What is Enterprise Resource Planning (ERP)?
ERP refers to an information system that controls and integrates the different business functions of an organization. It is a multi-module application that integrates the activities of different departments such as production, finance, human resource, and marketing.
The objective of an ERP system is to maintain a smooth flow of management information throughout an organization, thereby enabling the manager to make effective decisions.
Table of Contents
ERP integrates the functions of different departments of an organization. In addition, it ensures that all departments are automatically updated about the occurrence of an event. For example, when an order is placed by a customer, ERP automatically updates all the interrelated departments, such as production, finance, and inventory control, about the order.
Apart from this, ERP enables an enterprise to allocate resources efficiently, which further helps in enhancing the profitability of the organization.
Figure shows an ERP system:
Before implementing the ERP project, an enterprise should establish clear goals that can be achieved through such implementation. The implementation of an ERP project requires support from many people such as employees, package and hardware vendors, communication experts, etc.
The ERP project of an enterprise can be successful if all these people are well-versed in the actual working of an ERP system.
In general, there are two types of ERP systems that are implemented by organizations.
These systems are discussed as follows:
Commercial ERP Package
These packages are quite expensive and suitable only for large-scale organizations. Most of the well-known ERP vendors, such as Oracle, SAP, and Microsoft, provide commercial ERP packages. For implementing these packages, organizations need to change their existing technology and business processes and provide extensive training to their employees, so that they can work with the package.
Some of the commercial ERP software are Microsoft Dynamics AX, Microsoft Dynamics NAV, and mySAP ERP.
Open Source ERP Package
These packages are available free of cost. Open-source ERP packages are easy to use. Organizations need not change their existing technology for implementing it. Instead, they can change the code of the ERP package to make it compatible with the existing business processes.
Thus, the implementation of an open-source ERP package does not affect the regular working of an organization. Some of the open-source ERP packages are Compiere, ERP5, and Fisterra.
Evolution of an ERP System
How was information managed before the existence of ERP? Also, if there was already a method for managing information earlier, then why were ERP systems developed? ERP evolved as a result of continuous advancement in technology and radical changes in the ways organizations used to conduct their businesses in earlier times.
The table shows the historical milestones of ERP:
| Year | Technological Evolution With Respect to ERP |
|---|---|
| Before the 1960s | Organizations used different inventory control methods and models, such as Economic Order Quantity (EOQ), fixed order quantity, periodic order method, and optional replenishment method, for managing their business processes. |
| 1960s | Organizations started using software packages for controlling and managing their inventory. However, these packages were not very effective |
| 1970s | The Material Requirements Planning (MRP) system was invented, which helped organizations in identifying the materials required for producing products, reducing inventory levels and lead time, and maintaining on-time delivery performance. Later on, with the addition of various software tools, the functions of the MRP system were enhanced, and it was also used for performing activities such as sales planning, customer order processing, capacity planning, etc. This enhanced version of the MRP system was known as closed-loop MRP. |
| 1980s | The MRP II system, an assimilated form of various other systems, such as financial accounting systems, manufacturing systems, material management systems, etc, was invented. It enabled an organization to estimate the material and capacity requirements for producing products and transform these requirements into financial information. However, there were certain drawbacks of the MRP II system such as a limited focus on manufacturing activities, assumption of repetitive production setups, and ineffective budgetary and cost controls. |
| 1990s | Drawbacks of MRP II led to the evolution of ERP, which integrates the flow of information within the different departments of an organization such as finance, production, marketing, and human resource. ERP enabled organizations to streamline their business processes, improve workflow, and increase customer satisfaction. |
Benefits of an ERP System
Are you aware of the advantages of using an ERP system in an organization? An ERP system provides several direct and indirect benefits to an organization.
Some of these benefits are discussed as follows:
- Reduced Lead Time
- Timely Delivery of Products
- Minimized Cycle Time
- Better Customer Satisfaction
- Improved Supplier Performance
- Increased Flexibility
- Reduced Quality Costs
- Improved Resource Utility
- Improved Information Accuracy and Decision-making Capability
Reduced Lead Time
Lead time is the amount of time taken between the placing of an order and the receipt of products by a customer. For example, when an organisation places an order for raw materials with a supplier, the time given by the supplier to deliver the order, such as within 15 days, is considered the lead time.
The ERP system helps an organization to reduce the lead time of products by managing inventory effectively and providing updated information about the lead time of its different products. This further helps in reducing inventory costs, increasing the probability of timely delivery of products, acquiring new customers, and retaining the existing ones by achieving a high level of customer satisfaction.
Timely Delivery of Products
An ERP system helps an organization to ensure the on-time delivery of products to customers by integrating various business functions and automating different tasks. For example, if an ERP system is implemented in an organization and a customer places an order, the information regarding the requirement of a product will instantly pass from the sales department to the production department.
Further, the production department plans the delivery of the product to the customer and passes it to the concerned department. Thus, the department handling the delivery of the product is able to prepare for the same in advance, so that as soon as they receive the product, they can deliver it on time to the customer. This helps in enhancing customer satisfaction and building healthy relationships with customers.
Minimized Cycle Time
The amount of time taken to process a customer’s order and deliver the product to the customer is called cycle time. A long cycle time may result in undue delays in the delivery of products to customers. An ERP system helps an or ganisation to reduce cycle time by informing a customer about the availability of a product within a few seconds.
For example, when you visit a movie theatre and ask for the availability of tickets, the operator checks the availability on his/her system and provides you the required information within a few seconds.
Moreover, an ERP system integrates the activities of different departments in an organization. This helps the departments to get updated information about an event that may take place within the organization. Thus, an ERP system enables organizations to reduce cycle time between the placing of an order and the receipt of the order to a large extent.
Better Customer Satisfaction
An ERP system enables an organization to deliver its products on time, provide customized and high-quality products and services, and respond to customer queries and problems quickly. This further helps in increasing the satisfaction level of customers.
For example, you purchase a product but have problems while operating it. Thus, you called the customer service department of the organization from where you purchased the product.
The customer service representative asks you for the model number of the product and your personal details. He/she enters the details in the ERP system and derives detailed information about the product you have purchased and thus is able to provide you with a solution.
You neither need to be present at the customer service department to have a problem solved nor do you need to visit the department again and again. Your problem gets resolved within minutes using the ERP system.
Improved Supplier Performance
An ERP system contains features that help an organisation to manage supplier relations and track vendor activities. For example, an ERP system can help an organization check whether the product received from the vendor contains the quantity and quality mentioned by the organization while placing the order.
For this, the store manager, who received the product, needs to check the information related to the order placed in his/her system using the ERP system and match it with the product recieved. Nowadays, most organizations make an agreement with their suppliers for procuring good-quality raw materials at lower prices. An ERP system helps an organization in controlling and manage agreement-related activities.
Increased Flexibility
An organization needs to modify its products, services, or overall business strategy according to the ever-changing wants, tastes, and preferences of its customers. For example, an organization needs to modify its products, services, or overall business strategy according to the ever-changing wants, tastes, and preferences of its customers.
In addition, it also needs to be flexible enough to use different production methods, such as Configure-To-Order (CTO), Assemble-To-Order () (ATO), and Engineer-To-Order (ETO), to meet the changing requirements.
An ERP system enables an organization to remain flexible and respond to frequent changes in market conditions by maintaining a flow of internal and external information across all the departments and automating different processes.
Reduced Quality Costs
The cost of quality is not related to the amount spent on producing quality products or services, rather, it is associated with preventing defects in products and services. If there are defects in products, an organization needs to rework them, which increases the overall cost of the organization.
For example, rework on a product may involve the retesting of assembly, rebuilding of a tool, and reprocessing of a loan operation. This may result in additional costs for an organization.
An ERP system helps an organization to identify these defects at the designing stage of a product and rectify them before the product reaches a customer. The cost incurred for rectifying defects at the designing stage of a product is lower than the cost incurred at the final stage.
An ERP system ensures that all the functional departments of an organization follow a benchmark for maintaining the required product quality, thereby assisting organizations in improving their production processes.
Improved Resource Utility
An organization needs to determine its production capacity accurately for using its resources effectively. If the actual production capacity exceeds the desired production capacity, the resources are not utilized completely.
On the other hand, if the actual production capacity is less than the desired production capacity, the organization is not able to deliver products on time. This may adversely impact the goodwill of the organization.
For example, a customer asks for 10 pieces of a product of a particular brand, but the retailer tells the customer that he/she can only buy them after six months, because the organisation is yet to manufacture them. In this case, the customer buys a product of a different brand and does not prefer to buy any product of the previous brand in the future.
An ERP system facilitates the effective utilization of resources by enabling an organization to plan and schedule its production process properly. It uses master production schedules and material requirement plans for allocating resources as per the production requirements.
Improved Information Accuracy and Decision-making Capability
An ERP system helps an organization to collect and integrate required information. In addition, it facilitates a free flow of information among the different departments of an organization.
This information helps departments to take several crucial decisions such as selecting a product to be produced, determining the different sources of funds, and selecting the right technology for production purposes.
ERP Implementation
The process of implementing an ERP system in an organisation is called ERP implementation lifecycle or ERP lifecycle, which comprises a number of phases.
Figure shows the phases of an ERP implementation:
- Pre-evaluation Screening
- Package Evaluation
- Project Planning Phase
- Gap Analysis
- Re-engineering
- Configuration
- Implementation Team Training
- Testing
- Going Live
- End-user Training
- Post-implementation
The different phases of an ERP implementation are discussed as follows:
Pre-evaluation Screening
It includes examining all the available ERP systems. Among these systems, those which are able to meet the organisation’s requirements, are selected.
Package Evaluation
It involves a deep analysis of all the shortlisted ERP systems to select the final system. It is the most important phase, because the success of an ERP implementation highly depends on the selection of the right system. An organisation should select an ERP system that is as per its requirements.
Project Planning Phase
It involves formulating a detailed plan for implementing an ERP system. A project plan specifies the resources required for implementing an ERP system, the timeline for the completion of the implementation process, the targets that need to be achieved by implementing the ERP system, etc.
In addition, the project planning phase involves developing a contingency plan, identifying control measures, and deciding methods for the evaluation of the ERP system.
Gap Analysis
In this phase, an organisation develops a model that states its current status and future targets. Using this model, the organisation can anticipate any functional gaps and cover them.
Re-engineering
This involves the complete restructuring of business processes, technology, functions, etc. However, while implementing an ERP system, the term re-engineering is used in two different contexts. In the first context, re-engineering is used as a downsizing tool.
Generally, the top-level executives of an organisation implement an ERP system to reduce the number of employees. However, in reality, the ERP system modifies the job responsibilities of employees, because it automates all business activities.
Therefore, an ERP system should be considered as an investment and cost-cutting measure instead of a downsizing tool.
In the second context, the term re-engineering is used to signify the integration of Business Process Reengineering (BPR) with the ERP system. BPR brings changes in the roles and responsibilities of employees, which are required for the implementation of an ERP system.
Configuration
It is the functional phase of the ERP implementation lifecycle. In this phase, an ERP system is synchronised with the existing system of an organisation. For this, the organisation should properly analyse all its business processes, so that it can achieve its overall objectives.
Implementation Team Training
In this phase, the implementation team is trained for implementing the ERP system successfully in the organisation. The training is given on the working of the ERP system and its implementation. After the implementation of the ERP system, the vendor and external consultants leave the organisation.
In such a case, it is important for the organisation to give proper training to its employees to avoid any contingencies during the working of the ERP system.
Testing
In the testing phase, the ERP system is verified by creating real situations. These real situations can be related to system overloads, invalid data entry, hacking attacks, etc. If the ERP system is unable to pass the testing phase, the required changes should be made in the system.
Going Live
In this phase, the ERP system is made available to all the employees in the organisation. At this stage, the ERP system is ready to be used technically and functionally. In this phase, the old system is replaced by the new ERP system to perform the various business functions.
End-user Training
In this phase, the employees who need to work on the ERP system are identified and segregated into groups, so that they can be trained to work on the new system. This training also focuses on the methods an employee needs to use in case the ERP system does not work properly.
Post-implementation
The post implementation phase involves continuous evaluation of the ERP system implemented in the organisation. To receive the full benefits of the ERP system, it is important that the system is accepted in the entire organisation. Moreover, the system should be upgraded from time to time.
Information Areas of ERP System
Many organisations face issues, such as lack of real-time data, poor coordination among different departments and increased cost. To manage these issues, organisations implement ERP systems that help in streamlining business processes, reducing costs, maintaining a smooth flow of information, etc. An ERP system provides integrated information to various departments of an organisation, which are shown below:
Human Resource (HR)
The HR department of an organisation plays a key role in hiring and maintaining a pool of skilled employees. In addition, the department performs various activities such as compensation, performance appraisal, training and development, etc.
These activities can be performed effectively if an organisation has accurate information related to employees, such as employees’ background, qualifications, date of joining, salary details, performance, etc. An ERP system provides information related to all employees to the HR department of an organisation, thereby facilitating better decision making.
Sales
Sales is the primary source for an organisation to generate revenues. An organisation’s sales volume depends on how quickly it is able to fulfil the requirements of customers. To meet customers’ requirements, an organisation needs information related to customers’ buying preferences, contact details, purchase history, past relationships and buying capacity. An ERP system provides accurate and timely information related to customers, which ultimately boosts an organisation’s sales.
Supply chain
The supply chain network of an organisation is responsible for the timely procurement of raw materials to the final delivery of products to end users. For this, it requires the accurate and exact status of products in transit. An ERP system serves information needs related to the supply chain of an organisation.
Marketing
Marketing is one of the most important functions of an organisation as it is directly related to the organisation’s sales. It involves a number of activities, such as competitors’ analysis, market research, demand and supply analysis, branding and promotions. To perform these activities effectively, an organisation needs adequate information related to market trends. These information needs can be served by an ERP system.
Finance
Finance is about managing the monetary aspects of an organisation. It involves activities such as raising funds, dealing with debtors and creditors, preparing financial reports, etc. An ERP system is able to provide information related to debtors, creditors, revenues, etc., thereby facilitating efficient decision-making.
Production
The production function of an organisation is responsible for converting tangible and intangible inputs (raw materials, semi-finished goods, ideas, information and knowledge) into the desired output (final goods and services).
For this, it is important to procure raw materials on time and have set processes, up-to-date technology and skilled human resource. An ERP system helps the production department by providing information on the performance of different processes, latest technology, deployment of human resources for different production activities, procurement needs, etc.
Factors for Successful ERP Implementation
Organizations Vision
It is crucial for the users of an ERP system to be aware of the organization’s vision and plan, and to understand whether the ERP is a strategic tool or just a software solution. According to Nah et al. (2001), if there is no plan or vision in place, ERP implementation should not be carried out.
Software Selection
Due to its high cost and frequent updates, there have been numerous studies on ERP software, as noted by Butler (1999) and Bernroider and Koch (2001). Moreover, the ERP software is not tailored to any specific organization, industry sector, or country, and therefore requires customization to meet their unique needs, as highlighted by Klaus et al. (2000).
Project Management
In order for a project to achieve success, it is crucial to have qualified and experienced implementers, especially for an ERP project that involves significant financial investments. According to (Finney & Corbett, 2007) and (Nah et al., 2001), a fully empowered team, with all the necessary financial and material resources, should be made available.
The project manager should lead by example and motivate the team, as emphasized by (Nah et al., 2001) and (Francoise et al., 2009). Furthermore, a diverse team consisting of members with various skills from different areas is essential for the successful implementation of ERP, as noted by (Willcocks and Sykes, 2000).
Communications
Effective communication is crucial for the success of project implementation and user satisfaction. It is important to communicate users’ expectations at all levels appropriately. As per Rosario (2000), project implementation should manage users’ inquiries, comments, reactions, approval, and overall needs properly.
Communication in all phases of the project is significant for conveying the project’s importance along with the project vision, scope, objectives, activities, and all updates. All changes should be communicated to all stakeholders on time (Sumner, 1999) to ensure a smooth implementation process and user satisfaction.
Change Management
Change management is crucial throughout the entire project implementation process, as organizations are dynamic and need to maintain a strong identity while also being open to change. Therefore, enterprise-wide culture and structural changes, including changes to people, organizations, and culture, are important considerations during the implementation phase. Involving users at different levels in the design and implementation of a project is one way to manage change effectively.
According to Rosario (2000), it is essential to train users and address all of their needs and problems through effective communication and collaboration with change agents.
Reasons for the Failure of ERP Implementation
“One of the findings of our 2013 ERP Report is that most ERP projects take longer than expected, cost more than expected, and fail to deliver expected business benefits. In addition, in our 2013 ERP Report: Organisational Change and Business Process Management, we find that 41% of organizations experience some sort of material operational disruption at the time of their go-live”.
-Panorama Consulting Solutions
An ERP system often fails at the initial stages of its implementation, or it is not able to provide the desired results. Some of the reasons for the failure of ERP implementation are as follows:
Lack of Top Management Support
The top management of an organisation plays a vital role in the implementation of an ERP system by providing the required resources, reassigning jobs to employees, changing work processes, etc. For example, if the top management of an organisation does not support the ERP system implementation, the use of resources, such as men and materials, will not be allowed for this purpose.
If allowed, the required amount of resources may not be provided. In such a case, it becomes difficult to complete the ERP implementation process successfully. In addition, if the top management supports ERP implementation, employees automatically need to support it. Thus, it is important that the top management of an organization is aware of the importance of implementing an ERP system.
Improper Planning and Budgeting
The implementation of an ERP system requires detailed planning of the budget to be allocated, procedures to be used for the implementation, etc. If the plan for ERP implementation is not formulated properly, it can lead to disastrous situations such as insufficient funds, ineffective procedures, lack of support of team members, etc.
This can result in the failure of ERP implementation. For example, the complete implementation of an ERP system in the organization takes two years, but the plan prepared for the implementation is for one year. In such a case, the ERP implementation will fail, because either the implementation will not be complete, or, if it is completed, it will not provide the desired benefits to the organization.
Inappropriate ERP System
Different organizations have different environments, work cultures, and procedures. In addition, the objective of implementing an ERP system varies across different organizations. Thus, while selecting an ERP system, an organization should determine whether the system is able to fulfill its objectives.
In addition, an organization needs to determine whether the implementation of an ERP system is feasible with the existing technology and working environment. For example, Evick Enterprises implemented the production module of an ERP system to increase its production efficiency.
This resulted in increased profits. Observing this, Bowler Enterprises, a rival organization of Evick, also implemented the production module of the ERP system, without determining their own requirements for implementing the system. This implementation involved huge costs and time, and even after implementing it, Bowler Enterprises is not able to compete with Evick Enterprises.
Resistance From Employees and Lack of Training
Employees may resist ERP implementation in case proper training is not provided to them. This is because they may fear that the implementation will lead to an increased workload. In addition, some employees may also develop job insecurity, because the ERP system can perform their work. Thus, an organization should provide proper training to its employees on the functioning of an ERP system.
ERP implementation is more successful in an organization where employees are willing to learn new things and are flexible to change. On the contrary, the implementation of an ERP system fails in an organization where employees resist any type of change in the working environment.
For example, employees of an organization refuse to work on the new ERP system, because tasks take longer to complete on the new system, and it is difficult to understand. As a result, the organization is not able to benefit from the ERP implementation.
In this case, the organization needs to provide training to its employees on how to work on the system, making them aware of the benefits of the ERP system.
Most problems faced while implementing an ERP system can be overcome if organizations follow a step-by-step approach.
The steps that should be followed by an organization are mentioned as follows:
- Define the objectives and targets of implementing an ERP system.
- Define the role of different departments in the implementation of an ERP system.
- Formulate a project team for the implementation of an ERP system.
- Select the ERP vendor.
- Select the ERP system as per the requirements and the objectives of ERP implementation.
- Implement the ERP system (as discussed in section ERP Implementation).
- Monitor the performance of the ERP system.
Sometimes, organisations also hire an outside experienced consultant. This consultant acts as a coordinator between the ERP vendor and the organisation. The consultant should have experience in ERP implementation. However, the availability of an experienced consultant is low. Therefore, it is preferred that an organisation should select employees with the required technical skills and train them to work in coordination with external consultants.
