Implementing ERP in Organisations


By

Mr. S. Dhinesh Babu
Asst. Professor, MBA Department
Mr. B. Senthil Raja Manokar
Lecturer, MCA Department
Mohamed Sathak Engg. College
Kilakarai-623 806
 


ABSTRACT

Enterprise Resource Planning systems (ERPs) integrate (or attempt to integrate) all data and processes of an organization into a unified system. A typical ERP system will use multiple components of computer software and hardware to achieve the integration. A key ingredient of most ERP systems is the use of a unified database to store data for the various system modules. ERP is an amalgamation of a company's information systems designed to bind more closely a variety of company functions including human resources, inventories and financials while simultaneously linking the company to customers and vendors.

The aim of ERP is to advance and modernize inner business processes, which characteristically requires reengineering of current business processes.   The components of an ERP system are the common components of a Management Information System (MIS).

Because of their wide scope of application within a business, ERP software systems are typically complex and usually impose significant changes on staff work practices. Implementing ERP software is typically not an "in-house" skill, so even smaller projects are more cost effective if specialist ERP implementation consultants are employed. The length of time to implement an ERP system depends on the size of the business, the scope of the change and willingness of the customer to take ownership for the project. A small project (e.g., a company of less than 100 staff) may be planned and delivered within 3 months; however, a large, multi-site or multi-country implementation may take years.

The most important aspect of any ERP implementation is that the company who has purchased the ERP solution takes ownership of the project.  To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. These firms typically provide three areas of professional services: consulting, customization and support.

The top 5 vendors of ERP happen to be SAP, Oracle Corporation, Peoplesoft, Inc. (now Oracle Corp.), JD Edwards & Company, and Baan International. They account for 64 percent of total ERP market revenue. These vendors play a major part in shaping up the new target markets, with enhanced product functionality and higher access rates. As the industry analysts foresee, more and more companies will come to use ERP software, irrespective of their sizes and the rapid evolution of ERP, whose biggest evidence is ERP II (related with collaborative commerce), will proceed unhindered. Certain research proclaims that the consolidation among top ERP vendors will also continue to take place.

Introduction

ERP is the short form of Enterprise Resource Planning. ERP utilizes ERP software applications to advance the performance of organizations' resource planning, management control and operational control. ERP software is multi-module appliance software that integrates activities across functional departments, from product planning, parts purchasing, inventory control, product circulation, to order tracking. ERP software may include application modules for the finance, accounting and human resources aspects of a business.

Enterprise Resource Planning systems (ERPs) integrate (or attempt to integrate) all data and processes of an organization into a unified system. A typical ERP system will use multiple components of computer software and hardware to achieve the integration. A key ingredient of most ERP systems is the use of a unified database to store data for the various system modules. ERP is an amalgamation of a company's information systems designed to bind more closely a variety of company functions including human resources, inventories and financials while simultaneously linking the company to customers and vendors.

ERP Definition - A Systems Perspective

ERP, frequently like other IT and commerce concepts, are defined in many different ways. A sound definition should contain several purposes:
* It gives answer to the question of "what is ... ?".
* It provides a foundation for defining more detailed concepts in the field - ERP software, ERP systems, ERP realization etc.
* It provides a common ground for comparison with related concepts - CRM, SCM etc.
* It helps to answer the essential questions in the field - benefits of ERP, the causes of ERP failure etc.

ERP is a system which has its aim, components, and borders.

The Aim of an ERP System - The aim of ERP is to advance and modernize inner business processes, which characteristically requires reengineering of current business processes.

The Components of an ERP System - The components of an ERP system are the common components of a Management Information System (MIS).

* ERP Software - Module based ERP software is the core of an ERP system. Each software module automates business activities of a functional area within an organization. Common ERP software modules include product planning, parts purchasing, inventory control, product distribution, order tracking, finance, accounting and human resources aspects of an organization.

* Business Processes - Business processes within an organization falls into three levels - strategic planning, management control and operational control. ERP has been promoted as solutions for sustaining or streamlining business processes at all levels. Much of ERP success, however, has been limited to the integration of various functional departments.

* ERP Users - The users of ERP systems are workforce of the organization at all levels, from workers, supervisors, mid-level managers to executives.

* Hardware and Operating Systems - Many huge ERP systems are UNIX based. Windows NT and Linux are other popular operating systems to run ERP software. Legacy ERP systems may use other operating systems.

The Boundary of an ERP System - The boundary of an ERP system is usually smaller than the boundary of the organization that implements the ERP system. In contrast, the boundary of supply chain systems and ecommerce systems extends to the organization's suppliers, distributors, partners and consumers. In practice, however, many ERP implementations engage the integration of ERP with exterior information systems.

History of ERP

In 1960, the manufacturing units laid emphasis mainly on Inventory control and hence there was the emergence of inventory management and control systems. The software packages of this period were based on traditional inventory concepts and custom-made to handle the stock. In 1970, the focus shifted to material requirement planning (MRP) that dealt with transaction of master schedule of the finished products, components and raw materials planning and procurements.

1980's witnessed the evolvement of MRPII (manufacturing resource planning), which is an extension of MRP to shop floor and distribution management activities. To cover the whole range of activities within a business enterprise (like engineering, finance, human resources, etc) MRPII was further expanded and hence it usurped the term Enterprise Resource planning (ERP).


Some organizations - typically those with sufficient in-house IT skills to integrate multiple software products - choose to implement only portions of an ERP system and develop an external interface to other ERP or stand-alone systems for their other application needs. For instance, the PeopleSoft HRMS and financials systems may be perceived to be better than SAP's HRMS solution. And likewise, some may perceive SAP's manufacturing and CRM systems as better than PeopleSoft's equivalents. In this case these organizations may justify the purchase of an ERP system, but choose to purchase the PeopleSoft HRMS and financials modules from Oracle, and their remaining applications from SAP.

This is very common in the retail sector, where even a mid-sized retailer will have a discrete Point-of-Sale (POS) product and financials application, then a series of specialized applications to handle business requirements such as warehouse management, staff rostering, merchandising and logistics.

Ideally, ERP delivers a single database that contains all data for the software modules, which would include:

Manufacturing 

Engineering, Bills of Material, Scheduling, Capacity, Workflow Management, Quality Control, Cost Management, Manufacturing Process, Manufacturing Projects, Manufacturing Flow

Supply Chain Management 

Inventory, Order Entry, Purchasing, Product Configurator, Supply Chain Planning, Supplier Scheduling, Inspection of goods, Claim Processing, Commission Calculation

Financials

General Ledger, Cash Management, Accounts Payable, Accounts Receivable, Fixed Assets

Projects

Costing, Billing, Time and Expense, Activity Management

Human Resources 

Human Resources, Payroll, Training, Time & Attendance, Benefits

Customer Relationship Management 

Sales and Marketing, Commissions, Service, Customer Contact and Call Center support

Data Warehouse and various Self-Service interfaces for Customers, Suppliers, and Employees

ERP for the small and medium segments

A few years back, ERP was a distant concept, perceived as applicable for the most elite of companies, with deep pockets, who are ready to experiment with new ideas. Today, the scene has significantly changed and ERP is considered as a desirable tool for most organizations, in the medium and small sectors.

Entrepreneurs now seriously consider ERP as panacea for all their present day ills and as an imperative to retain their competitive edge. Some of the factors that have catalyzed this process are globalization, competition, need for faster response to the market place and the pressure to contain costs and improve efficiencies.

While ERP implementation can be undertaken by a well-run organization as a proactive measure to be ahead in the race, the normal symptoms that would suggest the need for ERP would be high levels of inventory, mismatched stock, lack of coordinated activity, excessive need for reconciliation, flouting of controls, poor customer response levels and operations falling short of industry benchmarks in terms of cost controls, and general efficiency.

ERP is often considered synonymous with enterprise computerization, which significantly dilutes the concept. It is really a business tool, which seamlessly integrates the strategic initiatives and policies of the organization with the operations, thus providing an effective means of translating strategic business goals to real time planning and control.

ERP, hence, means much more than computerizing the existing operations and is really an integrated change process, which encompasses all levels and elevates the total organization to a higher level of information, expertise and intelligence.

The SME segment is large and offers substantial potential to the ERP vendor. However, this segment is also extremely price-sensitive and is generally intolerant of high gestations on realizations from investment.

Hence, this segment would be keen on an effective but low priced solution, which can be speedily implemented and vendors have realized the potential of this segment and are working out ways to meet this requirement.

ERP Solutions for Small Businesses

As sales of ERP systems to large manufacturing companies began to slow, some vendors changed their focus to smaller companies. According to a survey by AMR research reported in Modern Materials Handling, the overall market for ERP systems grew 21 percent in 1998, despite the fact that sales to companies with greater than $1 billion in revenues declined 14 percent during the same period. "ERP applications are no longer just the stuff of huge corporations," Constance Loizos noted in Industry Week. "While billion-dollar manufacturing companies are now completing their ERP implementations, mid-size customers—witness to the improved business processes of manufacturing market leaders—are beginning to refine their own operations…. Invariably the most substantial reason for companies to implement ERP is that without it, staying competitive is a practical impossibility. The business world is moving ever closer toward a completely collaborative model, and that means companies must increasingly share with their suppliers, distributors, and customers the in-house information that they once so vigorously protected."

Of course, small and medium-sized companies—as well as those involved in service rather than manufacturing industries—have different resources, infrastructure, and needs than the large industrial corporations who provided the original market for ERP systems. Vendors had to create a new generation of ERP software that was easier to install, more manageable, required less implementation time, and entailed lower startup costs. Many of these new systems were more modular, which allowed installation to proceed in smaller increments with less support from information technology professionals. Other small businesses elected to outsource their ERP needs to vendors. For a fixed amount of money, the vendor would supply the technology and the support staff needed to implement and maintain it. This option often proved easier and cheaper than buying and implementing a whole system, particularly when the software and technology seemed likely to become outdated within a few years.

Investment required for ERP

Most customers are alive to the fact that an ERP solution, however comprehensive, cannot really be a shrink-wrapped plug-and-play package and customization and implementation chores are necessary evils to reach their destination.

Notwithstanding this realization, the customer is rarely prepared to accept that these add-on services could cost twice as much as the cost of the package, or even higher. The total cost of implementation, including hardware, networking, database and all add-on services could range anywhere from Rs. 20 lakh to Rs. 50 lakh, depending on the size of the organization and the customization desired.

Implementation

Because of their wide scope of application within a business, ERP software systems are typically complex and usually impose significant changes on staff work practices. Implementing ERP software is typically not an "in-house" skill, so even smaller projects are more cost effective if specialist ERP implementation consultants are employed. The length of time to implement an ERP system depends on the size of the business, the scope of the change and willingness of the customer to take ownership for the project. A small project (e.g., a company of less than 100 staff) may be planned and delivered within 3 months; however, a large, multi-site or multi-country implementation may take years.

The most important aspect of any ERP implementation is that the company who has purchased the ERP solution takes ownership of the project.

To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. These firms typically provide three areas of professional services: consulting, customization and support.

Consulting Services

The Consulting team is typically responsible for the initial ERP implementation and subsequent delivery of work to tailor the system beyond "go live". Typically such tailoring includes additional product training; creation of process triggers and workflow; specialist advice to improve how the ERP is used in the business; system optimization; and assistance writing reports, complex data extracts or implementing Business Intelligence.

The consulting team is also responsible for planning and jointly testing the implementation. This is a critical part of the project, and one that is often overlooked.

Consulting for a large ERP project involves three levels: systems architecture, business process consulting (primarily re-engineering) and technical consulting (primarily programming and tool configuration activity). A systems architect designs the overall dataflow for the enterprise including the future dataflow plan. A business consultant studies an organization's current business processes and matches them to the corresponding processes in the ERP system, thus 'configuring' the ERP system to the organization's needs. Technical consulting often involves programming. Most ERP vendors allow modification of their software to suit the business needs of their customer.

For most mid-sized companies, the cost of the implementation will range from around the list price of the ERP user licenses to up to twice this amount (depending on the level of customization required). Large companies, and especially those with multiple sites or countries, will often spend considerably more on the implementation than the cost of the user licenses -- three to five times more is not uncommon for a multi-site implementation.

Customization Services

Customization is the process of extending or changing how the system works by writing new user interfaces and underlying application code. Such customizations typically reflect local work practices that are not currently in the core routines of the ERP system software.

Examples of such code include early adopter features (e.g., mobility interfaces were uncommon a few years ago and were typically customized) or interfacing to third party applications (this is 'bread and butter' customization for larger implementations as there are typically dozens of ancillary systems that the core ERP software has to interact with). The Professional Services team is also involved during ERP upgrades to ensure that customizations are compatible with the new release. In some cases the functionality delivered via a previous customization may have been subsequently incorporated into the core routines of the ERP software, allowing customers to revert back to standard product and retire the customization completely.

Customizing an ERP package can be very expensive and complicated, because many ERP packages are not designed to support customization, so most businesses implement the best practices embedded in the acquired ERP system. Some ERP packages are very generic in their reports and inquiries, such that customization is expected in every implementation. It is important to recognize that for these packages it often makes sense to buy third party plug-ins that interface well with the organization's ERP software rather than reinventing the wheel.

Customization work is usually undertaken as bespoke software development on a time and materials basis. Because of the specialist nature of the customization and the 'one off' aspect of the work, it is common to pay in the order of $200 per hour for this work. Also, in many cases the work delivered as customization is not covered by the ERP vendors Maintenance Agreement, so while there is typically a 90-day warranty against software faults in the custom code, there is no obligation on the ERP vendor to warrant that the code works with the next upgrade or point release of the core product.

One often neglected aspect of customization is the associated documentation. While it can seem like a considerable -- and expensive -- overhead to the customization project, it is critical that someone is responsible for the creation and user testing of the documentation. Without the description on how to use the customization, the effort is largely wasted as it becomes difficult to train new staff in the work practice that the customization delivers.

Maintenance and Support Services

Once the system has been implemented, the consulting company will typically enter into a Support Agreement to assist the staff to keep the ERP software running in an optimal way. To minimize additional costs and provide more realism into the needs of the units to be affected by ERP (as an added service to customers), the option of creating a committee headed by the consultant using participative management approach during the design stage with the client's heads of departments (no substitutes allowed) to be affected by the changes in ERPs to provide hands on management control requirements planning. This would allow direct long-term projections into the client's needs, thus minimizing future conversion patches (at least for the 1st 5 years operation unless there is a corporate-wide organizational structural change involving operational systems) on a more dedicated approach to initial conversion.

A Maintenance Agreement typically provides the clients the rights to all current version patches, and both minor and major releases, and will most likely allow the company staff to raise support calls. While there is no standard cost for this type of agreement, they are typically between 15% and 20% of the list price of the ERP user licenses.

Factors in a Successful ERP Implementation

Once a small business has decided to install an ERP system and selected a vendor, there are a number of steps the company can take to ensure a successful implementation. In his article, Forger noted that the ERP implementation is more likely to succeed if the company positions it as a strategic business issue and integrates it with a process redesign effort. Of course, the ERP system should fit the company's overall strategy and help it serve its customers. It may also be helpful to find a passionate leader for the project and select a dedicated, cross-functional project team. The small business owner should make certain that these individuals have the power to make decisions about the ERP implementation process.

Forger recommends that companies attack the implementation project in short, focused stages, working backward from targeted deadlines to create a sense of urgency. It may be helpful to begin with the most basic systems and then expand to other functional areas. Forger also suggests using change management techniques to manage the human dimension of the project, since ERP requires a great deal of support from affected areas of the company. Finally, he emphasizes that once the ERP system is in place; companies need to interpret the data collected carefully and accurately if the system is to contribute to business planning.

Although ERP systems may seem complex and costly, even small businesses are increasingly finding it necessary to invest in such technology in order to remain competitive. "ERP systems are being implemented today to provide a stable foundation for a growing number of businesses across all segments, from dot-coms to major automotive manufacturers," Dave Morrison wrote in CMA Management. "The number of implementations down the supply chain and into small and medium-sized companies is steadily growing as the initial costs are reduced along with the overall cost of ownership. Pre-configured and pretested versions are now effectively slashing the implementation costs while reducing the project complexity and risks. These new systems are providing a clean head start in development and delivering a stable and fully tested product to production. The methodology is continually evolving and the results are very positive."

ERP - A re-engineering tool

ERP implementation is a re-engineering of sorts, though not the classical re-engineering invented by Mike Hammer, which calls for throwing out the old and ringing in the new while promising dramatic improvements in process cycle times.

The re-engineering is more in terms of business process-wise integration of activities and formalization of a number of operating parameters such as bill of materials, process routes, planning methodology, etc, all of which will now require detailing out and committing to paper.

There is often a debate on the desirability of conducting a Business Process Re - engineering (BPR) exercise prior to ERP implementation--one school of thought is ERP implementation without BPR would be tantamount to computerizing all existing inefficiencies.

The ERP system could then serve as the bedrock system, based on which the BPR exercise could thereafter be conducted more effectively.

ERP--The change process

With ERP implementation, the system and the centralized database becomes the basis for decision making and time honored power pockets, evolved organically by self appointed custodians of information and expertise lose relevance.

Most of the routine functions, such as statutory compliance, book keeping etc are taken over by the system and retraining and redeployment is a necessary part of the change process.

Managing the change calls for effective communication of the advantages of ERP implementation and emphasis on the organizational and individual gains by undertaking the exercise.

Implementation realities

As in any change process, the consultant's role in ERP implementation is limited to providing the technical inputs and guidance and the responsibility for implementation has to be indigenously vested.

The normal procedure is to form a core group, which is dedicated to the implementation process. The core group member profile essentially calls for intimate knowledge of the business processes in the organization, adequate level of seniority to wield the necessary clout and a deep conviction in the change process.

A steering committee is additionally constituted to oversee the implementation and provide management support to overcome hurdles encountered. The committee should comprise senior members of the management team who meet on a periodic basis to formally review the progress.

The core group besides being operationally responsible for implementation has to serve as effective arbiters, in the event of conflicts arising between the consultant and the user groups or even between user groups.

The issues involved generally pertain to role clarity, the levels of customization and changes in specifications after freezing. The core group has to play a pivotal role in the implementation and it is imperative that the management communicates this responsibility in no uncertain terms to the members of this group.

Vendor selection criteria

Selection of the vendor and the package is crucial to the success of the implementation. Essentially the vendor should have a track record of previous implementations and should be in a position to provide guidance in the implementation and the change process, as also be able to translate user requirements into efficient systems.

Very often, aspiring ERP entrants offer unrealistically low prices, with the avowed objective of using the implementation to build a package of their own.

This could be disastrous for the user and would result in a serious setback to the whole process as the attitude of the user groups to ERP concept would be rendered cynical and reversing the situation would be difficult.

On the other hand, if tying up with an international ERP major is considered a feasible proposition, serious consideration should be given to retention of the implementation personnel, as there is a continuous paucity of personnel exposed to such implementation and they are immediate candidates for overseas employment.

Advantages

In the absence of an ERP system, a large manufacturer may find itself with many software applications that do not talk to each other and do not effectively interface. Tasks that need to interface with one another may involve:

* Design engineering (how to best make the product)
* Order tracking from acceptance through fulfillment
* The revenue cycle from invoice through cash receipt
* Managing interdependencies of complex Bill of Materials
* Tracking the 3-way match between Purchase orders (what was ordered), Inventory receipts (what arrived), and Costing (what the vendor invoiced)
* The Accounting for all of these tasks, tracking the Revenue, Cost and Profit on a granular level.

Change how a product is made, in the engineering details, and that is how it will now be made. Effective dates can be used to control when the switch over will occur from an old version to the next one, both the date that some ingredients go into effect, and date that some are discontinued. Part of the change can include labeling to identify version numbers.

Computer security is included within an ERP to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data-tampering scenario might involve a terrorist altering a Bill of Materials so as to put poison in food products, or other sabotage. ERP security helps to prevent abuse as well.

Disadvantages

Many problems organizations have with ERP systems are due to inadequate investment in ongoing training for involved personnel, including those implementing and testing changes, as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and how it is used.

Limitations of ERP include:

Success depends on the skill and experience of the workforce, including training about how to make the system work correctly. Many companies cut costs by cutting training budgets. Privately owned small enterprises are often undercapitalized, meaning their ERP system is often operated by personnel with inadequate education in ERP in general, such as APICS foundations, and in the particular ERP vendor package being used.

* Personnel turnover; companies can employ new managers lacking education in the company's ERP system, proposing changes in business practices that are out of synchronization with the best utilization of the company's selected ERP.
* Customization of the ERP software is limited. Some customization may involve changing of the ERP software structure which is usually not allowed.
* Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage.
* ERP systems can be very expensive to install often ranging from 30,000 US Dollars to 500,000,000 US Dollars for multinational companies.
* ERP vendors can charge sums of money for annual license renewal that is unrelated to the size of the company using the ERP or its profitability.
* Technical support personnel often give replies to callers that are inappropriate for the caller's corporate structure. Computer security concerns arise, for example when telling a non-programmer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards.
* ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companies—this is cited as one of the main causes of their failure.
* Systems can be difficult to use.
* Systems are too restrictive and do not allow much flexibility in implementation and usage.
* The system can suffer from the "weakest link" problem—an inefficiency in one department or at one of the partners may affect other participants.
* Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications.
* Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level).
* The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale.
* Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software.
* Some large organizations may have multiple departments with separate, independent resources, missions, chains-of-command, etc, and consolidation into a single enterprise may yield limited benefits.
* There are frequent compatibility problems with the various legacy systems of the partners.
* The system may be over-engineered relative to the actual needs of the customer.

Future of ERP

The top 5 vendors of ERP happen to be SAP, Oracle Corporation, Peoplesoft, Inc. (now Oracle Corp.), JD Edwards & Company, and Baan International. They account for 64 percent of total ERP market revenue. These vendors play a major part in shaping up the new target markets, with enhanced product functionality and higher access rates. As the industry analysts foresee, more and more companies will come to use ERP software, irrespective of their sizes and the rapid evolution of ERP, whose biggest evidence is ERP II (related with collaborative commerce), will proceed unhindered. Certain research proclaims that the consolidation among top ERP vendors will also continue to take place.

References

Waldner, Jean-Baptiste (1992). CIM: Principles of Computer Integrated Manufacturing. Chichester : John Wiley & Sons Ltd, p47. ISBN 047193450X. 

www.sysoptima.com

http://www.systems-erp.com

en.wikipedia.org

www.investorwords.com

www.answers.com
 


Mr. S. Dhinesh Babu
Asst. Professor, MBA Department
Mr. B. Senthil Raja Manokar
Lecturer, MCA Department
Mohamed Sathak Engg. College
Kilakarai-623 806
 

Source: E-mail June 12, 2008

           

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