Enterprise Resource Planning Meaning
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. Figure below shows how information is integrated in a typical organization using a ERP system.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh


ERP system is thus a mirror image of the major business processes of an organization. Need for Enterprise Resource Planning - 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 incongruent, 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.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

invoice reconciliation. at the time a transaction occurs.ENTERPRISE RESOURCE PLANNING SYSTEM The successful implementation of an ERP system will have many advantages. human resources and tools. which minimizes loss of sensitive data.e. ERP system provides a tremendous boost to the efficiency of day to day and routine transactions such as order fulfilment. thereby improving operation of plant and equipment. vendor performance.  Improved Efficiency and Productivity: In addition to provision of improved planning. contains many inbuilt standard reports and also a report writer which produce ad hoc reports. Likelihood of duplicate/ erroneous data is. The centralized structure of the data base also enable better administration and security provisions. as and when needed. form integral part of an ERP system which helps in proper utilization of resources like materials. data needs to be entered only once at the origin of transaction. it automatically updates other related modules such as accounts payable and inventory. as indicated below:  Business integration and Improved Data Accuracy: ERP system is composed of various modules/ sub modules where a module represents a particular business component. an ERP system. therefore. and cash FUTURE LIGHT PVT. quality management. the need of multiple entries of the same data is eliminated.  Planning and MIS: The various decision support tools like planning engines and simulations functions. Since. This updating occurs at real time i. SCO 13-14. If data is entered in one module such as receiving.Sec-34/C Chandigarh . on time shipment. LTD. Constrained based planning help in drawing appropriate production schedules. sales realization. minimized. As a part of MIS.

from mainframe to client server to internet.  Establishment of Standardized Procedures: ERP system is based on processes of international best practices. Upgrading to latest technology for a running ERP system is uncomplicated. Because of top down view available to management. These provisions are available in most of the ERP systems. in an integrated manner. multi language and multi accounting modes. fraud and obsolescence are minimized. FUTURE LIGHT PVT. ERP vendors are also quick to adopt latest technologies. involving mostly adoption of service packs and patches. which are adopted by the organizations during implementation. Department silos are purged and maverick practices are done away with. distribution centers and corporate offices reside in different countries. proper evaluation and business process re-engineering. organizations need multi currency. LTD. SCO 13-14. particularly in products offered by tier 1 and tier 2 vendors. involving significant resources (both financial and human). chances of theft. Conclusion Although ERP provides many advantages.ENTERPRISE RESOURCE PLANNING SYSTEM management. A failed implementation may lead to bankruptcy of an organization.Sec-34/C Chandigarh . Unlike a bespoke system. where production units. its implementation is a strategic decision. Cycle time is reduced for sales to cash and procurement to pay sequences.  Flexibility and technology: Due to globalized environment. There must be commitment from all levels.

4. Operation cost which may consist of labor and machining cost. 3. Material cost: Which may be latest procurement price or simulated purchase price. Hours accounting. LTD. Overhead Cost controlling: Overhead cost. This functionality helps in defining allocation relations in the form of surcharge / rate applicable to various cost centers which in turn is comparable to budgeted surcharge/ rates. Cost Accounting module: Cost accounting module consists of following functionalities: 1. Cost price calculation. shop floor and bill of materials. This functionality is crucial in determining the lowest price limit for which a product is profitable.ENTERPRISE RESOURCE PLANNING SYSTEM Sales Order Analysis The costing module is one of the important controlling modules which enables effective intern provided by this module. 2. The overhead cost control thus helps to monitor and allocate of indirect cost. FUTURE LIGHT PVT.Sec-34/C Chandigarh . Cost price calculation: Under cost price calculation functionality. can not be directly assigned to the products manufactured or services rendered. warehousing. overhead cost is a significant percentage of overall cost. The cost price for standard item is calculated based on the following: 1. procurement. 2. and calculation of price for standard and customized items are performed. SCO 13-14. simulation (such as to make or subcontract). Sometime. which is an indirect cost. Overhead Cost controlling. Activity based costing. The cost accounting module is highly integrated with budget and ge as sales.

Sales price or suggested retail price where a sales price surcharge is added to cost price is also derived from this functionality. 4. project specific rates and surcharges are applicable. LTD. Work in progress inventory.ENTERPRISE RESOURCE PLANNING SYSTEM 3. Surcharges for coverage of overhead such as management cost / inspection cost. A typical flow chart for calculation of cost and sales price is as follows: FUTURE LIGHT PVT. Cost price calculation also forms basis of calculation of valuation price (where a surcharge is added such as warehouse transfer surcharge) which in turn is used for internal financial transactions such as inventory transfer.Sec-34/C Chandigarh . SCO 13-14. For calculation of cost price for customized items. Subcontracting rate.

It is also possible to enter estimated / budgeted number of working hour for an employee or a work centre for a particular period (such as month / year) and compare the estimated / budgeted hours with actual hours. Hours accounting is normally done through a working timetable and normal and overtime rates can be defined in the system.ENTERPRISE RESOURCE PLANNING SYSTEM Hours Accounting: This functionality is used to account for employees and machine cost and charge these costs to appropriate production orders. SCO 13-14. Hours spent can either be entered directly or the system can automatically back flush an estimated hour. FUTURE LIGHT PVT. on completion of an operation.Sec-34/C Chandigarh . financial transactions are created in general ledger. When hours are posted. LTD.

services. FUTURE LIGHT PVT. this functionality determines the consumption of business process by products. LTD. projects.ENTERPRISE RESOURCE PLANNING SYSTEM Activity based costing: This is an extension of traditional system of distribution of overhead allocation. This functionality helps in controlling cost objects (which may be anything like products. Thus. through a bill of activities and activity results. where only a few allocation bases are used.Sec-34/C Chandigarh . distribution channel) with their cost drivers. customers and other cost objects based on the cost drivers and helps in monitoring and controlling cross departmental business process. SCO 13-14.

as specified below: 1. 2. Routing is another important base of production module. a parent / child relationship between successive levels is formed. which are used to build the product through production operation(s). components (either work in progress or purchased) are needed. BOM is used both for production and planning purpose. An Engineering Bill of Material from Engineering Data Management module may also be copied to make a production BOM. Thereafter. An existing BOM can be easily modified to create a newer version of BOM. SCO 13-14. Method or route to be followed for manufacturing a product is a prerequisite f setting up production module. Defining a production bill of materials: The end item is described at highest level of BOM. Defining a planning bill of materials: Production of similar items (such as garments of same type but of different sizes) is linked through FUTURE LIGHT PVT. The main use of BOM is to define product structure of a manufactured end item. Bill of Materials: Any manufacturing process goes through various phases of production and each phase. A manufactured item consists of components. BOM details components required at various phases or levels of operations (either single level or multi leve In a multi level BOM. A generic BOM may also be modified to make a customized product with the help of Configuration Management module. Levels of BOM are defined indicating materialrouting relationship at every level of operation. which defines the method of manufacturing.ENTERPRISE RESOURCE PLANNING SYSTEM Material Resource Planning Bill of Material (BOM) is a base functionality of setting up production module of an ERP system. LTD.Sec-34/C Chandigarh . components are added at each level.

ENTERPRISE RESOURCE PLANNING SYSTEM aggregate relationship under planning bill of material so that their long term plan of production/ subcontracting are not done separately. This mistake is detected through utilities. FUTURE LIGHT PVT. which normally forms part of the module.Sec-34/C Chandigarh . Loops in BOM .While defining multi-level production bills of material. the user may mistakenly link a higher level item to its component at a lower level. LTD. SCO 13-14. This creates a data error and triggers an infinite loop for the manufactured item.

a Work center is a group of resource units used as a functional planning unit. which is called the Order FUTURE LIGHT PVT. LTD. A routing selection can depend on the order quantity. Work Centre . Work centre Task relationship .The routing code identifies a routing sheet. sales office etc. A department can be of various types such as work centre. Work centers and machines (for machine tasks) are used to define tasks. Multiple (alternative) routings are possible for each standard manufactured item. 2. Resources (like men and/or machines) are linked to a work centre.The objectives of Routing module are: 1. are maintained under this relationship. SCO 13-14.An organizational unit that carries out a specific set of tasks. 3. Task . The work centers related to these tasks are identified. .This term is used to describe any activity carried out on the shop floor.Sec-34/C Chandigarh . production rate etc. Work centers may be departmental work centre or sub contracting work center. repair etc.ENTERPRISE RESOURCE PLANNING SYSTEM Scheduling Aspect Routing .A Work Center is a place where production activities are performed. Thus. Routing Code . Task may be of various types such as production.The task is linked to the work center if the work center is able to executing the task. Details such as set up time. Department . service centre. The sequence of task linked operations to be carried out on work centers or sub contracting work centers are established. All tasks required to manufacture an item are determined.

The operations are identified by serial number. Routing Operation – Here. The main flow between business objects in Routing module is depicted below FUTURE LIGHT PVT.Sec-34/C Chandigarh . SCO 13-14. which indicates sequence of operations for the associated manufacturing process. LTD.ENTERPRISE RESOURCE PLANNING SYSTEM Quantity Dependent Routing. A routing code is needed to be linked to the manufactured item. series of routing steps that are carried out successively to produce an item is defined.

ENTERPRISE RESOURCE PLANNING SYSTEM Production Aspect Every organization that is engaged in production. While production and manufacturing organizations hold raw material inventories. sale or trading of Products holds inventory in one or the other form.Economic Order Quantity Continuous Ordering Periodic Ordering 1. As inventory planners. EOQ is a basic model and further models developed based on this model include production Quantity Model and Quantity Discount Model. trading companies might hold only finished goods inventories depending upon the business model. Traditional inventory management approach consists of two models namely:    EOQ . LTD.Sec-34/C Chandigarh . their main job consists in analyzing demand and deciding when to order and how much to order new inventories. Continuous Order Model: works on fixed order quantity basis where a trigger for fixed quantity replenishment is released whenever the inventory level reaches predetermined safety level and triggers re ordering. FUTURE LIGHT PVT. finished goods and spare parts inventories. First function deals with inventory planning and the second being inventory tracking. EOQ: Economic Order Quantity method determines the optimal order quantity that will minimize the total inventory cost. SCO 13-14. 2. When in case of raw material inventory management function is essentially dealing with two major functions.

What is the Most Economical Order Quantity ? D = Annual Demand C = Carrying Cost S = Ordering Cost D = 5. LTD.Sec-34/C Chandigarh . SCO 13-14.00/Ton/Year S = $595/Order FUTURE LIGHT PVT.000 tons of sodium nitrate for the coming year.40(22.75.50) = $9.50 per ton.Co produces chemicals to sell to wholesalers.75. EOQ Model Example: Biotech. The annual total carrying cost for this material is 40% of acquisition cost and the ordering cost is $595. One of the raw material it buys is sodium nitrate which is purchased at the rate of $22. Periodic System Model: This model works on the basis of placing order after a fixed period of time. Biotech’s forecasts show a estimated requirement of 5.ENTERPRISE RESOURCE PLANNING SYSTEM 3.000 tons C =0.

acquisition cost etc to calculate EOQ.Sec-34/C Chandigarh . This model pre supposes certain assumptions as under:       No safety Stocks available in inventory. FUTURE LIGHT PVT. further data extrapolation is possible to determine other factors like how many orders are to be placed in a year and what is the time lapse between orders etc. EOQ For Production Lot: This model is also used to determine the order size and the production lot for an item to be produced at one stage of production and stored as work in progress inventory to be supplied to the next state of production or to the customer. SCO 13-14. LTD. No Shortages allowed in order delivery. In this model.135 tons per Order. New order is always place for fixed quantities.ENTERPRISE RESOURCE PLANNING SYSTEM = 27. the demand increases for production the inventory gets depleted. On receipt of the delivery against the order the inventory level goes up. When the inventory drops to a critical point the re order process gets triggered. Demand is at uniform rate and does not fluctuate Lead Time for order delivery is constant One order = One delivery no shortages allowed.573. Using this model. This model does not take into account other costs of inventory such as stock out cost.

Tracking & Authorization of incoming invoices 3. LTD. Accounts Payable Module (AP) . Self-Billing Invoices this is suitable for JIT environment where receipt of goods automatically generates approved invoices in the system which is paid through remittances and supplier need not send any invoice. Automatic matching of invoices with receipts 5. Financial relationship with vendors who are providing input to the organization in the form of goods and services are maintained in Accounts Payable (AP) module. Entry of order-based and sundry invoices 4. On the flip side. as an integral part of General Ledger (GL). Accounts Classification for reconciliation FUTURE LIGHT PVT. that the organization received from its vendors. Both these modules maintain personal accounts either of debtors or creditors and maintain various sub ledgers such as control account. the financial connection with customers who use output of the organization. monitor. maintain and process for payment of invoices and credit notes.Sec-34/C Chandigarh . The key functionality of this module is as follows: 1.This module provides the functionality to enter. currency fluctuation accounts etc. SCO 13-14.ENTERPRISE RESOURCE PLANNING SYSTEM Financial Aspect Accounts payable and Accounts receivable modules are two important execution modules under finance segment of an ERP system. Immediate registration of incoming invoices 2. Separate procedure for approval of invoices that exceeded the user tolerances 6. 7. are dealt through Accounts receivable (AR) module.

Aging analysis periods for outstanding invoices of vendors. Automatic Matching of Invoices: This is an important functionality of AP module.Sec-34/C Chandigarh . through which invoices from vendors are automatically matched with purchase orders and receipt. where following parameters are needed to be defined: 1. 2. Linking ACP with GL through a schedule of Chart of accounts to which various transactions originating from AP are posted. Blocking codes for blocking an invoice.ENTERPRISE RESOURCE PLANNING SYSTEM Master data set up of AP: The initial set up of AP module is critical for its proper functioning. SCO 13-14. Some of these accounts are I) control accounts ii) anticipated payment iii) invoice accrual IV) price difference and v) payment difference. LTD. whether matching with receipt is manual or automatic. tolerated price difference limit for approving invoices (by users and vendors). A typical flow chart for automatic matching is as follows: FUTURE LIGHT PVT.


Interest for late payments. Customer statements. Aging Analysis reports for review. ACR Master Data set up 1.Sec-34/C Chandigarh .This module helps in tracking all the invoices that is awaiting payment from customers. The key functionalities of ACR are: 1. Terms of Payment parameters such as I) credit period ii) cash discount iii) payment days iv) tolerance for discount. Credit Control: An important feature of this module is to monitor invoices overdue for payment and generate reminder letters for sending to customers. 2. Default Data . 3. 6. 4. Accounts classification for reconciliation & Control.ENTERPRISE RESOURCE PLANNING SYSTEM Accounts Receivable Module (AR) . Defining chart of accounts for linking to GL such as i) control account ii) discount account iii) advance receipts iv) unallocated receipts. increasingly urgent reminders are generated in the system subsequently at a predefined interval. On-line credit management. 3. Currency / Payment Differences 6. 5.for Tax Calculation level. 2. Reminder letters with varying degrees of severity. The system also maintains a credit diary. SCO 13-14. FUTURE LIGHT PVT. In case the invoice is still not paid. LTD. Flexible periods for aging analysis 5. which contains details of all unpaid invoices whether due for payment or not. Free definable problem types to exclude invoices from reminding and direct debits 4.

2. the concept of dimension is used which gives a vertical view on ledger account. GL integration set up with logistics modules. accounts receivable. Chart of Account may also be defined separately for statutory purpose as well as well as for the purpose of reporting to management. Asset management for transferring depreciation details.Sec-34/C Chandigarh . Through finance modules such as accounts payable. SCO 13-14. cash management. GL master data set up. t planning. GL provid and other purpose. which is a complete structure of ledger accounts used by the organization. One of the important functions of GL is to real time update of sub ledger.ENTERPRISE RESOURCE PLANNING SYSTEM Financial accounting module of an ERP package provides company wide control and integrati accounting data within a framework of multiple companies. control and reporting. Another important parameter of GL is transaction type which FUTURE LIGHT PVT. Cash management wherefrom payment details are transferred to GL. integrated with GL are: 1. 4. The General Ledger (GL) module is the heart of finance package of an ERP system. Accounts receivable for sales invoice. Accounts payable for purchase invoices. Cost accounting for allocation of cost. In some packages. 5. credit notes. 3. Period and year closing. credit notes and adjustment. GL master data set up: One of the important processes of GL is setting up chart of Accounts. The important components of GL are: 1. languages and currencies. 2. Integration with other modules: Some of the modules. Chart of Accounts can be flexibly structured both at a parent and individual company level. 3. LTD.

2. Purchases . ii) Periods (Fiscal and Tax). vi) completion the production order v) closing the production order.Sec-34/C Chandigarh . iv) issue of inventory v) receive subcontracted item.i) Making of a production order ii) making subcontract purchase order based on the production order iii) initiate inventory issue to the subcontractor. 4.i) Making and releasing of a purchase order ii) receiving materials against the purchase order iii) inspection and approvals of the received materials iv) registration of the supplier invoice in logistics. 3. sales invoice. are given below: 1.i) Making of an inter-depot transfer manually or transfer the same from planning ii) issue materials from the issuing warehouse iii) receiving materials in the receiving warehouse. Examples of logistics transactions (for different transaction origins) that result in a corresponding financial transaction and for which corresponding chart of accounts are needed to be defined.i) Making of a sale order ii) releasing of the same to warehousing iii) issuing material against the resultant warehouse order iv) release the issue order to invoicing. currency fluctuations etc. iii) Tax code by countries GL integration set up with logistics modules: Integration mapping scheme needs to be defined for posting of logistics transactions into finance. 5. Other important parameters of GL are i) parent company and company parameters (this will contain accounts for profit and loss. FUTURE LIGHT PVT. Inter Depot Transfers . Sales . cash. LTD.ENTERPRISE RESOURCE PLANNING SYSTEM identifies different categories of transactions such as journal voucher. Issues for subcontract orders . Cycle Counting .i) Generate cycle count orders ii) approve cycle count orders iii) process cycle count orders. SCO 13-14. and corrections.

LTD.Sec-34/C Chandigarh . A typical flow diagram of closure of period and year.ENTERPRISE RESOURCE PLANNING SYSTEM Period and Year Closing: If a period or year is past its end date. SCO 13-14. passing of final correction entries and rebuilding of ledger history is carried out. it needed to be closed and the result is to be posted in next period/ year. Next. In the last part of this process. final closing of the periods and closing the year and and archiving of data is done. is given below: FUTURE LIGHT PVT. reconciliation. closing of the periods. auditing. Before closing any period it is necessary to check the status of the period.