Understanding ERP Systems

What does ERP stand for? Enterprise Resource Planning System

What is an ERP? An ERP System is a Software tool that manages business systems, from Manufacturing, Supply chain, receiving, inventory, customer orders, production planning, shipping, accounting, HR, CRM, SRM,DSS, to Financials. It also allows automation and integration of business processes, Enables data and information sharing, is an Enterprise-wide system, and makes sure best practices are followed throughout an organization.

Definition of an ERP System An ERP System attempts to integrate all data and processes of an organizations into a unified system, it is also an integrated software that supports the information flow among the various processes in an organization.

Examples of ERP SOFTWARES SAP Oracle Microsoft Dynamics Oracle eBusiness Suite Oracle People Soft

SAP still leads the market share in ERP systems.

ERP BUSINESS PROCESS MODULE ERP systems integrate and are involved in the following Business Processes.

Sales and Distribution Production Planning Financial Accounting Human Resources Material Management Plant Maintenance Quality Management Project Management SRM, CRM

ERP Overview ERP stands for Enterprise Resource Planning. Enterprise Resource Planning software is often referred to as the backbone for the entire business. Using medical analogy an ERP system has brains (process logic), muscle (business transactions), and heart (business policy). ERP system communicates (as a nervous system) across business functions. ERP systems grow and evolve over time. If left unattended, it can get inundated. The freshly implemented system is not very stable, like your legacy system. Users might not like your newly implemented ERP system until it matures.

ERP software comes under the category of online transaction processing (OLTP) software. A transaction in one module could start coordinated transactions in other modules, meaning the ERP system is integrated, For example, when shipping dock clerk records the transaction that goods have shipped to a customer, related changes are made in other modules: order management, billing, and inventory systems, New transactions for revenue recognition and cost of goods sold would also be started. ERP systems replicate the business structure, processes, policies, and procedures. Each business is different, that is why you cannot just install the ERP software and start using it immediately, the basic nature of the business needs to be determines first, Comparison to the functionality of the software is then made. By meticulously setting thousands of configuration parameters, you may achieve a system that meets 90%100% of your business requirements of which many of the parameters interact with each other. That makes the implementation tricky. For example, your strategy for configuring your enterprise organization structure can have significant impact on the way you prepare financial statements, manage inventories, fulfill customer orders, procure materials, manage compensation and benefits, secure your data, and so forth. For all you know, your company might be centralized for fulfillment of customer orders and decentralized for procurement and inventory management. In order to configure your system properly, you may have to resolve the centralized/decentralized issues within each application.

Attributes of ERP Systems Leading ERP systems supports industry standards and best practices- The Oracle Applications and SAP support recommendations of the American Production and Inventory Control Society (APICS) and Generally Accepted Accounting Practices (GAAP). The ERP system is composed of many modules called applications. The core applications support functions, such as financial, distribution, manufacturing, and human resource transactions. The financial applications, for example, are General Ledger, Accounts Payable, Accounts Receivable, and Fixed Assets. You may license only the applications you need.

The applications are integrated. They work together to pass individual transactions through an entire business process, this is called modularization approach which allows for flexibility. The modules interact by passing data through program interfaces and by sharing the commonly stored data. A single manual transaction in one application can initiate transactions in other applications. This function makes ERP systems complex, the more applications you use, the more complexity you have. Thousands of configuration parameters interact with each other and change the logic of the programs to fit your unique business situation. Sometimes, it could take months to set up and learn how the ERP operate. Although an ERP system is complex but the upside is flexibility, in that most ERP systems can be customized to fit the peculiarities and functions of your organization or business. Oracle and SAP has thousands of customers in hundreds of industries. They are all over the world. Each of them is using EPR in their own special way.

Manufacturing companies, utilities, service companies, governments, and others have configured applications to meet their specific business needs.

The backbone of the ERP systems is the sophisticated databases at the back end. Oracle Relational Database Management System (RDBMS) is a famous database. The database gives the ERP system performance and scalability, thousands of transactions per hour can be processed and Data could be stored for years. Large ERP databases can go more than 300GB in size.

EPR systems are a mixture of online and batch processes. For example, you can apply cash receipts to your Receivables modules by keying the data into a form, or you can configure the system to use the AutoLockbox program to process a data file from your bank. The major players in the ERP market are SAP AG and Oracle Corporation, and it is a multi-billion dollar industry.

ERP Advantages Companies implement ERP systems for various reasons, the reasons could be tangible, intangible, or strategic. Due to the intangible and strategic benefits most companies do not even try to calculate a total return on investment from an ERP system.

An ERP system could result in following benefits: * Reduce the amount invested in inventory. * Improve worker productivity. * Reduce processing costs per business transaction. * Reduce the time it takes to perform a financial close and prepare financial statements. * Reduce procurement costs. * Install systems with vendor-supported maintenance. * Improve the scalability of business systems to support future growth. * Upgrade systems to support global accounting transactions (for example, Euro currency requirements). * Obtain better reporting and information about your business. * Get rid of troubles of old systems, and install new or improved business processes. * Improve fiscal controls. * Integrate and standardize processes among your business units and trading partners in your supply chain. * Improve system performance, reliability, and fault tolerance. * Reduce the costs of Information Technology. * Improve order management, customer service, and on-time delivery.

ERP Disadvantages ERP systems come with their share of headaches, one of the major problems is that they are usually difficult to implement while sometimes they are difficult to operate but in the past few years, odds of success have improved. Other disadvantages are: * Everyone in your organization from the database administrator to the receiving clerk to the CEO needs new skills to work with the new technology and business processes. * Most companies must hire outside consultants to help accelerate and improve the implementation. * In the early 1990s, almost half of the MRP/ERP implementation projects failed. Many of these early projects were either abandoned or were finished late and over budget. An industry of software implementation specialists was created to assist businesses with implementation projects. * Many large and costly implementation projects have produced little or no return on investment for their owners other than to solve the Y2K problem. Several companies have actually observed a reduction in productivity in the first six to twelve months after starting their new systems. * Many companies are surprised to discover the ERP implementation wasn't just a software replacement project, but the start of a continuous process of change, evolution, and improvement. * Many implementation team members have discovered after the ERP project is over that their old jobs either no longer exist or are dull and insignificant. * Package software can force you to make certain choices about how your business will operate, and you might introduce some constraints on your traditional business processes.

Application Service Providers Recently the Application Service Providers (ASP) business model is becoming popular as a way to implement and operate your ERP applications. An application service provider (ASP) is a company that offers individuals or enterprises access over the Internet to applications and related services that would otherwise have to be located in their own personal or enterprise computers. Sometimes referred to as "apps-on-tap," ASP services are expected to become an important alternative, not only for smaller companies with low budgets for information technology, but also for larger companies as a form of outsourcing and for many services for individuals as well. Early applications include: * Remote access serving for the users of an enterprise * An off-premises local area network to which mobile users can be connected, with a common file server * Specialized applications that would be expensive to install and maintain within your own company or on your own computer While ASPs are forecast to provide applications and services to small enterprises and individuals on a pay-per-use or yearly license basis, larger corporations are essentially providing their own ASP service in-house, moving applications off personal computers and putting them on a special kind of application server that is designed to handle the stripped-down kind of thin client workstation. This allows an enterprise to reassert the central control over application cost and usage that corporations formerly had in the period prior to the advent of the PC. Microsoft's terminal server product and Citrix's WinFrame products are leading thin-client application server products. Hewlett-Packard, SAP, and Qwest have formed one of the first major alliances for providing ASP services. They plan to make SAP's popular R/3 applications available at "cyber centers" that will serve the applications to other companies. Microsoft is allowing some companies to offer its BackOffice products, including SQL Server, Exchange and Windows NT Server on a rental, payas-you-use basis. Oracle Corporation offers ASP model. They call it Business On-Line (BOL), they launched this service on October 1999, though it was expected to become a significant part of its future growth, BOL has not performed as expected. Probably BOL might not create billions of dollars in revenue for Oracle, but it still might become a viable alternative for several customers.

In Application Service Provider model, a service provider is established to host ERP applications, the applications are hosted in a centralized data center over an Internet/intranet connection and a monthly fee is charged.

Important considerations under this model are similar to the issues and concerns you would have with any outsourcing arrangement: * You want to make sure the application implementation meets the needs of your business. * The support expertise of the service provider must exceed the expectations of the users. * Data center management must be better than your own data center. * The ASP must provide an acceptable level of security and performance. * Costs of the service must be reasonable.

When the economics of the ASP model is evaluated, you need to compare the monthly charge per user of the system to the initial investment in software, hardware, support, implementation services, and the continuing costs of operating your own systems. Lets say you have 100 users at a monthly subscription cost of $500/user, the ASP model costs might be $50,000/month and might grow or shrink proportionately as the business changes. Compare that monthly charge with a $2 million up-front investment in hardware, software, and consulting, and add annual direct operating costs of $300,000+ for system administrator, support, and data center costs. Usually you must sign a multiyear deal for the ASP services, However you pay by the month. Consider the above mentioned advantages and disadvantages when you evaluate companies as an Application Service Provider.

ERP Vendors

Market share of ERP vendors in 2010 According to the Vendor Analyst Report

# 1 2 3 4 5

Vendor

Market share(%) 24% 18% 11% 11% 36%

SAP Oracle Applications Microsoft Dynamics All Tier ii vendors share All Tier iii vendors and other vendors share

Based on this report, SAP holds 24% of the global market share, while Oracle , and Microsoft follow with 18% and 11%. All other vendors share the remaining market share.