should know what the counterparts are doing and how their actions and decisions affect other departments. This kind of information sharing was difficult in the early days. Now with the advancements in IT, this is possible. IT plays a crucial role, both at the organisational level and at the departmental level. At the organisational level, IT assists in specifying objectives and strategies of the organisation. IT also aids in developing and supporting systems and procedures to achieve them. At the departmental level, IT ensures a smooth flow of information across departments, and guides organisations to adopt the most practical business practices. At this level, IT ensures faultless flow of information across different departments and develops and maintains an enterprise-wide database. This database eliminates the need of the isolated data units that was limited to one department earlier and now makes the organisation's data accessible across the departmental boundaries. This enterprise-wide data sharing has
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many benefits like automation of the procedures, availability of high quality information for better decision making, faster response times, and so on. Learning Objectives After studying this unit, you will be able to: Explain the evolution of ERP. Explain the concept of ERP. Describe the need of ERP. Assess the benefits of ERP. Analyse the reasons for failure of ERP. Self Assessment Questions 1. _______________ has become a vital process for efficient and effective working of any organisation. 2. _________________ plays a crucial role, both at the organisational level and at the departmental level.
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software that provided solution for handling these fragments of information. And IT had started its work in organisations for effective management of all the information of the organisation. Figure 1.1 shows a pre-ERP scenario.
Data Base
Although IT provided the perfect answer, in the haste, most developers ended up developing need-based, isolated, and piecemeal information systems that were non-compatible. In the pre-ERP scenario as depicted in the figure 1.1, the information or data regarding a particular department remained with in the departments own data base, and no other department could access that information. Only the top level management of the company was able to access this information. Any other department requiring this information had to collect the information from the top management. This led to a fragmented system, each working in isolation without direct communication between each other. The developers concentrated more on making the individual departments information organisation and maintenance more efficient instead of, integrating all the departments of a company, which was a major draw back. And it is no
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wonder that IT implementations automated only the existing applications and not the business functions. Most of this happened because IT was not integrated into the corporate strategy. We have to devise a system with a complete insight of the enterprise so that we can draw real benefits from a technology as powerful as IT. Such a system has to work around the core activities of the organisation, and should facilitate faultless flow of information across departmental barriers. Such systems can optimally plan and manage all the resources of the organisation, and hence, they can be called as Enterprise Resource Planning (ERP) systems. An Enterprise is a group of people with a common goal, which has certain resources at its disposal to achieve that goal. The group has some key functions to perform in order to achieve its goal. Resources included are money, manpower, materials, and other things that are required to run the enterprise. Planning is done to ensure that nothing goes wrong. Planning means, putting necessary functions in place and more importantly, putting them together. Therefore, Enterprise Resource Planning or ERP is a method of effective planning of all the resources in an organisation. We have many misconceptions about ERP. The first one is that ERP is a computer system. Yes, computers and IT are integral parts of an ERP system; but ERP is primarily an enterprise-wide system, which encompasses corporate mission, objectives, attitudes, beliefs, values, operating style, and people who make the organisation. The second misconception is that ERP is for manufacturing organisations alone. This assumption is basically due to the way ERP was historically developed from the methods of Material Requirement Planning (MRP) and Manufacturing Resource Planning (MRP-II), which are relevant to manufacturing organisations. In the manufacturing industry, MRP became the fundamental concept of production management and control in the mid 1970s. At this time the prevailing trend in manufacturing industry was Bill of Materials (BOM). BOM is a purchase order management system that utilises parts list management and parts development management techniques. And this concept unfolded from order inventory management of materials to plant. MRP-II was carved out of MRP, consisted Human Resource planning and distribution planning, in turn became MRP-II. This incorporated financial
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accounting, human resource management functions, distribution management functions, and management accounting functions. It came to globally cover all areas of enterprise core business, and eventually, was called ERP. But in reality, the concept of enterprise-wide planning of resources is not limited to any particular segment of industry. Self Assessment Questions 3. Some of the developers designed software that provided solution for handling these __________________ of information. 4. MRP became the fundamental concept of _________________ in the mid 1970s.
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Figure 1.2 shows how information is integrated within an organisation using an ERP system. This system is similar to the pre-ERP system but, in the ERP system all the different departments of an organisation are linked to a centralised system which stores all the information from various departments. Any department at any time can gain access to any required information from another department via ERP or from the ERP database itself. The manufacturing department can access information form quality management department via ERP system. This shows the flexibility of a system, where independent departments are bonded together as a unit and any two departments can establish communication at ease without depending on any other departments. Activity 1 Conduct a survey and gather information how ERP system can prove to be effective in an unorganised sectors and in small scale industries. Gather the reason why they prefer or dont prefer an ERP system
Figure 1.2: Information Integration through ERP Systems Sikkim Manipal University Page No. 7
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ERP software is a replica of the major business processes of an organisation, such as customer order fulfilment and manufacturing. The success of an ERP system depends on its ease for information access. A constrained ERP system is not much better than the legacy system it replaces. In lots of cases, it is worse, as the old code at least was written specifically for the company and the task. ERP systems are a set of generic processes, they are capable of producing dramatic improvements, when used to connect parts of an organisation, and integrate its various processes seamlessly. For example, when a warehouse in Noida enters a customer order, for example, the data flows automatically to others in the company who need to see it. Data flows to the finance department at the company headquarters in Mumbai, and to the manufacturing plant in Chennai. The attractive Information Integration Techniques (IIT) of ERP was able to capture the attention of ERP vendors primary targets the CEOs and CFOs of various organisations, and the sales of ERP in the global market took of in early 1990s. Self Assessment Questions 5. ________________ is a replica of the major business processes of an organization. 6. ERP systems are a set of generic ________________.
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To provide flexible, integrated, real-time decision support. Improve responsiveness across the organisation.
To eliminate limitation in legacy systems, which includes: Century dating issues. Fragmentation of data and processing. Inflexibility to change. Insupportable technologies. To take advantage of the untapped mid-market (medium size organisations), which includes: Increased functionality at a reasonable cost. Client server/open systems technology. Vertical market solutions.
These are some of the reasons for the unpredictable growth rate of the ERP markets and the ERP vendors. As more and more companies are joining the race, the ERP vendors are shifting their focus from big Fortune 1000 companies to different market segments (medium size companies, small companies, and so on.). The future will see fierce battle for market share, and mergers and acquisitions for strategic and competitive advantage. The ultimate winner in this race is the customer, who gets better products and better service at affordable prices. Activity 2 Conduct a study and collect the information on the growth of market in various sectors of ERP for the last two decades and various sectors available for ERP market in the coming days.
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Business integration Flexibility Better analysis and planning capabilities Use of latest technology
1.5.1 Business Integration The first and most important advantage lies in the promotion of integration. The reason why ERP packages are considered to be integrated is the automatic data updating (automatic data exchange among applications) that is possible among the related business components. Since conventional company information systems were aimed at the optimisation of independent business functions in business units, almost all were weak in terms of the communication and integration of information that transcended the different business functions. In many of the large organisations during product manufacturing the system construction timing and guide lines provide for manufacturing differs, this can also be seen even across its departments and many a times they are not well connected to each other. This turns out to be a biggest obstacle faced by most of the organisation when they plan to shift for new product line and also in classification of the business. With the help of ERP packages, when a transaction occurs the related data of the business functions is updated automatically in the system. For this reason, we are able to grasp business details in real time, and carry out various types of management decisions in a timely manner, based on that information. 1.5.2 Flexibility The second advantage of ERP packages is their flexibility. Different languages, currencies, accounting standards, and so on can be covered in one system, and functions that systematically manage multiple locations of a company can be packaged and implemented automatically. To cope with company globalisation and system unification, this flexibility is essential, and we can say that it has major advantages, not simply for development and maintenance, but also in terms of management. 1.5.3 Better Analysis and Planning Capabilities Yet 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 utilise many types of decision support
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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, we are able to give the decision-makers the information they want; thus enabling them to make better and informed decisions. 1.5.4 Use of Latest Technology The fourth advantage is the utilisation of the latest developments in IT. The ERP vendors were very quick to realise that, in order to grow, and to sustain that growth, they had to embrace the latest developments in the field of IT. Therefore, they quickly adapted their systems to take advantage of the latest technologies like open systems, client/server technology, Internet/Intranet, Computer-Aided Acquisition and Logistics Support (CALS), electronic-commerce, and so on. It is this quick adaptation to the latest changes in IT that makes the flexible adaptation to changes in future business environments possible. This flexibility makes the incorporation of the latest technology possible during system customisation, maintenance, and expansion phases. As stated above, ERP includes many of the functions that are 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 use them. It is necessary to take note that casually proceeding with the implementation of ERP, merely for reasons of system reconstruction or without a long term objectives, is likely to result in turning the above mentioned advantages into disadvantages. Self Assessment Questions 7. The first and most important advantage lies in the _____________. 8. The second advantage of ERP packages is their _______________.
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To work successfully, the ERP solutions need to address a lot of factors. There should be good people who know the business. The vendor should be good, and his package should be one of the best suited for the, companys needs. The ERP consultants should be good. The system developers should plan well and execute perfectly the implementation. The end-user training should be done so that the user must be aware of the system, and the effect of their efforts on the overall success of the program. In case of any of the above mentioned factors are not addressed properly by the companys top management, the possibility of system failure is evident during the implementation process of the ERP system. A change in the job descriptions and functions of many employees is imminent when ERP system is introduced in a company. Employees who were earlier doing the work of recording information are transformed into decision-makers. For example, in the past an order entry clerk's job was to enter the orders that came to him. With the implementation of a good ERP system, the order entry clerk becomes an action initiator. As soon as he enters the order into the system, the information is passed on to the sales, distribution, and finance modules. The distribution module checks whether the item is in stock, and if available, the item is dispatched and the information is sent to the finance module. If the items are not in stock, then the manufacturing module is given the information, so that the production can start. The customer is informed about the status of his order. If the items are shipped, the finance module prepares the invoice and sends it to the customer. All these actions take place automatically as soon as the order entry clerk enters the information regarding the order into the system. Thus the order entry clerk is transformed from a data entry operator to a decisionmaker whose actions can trigger a chain of actions. Many employees find this transformation difficult to accept. If the employees are not given proper training, well in advance, then the systems fails. Another factor is the fear of unemployment. When procedures become automated, the people who were doing those jobs become redundant. So it is quite natural to have resistance from the employees. But the same employees can be trained in the new system, and can work in more challenging and stimulating environments. For this also, the employees have to be told, in advance, as to what would be the result, and should be given ample time and training to make the transformation. Without support
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from the employees, even the best system is liable to fail. So it is very important that the management should take the necessary steps, well in advance, to ease the fears of, and provide necessary training to their employees. Activity 3 Contact an ERP vendor or a consultant and collect the details of the structure of planning before providing a package for a company Self Assessment Questions 9. The system developers should ____________ perfectly the implementation. 10. Employees who were earlier doing the work of recording information are transformed into____________________.
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Once you have decided to implement the ERP system, you have to find a package that is best suited for your company. In ERP implementation, package selection is one of the most important phases, because the package that you select will decide the success or failure of the implementation process. Since implementation of these ERP systems requires huge investment of money and time, it is a very difficult process to switch over to another package after a package is purchased by an organisation. So choosing a right package is of the highest priority in the implementation process. The company might have to face disastrous consequences by choosing a wrong package, often resulting in the shut down of the company for an indefinite period of time. In the market there are many ERP packages available from many vendors. Before reaching to a conclusion, it is better to analyses a maximum five packages, since it is always better to do a thorough and detailed evaluation of a small number of packages, than to do a superficial analysis of dozens of packages. A pre-evaluation screening has to be conducted by the company to limit the number of packages that are to be evaluated by the committee. The pre-evaluation process should eliminate those packages that are not at all suitable for the companys business processes. Looking at the product literature of the vendors one can select the few best packages. The company can get help from the external consultants and, can conduct a survey and find out the packages use by the companies similar to their own. Since, it will provide a better look around and find out how the different packages are performing in environments similar to yours. You can call the respective vendors for presentations/demos, once you select a few packages after the screening. Some of the key things that can be searched before choosing an ERP package are: The package should come with multi-language and multi-currency support. The package should be international and should have installations in countries where the company have offices. The vendor should also have a local presence in those countries. The package should have at least A number of installations out of which at least B should be in your business sector.
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The cost of the package with all the necessary modules should be less than C Rupees. The package should provide the company the facility to buy the core modules initially and then go in for the additional modules as and when desired. The vendor should provide support during the implementation and also post implementation. The vendor should give a commitment on training the company employees on the package. The package should have the flexibility of interfacing with other systems that the company is dealing with, for example: banks, suppliers, customers, and so on. The package must be customisable and the customisation process should be easily done and should be able achieve it in-house. The vendors policy and practices regarding updates, versions, and so on, should be should be verified and it should be acceptable to your company norms.
Since selection of the package is very crucial, the companys committee should sit together and analyse these issues and assign points to these items and draw down the layout for the implementation process. Self Assessment Questions 11. In ERP implementation and _____________is one of the most important phases 12. The package should come with ____________________support. Activity 4 Contact a manufacturing industry and find out the criteria they adopt before purchasing an ERP package for their company.
1.8 Summary
Enterprise Resource Planning. (ERP) is one of the means to integrate the data and processes of an organisation into one single system. Usually ERP systems have many components including hardware and software. Most ERP systems make use of a unified database to store data for various
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functions found throughout the organisation in order to achieve integration between the various components. The term ERP originally referred to how a large organisation planned to use organisational wide resources. In the past, ERP systems were used in large scale industries. Though, the use of ERP has changed and is extremely comprehensive, today the term can refer to any type of company, no matter what industry it falls in. In reality, ERP systems are used in almost any type of organisation - large or small. In order for a software system to be considered as ERP, it must provide an organisation with functionality for two or more systems. Although some ERP packages exist that only cover two functions for an organisation (i.e. payroll & accounting), a majority of ERP systems cover several functions. Today's ERP systems cover a large range of functions, and integrate them into one unified database. For example, functions like Human Resources, Supply Chain Management, Customer Relations Management, Financials, Manufacturing functions, and Warehouse Management functions were all once stand alone software applications, usually housed with their own database and network, today, they can all fit under one umbrella - the ERP system.
1.10 Answers
Answers to Self Assessment Questions 1. Information handling and sharing 2. Information Technology 3. Fragments
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Production management and control ERP software Processes Promotion of integration Flexibility Plan well and execute Decision-makers Package selection Multi-language and multi-currency
Answers to Terminal Questions 1. Refer to 1.3 2. Refer to 1.5 3. Refer to 1.5 4. Refer to 1.6 5. Refer to 1.5 6. Refer to 1.5 and 1.7 7. Refer to 1.7
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switched to Big Bang implementation. To meet the time line the company planned for simultaneous implementation of several modules. Due to lack of time, some of the modules implemented were not tested properly. Several problems related to order management and fulfilment resulted due to this. Even though the Cashe company company had the finished product stocked in its warehouses, it was not able to fulfil orders from many of its retailers and distributors. The failure in the implementation of ERP immediately resulted in an adverse affect. The company recorded annual revenues for 1999 reduced; there was a drop of 12% when compared to that in 1998. In the third quarter of 2000, the company announced that its revenues increased by 12% as compared to the revenues in the third quarter of 1999. During the same period, profits increased by 23%. Questions: 1. Study the circumstances that led to ERP implementation failure at the Cashe company. 2.Evaluate the role played by top management in ERP implementation. 3.Examine the factors that lead to success or failure of ERP projects.
1.12 Glossary
Term Cluster Collation Conceptions Imminent Legacy Scenario Bill of materials Description A small group of people or things that are closely packed together but not connected to each other The assembling of pieces of paper in the right order, particularly the sections of a book prior to binding The process of arriving at an abstract idea or belief or the moment at which such an idea starts to take shape or emerge Some thing that is about to happen in the near or distant future Associated with something that is outdated or discontinued An imagined sequence of possible events, or an imagined set of circumstances It is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, and the quantities of each item needed to manufacture an end item.
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References 1. The Internet Encyclopedia by Bidgoli & Hossein. 2. Enterprise Resource Planning by Mary Sumner. 3. Maximising Your ERP system by Scott Hamilton. 4. Concepts in enterprise Resource Planning by Ellen F. Monk, Bret J. Wagner.
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