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Sample Chapter ERP
Sample Chapter ERP
Sample Chapter ERP
Conceptual Framework
C H A P T E R
INTRODUCTION
The advancement in computers and communication technology has revolutionized the eld of Information Systems (IS) and Information Technology (IT). Over the time, many new terminologies emerged and some of them became magic words, popularly known as fads. Enterprise Resource Planning (ERP) Systems, a term used for highly integrated information systems in business organizations has become popular in the last decade. Because of its potential applications ERP System is a highly integrated and benets, the term has become a buzzword, and nowadays, is considered and enterprise wide information as the backbone of an organization. In other words, ERP System is a highly system that covers all the integrated and enterprise wide information system. Implementation of ERP functional areas or departments System requires crores of investment as it is enterprise wide and covers all in an organization. the functional areas or departments in an organization. An organization should judiciously decide whether to implement ERP systems or not.
Challenges of Business
There are many challenges of business, which are the main driving reasons for adoption of ERP systems. The two main challenges are mentioned below: (a) Competitive environment (b) Information age
Competitive Environment
In order to survive and grow in todays cut-throat competitive environment, an organization should take fast as well as the right decisions. If an organization fails to take quick decisions, it may lose its business to its competitors.
Information Age
Today, in this age of information, large voluminous information is available, which needs to be processed in an integrated manner so that organizations are able to take the right decision. If an organization fails to implement the process, it may cost them a fortune. Thus, an organization must be equipped with some tool or a system, which integrates various functional areas across the entire organization and can provide information support, thereby, enabling it to take operational as well as strategic decisions. Enterprise Resource Planning System is one such computer-based integrated information system that supports an organization in its operations and enables it to take enterprise wide and strategic decisions. Owing to this, today, ERP system is considered to be of great importance and sometimes regarded as the backbone of an organization as well. Such a system, in an organization, assists the decision-makers by providing information and decision support at various stages of decision-making and thus greatly helps the organization to achieve its, goals, and strategies. Since ERP systems integrate various business functions, which otherwise may be disparate or different, it provides a number of benets.
ERP Systems: An Introduction 5 Reduced quality costs ERP systems to prove beneImproved information accuracy cial, must be planned well, Improved decision making capability selected carefully, implemented judiciously and used efciently. Improved customer satisfaction, etc In view of the need and the benets from such a system, a large number of organizations have already acquired and implemented these systems and many more are in the process of acquiring such a system. However, ERP systems to prove benecial, must be planned well, selected carefully, implemented judiciously and used efciently. The ERP systems which are poorly conceived and/or poorly implemented are bound to fail and would not be able to yield the desired result and sometimes may even prove to be fatal for an organization.
Strategic planning: Need for ERP Basic concepts of Business and ERP System Implementation of ERP System
EVOLUTION OF ERP
ERP systems have evolved from the Materials Requirements Planning (MRP) systems of the 1970s and the Manufacturing Resources Planning (MRP II) systems of the 1980s. Assembly operations involving thousands of parts as in, automobile manufacturing led to large inventories. The need to bring down the large inventory levels associated with these industries led to the early MRP systems that planned the order releases. Such planned order releases ensured proper time phasing and accurate planning of the sub-assembly items, taking into account complex sub-assembly to assembly relationships characterized by the Bill of Materials. A natural evolution from the rst generation MRP systems was the Manufacturing Planning systems (MRP II) that addressed the entire manufacturing function and not just a single task within the manufacturing functions. MRP II systems went beyond computation of the materials required to include loading and scheduling. It could determine whether a given schedule of production was feasible, not merely from material availability but also from the point of view of other resources. Typically, the resources considered by MRP II systems would include production facilities, machine capacities and precedence sequences. Both MRP systems and MRP II systems were fairly successful in the industry. Thanks, to the power of information- system database, algorithms and their integration which helped the organizations in efciently managing the manufacturing functions in the eighties.
ERP Systems: An Introduction 7 The nineties saw unprecedented global competition, customer focus and Nowadays, the advanced ERP shortened product lifecycles. To respond to these demands, corporations systems, which are known as had to move towards agile manufacturing of products, continuous ERP-II or Enterprise Systems, improvements of processes and business process re-engineering. This extend beyond the boundaries called for integration of manufacturing with other functional areas including of an organization, and capt-ure accounting, marketing, nance and human resource development because inter-organizational processactivity-based costing would not be possible without the integration of es such as supply chain management (SCM), customer manufacturing and accounting. Mass customization of manufacturing relationship management (CRM) needed integration of marketing and manufacturing. Flexible manufacturing and so on. with people empowerment necessitated the integration of manufacturing with HRD function. In a sense, the 1990s truly called for integration of all the functions of management. ERP systems are such integrated information systems that helps to meet the information and decision needs of an enterprise spanning all the functions of management. Nowadays, the advanced ERP systems, which are known as ERP-II or Enterprise Systems, extend beyond the boundaries of an organization, and capture inter-organizational processes such as supply chain management (SCM), customer relationship management (CRM) and so on Such enterprise software focuses on supporting integrated groups of business processes rather than information processing requirements of the respective business function. Whereas, ERP focuses on efciency of a rms internal production logistics distribution, HR, and Financial Processes, CRM focuses on acquiring and retaining protable customers through marketing, sales and service processes and SCM focuses on developing the most efcient and effective sourcing and procurement processes with suppliers for the products and services needed by a business. Knowledge Management (KM) applications focus on providing a rms employees with tools that support group collaboration and decision support (Sawhney Mohan, and Jeff Zabin, 2001). Table 1.1 lists the evolution of ERP systems. Table 1.1
Period 1960s
1970s
Mainframe legacy using third generation software (For example COBOL, Fortran)
1980s
1990s
Mainframe or client-server using fourth generation database; software and package software applications to support organizational functions
2000s
ERP System refers to a computer based integrated information system, which is designed to process an organizations transactions and to integrate the various functions/departments/divisions within an organization Client-server using web platform, open ERP-II or Enterprise Systems are advanced ERP source and integrated with fth generation systems, which extend beyond the boundaries of applications like supply chain management an organization, and capture inter-organizational (SCM), customer relationship management processes such as supply chain management (CRM), Sales force automation (SFA). (SCM), customer relationship management (CRM) Also available on Software as a Service and so on. They provide anywhere anytime access (SaaS) environments to organizational resources
Accounting
Production
User
User
User
Figure 1.2
Marketing
Hardware
Finance
ERP Systems: An Introduction 9 As the needs of customers keep on changing, ERP systems provide Enterprise Resource Planning adaptability to these changing needs. ERP systems enable a manager to (ERP) System is a set of take an overall view of the business as a whole instead of having a myopic application software packages view of business functions, and thus, offer the benets of synergy of various that integrate manufacturing, functions in achieving the mission, goals, and strategies of an organization. nance, sales, distribution, These systems also offer exibility to business processes as the entire human resources and other process itself, instead of some function in the process, is automated. All business functions. the required changes are implemented quickly with ERP systems. For example, SAP-R/3, an ERP software package provides more than 700 processes that are automated and integrated with each other. Figure 1.3 illustrates a typical ERP system. In this system, the sales order processing interacts with the inventory system, work order maintenance and accounts receivable sub-systems. In other words, three important functional areas of a business, namely, marketing, production and nance are integrated. In the system, integration of some other activities like production planning, production scheduling, procurement of raw materials, material resource planning (MRP) has also been achieved.
Sales Analysis
Bill of Material
Inventory Scheduling
Customer Order
Production Scheduling
Production Planning
Accounts Receivable
Financial Accounting
Accounts Payable
Suppliers
Bu
ess sin
Data Base
ERP System
Software
Model Base
ERP Modules
ERP system is an integrated system, which comprises various modules covering different functions of an organization. Although, the features of ERP systems vary from application to application, the typical ERP functionality covers the core enterprise functions and the associated sample modules. A typical ERP system, as shown in Figure 1.5, consists of the following modules Sales and Distribution (SD) module Materials Management (MM) module Production Planning (PP) module Quality Planning (QM) module Plant Maintenance (PM) module Asset Management (AM) module Human Resources (HR) module Project Systems (PS) module Financial Accounting (FI) module Controlling (CO) module Workow (WF) module
QM: Quality Management PM: Plant Maintenance HR: Human Resources PP: Production Planning MM: Materials Management SD: Sales and Distribution
MM
SD
PP
FI CO AM
WF
PS
IS
FI: Financial Accounting CO: Costing and Controlling AM: Asset Management
This module tracks sales order and scheduled deliveries. It provides information about the customer which includes pricing, shipping of products, billing and so on.
Materials Management (MM) module: Purchasing of raw materials needed to manufacture products, handling of raw materials inventory, from storage to work-in-progress goods and so on.
QM module plans and records quality control activities, such as product inspections and material certications.
Quality Planning (QP) module: Plant Maintenance (PM) module: This module manages maintenance resources and planning for preventive maintenance of plant machinery to minimize equipment breakdowns. Asset Management (AM) module:
It helps in managing the xed asset like plant and machinery purchases This module facilitates employee recruiting, hiring, training, payroll and
benets.
Project Systems (PS) module:
PS module includes the activities pertaining to planning and control over various projects such as R & D, construction, marketing and IT. This module records transactions in the general ledger accounts, generates nancial statements, monitors and analyses cash holdings, nancial deals, investments and so on.
It supports the organization in controlling and decision making. By assigning costs to products and to cost centres the module helps in analyzing the protability of various activities of the company.
Workow (WF) module: This module, in fact, cannot be called an ERP module as it does not automate any of the organizational activity; rather, this module is a set of tools that can be used to automate any of the activities in ERP package. It can perform task-ow analysis and prompt employees for action. Besides, these modules, ERP can have other modules, which can also be integrated with the system. The other modules include the following: Product Lifecycle Management (PLM) Supply Chain Management (SCM) Customer Relationship Management (CRM) Advanced Planning and Optimization (APO) Business Information Warehouse (BIW) Strategic Enterprise Management (SEM) Enterprise Portals (EP)
ERP Systems: An Introduction 13 analysis to reveal patterns in the information generated by MIS systems to genuinely support tactical and even strategic decisions. KBS systems went beyond data, information and models to capture the knowledge of the decision-maker and to use the captured knowledge to propose superior solutions. Fortunately, this permitted an evolution of ideas and maturity of computer applications in management. A related development categorized the applications through the tasks addressed ofce automation system (OAS), online transaction processing (OLTP), and Decision Support System (DSS). Unfortunately, these approaches missed out the key issue of Enterprise Resource Planning integration. The EDP, MIS, DSS and KBS based classication assumes (ERP) System is a set of appa compartmentalization across the layers of management (Sadagopan S., lication software packages that 1999). The OAS, OLTP, DSS classication assumes that the tasks are integrate manufacturing, nance, independent. Both assumptions are invalid in the real-world scenario. sales, distribution, human reERP systems capture the essence of the business processes. It is driven by sources and other business business needs and not IT needs. An IT driven solution often attempts to functions. formulate a way of using a technique to solve a known business problem. The emphasis is on the usage of a technique or a technology. ERP systems take a business driven view and solve the business problem using a combination of tools and implement the best practices using contemporary technology. ERP systems are often called a software package because many vendors like SAP-AG, Oracle Corporation, Infor, Epicor and so on developed these systems on the basis of the best industry practices and implemented these in an organization after some customization either in the ERP package or in the business processes. Figure 1.6 illustrates the ERP scenario in the Indian marketplace.
FAD Necessity
?
Confusion People Issue
Legacy systems
Readiness Issues
Technology Issue
Data Issue
CHALLENGES OF ERP
There are many technical and organizational challenges in implementing ERP, which depend upon the organization, scope of implementation, business processes, and skill level of the users. The success of ERP implementation depends signicantly on redesigning the business processes and customizing the technology to t those processes. Customization is expensive and therefore, generally not
ERP Systems: An Introduction 15 recommended as ERP systems are designed and developed on the basis of the best practices of industry and the modications in ERP systems would not give the desired efciency. At the same time, redesigning of the business processes would change the structure as well as the way an organization does its business thus, leading to changes in organizational culture. ERP System, being a transformation and an expensive project, is not an easy decision, and thus, needs to be dealt with great care. Whether the organization needs an ERP system or not must be analysed properly based on the sound logic and should not be left to the IT people alone. While emphasizing on the challenges of ERP system implementation, Kalakota and Robinson (2000) cautioned the organizations when they said that an ERP implementation is like the corporate equivalent to a brain transplant. The risk was certainly disruption of business, because if you do not implement ERP properly, it can ruin your company. They stressed this fact further, and said that the fact cannot be denied that the implementation of ERP system is a complete business transformation which provides a competitive edge over other competitors but the costs and risks are also quite high. There have been different ERP implementation experiences from different companies. Many companies like Hershey Food, Nike, A-DEC and others sustained loses running into hundreds of millions of dollars. In the case of FoxMeyer Drugs, a $5 billion pharmaceutical wholesaler, the company had to le for bankruptcy protection, and then was bought out by its arch competitor McKesson Drugs (Kalakota and Robinson, 2000). The main reason for the failure of these systems has been lack of understanding of the complexity of the planning, development and implementation required for new ERP system. ERP system should not be regarded as another IT application; rather it is Whether the organization needs a complete business transformation which radically changes the business an ERP system or not must be processes as well as information systems of an organization. analysed properly based on the Another typical cause of unsuccessful ERP systems is the failure to sound logic and should not be involve all the affected users in all the stages of ERP system in a hurry. left to the IT people alone. Detailed discussion on such issues has been done in various chapters of this book.
SUMMARY
In order to survive in todays cut-throat competitive environment, an organization needs to take quick as well as the right decisions. In such circumstances, the comport-based ERP systems come to the rescue. Judicious implementation of the same can help an organization in its operations and enable it to take apt decisions. However, an organization must plan well in advance, select carefully and then implement ERP systems. Poorly conceived and/or poorly implemented ERP systems are bound to fail and thus would not be able to provide the desired results and sometimes may even prove fatal for an organization. ERP system plays a crucial role in almost all kinds of organizations irrespective of their size and nature of business. This feature of ERP system has increased its popularity and use. It has changed the way organizations carry out business and has increased the efciencies and competitiveness of organizations. It has also helped organizations in automating business transactions, streamlining routine operations and taking quick and wellinformed decisions, thus enabling the organizations to serve their customers better. Some of the rst Indian companies to have adopted ERP practices are HLL, ONGC, ESSAR, Godrej Soaps, Cadbury, BASF, Telco, Maruti Udyog Ltd, Century Rayon, Citibank, ACC, ANZ Grindlays, German Remedies, Blue Star, Mahindra & Mahindra, Rallis India, Sony India Pvt Ltd, Ceat Ltd., Indal, Ford Motors, Kirloskar, Knoll Pharmaceuticals, Glaxo and many others.
ERP Systems: An Introduction 17 4. ERP systems provide a number of benets, which include (a) Reduced Inventory (b) Reduced manpower (c) Reduced cycle time (d) All of the above 5. The ERP Systems which are poorly conceived and/or poorly implemented, will (a) fail and would not be able to provide the desired results (b) may even prove fatal for the organization (c) succeed after two years (d) (a) and (b) 6. The scope of an ERP system comprises (a) Quality (b) Plant Maintenance (c) Marketing (d) All the functional areas 7. ERP Systems play a vital role in supporting (a) The business processes and operations of an organization (b) Decision-making by employees and managers of an organization (c) The strategies of an organization for competitive advantage (d) All of the above 8. Any manager in an organization needs to understand (a) The basic concepts of ERP System (b) The strategic planning process and the implementation process for ERP System (c) (a) and (b) (d) the computer programming used in ERP Systems 9. ERP systems have evolved from (a) The Materials Requirements Planning (MRP) systems (b) The Manufacturing Resources Planning (MRP II) (c) (a) and (b) (d) Articial Intelligence Systems 10. The advanced ERP systems, are known as (a) ERP-II or Enterprise Systems (b) ERP Plus (c) ERP 2011 (d) ERP Forte 11. ERP II extends beyond the boundaries of an organization and (a) Manages relations of the employees (b) Capture inter-organizational processes such as SCM, CRM (c) Acts as a spying system (d) All of the above 12. ERP Systems may be dened as a set of application software/package that integrates (a) Manufacturing, nance, sales, distribution (b) Human resources and other business functions (c) (a) and (b) (d) None of the above
REVIEW QUESTIONS
1. Do you think ERP systems are important for any type of the organization? Discuss. 2. How is the role of ERP System different from traditional information systems? Can an ERP System support all levels of management? Discuss.
ERP Systems: An Introduction 19 3. Discuss the evolution of ERP systems. Do you think ERP systems overcome the limitations of traditional information systems? How? 4. Briey discuss the concept of ERP systems. How are they different from ERP-II? 5. Discuss the various modules of ERP system. Take suitable example. 6. Illustrate the role of ERP systems in business. Do you also think that ERP systems act as a backbone for the organizations? Justify your answer. 7. Do you think Business Process Re-engineering is a pre requisite for the implementation of an ERP System? Why? 8. What are the main challenges for implementing an ERP System in an organization? Discuss.
ASSIGNMENTS
1. Suppose you are to select an ERP system for a small manufacturing company. The company has 250 employees spread across India, Europe and United States of America. Search any ve prominent ERP vendors and visit their websites to nd information on: (a) The functional areas that the ERP supports (b) The industry focus of ERP and the size of business that ERP supports (c) The average cost of ERP system or any license fee per user (d) Credibility of the vendors (e) Any other critical information on the vendor 2. Find any three ERP systems specically to be used for educational institutions. Find out information on the following aspects: (a) All the features of these systems (b) How these three systems differ from one another (c) Cost of these systems 3. M/S Green Build Corporation, which is in the business of construction, is having many large projects on hand. The company has already implemented some of the computerized information systems like salary management system, leave management system, accounting and nance management systems, but they do not have any information system for monitoring the projects and many of its projects failed, because of poor monitoring of projects. Find out whether the company should implement an ERP system? Discuss the scope of proposed ERP systems. 4. Princess Beauty Parlour is a chain of Beauty Parlours across the country. They have been fairly successful in the past, but have now started facing intense competition from several people who operate from home, and therefore have lower costs. Customers do not see too much difference between the service offerings of Princess and its unorganized, home-based competitors, and are therefore, quite willing to switch. The Directors of Princess have organized a brainstorming session to gure out how to regain and constantly grow market share. You have been invited to this session as a Consultant, and you need to advise the company on what it should do, and where Information Technology based solutions can help.
BIBLIOGRAPHY
Goyal, D.P., Management Information Systems, Managerial Perspectives, Third edition, Macmillan Publishers India Limited, Delhi, 2010. Han, J. and Kamber, M., Data Mining Concepts and Techniques, Elsevier, San Francisco, 2004. Jaiswal MP and Vanapalli Ganesh: Text book of Enterprise Resource Planning, Macmillan India Limited, New Delhi, 2005. Kalakota R. and Robinson M., E-Business 2.0, Roadmap for success, Addison Wesley, Boston, 2001. Leon Alexis: ERP Demystied, Tata McGraw Hill Education Private Limited, New Delhi, 2008. Monk, Ellen f. and Wagner Bret J.: Enterprise Resource Planning, Course Technology a part of Cengage Learning, New Delhi, 2009. Motiwalla, Luvai F and Thomson Jeff, Enterprise Systems for Management, Pearson Education, Inc., New Delhi, 2009. Olson, David L., Managerial Issues of Enterprise Resource Planning Systems, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2004. Turban Efraim, Mclean Ephraim and Wetherbe James, Information Technology for Management, John Wiley & Sons, Inc., New York, 2001.
CASE STUDY
ERP Systems: An Introduction 23 Environment: At Sawhney & Sawhney, special attention is paid to ensure that no harm is done to the environment. Before being discharged into a public sewer, efuents are sent through special efuent treatment plants. Solid waste/garbage is sent to the farms for conversion into compost. The Efuent Treatment Plant is monitored by the Sawhney & Sawhney Quality Assurance Department.