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The rise of Enterprise Resource Planning (ERP)

By Prof. Dr. Khawaja Amjad Saeed, FCA, FCMA*
Sep 11 - 17, 2000

The world is being driven swiftly with changes. New management tools are being innovated. Information Technology is interweaving itself with all business disciplines. 20th Century has seen the rise of ERP. This piece looks at the following aspects:

  • ERP Terminology

  • Goal of ERP System

  • Evolution of ERP

  • Famous Players of ERP System

  • SAP and ERP System

  • Integrated ERP System

  • ERP & Delotte Consulting Company

  • Tributes to ERP

Each of the above aspects is now explained.

ERP Terminoloqy

E

Enterprise

R

Resource

P

Planning

Enterprise relates to a business firm or a company enegaged in an economic or commercial activity.

Resource refers to collective means possessed by an enterprise for its own support or assistance or activity. Generally four Ms characterize the resources namely, Men, Material, Machine and Money.

Planning indicates proposed or intended course of action for the future.

Annex "A" shows various definitions contained in accredited dictionaries.

Goal of ERP System: With an ERP system, the goal is to enter a customer order once into a computer and have it automatically synchronize the following resources required to get it into the hands of customers: Men; Material; Machinery; Warehouse; Transportation.

Users have obtained the following benefits:

  • Customers exactly know where their orders stand.

  • Significant reductions in inventory, procurement, distributions and manufacturing costs have been seen.

  • Eye-popping cycle-time improvements have occurred in order fulfillment and financial closing.

The focus of ERP goal for customers is on right products, right quantity, right quality, right time and right price.

Evolution of ERP: Table No. 1 highlights the evolutionary rise of ERP. For determining material requirements hynch was used. Later this was replaced by a scientific approach. Subsequently MRP and MRP II were introduced. Now the era belongs to ERP.

Table No. 1

Evolution of ERP

Stage
Number

Emphasis

Operating Details

1.

Hynch

Based on experience, material needed for production was determined.

2.

Scientific

1. Table was prepared to ascertain the lowest total (ordering cost and carrying cost) and the most economic quantity of material to be ordered was determined.

. .

2. "Q" model was invented to determine the most economic order unit for placing an order.

3.

MRP

1. MRP means Material Requirements Planning. This dominated the world during 1970s and followed linear planning approach.

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2. MRP II means Manufacturing Resource Planning. This dominated the world during 1980s. Main focus was on closed loop planning. It is essentially a computer system.

4.

ERP

Everything now except an ERP system is as archaic as the bell bottom.

Some views above ERP are stated as under:

Industrial Experts Views: They claim that ERP is their invention.

Accountants' View: They claim that ERP was developed from processing of accounting information. Later it tilted towards MRP (Manufacturing Requirements Planning) and then towards SCM (Supply Chain Management). These days ERP systems are recognized as total business solution providers.

The market for ERP Software grew very rapidly during 1990s. The major reason was that ERP system has been instrumental in ending huge inefficiencies that resulted when different business functions and business units did not collect information the same way and use the same data.

Computer Skills have been undergoing changes. The stages of changes are as under:

Regime No. 1
WordStar - Lotus - dBase

Regime No. 2
Windows, Ms Word and Excel

Regime No. 3
Everything now except an ERP seems to be as archaic as the bell bottom.

Famous Plavers of ERP Systems: Some of the famous players of ERP systems are listed below:

  • Players

  • SAP

  • Oracle Financial

  • SSA's BPCS

  • J. D. Edward

  • People Soft

  • BAAN

SAP's role in developing ERP System is now briefly reviewed.

SAP & ERP Systems

History: SAP was established in 1972 and is today ranked as the world's 5th largest software company. SAP is the name of the company and the name of computer system. SAP is a German Company. It operates globally with 28 subsidiaries and affiliates and six partner companies maintaining offices in forty countries. The SAP system comprises a number of fully integrated modules which cover every aspect of business management. It offers a unique system that supports nearly all areas of business on a global scale.

Approach: It provides an opportunity to replace large numbers of independent systems that have been developed and implemented in established organizations with one single modular system. Each module performs a different function. However it is designed to work with others. It is fully integrated and offers compatibility across business functions.

Markets served: SAP markets its products globally to almost every industry, Government, educational institutions, hospitals, etc.

SAP R/3 Applications: Scope of applications include the following:

  • Financials

  • Product Data Management (PDM)

  • Materials Management

  • Human Resources Management

A comprehensive treatment is needed to cover all the above aspects. However an abridged summary of the components of each modules are given in Table No. 2

Table No. 2

Components of Modules

Financials

Financial Accounting, Controlling, Investment Management, Treasury, Integrated Enterprise Management (IEM) and Enterprise Controlling (EC).

Product Data Management
(PDM)

Sales and Distribution, Production Planning & Control.

Materials Management

Purchasing, Inventory Management, Warehouse Management, Invoice Verification, Inventory Control, Quality Management, Service Management.

Human Resources
Management

Personnel Administration, Human Resource Information System (HRIS) and Executive Information System (EIS), Recruitment Management, Open Positions, Selection and Hiring, Travel Management, Benefits Administration, Personnel Cost Planning, Payroll Accounting, Time Management, Time Evaluation, Integration and Interface, Shift Planning, Qualifications and Requirements, Career & succession Planning, Additional Education & Training Programmes, Training Management, Training Programmes & Business Events, Registration and booking, Change Determination and Invoicing, Trends & Highlights, Internet and Intranet, SAP Business Workflow and Employee Self Service.

Integrated ERP System: In short, today accounting systems are the sub-set of total ERP. ERP is the hub around which various parts of an organization revolve. This is illustrated below:

Data flow description is described in Table No. 4.

Table No. 4

Data Flow Description

Department

Activity

Marketing & Sales (MS)

Enter sales forecast budget to the system and carry out sales planning through simulation facilities available in the system.

Supply Chain Management
(SCM)

Material requirement planning is undertaken and then material data are sent to arrive at procurement costs.

Production
(P)

It carries out capacity planning through the system after supplying the system the required parameters.
Total Cost of production is obtained by Cost Centres.

Distribution & Warehouse
(DWH)

It does distribution planning and sends the distribution data and costs to the system.

Administration & Support Services (ASS)

It informs the system their expenditures and cost.

Customer
(C)

Order is entered and revenue is generated  in the system.

Finally

ERP provides management an integrated information about costs, profits, capacity, excess resources, resources needed, etc.

The foregoing details show how data are captured and processed in the company at a single site. However, boundaries of ERP do not limit themselves to a single site. All the sites of the business can be located anywhere in the world but can be tied together with through a common ERP system as is illustrated below:

ERP & Delotte Consulting Company: The following aspects are worth noting:

1. Delotte Consulting teamed with Benchmarking Partners and Hammer and Co. in 1998 and 1999 on an extensive study of nearly 100 large Companies around the globe with US one billion dollar in revenue.

2. Payoff from ERP was mixed.

3. Thirty Seven (37%) of the Companies reported significant and quantifiable benefits from ERP.

Some of the benefits are listed below:

a . Process Manufacture
A process manufacture cut inventory working capital by US $ 10 million and logistics costs by US $ 45.

b. Hi-Tech Company
A hi-tech company was able to handle twice the business with few additional investments in manufacturing and distribution.

C. A Manufacturing Company
A manufacturer online delivery rose from 70% to 90%.

4. Some 15% of Companies got nothing out of their ERP systems.

5. Some 25% had modest results.

6. Remaining 23% were unable to report any specific quantifiable benefits. The major reason was that the installation was new and benefits could not be tracked.

The above case study can be summarized on Table 6.

Table NO. 6

Delotte Consulting Research on ERP System
(N = 100)

PARTICULARS

NUMBER (%)

1 Companies reported significant and quantifiable benefits

37

2 Companies with modest results

25

3 Could not track benefits

23

4 Could not get anything out of ERP System

15

  1000

7. Major reasons for achieving success in ERP system were as under: a.

Investment into
*New software
*Computer hardware
*Consultants

b. Wholesale changes in manufacturing, supply chain and financial operations.

c. Rewriting job descriptions and training people extensively for jobs requiring much higher levels of skills.

8. Prerequisites for improving chances of success are as under:

a. Focus on right destinations should exist. Attention should be given to the following:

i) Strategic goals should be kept highly visible.
ii) Critical process changes should be undertaken.
iii) Training programs be implemented.

b. Progress should be periodically assessed.
c. Ensure continuous improvements.
d. Make ERP "a way of life"
e. Program must be continuously measured.

Tributes to ERP

Several scholars have given befitting tributes to the benefits derived from ERP. Given below are excerpts from the famous CIO magazine, the leading resource for information executives published by CIO Communications, Inc., USA.

The hidden costs of enterprise software

(January 15, 1998 - CIO Enterprise)

Software packages - SAP's R/3, Baan, People Soft and their ilk - promise great benefits.

Living with ERP (December 01, 1998 - CIO) It is time we acknowledged ERP systems are here for the long hault and start adapting to permanent life with them.

An erp package for you and you and you and even you

(February 15, 1999 - CIO)

All men are created equal, but off-the-shelf ERP software packages are not. And choosing the right one for your business involves a lot more than you might think.

The ties that bolt

(April 15, 1999 - CIO)

There is no escaping it. You need bolt-ons so that your ERP software can share data with legacy and other systems. Four strategies for making integration work were identified.

From team Techie to enterprise leader (October 15, 1999 - CIO)

After leading an ERP team, David Jhon discovered that he had learned everything management knew it too.

The most important team in history (October 15, 1999 - CIO)

After a company turns on its ERP software, the only people who understand how the business works are on the implementation team.

Scted Bibliography

A: BOOKS

1. Muhlemann, Alan, Oakland, John, Lockyer, Keith, Production and Operations Management, London. Pitman Publishing, 1993.

2. Garg, Vinod Kumar, Venkitakrishnan, N.K, Enterprise Resource Planning: Concepts and Practice, New Delhi: Prentice-Hall of India Private Limited, 1999.

B: Magazines

1. McCann Greg, and Lucas, Tony, "Making ERP spell ROI", Charter, Sydney, March, 2000, pp 56-57.

2. Sridbaran, R. "The Skilled Accountant", The Chartered Accountant, New Delhi, p 80.

C: Dictionaries

1. Webster's Encyclopedic Unabridaed Dictionary of the English Language, New York: Gramercy Books, 1983.

2. The New Lexicon Webster's Dictionary of the English Language, New York: Lexicon Publications, Inc. 1991.

3. The New Shorter Oxford English Dictionary on Historical Principles, Oxford: Clarendon Press, 1993.

4. Merriam - Webster's Collegiate Dictionary, Online download from: http://www.m-w.cgi-bin/dictionary on July 18, 2000.

D: Internet

Download from:
http://www.cio.com/forums/erp/edit/122299-erp.html

[Source: CIO Magazine (the leading Resource for Information Executives), 1995-99 CIO Communications, Inc.]

Areas Covered:
What is ERP?
How long will an ERP project take?
What will ERP fix in my business?
What.will ERP really cost?
When will I get payback from ERP - and how much will it be?
What are the unforeseen costs of ERP?
How do you configure ERP software?
How do companies organize their ERP projects?
How does ERP fit with electronic commerce?

Dean: Executive Programs, Punjab College of Business Administration, Lahore. Member, Governing Council, IFAC (1997-2000) Chairman, Seminars & Conferences Committee, ICMAP