MODULE 1: INTRODUCTION TO ERP

DEFINITION:

“ERP is a business management software that allows an organization to to use a system of

integrated applications to manage its operations.”

“ERP is software application which facilitates integration of the information of different

department or business processes.”

ERP is the technique or concepts for integrated management of business as a whole with the
objective of effective and efficient use of management resources and to improve the efficiency of
enterprise management.

ERP packages are integrated software packages that cover all business functions.

ERP systems integrate all departments and functions across a company onto a single copmputer
system that can serve the entire organization.

This real time integration and sharing of information throughout the company’s functional areas
inreases the efficiency of operations and helps managers to take better decisions.

Originally, ERP packages are targeted at the manufacturing industry and consisted mainly of
functions for generally planning and core business such as production management, sales
management etc.

Today, the power of ERP is enhanced by a host of technologies like : BI, e-business and e-
commerce, BPR, data warehousing, data mining, SCM, CRM, OLAP, PLM, GIS etc.

The basic goal of an ERP system is one central database for the data which is accessible by
various ERP facets in order to ensure the smooth flow of information across the organization.
EVOLUTION OF ERP

1. INVENTORY MANAGEMENT & CONTROL

 In 1960s
 Main tool was Bills of Material concept.
 Combination of IT and business processes of maintaining the appropriate level of stock in the
warehouse.
 The activities of inventory management include identifying inventory requirements, setting
targets, providing replenishment techniques and options, monitoring item usages, reconciling
the inventory balances and reporting inventory status.

2. MATERIAL REQUIREMENT PLANNING (MRP)

 MRP was born in the 1960s and became prominent in 1970s.
 MRP utilizes software applications for scheduling production processes.
 MRP was concerned with the products to be produced, materials needed, stock of materials
and materials to be purchased.
 MRP uses Master Production Schedule (MPS).
 MRP generates schedules for the operations and raw material purchases based on the
production requirements of finished goods, the structure of production system, the current
inventory levels and the lot sizing proceduring for each operation.

3. CLOSED LOOP MRP

 It merged the planning capacity requirements with MRP.
 Tools were developed to support the planning of sales and production levels, development of
production schedules, forecasting, sales planning, capacity planning and order processing.
 Various plant, production and supplier scheduling techniques for automating the processes
inside and outside the organization were built into the MRP. These developments resulted in
the creation of Closed Loop MRP.
 Closed-loop MRP contains tools and techniques to address to both priority and capacity and
supports both planning and execution.
 It has provision for accepting feedback from the execution function back to the planning
function which enables the plans to be revised and updated depending upon the actual
execution or changes in priorities.

4. MANUFACTURING REQUIREMENTS PLANNING (MRP II)

 In 1980s.
 MRP II utilizes software application for coordinating manufacturing processes from product
planning, parts purchasing, inventory control to product distribution.
 It contains additional capabilities as compares to closed-loop MRP like sales and operational
planning, financial interface and stimulation capabilities foe effective decision making.
 MRP II integrates various functions such as business planning, sales & operational planning,
demand management, production planning and the execution support system for capacity and
material.

5. ENTERPRISE RESOURCE PLANNING (ERP)

 In 1990s.
 ERP uses multi-module s/w applications for improving the performance of internal business
processes.
 It integrates business activities accross functional departments from product planning,
purchasing, inventory control, product distribution, order fulfillment to order tracking.
 ERP systems include applications modules for manufacturing, marketing , finance,
accounting and human resources.

BENEFITS OF ERP

(I) GENERAL BENEFITS

1. Business Integration
2. Flexibilty
3. Better Analysis and Planning Capabilities
4. Latest Technologies
5. Reduction of Lead time
6. On-time Shipment
7. Reduction in Cycle Time
8. Greater Customer Satisfaction
9. Improved Suppliers’ Performance
10. Reduction in Cost
11. Improved Resource Utility
12. Improved Information Accessibilty
13. Improved Decision-making Capabilities
(II)TANGIBLE BENEFITS
1. Reduced Inventory and Inventory Carrying Cost
2. Reduced Manpower Cost
3. Reduced Material Cost
4. Improved Sales and Customer Satisfaction
5. Improved Production Throughput
6. Shorter Order to Shipment Cycle and On-time Shipment
7. Efficient Financial Management

BENEFITS PERCENTAGE
Average Improvement 17%
Improvement in Mfg. Schedule Compliance 17%
Improvement in Complete and On-time Shipments 19%
Reduction in Administsration Costs 13%
Reduction in Operation Costs 13%
Reduction in Inventory 16%
Source: Aberdeen Group, 2009

TANGIBLE BENEFITS PERCENTAGE

On-time Delivery Improvements 6%
Maitenance Reduction 7%
Transportation/Logistics Cost Reduction 9%
Revenue/Profit Increases 11%
Cash Management Improvements 11%
Procurement Cost Reduction 12%
IT Cost Reduction 14%
Financial Close Cycle Reduction 19%
Other Management Improvements 20%
Productivity Improvements 26%
Personnel Reduction 27%
Inventory Reduction 32%
Source: Survey by Deloitte Cosulting

(III) INTANGIBLE BENEFITS

1. Better Corporate Image
2. Error Reduction and Improved Data Accuracy
3. Improved Customer Service
4. Improved Quality of information and Better Decisions
5. Accounting
6. Product and Process Design
7. Production and Material Mangement
8. MIS Function

INTANGIBLE BENEFITS PERCENTAGE

Suply Demand Chain 5%
Business Performance 7%
Technology 8%
Globalization 9%
Flexibility 9%
Standardization 12%
Integeration 13%
Cost Reduction 14%
Customer Responsiveness 22%
New Improved Process 24%
Information Visibility 55%
Source: Survey by Deloitte Consulting

(IV) OTHER BENEFITS

1. Lower Implementation Costs
2. Lower Production and Business Transaction Costs
3. Lower Costs of Reporting
4. Lower Personal Costs
5. Enabling New Business Oppurtunities

LIMITATIONS OF ERP

1. Transaction based and not intelligence based

2. Unable to expand the scope
 3. User Resistance
4. Mismatch between ERP and organizational culture
5. Inability to stop processing quickly
6. Concentration of data
7. High Investment Cost

WHY IS ERP IMPORTANT TO A COMPANY ?

 ERP is important to companies in respect of Order Fulfillment Process.

 That’s why ERP is referred to as Back-Office-Software

REASONS
1. Affects Almost All Organization
2. Forces Competition to Change
3. Forces Business Partners to Become More Competitive
4. Improves the profits of Consulting Firms
5. Most Important Tool For BPR
6. Enforces “Best Practice Business Processes” in Organization
7. Changed the Nature of IS and IT Professionals

HOW DOES ERP CREATE VALUE?

1. Integerate Organization’s Activities

2. Force the use of “Best Practices”
3. Enables Organizational Standardization
4. Eliminates Information Asymmetries
5. Provides On-Line and Real- Time Information
6. Allows simultaneous Access to Data for Planning and Control
7. Facilitate Intra-organization Communication
8. Enable Inter-organization Collaboration
ERP MARKET

 The ERP market is a vey competitive and fast growing market.

 Economic growth fuelled IT spending in manufacturing, banking, finance and public
sectors.
 IT spending, technological innovations and economic growth influence the industry
dynamics.
 The ERP has been benefited from wide spread acceptance of the idea that business must
have integerated information system in order to take competitve advantage.
 Management and IT organizations have realized that the most effective way to integrate
information system is to implement an ERP package that features broad functionality and
inbuilt integeration.
 Therefore ERP system are become a basis tool for Resource Mangement and business
integration in most organization, irrespective of size and profile.
 According to Lucintel, a leading global management consulting and market research
firm, the global ERP software industry reached an estimated $47.5 billion in 2011 with
7.9% CAGR.
 Forecast is to reach an estimated $67.7 billion by 2017 with a 6.1% CAGR over 2012-17.
 The report focuses on North America, Europe, Asis Pacific and rest of the world.
Currently North America dominates the ERP market.
 Asia Pacific and rest of world witnessed the highest growth during 2006-11, and this
growth momentum is likely to continue during 2012-17.
 Asia Pacific and Latin America are expected to be the industry drivers due to thei large
base of SMEs heavily investing in software.
 The ERP market is stable and growing after a bit of slowdown during 2008-09 recession.
 Today most ERP vendors started integerating additional application such as SCM, CRM,
Data Warehouse, Portals etc. into their existing s/w applications. These additional
applications help ERP to reach beyond organizational boundaries and therefore
expanding their utility base.
 According to the Forester Research, the ERP market will see the tremendous growth in
s/w Licences, Maintenance and Services in coming years.
Table below shows the growth of these three components during 2005-09:

Comp. 2005 2006 2007 2008 2009 Total % Gr.

Licence 7610 7360 7802 8348 9016 9737 6.8
Maint. 9602 10371 11200 12208 13307 14505 8.6
Service 7212 7284 7430 7653 7882 8119 2.4
Total 23824 25015 26432 28209 13205 32361 6.3

 ERP market size is of much importance for ERP vendors or suppliers.

 Althought there are a number of vendors – 2011’s top three were SAP, Oracle and
Microsoft.Market leaders also include Infor Global Solution and Epicor. These
compnaies enjoy more than half of all revenues over the last few years.
 After the top five, there are a number of other established successful ERP suppliers
including Consona, Sage, Peoplesoft, QAD, IFS, Netsuite, HansaWorld, HarrisData and
others.
 Each of these companies have made their place in the ERP marketplace by offering
alternatives to “Big ERP” that are affordable, quicker, and easier to implement and
specially designed to address the unique needs of a specific market segment.
 The ERP market has undergone a significant consolidation over the last 10 years.
 Many of the independent suppliers that evolved in the 1980s and 1990s merged or were
acquired as the companies resorted to additional functionality, technology or market
share. For example –
 SAP acquired Business Objects, Subase SucessFactor, Syclo, Ariba etc.
 Oracle acquired PeopleSoft, J.D. Edwards, Siebel, Hyperion etc.
 Infor acquired GEAC ERP, SSA Global, Lawson Software etc.

ERP MARKET TIERS

Depending on the organization’s size (revenue, no. of users etc.) and needs there are a number of
ERP software vendors, categorized in three segments or tiers:

1. Large Enterprise ERP (ERP Tier I)

 Dominated by three companies – SAP, Oracle and Microsoft.
 Consists of companies with annual revenues in excess of $250 million with global ERP
requirement.
 High complexity. Manage multiple companies and multiple plants with international
location.
 Highest cost of ownership.
 Industry-specific solutions for most industries.
 These Tier I ERP vendors have developed mid market pricing and implementation strategies
to make them more appealing to the mid market buyer.

2. MID-MARKET ERP (ERP Tier II)

 Mid sized Tier
 Consists of companies with annual revenue between $25 million and $250 million.
 Tier II is the largest of all the tiers in term of potential customers.
 Medium complexity
 Medium cost of ownership
 Vertical industry focus
 A co. that has a main office with a manufacturing facility and a distribution outlet would be a
typical Tier II client.
 Tier II vendors – QAD, Glovia, Sage, IFS, Epicor, ABAS, CDC Software, Cincom, Fujitsu,
IBS, Plex Systems, Ramco etc.
 Problem with Tier II vendors – Tier I players are pushing down into this space. The Tier I
market is small and to continue to expand their businesses.
 Benefit to the Tier II ERP product is that they are designed and priced for the middle market.

3. Small Business ERP (ERP Tier III)

 Tier III s/w is designed for companies with annual revenue less than $25 million.
 These are the companies with 5-30 users and have less demanding needs.
 Tier III vendors – Conson, Exact Globe, Expandable, Activant Solutions, NetSuite, Smarter
Manager, Solarsoft Business Systems, Syspro, Visibility, xTuple etc.
 Designed for small establishment
 Low cost of ownership
 Quick and easy to implement
 Tier III vendor is a small company with limited size and resources to keep up with
technology.

MARKETPLACE DYNAMICS
 SAP and Oracle are the two biggest players in ERP market.
 Microsoft is not as big as these two, but the three together comprise of the Tier I ERP market.
 SAP and Oracle are viable for small and mid-sized businesses while Microsoft is now viable
for mid-to-large sized businesses.

ERP VENDORS ERP MARKET SHARE (%)

SAP 22
Oracle 15
Microsoft 10
Tier II Vendors 16
Tier III Vendors 37

ERP Market Share

SAP
Oracle
Microsoft
Tier II Vendors
Tier III Vendors

 The growth of ERP market is fuelled by following three factors:

 ERP vendors are contnuing to expand market presence by offering new applications such as
SCM, CRM, Sales force automation, Business Analytics, Business Intelligence etc.
 To sustain their rapid growth, ERP vendors will look to sell more licences to their intalled
base.
 While ERP originated in manufacturing market, ERP usage has spread to nearly every type
of enterprise including retail, utilities, public sector and healthcare organizations.
 According to Forester, ERP market is projected to bring in sales of $50.3 billion by 2015.
 The figures for
 2010 - $43 billion
 2011 - $45.5 billion
 2012 - $46.6 billion appx.
 2015 - $50.3 billion (expected)
 2017 - $67.7 billion (expected)

INDUSTRY-WISE ERP MARKET SHARE

INDUSTRY MARKET SHARE (%)

Finance & Banking 6
Telecommunication 5
Electronic & High-Tech Components 4
Oil & Gas Extraction 4
Manufacturing 28
Business Services & Consulting 17
Wholesale & Retail Trade 12
Education 11
Food & Beverage Products 7
Construction 6
Source: Survey by Tec between October 2011 & March 2012
 MARKET SHARE (%)

Finance & Banking

Telecommunication
Electronic & High-Tech
Components
Oil & Gas Extraction
Manufacturing
Business Services & Consulting
Wholesale & Retail Trade
Education
Food & Beverage Products
Construction

The table and corresponding diagram show the top ERP feartures and functions that the
manufacturers requested in Tec’s survey:

FEATURES & FUNCTIONS DEMAND (%)

Process Manufacturing Mgmt. 33
Warehouse Mgmt. 33
Mfg. Execution System 34
Maintenance Mgmt. 35
 Discrete Mfg. Mgmt. 35
Sales Order Mgmt. 38
APS 39
Inventory Mgmt. 45
Purchase Mgmt. 56
Financials & Accounting 62

DEMAND (%)
Financials & Accounting
Purchase Mgmt.
Inventory Mgmt.
APS
Sales Order Mgmt. DEMAND (%)
Discrete Mfg. Mgmt.
Maintenance Mgmt.
Mfg. Execution System
Warehouse Mgmt.
Process Manufacturing Mgmt.
0 10 20 30 40 50 60 70

ERP: THE INDIAN SCENARIO

 The Indian scenario is slightly different from the global one.

 Today, India is established as world IT hub and all major players in the field are working
constantly towards promoting and extending their market.
 In India, small and medium sized enterprises such as automotive, pharmaceuticals,
textiles etc. are resorting to ERP solutions to gain competitive advantages.
 Now the major ERP vendors changed their game plan and have come out with solutions
suited for the Indian market.
 Majority of Indian manufacturers are small by global standards, requiring ready-to-use
ERP solutions to meet their specific requirements.
 Market Size and Forecast
 Indian ERP market is booming and is expected to grow manifolds in coming years.
  According to Kalyan Banga, Manager, Product Development, Netscribes India, the
Indian ERP market is currently estimated at $7.3 billion and is expected to grow at a
CAGR OF 25% in the next 3-4 years.
 Market Opportunities
 Finance, distribution, retail, media and services contribute 30-40% to overall ERP
segment.
 Retail is the single largest market.

Table below shows the number of firms ready to adopt ERP in 2012 and 2015:

Sectors 2012 (million) 2015 (million)

Retail 2 2.5
Professional Services 1.9 2.3
Manufacturing 1.2 1.6
Hotels & Restaurents .9 1.1
Education .9 1.1
Source: Zinov Study

 Oracle is working with partners to develop industry-specific solutions.

 SAP has developed templates for 26 industries and is now looking at the auto
components, dairy, special chemicals infrastructure, healthcare, sugar, poultry farms and
textile sectors.