Week 5 Write Up : ERP (Traditional Integration Technology)

Traditional Integration Technology: ERP

Let me start this writeup with a good saying –

History teaches everything, including the future.
—Lamartine

Introduction

The names for new technology systems continue to change, but the promises they make remain the same: improve the bottom line. This is the first installment of Back to the Basics, an intermittent series that will unearth the core definitions of buzzwords and key application systems, and chart their evolution. Understanding their evolution is essential to knowing their current use, future developments, and upcoming trends—and more importantly, for making informed decisions.

Definition:-

Enterprise resource planning: An accounting-oriented information system for identifying and planning the enterprise-wide resources needed to take, make, ship, and account for customer orders…

—from the APICS Dictionary, 10th edition

Enterprise resource planning (ERP) systems started as a means for inventory control and grew to replace islands of information by integrating traditional management functions, such as financials, payroll, and human resources, with other functions including manufacturing and distribution. Currently, the complexity of business is creating new user needs; the growth of computers is developing new potential; the quest for new markets by vendors has given users a new voice; and ERP is evolving once again. Names and acronyms like extended-ERP, ERP II, enterprise business applications (EBA), enterprise commerce management (ECM), and comprehensive enterprise applications (CEA) are being tossed about, but what's really going on?

Evolution

In the 1960s, the key goal of an ERP system was inventory control. Manufacturers assumed consumers would continue their buying patterns and aimed to keep enough inventory on hand to meet demand. The sophistication of resource planning grew with the affordability and feasibility of the computer. In the sixties, computers were large, hot, noisy machines that occupied entire rooms, but by the seventies, average manufacturing companies could finally afford them. The innovation computers allowed caused management to review traditional product cycles and resource allocation. Materials requirement planning (MRP) computer systems were developed to promote having the right amount of materials when needed. First developed by IBM and J I Case, a US tractor maker, MRP promised to automatically plan, build, and purchase requirements based on the finished products, the current and allocated inventory, and expected arrivals. Master production schedule (MPS) was built to monitor the finished goods. Naturally data from MPS fed into the MRP, which contained phased, net requirements for planning the procurement of sub-assembly components, raw materials, and ingredients.

MRP gave planners more control, allowing them to be proactive and use time phased orders, rather than reacting only when delays occurred. However, because of the limitations of computers at the time, the software could handle only limited variables. There was no way to see how a late part, for example, would impact overall production. The general assumption was that delays in the system would mean the customer would receive the product late. Also, backward scheduling, where the start date was calculated backwards from the desired completion date, had to be employed to minimize inventory and still meet the customer's delivery date.

Determining the quantity of parts needed to complete the order, however, was not enough. Companies needed to create capacity plans based on materials, equipment, and priorities to improve efficiency. Thus capacity requirements planning (CPR) emerged. Unfortunately, again due to the limited capabilities of computers, variables such as idle time, maintenance, and labor could not be fitted into the CPR equation. Thus each work center was assumed to have an infinite capacity—a problem that still plagues manufacturers today. Scheduling and planning still remained imprecise. As a result, the need to factor in other resources became apparent.

This need moved beyond the shop floor. Keeping financial tabs on the coming and going of inventory, the labor and overhead involved, and the revenue generated from the delivery was also necessary. Manufacturing resource planning (MRPII) attempted to integrate business planning, sales, support, and other functions together so they could work in concert.

By the nineties, each functional area also saw the benefits of computerized tracking and planning. With computers being more common and affordable and programming more sophisticated, each department could use its own software program. Unfortunately, that was the problem. Disparate systems and different databases were not linked and the need for integration became obvious. Moreover, the time to market for consumer goods decreased sharply because of consumer demand. This combined with new, Japanese manufacturing philosophies, meant that western enterprises had to re-evaluate their manufacturing processes. Just in time (JIT), which aimed to eliminate waste and material lag time, meant that suppliers and manufacturers had to develop closer relationships. Also, labor exploitation caused cost of goods sold (COGS) to shift to purchase materials. Planners needed to know the cost of material allocations immediately after orders were placed, but buyers purchasing raw materials need to know the sales plan months in advance. A common database had to be developed: enterprise resource planning was born.

Before the birth of ERP

Prior to the concept of ERP systems, departments within an organization (for example, the Human Resources (HR) department, the Payroll (PR) department, and the Financials department) would have their own computer systems. The HR computer system (Often called HRMS or HRIS) would typically contain information on the department, reporting structure, and personal details of employees. The PR department would typically calculate and store paycheck information. The Financials department would typically store financial transactions for the organization. Each system would have to rely on a set of common data to communicate with each other. For the HRIS to send salary information to the PR system, an employee number would need to be assigned and remain static between the two systems to accurately identify an employee. The Financials system was not interested in the employee level data, but only the payouts made by the PR systems, such as the Tax payments to various authorities, payments for employee benefits to providers, and so on. This provided complications. For instance, a person could not be paid in the Payroll system without an employee number.

After

ERP software, among other things, combined the data of formerly separate applications. This made the worry of keeping numbers in synchronization across multiple systems disappear. It standardized and reduced the number of software specialities required within larger organizations.

Advantages of ERP:-

• Ease of use – The ERP System is very user friendly and with the right amount of training, it is easy for the employees to use the system.
• Introduces business best practices – It helps companies to do away with the incorrect ways of carrying out the different business functions and introduces business best practices. This helps to provide greater control and introduces standardized ways to perform business processes.
• Ready-made solutions for most of the problems – As the vendors who develop ERP software packages, take the best ideas from all their customers and incorporate them into their products, they develop systems that help resolve most of the problems
• Easy enterprise wide information sharing – Once the information is entered into the single database, everyone in the organization has access to the information and sees the same computer screen.

Disadvantages of ERP:-

• Costs – The costs involved in setting up an ERP System are huge. Hence it is very important for companies to first figure out whether their ways of doing business will fit within a standard ERP package. Software cost is not the only expense for the company. They have to consider costs involved in training, data conversion, integration and testing, post-ERP performance issues that may lead to reduction in revenues, maintenance costs etc.

• Time – The implementation of an ERP system takes a long time. Since time is a valuable resource for the organization, it is important to make accurate estimates of the time required. There is also a chance that the implementation process may slow down the routine operating works within organizations. (ERP)

• Acceptance – Employees are never ready to accept change. They don’t really want to change the way they perform their daily tasks and love to stick with the same old ways to carry out their work. Hence it is important for organizations to involve the users in the project activities from the beginning. This will create a sense of ownership in their minds and make them accept the ERP System more willingly. (Shields, 2001)
• Training – Many a time companies underestimate the amount of time employees will require getting familiar with new systems. They tend to budget less time and costs for training, that could lead to improper training of employees or actual costs exceeding the budget by a large number.

Current and future developments in ERP

Currently, the goal of integrated ERP is to replace islands of information with cross-communication to ensure enterprise-wide coherency. Though ERP promises quick access to information, it is still plagued with problems it inherited from MRPII: assumptions of infinite capacity, and inflexible scheduling dates. However, ERP can be purchased as a product. Vendors now offer broad functional coverage nearing best-of-breed capabilities; vertical industry extensions; and strong technical architectures. This, combined with product enhancements, global support, and technology partners, is narrowing the gap between desired and actual features.

Traditionally the biggest purchasers of ERP solutions have been large Fortune 100 companies, however, the surge of IT investments in the nineties dropped in 1998. It continued to fall until 2000, and has not yet reached the same numbers. As a result, vendors are now looking to increase their market share by meeting the needs of small and medium businesses. However, entering a new market is not enough to build a strong repertoire. What will truly differentiate the leaders in this industry is the breadth, depth, and diversity offered at the plant level, and the ability to meet the requirements of distribution centers. Furthermore, planning functionality will have to extend from the shop floor to distribution centers. This includes flow-based manufacturing, work instruction, dynamic dispatching, and other elements. Web-based, service oriented architecture will also have to be factored in. New systems will also have to be more customer-focused, incorporating e-commerce interaction and collaboration with business partners.

ERP "extension" software is also in demand. Users want comprehensive functionality from advanced planning and scheduling (APS), manufacturing execution systems (MES), to sales force automation (SFA). As a result, broader customer relationship, business intelligence (BI), business-to-business (B2B) and business-to-commerce (B2C) functionalities are being included. These features need to be integrated, and ideally, "one-stop-shop" offerings should synchronize and integrate releases.

To meet the integration needs of users, all major, traditional ERP players have begun moving into the areas of supply chain management (SCM) and customer relationship management (CRM). For example, in 2004 it was reported that SAP's SCM revenue outpaced industry leaders i2 Technologies, Ariba, and Manugistics. Incorporating SCM functionality may be a way to circumvent MRP II's capacity planning limitations. Furthermore, APS, a subset of supply chain planning (SCP), allows users to create a feasible schedule using identified, finite constraints. Finite capacity creates simulations and allows the user to analyze the results prior to committing to the action. SCM also addresses the need for enhanced information flow among customers, suppliers, and business partners outside of the enterprise. The concept of global logistics was created by combining APS with specialized warehouse and transportation management solutions. Thus the global supply management chain linked suppliers and user companies and encompassed all processes, including initial raw materials, to the consumption of finished goods. Yet, while SCM and its offshoots promise to improve some of the deficits in ERP, it will not be a replacement. No matter how responsive a supply chain execution (SCE) system is, it still functions on the premise of waiting for a problem to occur, then acting on it. This is just as flawed as relying on unyielding plans and never obtaining feedback. They are both needed for an enterprise to be productive.

Product lifecycle management (PLM) too may seem to be a rival system to ERP, perhaps more so than SCM. PLM solutions are oriented around creative product innovation processes, whereas ERP is transaction oriented. Furthermore, PLM stand-alone packages accommodate collaboration better than ERP. However, the market is up for grabs and PLM vendors need to focus on easy integration with ERP in order to stay competitive. Likewise, if ERP vendors continue to develop extended functionality, collaborative capabilities, accessibility, and integration by incorporating universal interfaces and Web services standards, then PLM's current market superiority will be noticeably diminish.

The Future of ERP

Originally, the predictions said that the enterprise resource planning market would quickly end as soon as the year 2000 arrived. This is now proving not to be the case. A recent survey of 50 information technology executives by Forrester Research Inc. has shown that year 2000 fixes did not even make the list of the top ERP incentives. New reports show that the year 2000 impact on ERP sales was overstated and the prediction is that annual compound growth rates for the next five years will be 37%. ERP solutions are now being purchased by major firms all over the world to streamline their business processes. The new ERP solutions are reaching beyond the traditional industry of manufacturing and are now being tailored to adapt to industries such as retail, healthcare, utilities, and telecommunications. The benefits of having everyone in the organization working off of one common data, with the same pricing, product information allows companies to be more responsive to customers. The ERP industry is expected to grow from its current level of $11 billion to be a $52 billion market in the next five years.

ERP Success Stories

The benefits of Enterprise systems have led to many gains in productivity and speed of processes. A few examples of ERP working to a companys advantage are seen through IBM Storage Systems division, Autodesk and Fujitsu Microelectronics. IBM decreased the time it took to reprice all of its products from 5 days to 5 minutes, and the time to ship replacement parts from 22 days to 3 days. IBM can also now do a complete credit check in 3 seconds, down from the previous 20 minutes. Fujitsu was able to reduce cycle time for order fufillment from 18 days to a day and a half. Also, Autodesk a leading designer of CAD software now ships out orders with in 24 hours. Before they installed ERP it took them an average of two weeks to get the order out.

Case Study

Elf Atochem North America, a two billion-dollar chemical company, used enterprise systems as part of the corporate and organizational strategy. In the early 1990's Elf had multiple critical information systems throughout their 12 business units. Systems were not integrated. Each business unit tracked and reported data seperately. This resulted in a lack of information flowing through the organization. Top managers did not have the information necessary to make critical decisions.

The company decided to implement SAP R/3 product in a client server environment. This implementation was not labeled in the company as an Information Technology project, but it was looked at as a strategy initiative. The company looked at the organization as a whole and noticed that each business unit ran in different ways making it difficult for customers to understand and do business with.

Before the ERP system was put into place it took Elf Atochem four days to process an order. The company was also not able to coordinate manufacturing and inventory. As a result the company wrote off g reater than 60 million dollars a year in losses. Sales representatives were never able to guarantee order and delivery dates, resulting in lost customers.

The ultimate goal of the company was to turn from an industry slacker into a leader. To do this they needed to provide better customer service, an area they greatly lacked in. Elf Atochem decided they needed to focus their efforts on redesigning four key processes to improve their business. The processes they concentrated on were production planning, order management, financials and materials management. When implementing the R/3 product they chose to only purchase the modules that directly supported the four key areas. The company did not implement modules such as Human Resources or Plant Maintenance. Elf Atochem made many changes to the organizations fundamental structures in coordination with the ERP implementation.

The ERP system integrated all of the company's financial systems. It also enabled the company to integrate all orders and invoicing throughout all 12 business units. One of the most important things that ERP gave to the company was the real-time information that was necessary to connect sales and production.

Elf Atochem's implementation is now more than 75% complete. The rollout of SAP is ahead of schedule and under budget, a true rarity in this industry. This success is largely due to the management techniques of the implementation team. The team is comprised of over 60 employees with different areas of expertise. They are installing the system one business unit at a time which ensures that the project is under control and manageable.

So far, Elf Atochem's results have been great. They have seen improvements in customer satisfaction levels and the time it takes to process orders has greatly been reduced. The company is now operating more efficiently and inventory, receivables and labor expenses has all been cut. The company is estimating the ERP system, once complete will save them tens of millions of dollars.

ERP Software packages:

1. webERP: webERP is an open source ERP system for Small and Medium-sized Enterprise. webERP is integrated software capable of simultaneously performing many functions. Each process uses the latest real-time information after it has been updated by other processes in other parts of the business. Continuous online availability of the current status of every area of the business is a critical advantage in today's fast moving business environment. The webERP machine comes fully equipped with all the attachments required to process multi-currency accounts receivable, multi-location inventory, multi-currency accounts payable, as well as bank accounts and general accounting.

The webERP makes use entirely of Internet technologies to allow for massive scalability. It requires only a minimal bandwidth network connection, a web browser and Acrobat reader. The client software is already familiar to most users. An accounting system designed from the ground up to be easily run as a web application using the open source PHP scripting language.

For more information, visit www.weberp.org

2. SAP R/3: SAP R/3 is the former name of the main ERP software produced by SAP. Its new name is mySAP ERP. SAP R/2 was a mainframe based business application software suite that was very successful in the 1980s and early 1990s. It was particularly popular with large multinational European companies who required soft-real-time business applications, with multi-currency and multi-language capabilities built in. With the advent of distributed client-server computing SAP AG brought out a client-server version of the software called SAP R/3 that was manageable on multiple platforms and operating systems, such as Windows or UNIX since 1999, which opened up SAP to a whole new customer base. SAP R/3 was officially launched on 6 July 1992. SAP came to dominate the large business applications market over the next 10 years.

SAP R/3 is a client/server based application, utilizing a 3-tiered model. A presentation layer, or client, interfaces with the user. The application layer houses all the business-specific logic, and the database layer records and stores all the information about the system, including transactional and configuration data

Conclusion

To implement ERP Systems is not easy, since ERP is not for everyone. Especially, the small and medium size organizations may have to take extra precaution about the cost of implementation, training, and maintenance. Organizations need to make the right decision from the beginning, since technically after implementing ERP it is nearly impossible to migrate to another platform due to tremendous investment cost.

Many companies are now using the Internet for their business. One of the major challenges for the ERP system in the future will be the need to accommodate the e-business requirements of companies that are growing everyday.