Enterprise resource planning

Semester 5th
BSc (IT)
Chapter: 1
Content:
1. Introduction to ERP
2. Evolution of ERP
3. What is ERP?
4. Reason for the growth of ERP
5. Scenario and Justification of ERP in India
6. Evaluation of ERP
7. Various modules of ERP
8. Advantages of ERP

1. Introduction to ERP

Short for enterprise resource planning, a business management system that integrates all
facets of the business, including planning, manufacturing, sales, and marketing.
As the ERP methodology has become more popular, software applications have emerged
to help business managers implement ERP in business activities such as inventory
control, order tracking, customer service, finance and human resources.

Enterprise resource planning's true ambition is to integrate all departments and functions
across a company onto a single computer system that can serve all those different
departments' particular needs.
Thus ERP attempts to integrate all departments and functions across a company onto a
single computer system that can serve all those different departments' particular needs.

ERP systems are IT systems which are meant to serve all the IT needs of a manufacturing
company. ERP stands for "Enterprise Resource Planning". This type of system has
evolved from earlier MRP and MRPII systems.

MRP stands for "Material Requirements Planning", and is a computer technique for
taking a product schedule as input and generating works and purchase orders as output.

MRP II was a later development of MRP which arose because MRP needed a set of
business processes surrounding it to make it effective. Not all of the business processes
needed IT support, but others did, hence MRPII systems supported a wider range of
business processes than MRP. The name MRPII came about because the new set of
business processes was called "Manufacturing Resource Planning", and because the
initials were the same as MRP, the II was tagged on.
MRPII systems tended to be so wide in scope that eventually systems developed towards
giving IT support to all parts of a manufacturing company. This is when the term ERP
came into use to signify its enterprise-wide scope.

2. Evolution of ERP
The history of ERP can be traced back to the 1960’s, when the focus of systems was
mainly towards inventory control. Most of the systems software were designed to handle
inventory based in traditional inventory concepts. The 1970’s witnessed a shift of focus
towards MRP (Material Requirement Planning).

This system helped in translating the master production schedule into requirements for
individual units like sub assemblies, components and other raw material planning and
procurement. This system was involved mainly in planning the raw material
requirements.

Then, in 1980’s came the concept of MRP-II i.e. the Manufacturing Resource Planning
which involved optimizing the entire plant production process. Though MRP-II, in the
beginning was an extension of MRP to include shop floor and distribution management
activities, during later years, MRP-II was further extended to include areas like Finance,
Human Resource, Engineering, Project Management etc.

This gave birth to ERP (Enterprise Resource Planning) which covered the cross-
functional coordination and integration in support of the production process. The ERP as
compared to its ancestors included the entire range of a company’s activities. ERP
addresses both system requirements and technology aspects including client/server
distributed architecture, RDBMS, object oriented programming etc.

Evaluation Criteria
1. Some important points to be kept in mind while evaluating ERP software include
2. Functional fit with the Company’s business processes.
3. Degree of integration between the various components of the ERP system
4. Flexibility and scalability
5. User friendliness
6. Ease of implementation
7. Ability to support multi-site planning and control
8. Technology - client/server capabilities, database independence, security
9. Availability of regular upgrades
10. Amount of customization required
11. Local support infrastructure
12. Reputation and sustainability of the ERP vendor
13. Total costs, including cost of license, training, implementation, maintenance,
customization and hardware requirements.
 Why ERP?
1. To Enhance Profitability:
a) Increase in sales
b) /or Reduce Procurement Cost

2. for Healthy Operations:

a) Integration of Systems across the Functional Departments in a
Company as well as across the Enterprise as a Whole.
b) Better Customer Service.
c) Introduction of Latest Technologies as and when the are ready for the
Industry acceptance
d) Expertise database
e) Avoids data redundancy

3. Competition in the Market:

a) Manufacturing Challenges.
b) Manufacturing Globally.
c) Distribution network spread.
d) New Product introduction.
e) Lower manufacturing lead time.
f) Focus on industry markets.
g) Satisfying the needs of customers.
h) Develop specific business methods and processes.
i) Integration with third party products.

4. Demands on the Industry:

a) Better products at lower costs
b) Tough competition
c) Need to analyze costs / revenues on a product or customer basis
d) Flexibility to respond to changing business requirements
e) More informed management decision making

5. Solving the Problems:

a) Unable to get accurate, timely information
b) Applications not complete for existing business practices
c) Modifications are time consuming or not feasible

Solving these Problems will the company ahead of competition!

 The advantages of ERP
Installing an ERP system has many advantages -both direct and indirect.
The direct advantages include improved efficiency, information integration for better
decision making, faster response time to customer queries, etc. The indirect benefits
include better corporate image, improved customer goodwill, customer satisfaction, and
so on.

The following are some of the direct benefits of an ERP system:

1. Business Integration
2. Flexibility
3. Better Analysis and Planning Capabilities
4. Use of Latest Technology.

1. Business Integration: The first and most important advantage lies in the promotion of
integration. The reason why ERP packages are considered to the integrated, is the
automatic data updating (automatic data exchange among applications) that is possible
among the related business components.

Since conventional company information systems were aimed at the optimization of

independent business functions in business units, almost all were weak in terms of the
communication and integration of information that transcended the different business
functions.

In the case of large companies in particular, the timing of system construction and
directives differs for each product and department/ function and sometimes, they are
disconnected. For this reason, it has become an obstacle in the shift to new product and
business classification.

In the case of ERP packages, the data of related business functions is also automatically
updated at the time a transaction occurs. For this reason, one is able to grasp business
details in real time, and carry out various types of management decisions in a timely
manner, based on that information.

2. Flexibility: The second advantage of the ERP packages is their flexibility. Different
languages, currencies, accounting standards and so on can be covered in one system, and
functions that comprehensively manage multiple locations of a company can be packaged
and implemented automatically. To cope with company globalization and system
unification, this flexibility is essential and one can say that it has major advantages, not
simply for development and maintenance, but also in terms of management.

3. Better Analysis and planning Capabilities: Yet another advantage is the boost to the
planning functions. By enabling the comprehensive and unified management of related
business and its data, it becomes possible to fully utilize many types of decision support
systems and simulation functions. Furthermore, since it becomes possible to carry out,
flexible and in real time, the filing and analysis of data from a variety of dimensions, one
is able to give the decision-makers the information they want; thus enabling them to
make better and informed decisions.

4. Use of Latest Technology: the fourth advantage is the utilization of the latest
development in information Technology (IT). The ERP vendors were quick to realize that
in order to grow and to sustain that growth; they had to embrace the latest developments
in the field of information technology. Therefore, they quickly adapted their systems to
take advantage of the latest technologies like open systems, client/ server technology,
Internet/Intranet, CALS (Computer- Aided Acquisition and Logistics Support),
electronic-commerce, etc.

It is this quick adaptation to the latest changes in the Information Technology that makes
the flexible adaptation to changes in future business environments possible. It is this
flexibility that makes the incorporation of the latest technology possible during system
customization, maintenance and expansion phases.

What is that ERP enables?

a) Systematic Look into your Systems & procedures
b) Optimizing the processes
c) Enables you to adapt yourself to new technologies
d) Discipline across the functions

Problems Taken Care of by the ERP:

a) Availability check at the time of Accepting Sales order
b) On-line Material Status & Shortages
c) Productivity Enhancements
d) Material Planning
e) Customer Service
f) Cash Management
g) Inventory
h) Quality

What drives ERP?

 Business drives
a) Customer Satisfaction
b) Business Development - new areas, products, services
c) Ability to face competition
d) Efficient processes required to push the company to top gear

 IT drives
a) Present Software does not meet business needs
b) Legacy systems difficult to maintain
c) Obsolete hardware/software difficult to maintain
Drivers
The market for ERP however does not sound so depressing. Companies still have
growth avenues which include:
Less penetrated modules within the ERP suite, both horizontal and vertical. The new
horizontal areas include E-commerce, Customer relationship management, Supply chain
management, plant maintenance, field service, data warehousing, product data
management, service contract management, warehousing & distribution,, transportation
management etc. Among the vertical application are industries such as retail, utilities,
insurance, and government organizations.

The mid market segment presents immense opportunities. However, the margins from
SMEs will be far below that from the larger players.
Another problem that the SMEs present is the low transaction (order) size and the
difficulty of reaching out to these players. Also they are relatively less sophisticated on
the technology side.
Another major demand driver will be the e-commerce wave. As more and more company
move towards e-commerce it becomes necessary to implement ERP solutions.

Inhibitors or hurdles for the growth of ERP market:

After posting significant gains for 3-4 years the ERP market may be heading towards a
slowdown. Except for SAP most other players have witnessed a slowdown in revenue
growth.

The main constraints to growth for the sector can be classified as:
a) Saturation of the certain horizontal applications including Finance and
accounting, MRP etc which accounted for nearly 45% of the ERP revenues during
1998.
b) Saturation of large customers. Most of the Fortune 500 companies and companies
having revenues over $1bn have already implemented ERP.
c) Though the medium enterprises provide a good opportunity for growth, pricing
for these companies will have to be highly competitive and margins may come
under pressure. Thus smaller players who have a cost advantage will have an edge
over the others.

ERP in India
Until recently Indian organizations were in a sellers market and operating in a regulated
environment. They grew by managing the environment, rather than innovating and
improving internal efficiencies. The customer was taken for granted and quality was
available only at a premium. With globalization and gradual lifting of regulation, there is
a paradigm shift in running the business.

Indian companies now need to increase customer focus, improve speed of delivery, be
cost competitive and provide value for money (improved quality at lower price). Indian
companies therefore need to implement ERP systems for improving their business
processes and becoming more competitive in the global environment. Though ERP
implementation is costly and time consuming, it has several benefits which will help
recover these costs in the long run.

According to NASSCOM, during the year 1998-99, the Indian ERP market has been
estimated at R5200mn compared to Rs2800mn in the previous year ie a growth of
85%yoy. The growth in the export market was far higher and more than doubled during
the same time period. According to the NASSCOM, by the end of FY2001-02, the total
Indian ERP market is expected to multiply by nearly 4 times and reach Rs65bn compared
to Rs13.4bn in 1998-99.