ERP-Systems – Situation
and future Developments
by Rainer Kämpf
Enterprise Resource Planning (ERP)
integrates core business areas such as manufacturing, distribution, financials and human
resources. ERP is often implemented in companies together with process-oriented
organization or Supply Chain Management (SCM). In order to manage the information-flow of
such structures new IT-systems are generated – known as ERP-Systems. IT-systems of
this kind allow managers from all departments to look vertically and horizontally across
the organization to see what others are accomplishing or not. It attempts to integrate all
departments and functions across a company onto a single computer system that can serve
all those different department's particular needs. ERP-systems also implement and automate
business processes, putting them into a useful format that is standardized across the
corporation and between their suppliers and customers. ERP-systems capture data about
historical activity, current operations and future plans and organize it into information
people can use to help develop business strategies.
In the ERP industry, the systems are often referred
to as the 4M’s. Man, Money, Materials and Machines. This type of system brings all
four aspects of business together, giving them a synergistic value. ERP is an enabling
technology that can give corporations a strong competitive edge. In addition, this
technology is as close to virtual enterprises as business today has ever seen.
History
The history of ERP can be traced back to
the 1960’s, when the focus of systems was mainly towards inventory control. Most of
the systems software were designed to handle inventory based in traditional inventory
concepts. The 1970’s witnessed a shift of focus towards MRP (Material Requirement
Planning). This system helped in translating the master production schedule into
requirements for individual units like sub assemblies, components and other raw material
planning and procurement. This system was involved mainly in planning the raw material
requirements.
Then, in 1980’s came the concept of MRP-II
(Manufacturing Resource Planning) which involved optimizing the entire plant production
process. Though MRP-II, in the beginning was an extension of MRP to include shop floor and
distribution management activities, during later years, MRP-II was further extended to
include areas like Finance, Human Resource, Engineering, Project Management etc. This gave
birth to ERP (Enterprise Resource Planning) which covered the cross-functional
coordination and integration in support of the production process. The ERP as compared to
its ancestors included the entire range of a company’s activities.
However, it has been within the last five years that
ERP has really taken off and seen record revenues by the software companies. In the past,
ERP software was used to numbercrunch and schedule manufacturing processes. Management was
not using ERP to its full potential. Today, ERP is the foundation of businesses
domestically and globally. It is used as a management tool and gives organizations a great
competitive advantage.
But the consulting firm that created the term a
decade ago Gartner, claimed ERP was dead.
They also recognized that the need for an
information backbone for an enterprise hasn’t gone away. As e-business becomes
business as usual, sharing accurate real-time information about orders and inventory is
critical to success. And not just across an enterprise. Now, business needs to move that
information across a supply chain.
For that reason, Gartner has introduced a new term
to describe the enterprise systems for the 21st century: ERP II.
The difference between ERP and ERP
II
The difference between ERP and ERP II
"In 1990 when we coined the term, ERP was enterprise centric with very little
awareness of anything going on around it," says Zrimsek. "Today, we’re
moving towards collaborative commerce, or c-commerce. To do that you have to share
information outside the enterprise."
ERP II systems are not just the backbone of the enterprise. They are
also the information link for an enterprise in the supply chain. That’s because the
business of tomorrow is going to play multiple roles in multiple supply chains, from
traditional sources to electronic marketplaces.
The challenge for ERP II is two-fold. First, it’s to aggregate
and manage the data surrounding all the transactions of an enterprise as accurately as
possible in real time. Then, it’s to open up the system to make that information
available to trading partners.
Zrimsek has identified six key differences between ERP and ERP II
systems (Figure 1), but he doesn’t expect to see a fully realized ERP II system
deployed before 2005.
| Role |
Traditional ERP was concerned with
optimizing an enterprise. Internal optimization, however, will only take you so far. ERP
II systems are about optimizing the supply chain through collaboration with trading
partners. |
| Domain |
ERP systems focused on manufacturing and
distribution. ERP II systems will cross all sectors and segments of business, including
service industries, government, and asset-based industries like mining. |
| Function |
As ERP systems cross sectors and segments,
they will no longer be able to present all things to all people. Zrimsek expects ERP II
vendors to pick the industries in which they’re going to play, and focus on providing
deep functionality for those users. |
| Process |
In ERP systems, the processes were focused
on the four walls of the enterprise. ERP II systems will connect with trading partners,
wherever they might be, to take those processes beyond the boundaries of the enterprise. |
| Architecture |
Old ERP systems were monolithic and
closed. ERP II systems will be Web-based, open to integrate and interoperate with other
systems, and built around modules or components that allow users to choose just the
functionality they need. |
| Data |
Information in ERP systems is generated
and consumed within the enterprise. In an ERP II system, that same information will be
available across the supply chain to authorized participants. |
Figure 1: Six key differences between ERP and ERP II systems
(Zrimsek)
Major Reasons for ERP?
There are three major reasons why
companies undertake ERP:
- To integrate financial data.
As the CEO tries to understand the companies
overall performance, he or she may find many different versions of the truth. Finance has
its own set of revenue numbers, sales has another version, and the different business
units may each have their own versions of how much they contributed to revenues. ERP
creates a single version of the truth that cannot be questioned because everyone is using
the same system.
Instruments for Finance
General ledger Keeps centralized charts
of accounts and corporate financial balances.
Accounts receivable Tracks payments due to a
company from its customers.
Accounts payable Schedules bill payments to
suppliers and distributors.
Fixed assets Manages depreciation and other
costs associated with tangible assets such as buildings, property and equipment.
Treasury management Monitors and analyzes
cash holdings, financial deals and investment risks.
Cost control Analyses corporate costs related
to overhead, products and manufacturing orders.
Figure 2: Instruments for Finance
- To standardize manufacturing processes.
Manufacturing companies - especially those with
an appetite for mergers and acquisitions - often find that multiple business units across
the company make the same widget using different methods and computer systems.
Standardizing those processes and using a single, integrated computer system can save
time, increase productivity and reduce head count.
- To standardize Human Resource (HR) information.
Especially in companies with multiple business units, HR may not
have a unified, simple method for tracking employee time and communicating with them about
benefits and services. ERP can fix that. In the race to fix these problems, companies
often lose sight of the fact that ERP packages are nothing more than generic
representations of the ways a typical company does business. While most packages are
exhaustively comprehensive, each industry has its quirks that make it unique. Most ERP
systems were designed to be used by discrete manufacturing companies (who make physical
things that can be counted), which immediately left all the process manufacturers (oil,
chemical and utility companies that measure their products by flow rather than individual
units) out in the cold. Each of these industries has struggled with the different ERP
vendors to modify core ERP programs to their needs.
The important thing is not to focus on how long it will take, real
transformational ERP efforts usually run between one to three years, on average - but
rather to understand why you need it and how to use it to improve your business.
Instruments for Manufacturing and Logistics
Production planning Performs capacity
planning and creates a daily production schedule for a company's manufacturing plants.
Materials management Controls purchasing of
raw materials needed to build products. Manages inventory stocks.
Order entry and processing Automates the data
entry process of customer orders and keeps track of the status of orders.
Warehouse management Maintains records of
warehoused goods and processes movement of products through warehouses.
Transportation management Arranges, schedules and monitors
delivery of products to customers via trucks, trains and other vehicles.
Project management Monitors costs and work schedules on a
project-by-project basis.
Plant maintenance Sets plans and oversees upkeep of internal
facilities. Customer
Service management Administers installed-base service
agreements and checks contracts and warranties when customers call for help.
Figure 3: Instruments for Manufacturing and Logistics
Instruments for Human Resources
Human resources administration Automates personnel management
processes including recruitment, business travel and vacation allotments.
Payroll Handles accounting and preparation of checks related
to employee, salaries, wages and bonuses.
Self-service HR Lets workers change their personal
information and benefit allocations online without having to send forms to human
resources.
Figure 4: Instruments for Human Resources
The Cost of ERP
Meta Group recently did a study looking
at the Total Cost of Ownership (TCO) of ERP, including hardware, software, professional
services, and internal staff costs. The TCO numbers include getting the software installed
and the two years afterward, which is when the real costs of maintaining, upgrading and
optimizing the system for your business are felt. Among the 63 companies surveyed -
including small, medium and large companies in a range of industries - the average TCO was
$15 million (the highest was $300 million and lowest was $400,000). While it’s hard
to draw a solid number from that kind of a range of companies and ERP efforts, Meta came
up with one statistic that proves that ERP is expensive no matter what kind of company is
using it. The TCO for a "heads-down" user over that period was a staggering
$53,320. If you are willing to wait for it you will have pretty good payback – the
Meta Group study found that it took eight months after the new system was in (31 months
total) to see any benefits. But the median annual savings from the new ERP system was $1.6
million per year.
The challenge for ERP II is 2-fold. First it is to
aggregate and manage the data surrounding all the transactions of an enterprise as
accurately as possible in real time. Then it is to open up the system to make that
information available to trading partners. ERP is all about sharing information and
collaboration. Management is under constant pressure to improve competitiveness by
lowering operating cost and improving logistics. Organization therefore have to be more
responsive to the customer and competition.
Advantages of ERP
Faster inventory
turnover |
Without ERP, a business
may turn over its inventory once or twice a year With ERP to automate processes such as
production planning and procurement, many manufacturers and distributors increase
inventory turns by tenfold and reduce inventory costs by 10% to 40%. The result is
significant reduction in inventory expense, as well as associated transportation, storage
and warehousing costs. This, in turn, leads to better cash flow. |
Improved customer
service |
To remain competitive,
manufacturers are looking to improve their customer-order fulfillment rates. In many
cases, an ERP system can increase fill rates to 80% or 90% by providing the information
that allows the company to have the right product in the right place at the right time.
The result is higher customer satisfaction and retention. Although it’s hard to put a
price on lost business, customers will take their business elsewhere if the products they
want are not available when they need them. |
| Better inventory accuracy, fewer audits |
Some manufacturers
physically count inventory each month-in some cases, each weekend often have an inventory
accuracy rate as low as 20%. An ERP system can increase inventory accuracy to more than
90%, while reducing the need for frequent physical audits. For many, a comprehensive
physical inventory is not only costly in itself, but requires a temporary shutdown of
business to count, tag and check stock. |
| Reduced setup times |
Manufacturers often
spend anywhere from one to three shifts setting up major pieces of production machinery.
An ERP system can improve setup time by 25% to 80%-from days to a few hours by grouping
similar production jobs together, ensuring coordination of people, tools and machinery,
and planning for maximum equipment use and efficient machine maintenance to minimize
downtime. Optimizing production in this manner translates into increased capacity, which
means you can make more products with the same amount of machinery and people, thus
increasing revenue and ROI without having to increase capital expenses. |
| Higher quality, less re-work |
In some plants, re-work
rates, because of unacceptable quality, may fall between 15% and 40% of production output.
The production staff may not realize there is a problem until after the product has been
manufactured. ERP software with a strong manufacturing component proactively pinpoints
quality issues, providing the information needed to increase production efficiency and
reduce or eliminate re-work. |
| Timely revenue collection, improved
cash flow |
Some companies take up
to 90 days to collect on customer invoices. An ERP system can automatically generate a
list of late paying customers, send notifications as needed, and "redflag"
customers whose credit should be put on hold before more products are manufactured or
shipped. ERP systems give manufacturers the power to proactively examine accounts
receivable before significant problems occur, instead of merely reacting. Timely
receivable equates to better cash flow, freeing up funds for the business to invest in
revenue generating assets. |
Figure 5: Advantages of ERP
Disadvantages of ERP
When an ERP project fails, the finger
pointing often begins with the software. But in many cases a lack of planing prior to
implementation and unrealistic expectations are the real points behind an unsuccessful ERP
execution. "We find companies are buying the software but they really don’t know
what there doing with it" says Barry Levine, practice leader at Toronto-based Richter
Consulting Group.
The companies install their ERP projects like:
The Big Bang In this, the most ambitious and
difficult of approaches to ERP implementation, companies cast off all their legacy systems
at once and implement a single ERP system across the entire company.
Franchising strategy This approach suits
large or diverse companies that do not share many common processes across business units.
Independent ERP systems are installed in each unit, while linking common processes, such
as financial book keeping, across the enterprise.
This has emerged as the most common way of
implementing ERP.
Slam-dunk ERP dictates the process design in
this method, where the focus is on just a few key processes, such as those contained in an
ERP system’s financials module. The slam-dunk is generally for smaller companies
expecting to grow into ERP.
The goal here is to get ERP up and running quickly
and to ditch the fancy reengineering in favor of the ERP system’s "canned"
processes.
Figure 6: Methods to install ERP
Conclusion
The "soft" benefits of ERP provide good
bottom-line savings and sustainable top-line growth, lower inventory and operating cost,
more efficient production, improved quality with less waste, higher customer acquisition
retention and better cash flow.
In the future, more companies will be able to let their ERP systems
handle cash management, as this functionality works through the industry. More companies
will pull everything into the cash management module of their ERP systems.
ERP II systems are not just the backbone of the enterprise. They are
also the information link for an enterprise in the supply chain.
Notes
Treasury merges with ERP: The effect in the accounting dept
Accounting Department Management & Administration Report;
New York; Apr 2001
- theSupplyChain.com beefs up ERP II line
Industrial Distribution; New York; Mar 2001
- ERP vendors make move from back office to front
B to B; Chicago; Feb 19, 2001; Phat X Chiem
- ERP doomed by poor planning
Computing Canada; Willowdale; Feb 9, 2001; Jennifer Brown
- Sobeys fires SAP over ERP debacle
Computing Canada; Willowdale; Feb 9, 2001; Jennifer Brown
- Reaping long-term value from ERP’s soft benefits
Frontline Solutions; Duluth; Feb 2001; Jay Taylor
- ERP solves production woes
Material Handling Management; Cleveland; Feb 2001
- Taking the pulse of ERP
Modern Materials Handling; Boston; Feb 2001
- ERP gets redefined
Msi; Oak Brook; Feb 2001; Roberto Michel
My special thanks to Mrs. Maria Emilia Villaescusa for
collecting all the important information for this essay.. |
