Introduction to ERP

Contents

• Information System Silos

• ERP Systems

• Evolution of Business Software

• Role of ERP in Business• Role of ERP in Business

• Vanilla and Chocolate Implementations

• ERP System Components

• ERP Architecture

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Business Unit Silos

• As organizations become larger and more complex they tend tobreak functions into smaller units by assigning a group of staffto specialize in these activities.– This allows the organization to manage complexity as well as some

of the staff to specialize in those activities to enhance productivityand efficiency.and efficiency.

• The role of information systems has been and always will be oneof supporting business activities and enhancing the workers,efficiency.

• Over time, however, as business changes and expands, systemsneed to change to keep pace. The result is sometimes a widevariety of information systems and computer architectureconfigurations, which creates a hodgepodge of independentnonintegrated systems.– These systems ultimately created bottlenecks and interfered with

productivity.

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Information System Silos

• No decision-maker can take good decisions with theisolated information that they can get from the informationproduced by individual departments.

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Information Silos…

• In today's globally competitive environment, anorganization will find it very difficult to operate andsurvive with silo information systems.

• Today's competitive business is cross-functional,dynamic, and global. Since the early 1990s, mostdynamic, and global. Since the early 1990s, mostorganizations have tried to remove the functionalbarriers that had existed for decades.

• Integrated information systems are needed today tofocus on customers, to process efficiency, and tohelp build teams that bring employees togetherfrom different functional areas.

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Enterprise Resource Planning (ERP)

Systems

• Enterprise Resource Planning (ERP) systemsare the first generation of enterprise systemswhose goal was to integrate data across andbe comprehensive in supporting all the majorfunctions of the organization.functions of the organization.

• ERPs are basically integrated informationsystems that support such enterprisefunctions as accounting, financial, marketing,and production requirements oforganizations.– This allows for real-time data flows between the

functional applications.6/25/2013 Prof M P Sebastian, IIM Kozhikode 6

ERP

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ERP• ERP systems are comprehensive software applications

that support critical organizational functions, integratethe various functional aspects of the organization aswell as the systems within the organization with thoseof its partners and suppliers.

• They work using web clients making them accessible toall of the organization's employees, clients, partners,and vendors from anytime and anyplace, therebyand vendors from anytime and anyplace, therebypromoting the BUs effectiveness.

• An ERP's goal is to make the information flow dynamicand immediate, therefore increasing the usefulnessand value of the information.

• An ERP system acts as a central repository eliminatingdata redundancy and adding flexibility.

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ERP…

• Companies choose to implement ERP systems– increase supply chain efficiency

– increase customer access to products and services

– reduce operating costs

– respond more rapidly to a changing marketplace– respond more rapidly to a changing marketplace

– extract business intelligence from the data

• The central idea behind data integration is thatclean data can be entered once into the systemand then reused across all applications.

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Evolution of Business Software

• Origins in the manufacturing industry

• 1960’s : Inventory management and controlsystems

• 1970’s : Materials Requirement Planning (MRP)and Closed-loop MRPand Closed-loop MRP

• 1980’s : Manufacturing Requirements Planning(MRP II)

• 1990’s : Enterprise Resource Planning (ERP).Gartner Group first employed the acronym ERP

• 21st century – ERP II (ERP with CRM, SCM, etc.)

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1960’s – Inventory Management and Control (IMC) Systems

• Inventory management and control is the combination ofinformation technology and business processes ofmaintaining the appropriate level of stock in a warehouse.

• The activities of inventory management include

– identifying inventory requirements– identifying inventory requirements

– setting targets

– providing replenishment techniques and options

– monitoring item usages

– reconciling the inventory balances

– reporting inventory status

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1970’s - Materials Requirement Planning (MRP)

• Outgrowth of bill of material (BOM) processing• Uses the master production schedule (MPS) to find out

what products are going to manufactured. • Gets the details of the materials required to make the

products from BOM.

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products from BOM.• Searches the inventory records to find out what items are

in stock. • Calculates the items that need to be purchased for

producing the goods. • MRP solves manufacturing and production planning

problems and made manufacturing of goods easier.

IMCS MRP

• Closed loop manufacturing resource planning, also known asclosed loop MRP (CLMRP), is a manufacturing resource planningmodel that incorporates returned products as part of the supplychain.

• In such a model, the original equipment manufacturer (OEM)takes responsibility for the return loop (RL) process.• Product returns (also known as cores) often come directly from

customers or retail channels, but they can also come from productionfacilities in the form of manufacturing by-products or components thatfail to meet the manufacturer's quality control criteria.

1970’s - Closed-loop MRP (CLMRP)

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fail to meet the manufacturer's quality control criteria.• Returned products are counted as inventory because they can be

inspected and resold, refurbished or used for parts. By closing theloop and managing the product lifecycle in a holistic manner, themanufacturer has more control over both supply chain andmanufacturing planning.

• Closed loop MRP planning is often credited to IBM.

IMCS MRP CLMRP

• Evolved from closed-loop MRP• Contains additional capabilities like sales and operational

planning, financial interface and simulation capabilities forbetter decision-making• MRP II is a method for the effective planning of all the resources

1980’s - Manufacturing Resource Planning (MRP II)

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better decision-making• MRP II is a method for the effective planning of all the resources

of a manufacturing company• Utilizes software applications for coordinating manufacturing

processes, from product planning, parts purchasing, inventorycontrol to product distribution.

IMCS MRP CLMRP MRP II

MRP

• Fundamentals of ERP are the same as that of MRP II.• ERP is broader in scope and is capable of dealing with more business

functions and has a better and tighter integration with the finance andaccounting functions.• ERP is an enterprise-wide set of forecasting, planning and scheduling tool,

which links customers and suppliers into a complete supply chain.• The goals of ERP include high levels of customer service, improved

1990’s - Enterprise Resource Planning (ERP)

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• The goals of ERP include high levels of customer service, improvedproductivity, cost reduction, better inventory turnover (just-in-timeinventory), etc.

• ERP is more powerful because it applies a single set of resource planningtools across the entire enterprise, provides real-time integration of sales,operating and financial data and connects resource planning approaches,to the extended supply chain of customers and suppliers.

IMCS MRP CLMRP MRP II ERP

21st century – ERP II

• ERP II is regarded as the “next generation” of ERP and offers severaladvantages over traditional ERP systems.– ERP systems have historically been mostly limited to the manufacturing

sector, primarily serving logistics, supply chain, and warehousing functions.

• ERP II expands the scope of ERP to offer solutions for a broader rangeof industries and sectors.

• ERP II solution offers greater flexibility in the integration of functionsbetween departments and even industries.

• ERP II system is a much more “Web-friendly” application that makes• ERP II system is a much more “Web-friendly” application that makesbetter use of the Internet, especially as a means for support. ERP IIencourages user participation, facilitating interaction betweencustomers and vendors, which effectively eliminates the difficulties thatresulted from limited communication.

• ERP II = ERP + SCM + CRM + …

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IMCS MRP CLMRP MRP II ERP ERP II

Rise of ERP

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Courtesy:

Business Software: Companies

• Automation Software: In 60s, the first company to launchthe concept of automation software was formed by IBMand J.I. Case.

• SAP: In 1972, five former IBM employees – Dietmar Hopp,Hans-Werner Hector, Hasso Plattner, Klaus Tschira, andClaus Wellenreuther – launched a company called SystemsClaus Wellenreuther – launched a company called SystemsApplications and Products in Data Processing in Mannheim,Germany.

• Oracle: In 1977, Oracle was formed by Larry Ellison and in1979, relational database SQL was launched by Oracle.

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Business Policies and ERP

• A crucial role of ERP in business, beside integrationof functional applications and organizationinformation, is to better position the organizationto change its business processes.

• Most organizations have a set of policies and• Most organizations have a set of policies andprocedures to guide their business process.

– The ERP software has hundreds of business processesbuilt into the logic of the system. These processes mayor may not agree with the organization's currentbusiness processes.

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Choices for ERP Implementation

• An organization has two choices whenimplementing ERP:

1. change business processes to match thesoftware’s functionalitysoftware’s functionality

2. modify the ERP software

• The consequences of selecting either optionhave a long-term impact on the organization interms of its performance of its employees,customers, and other stakeholders.

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Choices for ERP Implementation…

• This is not an easy decision

– A wrong decision can bring down the entire organization

– A right decision can reap enormous benefits

• A good understanding of the ERP technology andimplementation process can significantly improveimplementation process can significantly improveefficiency and effectiveness of the organizations' businessprocesses.

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Problems with Modification of ERP

Processes (chocolate)• Vendors assert that they have embedded the "best practices or

leading practices” of a business process in their software.• It is therefore possible for organizations to maximize their

benefits by taking advantage of these best practices only whenorganizations do not make major modifications to their ERPsoftware during implementation.

• Any future upgrades to the ERP system once it has been modified• Any future upgrades to the ERP system once it has been modifiedbecome cumbersome and expensive. This is due to the fact thatthe modified system logic needs to be updated separately onevery new version of the software.– Thus, every time an organization has to upgrade the ERP system, the

IT staff will have to upgrade the application and upgrade themodifications.

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Problems with As-is Implementation

(vanilla)

� If the organization decides to implement theERP system “as is”, disruptions can occur withthe functioning of the organization.

� Employees, business partners, and clients will� Employees, business partners, and clients willhave to be retrained in the new businessprocesses (in addition to the ERP system).

� This can generate resistance from the users,adding to the training expense for theimplementation.

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ERP System Components• The key components for an ERP implementation are

hardware (servers and peripherals), software (operatingsystems and database), information (organizational datafrom internal and external resources), processes (businessprocesses, procedures, and policies), and people (endusers and IT staff).

• These components must work together seamlessly for theThese components must work together seamlessly for theimplementation to be successful.

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Server

(hardware)Company Processes

People

Software

Database

ERP System Components…

• These components work together to achieve anorganization's goal of enhanced efficiency andeffectiveness in their business processes.

• The implementation team must carefully evaluateeach component in relation to the others whiledeveloping an implementation plan.

• Hardware, software, and data play a significant role in• Hardware, software, and data play a significant role inan ERP system implementation.

• Failures are often caused by a lack of attention to thebusiness processes and people components.

• Each component must be layered appropriately andeach layer must support the efficiency of the otherlayers.

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ERP Architecture

• The architecture of the ERP implementationinfluences the cost, maintenance, and theuse of the system.

• A flexible architecture is best because itallows for scalability as the needs of theorganization change and grow.organization change and grow.

• A system's architecture is a blueprint of theactual ERP system and transforms the highlevel ERP implementation strategy into aninformation flow with interrelationships inthe organization.

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ERP Architecture…• The layered approach

provides the ability tochange layers withoutsignificantly affectingthe other layers.

• This can help• This can helporganizations lower thelong-term maintenanceof the ERP application.

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ERP Architecture…

• An ERP package can have a very differentimplementation outcome from one organization toanother.

• Many organizations often make the mistake of ignoringthe system architecture stage and jumping directly intoERP implementation because they have planned a"vanilla" or "as is" implementation. This can beERP implementation because they have planned a"vanilla" or "as is" implementation. This can bedisastrous because the organization will not be preparedfor long-term maintenance and upkeep of the system.

• The architecture sets the stage for modifications orcustomizations to support an organization's policies andprocedures, data conversion, system maintenance,upgrades, back-ups, security, access, and controls.

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ERP Architecture vis-à-vis IT

Architecture

• IT architectures are generally driven byorganizational strategy and business processes

• ERP architecture is often driven by the ERP vendor(package-driven architecture).– Most ERP vendors claim to have the best practices of

their industry's business processes captured in their– Most ERP vendors claim to have the best practices of

their industry's business processes captured in theirsystem logic which is convincing the organizations tospend millions of dollars for the ERP package.

• The ERP architecture be conceived only after theselection of the ERP software

• The architecture is conceived well before buying ordeveloping software in other IT implementations

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Architecture of ERP at a Large University� In the architecture of a large university, an ERP system can he very complex and

must be designed and tested thoroughly before implementing it in theorganization.

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ERP Logical Architecture

• The logical architecture focuses on supporting the needs of the end-users

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ERP logical architecture …

• Tier1: The database schemas of entities and relationships

• Tier2: The core business processes and business logic

handled by the system

• Tier3: Details on the applications that support the various

business functions built in to the ERP systembusiness functions built in to the ERP system

• The end-users do not ever see the first and second tiers

because they interact primarily with the client-user interface

application tier that provides them access to the functional

applications.

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ERP Physical Architecture

• The physical architecture focuses on the efficiency of the ERP

system.

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Conclusion

• Information System Silos

• ERP Systems

• Evolution of Business Software

• Role of ERP in Business• Role of ERP in Business

• Vanilla and Chocolate Implementations

• ERP System Components

• ERP Architecture

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