ENTERPRISE RESOURCE PLANNING : WHAT'S THERE IN IT!

Akhilesh Tuteja

Abstract

In today's dynamic and turbulent business environment, there is a strong need for the organisations to become globally competitive. The survival guide to competitiveness is to be closer to the customer and deliver value added product and services in the shortest possible time. This, in turn, demands integration of business processes of an enterprise. Enterprise Resource Planning (ERP) is such a strategic tool, which helps the company to gain competitive edge by integrating all business processes and optimising the resources available. This paper throws light on how ERP evolved, what makes up an ERP system and what it has to offer to the industries. The paper includes the role of various enabling technologies, which led to the development of such a huge system. The author also argues the role of Business Process Reengineering as a precursor to ERP implementation.

Introduction

In today's fiercely competitive business environment, there has to be much greater interaction between the customers and manufacturers. This means that, in order to produce goods tailored to customer requirements and provide faster deliveries, the enterprise must be closely linked to both suppliers and customers. In order to achieve this improved delivery performance, decreased lead times within the enterprise and improved efficiency and effectiveness, manufacturers need to have efficient planning and control systems that enable very good synchronisation and planning in all the processes of the organisation. Today, however, the challenge is intense and requires a strong integration across the value chain. Enterprise Resource Planning is such a strategic tool, which equips the enterprise with the necessary capabilities to integrate and synchronise the isolated functions into streamlined business processes in order to gain a competitive edge in the turbulent business environment.

Genesis

ERP is an outcome of 40 years of trial and error. It has evolved as a strategic tool because of continuous improvement in the available techniques to manage business and the fast growth of information technology. Prior to 1960s, the business had to rely on the traditional ways of inventory management to ensure smooth functioning of organisation. The most popularly known amongst them is EOQ (Economic Order Quantity). In this method, each item in the stock is analysed for its ordering cost and the inventory carrying cost. A trade off is established on a phased out expected demand of one year, and this way the most economic ordering quantity can be decided. This technique in principle is a reactive way of managing inventory.

In 1960s, a new technique of Material Requirements Planning, popularly known as MRP, evolved. This was a proactive manner of inventory management. This technique fundamentally explodes the end product demand obtained from the Master Production Schedule (MPS) for a specified product structure (which is taken from Bill of Material) into a detailed schedule of purchase orders or production orders taking into account the inventory on hand. MRP is a simple logic but the magnitude of data involved in a realistic situation makes it computationally cumbersome. If undertaken manually, the entire process is highly time consuming. It therefore becomes essential to use a computer to carry out the exercise.

MRP successfully demonstrated its effectiveness in:

 Reduction of inventory
 Reduction in production and delivery lead times by improving
co-ordination and avoiding delays
 Making commitments more realistic
 Increased efficiency

MRP proved to be a very good technique for managing inventory, but it did not take into account other resources of an organisation. In 1970s, this gave birth to a modified MRP logic, popularly known as Closed Loop MRP. In this technique, the capacity of the organisation to produce a particular product is also taken into account by incorporating a module called Capacity Requirements Planning (CRP). Hence, a feedback loop is provided from the CRP module to MPS if there is not enough capacity available to produce.

In 1980s, the need was felt to integrate the other resources of a manufacturing organisation. Hence, evolved an integrated manufacturing management system called Manufacturing Resources Planning (MRPII). MRPII has been defined by APICS as:

"A method for effective planning of all the resources of manufacturing company. Ideally it addresses operational planning in units, financial planning in dollars and has a simulation capability to answer 'what-if' questions. It is made up of a variety of functions each linked together: Business Planning, Production Planning, Master Production Scheduling, Material Requirements Planning, Capacity Requirements Planning and the execution system for capacity and priority. Outputs from these systems would be integrated with financial reports, such as the business plan, the purchase commitment report, shipping, budget, inventory production, etc."

The Manufacturing Resources Planning suffered from a few drawbacks, like it assumed the lead times to be fixed, the capacity to be infinite, the batch sizing concept, etc. Over the years, other tools had evolved to automate the manufacturing management process like Computer Aided Design, Computer Aided Manufacturing, Computer integrated manufacturing, Customer oriented manufacturing management system, etc. The shortcomings of MRPII and the need to integrate these new techniques, led to the development of a total integrated solution called Enterprise-wide Resource Planning (ERP). ERP atempts to integrate the suppliers and customers with the manufacturing environment of the organisation.

The Essence

How does an ERP system make it all happen? The essence of it is the fundamental premise that the whole being greater than the sum of its parts. The traditional application systems, which the organisations generally employ, treat each transaction separately. They are built around the strong boundaries of specific functions that a specific application is meant to cater. For an ERP, it stops treating these transactions separately as stand-alone activities and considers them to be the part of the inter-linked processes that make up the business.

Almost all the typical application systems are nothing but the data manipulation tools. They store data, process them and present them in the appropriate form whenever requested by the user. In this process, the only problem is that there is no link between the application systems being used by different departments. An ERP system also does the same thing, but in a different manner. There are hundreds of such data tables, which store data generated as a result of diverse transaction, but they are not confined to any departmental or functional boundaries, rather integrated to be used by multiple users, for multiple purposes and at multiple places.

Enabling Technologies

It is not possible to think of an ERP system without sophisticated information technology infrastructure. It is said that, ERP is the finest expression of the inseparability of business and information technology. The incremental improvement in the information technology and the drastic reduction in prices of computers have made it possible even for the small organisation to think about ERP systems. The earlier ERP systems were built only to work with huge mainframe computers. The new era of PC, advent of client server technology and scalable Relational Data Base Management Systems (RDBMS) all have contributed for the ease of deployment of ERP systems. Most of the ERP systems exploit the power of Three Tier Client Server Architecture. In a client server environment, the server stores the data, maintaining its integrity and consistency and processes the requests of the user from the client desktops. The load of data processing and application logic is divided between the server and the client. The three tier architecture adds a middle stratum, embodying all application logic and the business rules that are not part of the application, enforcing appropriate validation checks.

It is assumed that the companies implementing ERP solutions have multiple locations of operation and control. Hence, the online data transfer has to be done across locations. To facilitate these transactions, the other important enabling technologies for ERP systems are Workflow, Workgroup, GroupWare, Electronic Data Interchange (EDI), Internet, Intranet, Data warehousing, etc.

Characteristics

An ERP system is not only the integration of various organisation processes. Any system has to possess few key characteristics to qualify for a true ERP solution. These features are:

Flexibility: An ERP system should be flexible to respond to the changing needs of an enterprise. The client server technology enables ERP to run across various data base back ends through Open Data Base Connectivity (ODBC).

Modular & Open: ERP system has to have an open system architecture. This means that any module can be interfaced or detached whenever required without affecting the other modules. It should support multiple hardware platforms for the companies having heterogeneous collection of systems. It must support some third party add-ons also.

Comprehensive: It should be able to support variety of organisational functions and must be suitable for a wide range of business organisations.

Beyond The Company: It should not be confined to the organisational boundaries, rather support the on-line connectivity to the other business entities of the organisation.

Best Business Practices: It must have a collection of the best business processes applicable world-wide.

Simulation of Reality: Last but not the least, it must simulate the reality of business processes on the computers. In no way it should have the control beyond the business processes and it must be able to assign accountabilities to the users controlling the system.

The Building Blocks

There are various ERP vendors available today. Few of them are SAP AG (SAP R/3), BaaN Infosystems (BaaN IV), People Soft, Ramco Systems (Marshal), System Software Associates (BPCS), QAD (MFG/PRO), etc. These vendors offer slightly differing features in their products; still the major modules are same in all of the products. SAP R/3, which is the market leader in this segment, offers the following modules:

Financial Accounting
Treasury
Controlling
Enterprise Controlling
Investment Management
Production Planning
Materials Management
Plant Maintenance & Service Management
Quality Management
Project System
Sales & Distribution
Human Resources Management
Business Information Warehouse

Today SAP is considered to be the most exhaustive ERP system. SAP R/3 also allows the connectivity to Internet and the business through it for the mobile and distantly located users. Other vendors also provide more or less similar functionality in their bundle of product.

Reengineering & ERP

ERP is a bundle of all the integrated processes any business enterprise has to carry out. An ERP systems can be called as the simulation of reality, as it simulates these necessary functions of the business and provides seamlessly integrated information at all the required places and in an appropriate form. It helps the enterprise link its resources, utilise and allocate them in the best possible manner and control them on a real time basis. It enables the enterprise to achieve world class performance by streamlining its processes and optimising the resources.
It is said that, what the stethoscope is to medical treatment, ERP, is to reengineering. Reengineering can be called as an essential precursor to ERP implementation. Since, ERP gets the best out of the available resources, it is very important to reengineer the business processes before going for an ERP implementation. If the business processes are not streamlined, the resource allocation will always be sub-optimal. Reengineering also makes it smooth to drive the ERP implementation programme, because the former builds the spirit of competitiveness and adaptation of best practices. In late 1994, for instance the ¥450 billion Yamaha Motors started a global reengineering project to consolidate its operations in 65 countries. Every process in the company was to be right-sized as part of the project. The first to be tackled was financial accounting. From a situation where Yamaha did not even attempt the consolidation of global accounts, it took only six months to implement an ERP based system in which such a consolidation was routine. While production planning was implemented next, the entire project is expected to be completed by mid 1998.

Applications

The earlier MRPII systems were meant for the manufacturing organisations. However, ERP system has gone beyond this barrier. Today, ERP is being implemented in almost all types of organisations irrespective of its mode and spread of operation. A typical list of segments where ERP systems have been implemented are Aerospace & Defence, Automotive industry, Banking & insurance, Chemical & pharmaceutical industries, Consumer goods, Healthcare, High-tech & electronics, Mechanical engineering & heavy construction, Oil & gas, Project oriented manufacturing, Public administration & education, Retail, Telecommunications, Utilities, etc.

ERP implementation in India is picking up very fast. Last few years have seen lot of products coming into the market and the leading companies taking initiatives to implement ERP. But most of these implementations have not yet witnessed the expected results. However, the experts are hopeful about the success an ERP system can bring to the industry. Again, it is not a magic tool, which will transform everything overnight, rather successful implementation is a long journey towards enterprise excellence.

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