Introduction to ERP

Unit-1
 Introduction
• Enterprise Resource Planning (ERP) programs are core software
used by companies to coordinate information in every area of the
business.
• ERP (pronounced “E-R-P”) programs help to manage companywide
business processes, using a common database and shared
management reporting tools.
• A business process is a collection of activities that takes one or
more kinds of input and creates an output, such as a report or
forecast, that is of value to the customer.
• ERP software supports the efficient operation of business
processes by integrating throughout a business tasks related to
sales, marketing, manufacturing, logistics, accounting, and staffing.
 FUNCTIONAL AREAS AND BUSINESS
PROCESSES

• Functional Areas of Operation

• Most companies have four main functional areas of operation:

• Marketing and Sales (M/S),

• Supply Chain Management (SCM),
• Accounting and Finance (A/F), and
• Human Resources (HR).
• Each area comprises a variety of narrower business functions,
which are activities specific to that functional area of operation
 contd
• Functional areas are interdependent, each
requiring data from the others.
• An information system (IS) includes the
computers, people, procedures, and software
that store, organize, and deliver information.
• This chapter illustrates the need for information
sharing between functional areas and the
effects on the business if this information is not
integrated.
 Business Processes
• Recently, managers have begun to think in terms of
business processes rather than business functions.
• Recall that a business process is a collection of
activities that takes one or more kinds of input and
creates an output that is of value to the customer.
• The customer for a business process can be the
traditional external customer (the person who buys
the finished product), or it may be an internal
customer (such as a colleague in another
department).
Business Processes
 Integrated Information Systems
• Every department in an organisation cannot
function in isolation.
• The key resource for every organisation is
information.
• The three fundamental characteristics of
information are: accuracy, relevancy and timeliness.
• What is needed is a system that treats the
organisation as a single entity.
• Helps in decision making.
• Sharing data effectively and efficiently between and
within functional areas leads to more efficient
business processes.
• Information systems can be designed so that
functional areas share data. These systems are called
integrated information systems.
• Working through this textbook will help you
understand the benefits of integrated information
systems and the problems that can occur when
information systems are not integrated.
• ERP systems are comprehensive software applications that
support critical organizational functions.
• These systems are “Web enabled,” meaning that they work using
Web clients, making them accessible to all of the organization’s
employees, clients, partners, and vendors from anytime and
anyplace, thereby promoting the BUs’ effectiveness.
• ERP system’s goal is to make information flow be both dynamic
and immediate, therefore increasing the usefulness and value of
the information.
• In addition, an ERP system acts as a central repository eliminating
data redundancy and adding flexibility.
• A few of the reasons companies choose to implement ERP
systems is the need to “increase supply chain efficiency,
increase customer access to products and services, reduce
operating costs, respond more rapidly to a changing
marketplace, and extract business intelligence from the
data.”
• An ERP system, however, combines them all together into
a single, integrated software environment that works on a
single database, thereby allowing various departments to
share information and communicate with each other
more easily.
 ERP System Components
• An ERP system, like its information system counterpart, has similar
components such as hardware, software, database, information, process,
and people.
• These components work together to achieve an organization’s goal of
enhanced efficiency and effectiveness in their business processes.
• An ERP system depends on hardware (i.e., servers and peripherals),
software (i.e., operating systems and database), information (i.e.,
organizational data from internal and external resources), process (i.e.,
business processes, procedures, and policies), and people (i.e., end users
and IT staff) to perform the input, process, and output phases of a system.
• The basic goal of ERP, like any other information system, is to serve the
organization by converting data into useful information for all the
organizational stakeholders.
ERP Components
 ERP Architecture
• The architecture of the ERP implementation
influences the cost, maintenance, and the use of the
system.
• ERP architecture is often driven by the ERP vendor.
This is often referred to as package-driven
architecture.
• The reason for this reversal is that most ERP vendors
claim to have the best practices of their industry’s
business processes captured in their system logic.
• The two types of architectures for an ERP system are logical and
physical or tiered.
• The logical architecture,focuses on supporting the requirements
of the end users, whereas the physical architecture focuses on
the efficiency (cost, response time, etc.) of the system.
• The logical architecture provides the database schemas of
entities and relationships at the lowest tier, followed by the core
business processes and business logic handled by the system at
the second tier. The third tier provides details on the
applications that support the various business functions built in
to the ERP system.
Logical Architecture
Physical/Tiered Architecture
 Benefits and Limitations of ERP
• The system benefits of ERP systems are as follows:

• • Integration of data and applications across functional areas of the

organization (i.e., data can be entered once and used by all applications in
the organization, improving accuracy and quality of the data).
• • Maintenance and support of the system improves as the IT staff is
centralized and is trained to support the needs of users across the
organization.
• • Consistency of the user interface across various applications means less
employee training, better productivity, and cross-functional job
movements.
• • Security of data and applications is enhanced due to better controls and
centralization of hardware, software, and network facilities.
• The system limitations of ERP systems are as
follows:

• Complexity of installing, configuring, and maintaining the

system increases, thereby requiring specialized IT staff,
hardware, network, and software resources.
• • Consolidation of IT hardware, software, and people
resources can be cumbersome and difficult to attain.
• • Data conversion and transformation from an old system to a
new system can be an extremely tedious and complex process.
• • Retraining of IT staff and personnel to the new ERP system
can produce resistance and reduce productivity over a period
of time.
 The business benefits and limitations of ERP
systems are as follows:
• Benefits:

• Increasing agility of the organization in terms of responding to changes in the

environment for growth and maintaining the market share in the industry.
• • Sharing of information across the functional departments means employees can
collaborate easily with each other and work in teams.
• • Linking and exchanging information in real time with its supply chain partners
can improve efficiency and lower costs of products and services.
• • Quality of customer service is better and quicker as information flows both up
and down the organization hierarchy and across all business units.
• • Efficiency of business processes are enhanced due to business process
reengineering of organization functions.
• • Reduction in cycle time in the supply chain from procurement of raw materials
to production, distribution, warehousing, and collection
• Limitations:

• Retraining of all employees with the new

system can be costly and time consuming.
• Change of business roles and department
boundaries can create upheaval and
resistance to the new system.
 ERP Life Cycle
• ERP implementation is not a onetime implementation. It requires a continuous
cycle of product release and support.
• The key to a successful implementation, therefore, is to use a proven methodology,
to take it one step at a time, and to begin with an understanding of the ERP life
cycle.
• When a system implementation does not have a well-defined methodology,
deadlines will likely be missed, budgets will be overspent, and functionality will not
meet the client’s needs and requirements.
• There must be a strong well-communicated need to make the change from the
existing information systems/applications to an ERP system before starting any ERP
development or implementation.
• There should also be clear and well-defined business objectives written and
communicated to the organization.
• The project methodology needs to be documented, reviewed, and fully understood
by everyone involved in the project once objectives are outlined.
ERP Life Cycle
 ERP Implementation
• ERP implementation methodology in which there are five phases of
the life cycle from requirement gathering analysis to stabilization and
production support, which are applied to the three levels of ERP
implementation: functional, technical, and organizational.
• When selecting a methodology, make sure it is robust and addresses
issues at all components and levels of the enterprise system.
• If an external implementation partner or consultant is involved, be
sure to review their methodology and determine whether it is
appropriate for your organization.
• Implementation partners may have good expertise in the functional
areas, but their most important criteria are a knowledge base of how
to design and implement systems successfully.
ERP Implementation Methodology
 ERP Implementation Strategies
• Implementing an ERP system is problematic without first
considering current business processes and changes to those
processes based on the functionality of the new system.
• If business processes are not analyzed and compared with
what the new system can do, it is very likely the
implementation will require significant system modifications
after implementation.
• In developing the business case for an ERP implementation
one must make a decision on the number of modifications to
be made to address business requirements.
• An implementation with considerable modifications to the ERP software
package, sometimes referred to as “chocolate” implementation, can
increase the chances of success with the users because the package has
been customized based on user requirements; however, modifications
increase the investment in the system and introduce higher
implementation risk.

• In a purchased system like ERP, modifying the system means that every
modification will have to be addressed each time the system is
upgraded. It is like paying for the modification over and over again. Most
purchased ERP systems today are minimally modified (or as-is) to protect
the investment in the system. This is sometimes called a “vanilla”
implementation.
• Every ERP vendor upgrades their system on a regular basis, adding
functionality, fixing problems, and generally keeping the product current
with the ever-changing technology innovations to remain competitive.
Product Life Cycle
 Software and Vendor Selection
• Before selecting a vendor, the organization must carefully evaluate its current and
future needs in enterprise management systems.
• This needs assessment can begin very simply by looking at the size of the organization
in terms of the number of employees that will be accessing the ERP applications.
• The assessment must look at the industry that the organization belongs to and the
functional areas that the ERP application will be supporting.
• In addition, it must review the organization’s existing hardware, network, and
software infrastructure and, finally, the resources (i.e., money and people
commitment) available for the implementation.
• The criteria developed from this needs assessment can help the organization narrow
down the vendors to a select few (i.e., three or four).
• These vendors should be invited to submit their bids for the project.
• During this phase, vendors should be asked to install their application (sandbox) on
the company’s IT infrastructure and to have it made available to potential users for
testing.
 The vendor needs to be evaluated on the
following:
• Business functions or modules supported by their software
• Features and integration capabilities of the software
• Financial viability of the vendor as well as length of time they have been
in business
• Licensing and upgrade policies
• Customer service and help desk support
• Total cost of ownership
• IT infrastructure requirements
• Third-party software integration
• Legacy systems support and integration
• Consulting and training services
• Future goals and plans for the short and long term
 Operations and Post-Implementation
• Going live (“Go-live”) is one of the most critical points in a project’s
success.
• A lot of time and resources have been spent to get to this point.
• In assessing an ERP project’s readiness for Go-live, it is vital to focus
the efforts of the teams to ensure that task and activities are
completed before going live.
• Much of the success of the implementation, therefore, is in the
stabilization and postproduction support processes.
• Stabilization is the time from Go-live to about 90 days after, or until
the number of issues and problems has been reduced.
• An effective response to stabilization issues will determine how
well the system is accepted by the end users and management.
Five areas of stabilization are important:

1. Training for end users

2. Reactive support (i.e., help desk for
troubleshooting)
3. Auditing support to make sure data quality is not
compromised by new system
4. Data fix to resolve data migration and errors that
are revealed by audits
5. New features and functionalities to support the
evolving needs of the organization
 ERP VENDORS
• This vast market can be grouped into three tiers
• Tier I includes large vendors like SAP, Oracle, and
Microsoft, who provide support for large companies;
• Tier II includes vendors supporting the midsize
companies; and Tier III vendors support small companies.
• Small companies, which usually have less than 30 users
and less demanding needs, prefer using Tier III software.
• Midsize companies (with less than 100 users) that have
outgrown Tier III packages often become Tier II clients.
• Tier I software is targeted for a large enterprise company.
ERP MARKET TIERS
 Key Vendors
• SAP
• ORACLE
• INFOR
• MICROSOFT
• LAWSON
• SSA GLOBAL
• EPICOR
 SYSTEMS INTEGRATION
• Logical Vs. Physical SI

• At the logical or human level, systems integration means

developing information systems that allow organizations to
share data with all of its stakeholders based on their need
and authorization. It also means, however, allowing access
to a shared data resource by people from different
functional areas of the organization.
• On the other hand, at the physical or technical level,
systems integration means providing seamless connectivity
between heterogeneous application systems.
 Steps in Integrating Systems
• System integration generally involves the eight
steps
 Benefits of System Integration
• 1. Increased Revenue and Growth. In general, one of the biggest
benefits is reduction in inventory and personnel costs due to
integrated systems. For example, Uvex Sports, Inc., a sports gear
company, saw sales grow from $1.2 million to $5.2 million without
additional costs and with the addition of only two extra employees.

• 2. Leveling the Competitive Environment. Systems integration can

make a small company behave like a big player because, with the
help of integrated business-to-business (B2B) software, many of
them can now compete with big companies to get orders from
giant retailers like Walmart, Target, and others because they can
provide the same level of service with enterprise systems.
• 3. Enhanced Information Visibility. The increased availability
of information enables managers and employees to make
informed decisions in a timely manner. For example, customer
service representatives of American Express can now make
credit approval decisions on the spot while talking with their
customers due to better access to customer credit profiles.

• 4. Increased Standardization. A side benefit of integration is

that it forces organizations to standardize on their hardware,
software, and IT policy. This may initially cost some money, but
in the long run companies easily recoup those costs.
 Limitations of System Integration
1. High Initial Setup Costs. The initial implementation of integrated systems
is high in terms of both hardware and software costs and human costs due
to the re-engineering of business processes. Although these cannot be
avoided, their negative influence on the implementation can be
minimized by a long-term resource allocation plan and commitment from
top management.

2. Power and Interdepartmental Conflicts. Systems integration often

involves sharing of information across department and interdepartmental
teams. This often creates power conflicts among the functional departments
if they have not bought into the integration. Educating employees with a
good change management strategy that communicates the long-term
benefits from systems integration can minimize these conflicts.
3. Long-Term and Intangible ROIs. The return on investments (ROI) from
systems integration often do not show up until several years after the
implementation, and many of these returns come in intangible form and
are therefore not recognized on the bottom line of the organization.
Financial managers get very upset with this situation and can create
pressures that will ruin the long-term impact of systems integration;
therefore, top management’s understanding and support for the long
term are key ingredients for the success of systems integration.

4. Creativity Limitations. One of the drawbacks of standardization is that

it restricts creativity and independence in the functional areas; however,
this can be minimized with a better integration policy that provides
flexibility and better communication from top management.
 Why is ERP important to a Company?

• Works as a back office software