Overview
ERP vendors are fast transforming themselves into vendors offering an extended and integrated range of applications. During the last decade, ERP was the buzzword for all corporates around the world, which was expected to solve all their efficiency problems, if implemented. Companies selling ERP packages, and consultants helping in the implementation, made huge sum of money. However, by the end of the decade, ERP took the back stage, with the emergence of the Internet technologies and the opportunities that arose with them. ERP, which made the internal systems of companies efficient, was not enough to tap into the new opportunities. In the new millennium, ERP vendors, who were earlier slow to see the power of the Internet, have been making it an integral part of their offerings, thus creating fresh impetus for growth.
Genesis and Growth of ERP
In the early days of computer usage, software applications were either developed in-house by the employees of Information Systems or EDP (Electronic Data Processing) departments, or were sourced from small software firms operating in the neighborhood. This trend, however, resulted in information islands within an organization, where departments were computerized independent of each other, and the information in the form of data was accumulating and residing in departmental silos.
The origins of ERP can be traced to the introduction of Materials Requirement Planning (MRP) in organizations, in the early 60's, for proactively managing inventories. MRP demonstrated its effectiveness in reducing inventories, and reduction in production and delivery lead times. However, it did not take into account the other resources of the organization. This gave rise to a new technique, Closed Loop MRP, which takes into account the production capacity constraints, and thus also came to be called as Capacity Requirements Planning (CRP). In the 1980's, the need was felt to integrate other resources of a manufacturing organization, and thus evolved the integrated manufacturing management system called Manufacturing Resources Planning (MRP II). This method sought to integrate a variety of functions like business planning, production planning and scheduling, materials requirement planning, and capacity requirements planning, thus bringing more efficiency into manufacturing operations.
MRP II also suffered from a few drawbacks, as it relied upon various assumptions that it made about lead times, capacity and batch sizes etc., for its functioning. The shortcomings of MRP II, as also the need to integrate new techniques like CAD/CAM, led to the development of the total integrated solution called Enterprise Resources Planning (ERP), which attempts to integrate the supplier and customer interfaces, with the manufacturing environment of the organization. The essence of ERP is that it stops treating functional transactions separately as stand-alone activities, and considers them to be part of the inter-linked processes that makes up the business.
ERP aims to combine all departments and functions together into a single, integrated database so that they can more easily share and communicate with each other. ERP automates the tasks involved in performing business processes such as order fulfillment, payments and material receipts, and makes the same data available to all the other functions, instantaneously. Many companies have undertaken ERP implementation, to integrate financial data, to standardize their manufacturing processes, and to have standardized HR information that enables faster decision-making. For best performance, ERP solutions should be modular and open, simulate reality and also be comprehensive in terms of coverage and scope. For companies going ahead with ERP implementation, some of the hidden costs could arise in the form of employee training, integration and testing of the new software, and data analysis and conversion from the legacy systems.
Section I of this book features some articles which explain the genesis and concepts of ERP, the key characteristics of ERP solutions, the main areas of potential benefit, and the typical project costs to be evaluated before starting off on the implementation projects.
Evaluating and Planning ERP Projects
Many organizations have implemented ERP projects during the last few years, with mixed results. While there could be several reasons why projects have not translated into the expected benefits, a lot has to do with understanding the business requirements, finding the suitable software package that fits the needs, and planning the project carefully. Doing a cost and benefit analysis of the proposed ERP projects is a must, before proceeding with the implementation. The typical costs involved in ERP projects would be in the areas of hardware, software, customization, data conversion and training. The potential benefits could be in terms of increase in sales, improvement in margins, savings in inventory carrying costs, etc.
It is important to make a proper business case for an ERP implementation project, before making the investment decision, so as to reduce the project risks. A cost-based approach should first identify the yearly savings that can accrue due to the implementation. After considering the business costs involved, the annual cash flows due to the project can be estimated, and the NPV of the project can be derived. A sensitivity analysis will ensure that the business case is strong enough to withstand time and cost overruns, and also sensitize the firm to the need of having contingency plans. An important aspect of planning for ERP projects is to make the business units responsible and accountable for the outcomes. This can be done by building tracking metrics into the project plan, so that the progress towards the targets can be measured and remedial actions taken as and when necessary. Some of the common problem areas of ERP projects include understanding the integration issues between legacy systems/applications and the new software programs, managing the communications among the project staff and the user community, the decision-making process for resolving project related issues, as also the testing of the infrastructure before and after implementation.
While evaluating ERP systems, the key issues to be examined are the functional fit with the company's business processes, flexibility and scalability of the software, and complexity and user- friendliness of the packages. Quick implementation of ERP projects will ensure that the expected benefits can be materialized faster. The other issues are the ability of the package to support multi-site planning and control, the necessity of regular upgrades, customization required, and the local support infrastructure, as these would increase the total costs for the organization.
Section II of this book features articles that discuss the various issues in the evaluation, selection and planning of ERP projects.
Strategies for Successful ERP Implementation
If one looks into the reasons for mixed outcomes of past ERP implementations, some of the potential causes for the failure can be identified during each stage of the implementation. For example, during the selection phase, lack of user involvement in defining requirements and evaluating packages could result in wrong expectations and wrong choice of software. The other possibility is that the organization fails to make a realistic estimate of the level of effort and commitment to accomplish the implementation, and may cause budget overruns during the project. During the implementation phase, poor executive support due to non-involvement in the planning process may result in lack of required resources on the project, causing time overruns. Finally, in the application rollout phase, the system platform, infrastructure, and technical software issues could become a bottleneck, if the organization underestimates the training required to be given to the users, to support the new technologies.
For ERP implementation to deliver the desired results, management should take sufficient time to structure the organization to take advantage of the systems. ERP's benefits are a direct result of effective preparation and implementation. For this, the organization should first draw up a business strategy and operating strategy, so that the selection of the software that supports the business processes becomes easier. While selecting the software, thought has to be given to the changes required in the current business processes, and how the software will support the changes. In the planning stage it is preferable that the implementation effort is led by a senior executive, who has the authority to make changes happen quickly.
The Supply Chain Operation Reference (SCOR) model offers a methodology for injecting best practices by mapping processes into the ERP system. It becomes a blueprint for change that ultimately accelerates the decision-making, acceptance and use of new software. The SCOR model focuses more on business, and less on the technology side of ERP implementation. The model provides a four-step road map to project implementation, and provides a top-down training opportunity by requiring rigorous stakeholder participation. Organizations using the SCOR model can benefit from a more detailed and realistic scope statement, identify organizational deficiencies before they impact ERP budgets, expedite requirement definition and generate change management blueprints.
Extending ERP Applications
The early versions of ERP software were basically large-scale, on-site installations in the user organizations. With the high cost of ownership that accompanied such projects, the growth of the ERP market was restricted to the large and medium enterprises, which could afford the cost. With growth slowing in these segments, and the developments in Internet technologies, ERP vendors have started offering their software applications through the Application Services Provider (ASP) model, which is web-based. There are several misconceptions in the minds of user organizations, about the ASP model, the main concerns being that of information security, and the perception of a lack of control on the application. The benefits of hosted ERP solutions include cost savings, quick implementation, and easier upgrades to newer versions.
Having an ERP system in place will also enable companies to embrace e-commerce more effectively. When a company adds the benefits of an integrated automated credit solution with automated collections, it can create an end-to-end automated order-to-cash process. Web-based ERP applications enable e-commerce customers to get direct access to the supplier's ERP systems, for checking product pricing and availability. The vendors can also provide a web-based interface between their ERP system and the supply chain members, allowing real-time flow of reliable and consistent information.
Web-based ERP applications also help in effective Supply Chain Management by sharing data in real time with supply chain partners, improving the optimization decisions. This is particularly true for large retail chains and companies in the FMCG industry. Use of data warehousing solutions on the back of ERP systems, help in forecasting the demand, track product movement, build greater flexibility into the supply chain management, and help in collaborating with suppliers and stockists. This provides greater transparency in information through the supply chain, and keeps suppliers and vendors updated about the demand and supply targets. The efficient planning helps in analyzing information on a daily basis, and for purposes of future planning and operations.
