Enterprise Resource Planning (ERP)

Definition

There are various ways in defining an Enterprise resource Planning System. This is how it has been defined by American Inventory and Production Control System (APICS) dictionary:

“Enterprise Resource Planning: An accounting oriented information system for identifying and planning the enterprise-wide resources to make, ship and account for customer orders.”

Again in Internet encyclopedia, it has defined as: “An enterprise planning system is an integrated computer based application used to manage internal and external resources, including tangible assets, financial resources, material and human resources”.

Basically, an ERP combines several traditional management functions into a logical integrated system and facilitate flow of information across these functions. It is designed to model and automate basic processes across the organization over a centralized database and eliminates the need of disparate systems maintained by various units of the organization.

Why ERP ?

Separate systems were being maintained during 1960/70 for traditional business functions like Sales & Marketing, Finance, Human Resources, Manufacturing, and Supply Chain Management. These systems were often in congruent, hosted in different databases and required batch updates. It was difficult to manage business processes across business functions e.g. procurement to pay and sales to cash functions. ERP system grew to replace the islands of information by integrating these traditional business functions.

The successful implementation of an ERP system will have many advantages, as indicated below:

  1. Business integration and Improved Data Accuracy: ERP system is composed of various modules/ sub modules where a module represents a particular business component. If data is entered in one module such as receiving, it automatically updates other related modules such as accounts payable and inventory. This updating occurs at real time i.e. at the time a transaction occurs. Since, data needs to be entered only once at the origin of transaction, the need of multiple entries of the same data is eliminated. Likelihood of duplicate/ erroneous data is, therefore, minimized. The centralized structure of the data base also enable better administration and security provisions, which minimizes loss of sensitive data.
  2. Planing and MIS: The various decision support tools like planning engines and simulations functions, form integral part of an ERP system which helps in proper utilization of resources like materials, human resources and tools. Constrained based planning help in drawing appropriate production schedules, thereby improving operation of plant and equipment. As a part of MIS, an ERP system, contains many inbuilt standard reports and also a report writer which produce ad hoc reports, as and when needed.
  3. Improved Efficiency and Productivity: In addition to provision of improved planning, ERP system provides a tremendous boost to the efficiency of day to day and routine transactions such as order fulfillment, on time shipment, vendor performance, quality management, invoice reconciliation, sales realization, and cash management. Cycle time is reduced for sales to cash and procurement to pay sequences.
  4. Establishment of Standardized Procedures: ERP system is based on processes of international best practices, which are adopted by the organizations during implementation. Department silos are purged and maverick practices are done away with. Because of top down view available to management, chances of theft, fraud and obsolescence are minimized.
  5. Flexibility and technology: Due to globalized environment, where production units, distribution centers and corporate offices reside in different countries, organizations need malty currency, multi language and multi accounting modes, in an integrated manner. These provisions are available in most of the ERP systems, particularly in products offered by tier 1 and tier 2 vendors. ERP vendors are also quick to adopt latest technologies, from mainframe to client server to internet. Unlike a bespoke system, Upgrading to latest technology for a running ERP system is uncomplicated, involving mostly adoption of service packs and patches.

Selection of ERP

Evaluation and selection of ERP package is an essential criterion for successful ERP implementation. Quality of selection will have a long term impact on the processes of the organization. It is also not easy to switch to another product with concomitant scale of investment and complexities. This evaluation and selection process should be properly directed and normally comprises of following activities:

Formation of an evaluation committee: An ERP implementation is not an IT project but a business oriented development. Therefore, in addition to Chief Information Officer, this committee should comprise of all functional heads and driven by a top management representative. Since all business functions are represented in selection process, the chosen package would have wide acceptance subsequently.

Selection Criteria: A pre-determined selection Criteria should be ready before actual selection process commences. Selection criteria are normally in the form of questionnaire and point system, where each question represents a business or technical need. Weightage for each point or a group of points are predetermined which varies according to criticality of the issue. These processes help in making the selection process objective and transparent.

Selection Process: Selection process constitutes various stages as mentioned below:

  1. Short listing of vendors: Hundreds of ERP packages are available in the market, which have different concept, architecture and sets of functionalities. Analyzing all the packages is not feasible. Organization need to identify a few best suited packages by looking at product literatures of vendor, finding out which product is being used by their peer organizations and getting help from external consultants. Once a few packages are short listed, respective vendors should be asked to respond to the RFP, as per its format.
  2. Demo and Presentation: Responses from shortlisted vendors are evaluated by the selection committee after collating scores obtained by them and a consensus is reached about their final ranking. Anyone not fulfilling a predetermined vital requirement is eliminated at this stage. Top two or three vendors, are then invited for demo and presentation. Mode of presentation should be carefully scripted and send to the vendors in advance. They should be asked to walkthrough a particular business cycle through their vanilla software. They should be specifically asked to clarify any area of concern about their proposal, which may expose weak/ problem area of their offer.
  3. Site visit and contract negotiations: After the committee has reached a decision on best suited package, visits to reference sites are imperative. The vendor should provide reference sites of similar size and industry, identical version and belonging to same geographical location. Team members should have look and feel of the systems operating at reference sites and ask pertinent questions covering overall satisfaction, functionality, cost/ time over run, support concerns etc. After site visit, if the committee members feel that their selection is right, they proceed with final negotiation and procurement. Negotiations are normally held on license and annual maintenance cost, payment plan including a leasing option, support issues and other commercial and legal terms.

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1 Comment

  1. Pingback: Small Business Owner Weekly Review – Week of December 23, 2013 | Soltis Consulting, Inc.

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