August 1, 2010

What is ERP- Enterprise Resource Planning ?

Supply chain diagram black arrow - flow of mat...

Enterprise resource planning (ERP) is a company-wide computer software system used to manage and coordinate all the resources, information, and functions of a business from shared data stores.
An ERP system has a service-oriented architecture with 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.
The initials ERP originated as an extension of MRP (material requirements planning; 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. These systems can now be found in non-manufacturing businesses, non-profit organizations and governments.


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To be considered an ERP system, a software package must provide the function of at least two systems. For example, a software package that provides both payroll and accounting functions could technically be considered an ERP software package.

Examples of modules in an ERP which formerly would have been stand-alone applications include:
Product lifecycle management
Supply chain management (e.g. Purchasing, Manufacturing and Distribution)
Warehouse Management
Customer Relationship Management (CRM)
Sales Order Processing, Online Sales
Financials, Human Resources
Decision Support System.
Some organizations — typically those with sufficient in-house IT skills integrate multiple software products — choose to implement only portions of an ERP system and develop an external interface to other ERP or stand-alone systems for their other application needs. For example, one may choose to use human resource management system from one vendor, and perform the integration between the systems themselves.
This is common to retailers, where even a mid-sized retailer will have a discrete Point-of-Sale (POS) product and financials application, then a series of specialized applications to handle business requirements such as warehouse management, staff rostering, merchandising and logistics.
Ideally, ERP delivers a single database that contains all data for the software modules, which would include:
Manufacturing- Engineering, bills of material, scheduling, capacity, workflow management, quality control, cost management, manufacturing process, manufacturing projects, manufacturing flow.
Supply chain management - Order to cash, inventory, order entry, purchasing, product configuration, supply chain planning, supplier scheduling, inspection of goods, claim processing, commission calculation.
Financials -General ledger, cash management, accounts payable, accounts receivable, fixed assets
Project management- Costing, billing, time and expense, performance units, activity management
Human resources- Human Resources, Payroll, training, time and attendance, rostering, benefits
Customer relationship management (CRM) - Sales and marketing, commissions, service, customer contact and call center support.
Data warehouse and various self-service interfaces for customers, suppliers, and employees
Access control - user privilege as per authority levels for process execution
Customization - to meet the extension, addition, change in process flow
Implementation

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. There are three types of services that may be employed for - Consulting, Customization, Support. The length of time to implement an ERP system depends on the size of the business, the number of modules, the extent of customization, the scope of the change and the willingness of the customer to take ownership for the project. ERP systems are modular, so they don't all need be implemented at once. It can be divided into various stages, or phase-ins.
To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. These firms typically provide three areas of professional services: consulting, customization and support. The client organization may also employ independent program management, business analysis, change management and UAT specialists to ensure their business requirements remain a priority during implementation.
Data migration is one of the most important activities in determining the success of an ERP implementation. Since many decisions must be made before migration, a significant amount of planning must occur. Unfortunately, data migration is the last activity before the production phase of an ERP implementation, and therefore receives minimal attention due to time constraints. The following are steps of a data migration strategy that can help with the success of an ERP implementation:
Identifying the data to be migrated
Determining the timing of data migration
Generating the data templates
Freezing the tools for data migration
Deciding on migration related setups
Deciding on data archiving
Process preparation
ERP vendors have designed their systems around standard business processes, based upon best business practices. Different vendors have different types of processes but they are all of a standard, modular nature. Firms that want to implement ERP systems are consequently forced to adapt their organizations to standardized processes as opposed to adapting the ERP package to the existing processes. Neglecting to map current business processes prior to starting ERP implementation is a main reason for failure of ERP projects. It is therefore crucial that organizations perform a thorough business process analysis before selecting an ERP vendor and setting off on the implementation track. This analysis should map out all present operational processes, enabling selection of an ERP vendor whose standard modules are most closely aligned with the established organization. Redesign can then be implemented to achieve further process congruence. Research indicates that the risk of business process mismatch is decreased by:
linking each current organizational process to the organization's strategy;
analyzing the effectiveness of each process in light of its current related business capability;
understanding the automated solutions currently implemented.
ERP implementation is considerably more difficult (and politically charged) in organizations structured into nearly independent business units, each responsible for their own profit and loss, because they will each have different processes, business rules, data semantics, authorization hierarchies and decision centers. Solutions include requirements coordination negotiated by local change management professionals or, if this is not possible, federated implementation using loosely integrated instances (e.g. linked via Master Data Management) specifically configured and/or customized to meet local needs.
A disadvantage usually attributed to ERP is that business process redesign to fit the standardized ERP modules can lead to a loss of competitive advantage. While documented cases exist where this has indeed materialized, other cases show that following thorough process preparation ERP systems can actually increase sustainable competitive advantage.
Configuration

Configuring an ERP system is largely a matter of balancing the way you want the system to work with the way the system lets you work. Begin by deciding which modules to install, then adjust the system using configuration tables to achieve the best possible fit in working with your company’s processes.
Modules — Most systems are modular simply for the flexibility of implementing some functions but not others. Some common modules, such as finance and accounting are adopted by nearly all companies implementing enterprise systems; others however such as human resource management are not needed by some companies and therefore not adopted. A service company for example will not likely need a module for manufacturing. Other times companies will not adopt a module because they already have their own proprietary system they believe to be superior. Generally speaking the greater number of modules selected, the greater the integration benefits, but also the increase in costs, risks and changes involved.
Configuration Tables – A configuration table enables a company to tailor a particular aspect of the system to the way it chooses to do business. For example, an organization can select the type of inventory accounting – FIFO or LIFO – it will employ or whether it wants to recognize revenue by geographical unit, product line, or distribution channel.
So what happens when the options the system allows just aren’t good enough? At this point a company has two choices, both of which are not ideal. It can re-write some of the enterprise system’s code, or it can continue to use an existing system and build interfaces between it and the new enterprise system. Both options will add time and cost to the implementation process. Additionally they can dilute the system’s integration benefits. The more customized the system becomes the less possible seamless communication becomes between suppliers and customers.
Consulting services
Many organizations did not have sufficient internal skills to implement an ERP project. This resulted in many organizations offering consulting services for ERP implementation. Typically, a consulting team was responsible for the entire ERP implementation including planning, training, testing, implementation, and delivery of any customized modules. Examples of customization includes additional product training; creation of process triggers and workflow; specialist advice to improve how the ERP is used in the business; system optimization; and assistance writing reports, complex data extracts or implementing Business Intelligence.
For most mid-sized companies, the cost of the implementation will range from around the list price of the ERP user licenses to up to twice this amount (depending on the level of customization required). Large companies, and especially those with multiple sites or countries, will often spend considerably more on the implementation than the cost of the user licenses -- three to five times more is not uncommon for a multi-site implementation.
Unlike most single-purpose applications, ERP packages have historically included full source code and shipped with vendor-supported team IDEs for customizing and extending the delivered code. During the early years of ERP the guarantee of mature tools and support for extensive customization was an important sales argument when a potential customer was considering developing their own unique solution in-house, or assembling a cross-functional solution by integrating multiple "best of breed" applications.
Advantages
In the absence of an ERP system, a large manufacturer may find itself with many software applications that cannot communicate or interface effectively with one another. Tasks that need to interface with one another may involve:
Integration among different functional areas to ensure proper communication, productivity and efficiency
Design engineering (how to best make the product)
Order tracking, from acceptance through fulfillment
The revenue cycle, from invoice through cash receipt
Managing inter-dependencies of complex processes bill of materials
Tracking the three-way match between purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced)
The accounting for all of these tasks: tracking the revenue, cost and profit at a granular level.
ERP Systems centralize the data in one place. Benefits of this include:
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.
Some security features are included within an ERP system to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data-tampering scenario, for example, might involve a disgruntled employee intentionally modifying prices to below-the-breakeven point in order to attempt to interfere with the company's profit or other sabotage. ERP systems typically provide functionality for implementing internal controls to prevent actions of this kind. ERP vendors are also moving toward better integration with other kinds of information security tools.
Disadvantages
Problems with ERP systems are mainly due to inadequate investment in ongoing training for the involved IT personnel - including those implementing and testing changes - as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and the ways in which it is used.
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 (This has led to a new category of "ERP light" {Expand section} solutions)
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.
Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications.
Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level).
The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale.
Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software.
Some large organizations may have multiple departments with separate, independent resources, missions, chains-of-command, etc, and consolidation into a single enterprise may yield limited benefits.
The system may be too complex measured against the actual needs of the customers.
ERP Systems centralize the data in one place. This can increase the risk of loss of sensitive information in the event of a security breach.


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