Introduction & ERP Background

(Part 1)

Lecture 01
Contents to be covered:

 Introduction to ERP

 Background of ERP

 ERP Software

 Future of ERP
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Learning Objectives:
 After completing this chapter, you will be able to:
 Define the concept of ERP
 Discuss the importance of ERP and how it creates value for an
organization
 Identify the rationale behind ERP and the role it play in an
organization
 Define integrated information systems and explain why they are
important
 Identify the factors that led to the development of ERP systems
 Identify current ERP software available in the market
 Discuss the pros and cons of implementing an ERP system
 Summarize ongoing developments in ERP

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1.0 Introduction to ERP
1.1 Definition

 Enterprise Resource Planning (ERP) programs: Core

software used by companies to coordinate information in every
area of business
 Help manage companywide business processes
 Use common database and shared management reporting tools

 What does ERP integrate?

 Database
 Applications
 Interfaces
 Tools
 Business Process Reengineering (BPR)

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1.0 Introduction to ERP (cont.)
1.2 Why is ERP important?

 ERP affects most major corporations in the world

 ERP affects many SMEs (small and medium enterprises)
 ERP affects competitors’ behaviour
 ERP affects business partner requirements
 ERP has changed the nature of many consulting firms
 ERP provides one of the primary tools for re-engineering
 ERP has diffused “best practices“
 ERP gave client server computing its first enterprise product
 ERP has changed the nature of the information systems
function
 ERP has changed the nature of jobs in all functional areas
 ERP cost is high
 ERP has experience huge market growth
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1.0 Introduction to ERP (cont.)
1.3 How does ERP create values?

 ERP integrates firm activities

 ERPs employ use of “best practices“
 ERP enables organizational standardization
 ERP eliminates information asymmetries
 ERP provides on-line and real-time information
 ERP allows simultaneous access to the same data for planning
and control
 ERP facilitates intra-organizational communication and
collaboration
 ERP facilitates inter-organizational communication and
collaboration
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1.0 Introduction to ERP (cont.)
1.4 What drives ERP?

 Business
 Customer satisfaction
 Business development – new areas, products, services
 Ability to face competition
 Efficient processes required to push the company to top gear
 Business process rationale
 Strategic rationale; e.g. e-commerce capability

 Technology Rationale
 Difficult-to-integrate acquisitions
 Legacy systems difficult to maintain, e.g. Y2K problem
 Disparate and poor existing systems
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1.0 Introduction to ERP (cont.)
1.5 Role of ERP in Organization

 Assists in sales management

 Assists in handling material and inventory management

 Assists in financial management

 Assists in human resources management

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1.0 Introduction to ERP (cont.)
1.6 Technology Enabled ERP

 Information system (IS): Computers, people, procedures, and

software that store, organize, and deliver information

 Integrated IS: enables sharing of data and information in an

organization; ensuring accuracy and timely data are used

 An ERP system can help integrate a company’s operations

 Acts as a company-wide computing environment
 Includes a database that is shared by all functional areas
 Can deliver consistent data across all business functions in real
time

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2.0 Background of ERP
2.1 The Evolution of IS

 Silos
 Information systems configuration used until recently
 Companies had unintegrated information systems that
supported only the activities of individual business functional
areas

 Current ERP systems evolved as a result of:

 Advancement of hardware and software technology
 Development of a vision of integrated information systems
 Reengineering of companies to shift from a functional focus to a
business process focus

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2.0 Background of ERP (cont.)
2.2 Computer Hardware and Software Development

 Computer hardware and software developed rapidly in the

1960s and 1970s

 First practical business computers were the mainframe

computers of the 1960s

 Over time, computers got faster, smaller, and cheaper

 Moore’s Law
 Number of transistors that could be built into a computer chip
doubled every 18 months

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2.0 Background of ERP (cont.)

 Advancements in computer software

 1970s: relational database software developed
 Provide businesses the ability to store, retrieve, and analyze
large volumes of data

 1980s: spreadsheet software became popular

 Managers can easily perform complex business analyses

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2.0 Background of ERP (cont.)
2.3 Development of a Vision of Integrated IS

 By the mid-1980s, telecommunications developments allowed

users to share data and peripherals on local networks
 Client-server architecture

 By the end of the 1980s, the hardware needed to support

development of ERP systems was in place

 By the mid-1980s, database management system (DBMS)

required to manage development of complex ERP software
existed

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2.0 Background of ERP (cont.)

 Manufacturing software developed during the 1960s

and 1970s
 Evolved from simple inventory-tracking systems to material
requirements planning (MRP) software

 Electronic data interchange (EDI)

 Direct computer-to-computer exchange of standard business
documents
 Allowed companies to handle the purchasing process
electronically

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2.0 Background of ERP (cont.)
2.4 Management’s Impetus to Adopt ERP

 Hard economic times of the late 1980s and early 1990s caused
many companies to downsize and reorganize
 Stimulus to ERP development

 Inefficiencies caused by the functional model of business

organization
 Silos of information
 Limits the exchange of information between the lower operating
levels

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2.0 Background of ERP (cont.)

Figure 2-2 Information and material flows in a functional business model

Source: Concepts in Enterprise Resource Planning, Third Edition

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2.0 Background of ERP (cont.)

 Functional model led to top-heavy and overstaffed

organizations incapable of reacting quickly to change

 Process business model

 Information flows between the operating levels without top
management’s involvement

 Further impetus for adopting ERP systems has come from

compliance with the Sarbanes-Oxley Act of 2002
 Requires companies to substantiate internal controls on all
information

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2.0 Background of ERP (cont.)

Figure 2-3 Information and material flows in a process business model

Source: Concepts in Enterprise Resource Planning, Third Edition

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3.0 ERP Software
3.1 Commercialized Types

 SAP
 1972: five former IBM systems analysts in Mannheim, Germany
formed Systemanalyse und Programmentwicklung (Systems
Analysis and Program Development, or SAP)

 SAP’s goals:
 Develop a standard software product that could be configured
to meet the needs of each company
 Data available in real time
 Users working on computer screens, rather than with
voluminous printed output

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3.0 ERP Software (cont.)

 During their work for German chemical company ICI, Plattner and
Hopp had developed the idea of modular software development

 Software modules: individual programs that can be purchased,

installed, and run separately, but that all extract data from the common
database

 1982: SAP released its R/2 mainframe ERP software package

 1980s: sales grew rapidly; SAP extended its software’s

capabilities and expanded into international markets

 By 1988, SAP had established subsidiaries in numerous foreign

countries
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3.0 ERP Software (cont.)

 1988: SAP began development of its R/3 system to take

advantage of client-server technology

 1992: first version of SAP R/3 released

 SAP R/3 system was designed using an open architecture

approach

 Open architecture: third-party software companies

encouraged to develop add-on software products that can be
integrated with existing software

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3.0 ERP Software (cont.)

 PeopleSoft
 Founded by David Duffield, a former IBM employee
 Today, PeopleSoft, under Oracle, is a popular software choice
for managing human resources and financial activities at
universities

 Oracle
 SAP’s biggest competitor
 Began in 1977 as Software Development Laboratories (SDL)
 Founders: Larry Ellison, Bob Miner, and Ed Oates

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3.0 ERP Software (cont.)

 SAP ERP
 Latest versions of ERP systems by SAP and other companies
allow:
 All business areas to access the same database
 Elimination of redundant data and communications lags
 Data to be entered once and then used throughout the
organization

 Current SAP ERP system: SAP ECC 6.0 (Enterprise Central

Component 6.0)

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3.0 ERP Software (cont.)
3.2 Open-Source Types

 SQL Ledger
 Developed by DWS Systems Inc.
 It is an accounting, commercial and production suite for micro
and small enterprises or medium enterprises with basic
requirements. Besides accounting it offers basic functionality for
purchasing, sales and inventory management
 Website: http://www.sql-ledger.org

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3.0 ERP Software (cont.)

 LX-Office
 A fork of SQL Ledger which targets the needs of the German
speaking market and offers commercial support to its
customers
 It offers different functionality in the areas of accounting,
reporting, security and special interfaces for Germany
 A main difference lies in the handling of taxes. They are defined
within the accounting schema as opposed to SQL Ledger,
where the taxes depend on the customer, supplier, service or
product
 Website: http://www.lx-office.org

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3.0 ERP Software (cont.)

 TinyERP
 Its name has evolved to Open ERP
 The development of Open ERP started in 2000 by Fabien
Pinckaers
 It is targeted to micro, small and medium enterprises having up
to 150 employees in the sectors trade, distribution and service
 The modules available are accounting, CRM, sales &
purchases, human resources, marketing, MRP, MRPII,
inventory control, project management, special purpose
modules and a interface to eCommerce application
 Modules can be installed partly in TinyERP
 Website: www.tinyerp.com

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3.0 ERP Software (cont.)

 GNU Enterprise (GNUe)

 Began as GNU G/L by Wiesiek Poszewiecki in 1996. From
1997 to March 2000, it has merged to become GNU Enterprise,
and later merged with Project sanity (ERP) to become the
current GNUe
 Aims to deliver a complete ERP Software Package based on
universal database drivers and XML defined forms, reports and
workflow. Its architecture is based on open standards and
universal best-practice approaches with interfaces to several
programming languages
 There is no out-of-the-box packaged solution available. All ERP
package modules are still in planning stages
 Website: www.gnuenterprise.org
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3.0 ERP Software (cont.)
 ERP5
 Developed by the French company Nexedi. It is mainly
developed in the Python programming language and the source
code is freely available under the GNU General Public License.
 ERP5 was originally developed as apparel industry solution for
an organization with more than 300 employees on 5
internationally distributed sites. The original modules are now
generalized as business templates.
 There are currently two version of ERP5:
 ERP5 Enterprise is used in enterprise level customer projects
which are mainly focused on custom development and
customizations based on the individual business processes of
the company
 ERP5 Express is a hosted solution offered as Software as a
Service for a monthly fee which is standardized for the typical
needs of small companies
 Website: www.erp5.org
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3.0 ERP Software (cont.)

 opentaps – OfBiz
 Sponsored by Open Source Strategies, Inc. and developed by full-
time professional developers with the help of a global community of
contributors 
 The word "opentaps" is an acronym for "Open Source Enterprise
Applications Suite."  It was originally named "Sequoia ERP" after
the Sequoia evergreen tree, commonly known as the "Redwood,"
and was first released on August 23, 2005.
 opentaps is a production-ready version of the Open for Business
(OfBiz) framework. Its module structure is an attempt to group
OfBiz application functionality like traditional ERP modules
 The framework is intended for developing enterprise-level custom
business applications, with initial focus on e-Commerce solutions,
but it evolved into a general framework for ERP development
 The target groups are retailers, distributors and manufacturers
 Website: www.opentaps.org

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3.0 ERP Software (cont.)

 Compiere
 It is the current market leader for open source ERP
 The Compiere project started in January 1999 by one of the
founders, Jorg Janke, and later joined by Kathy Pink. The
software is developed and supported by ComPiere, Inc.
 Compiere is Italian and stands for "complete, accomplish"
 Compiere is targeted to small and medium companies
operating in distribution/retail, and service areas
 Its functionality is organized along business processes
 Website: www.compiere.org

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3.0 ERP Software (cont.)
3.3 Consultants and Vendors

 One person cannot fully understand a single ERP

system

 Before choosing a software vendor, most companies:

 Study their needs
 Hire an external team of software consultants to help choose
the right software vendor(s) and the best approach to
implementing ERP

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3.0 ERP Software (cont.)
3.4 Significance and Benefits of ERP Software and
System

 More efficient business processes that cost less than those in

unintegrated systems
 Easier global integration
 Integrates people and data while eliminating the need to update
and repair many separate computer systems
 Allows management to manage operations, not just monitor
them
 Can dramatically reduce costs and improve operational
efficiency

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3.0 ERP Software (cont.)
3.5 Questions about ERP
3.5.1 How much does an ERP system cost?

 Size of the ERP software

 Corresponds to the size of the company it serves

 Need for new hardware that is capable of running complex ERP

software

 Consultants’ and analysts’ fees

 Time for implementation

 Causes disruption of business

 Training
 Costs both time and money
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3.0 ERP Software (cont.)
3.5.2 Should every business buy an ERP package?

 Some of a business’s operations, and some segments of its

operations, might not be a good match with the constraints of
ERP

 Sometimes, a company is not ready for ERP

 ERP implementation difficulties result when management does

not fully understand its current business processes and cannot
make implementation decisions in a timely manner

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3.0 ERP Software (cont.)
3.5.3 Is ERP software inflexible?

 Many people claim that ERP systems, especially the SAP ERP
system, are rigid

 Options for customization offered by SAP ERP

 Numerous configuration options that help businesses customize
the software to fit their needs
 Programmers can write specific routines using Advanced
Business Application Programming (ABAP)

 Once an ERP system is in place, trying to reconfigure it while

retaining data integrity is expensive and time-consuming
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3.0 ERP Software (cont.)
3.5.4 What return can a company expect from its ERP
investment?

 ERP eliminates redundant efforts and duplicated data; can

generate savings in operations expense

 ERP system can help produce goods and services more quickly

 Company that doesn’t implement an ERP system might be

forced out of business by competitors that have an ERP system

 Smoothly running ERP system can save a company’s

personnel, suppliers, distributors, and customers much
frustration

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3.0 ERP Software (cont.)

 Cost savings and increased revenues occur over many years

 Difficult to put an exact dollar figure to the amount accrued from
the original ERP investment

 ERP implementations take time

 Other business factors may be affecting the company’s costs
and profitability
 Difficult to isolate the impact of the ERP system alone

 ERP systems provide real-time data

 Improve external customer communications

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3.0 ERP Software (cont.)
3.5.5 How long does it take to see a return on an ERP
investment?

 Return on investment (ROI): assessment of an investment

project’s value
 Calculated by dividing the value of the project’s benefits by the
project’s cost

 ERP system’s ROI can be difficult to calculate

 Peerstone Research study

 63 percent of companies that performed the calculation
reported a positive ROI for ERP
 Most companies felt that nonfinancial goals were the reason
behind their ERP installations
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3.0 ERP Software (cont.)
3.5.6 Why do some companies have more success with ERP
than others?

 Usually, a bumpy rollout and low ROI are caused by people

problems and misguided expectations, not computer
malfunctions
 Executives blindly hoping that new software will cure fundamental
business problems that are not curable by any software
 Executives and IT managers not taking enough time for a proper
analysis during planning and implementation phase
 Executives and IT managers skimping on employee education and
training
 Companies not placing ownership or accountability for the
implementation project on the personnel who will operate the system
 Unless a large project such as an ERP installation is promoted from
the top down, it is doomed to fail
 ERP implementation brings a tremendous amount of change for
users
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3.0 ERP Software (cont.)

 For many users, it takes years before they can take advantage
of many of an ERP system’s capabilities

 Most ERP installations do generate returns

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4.0 Future of ERP
 Understanding the social and business implications of new
technologies is not easy

 ERP systems have been in common use only since the mid-1990s

 ERP vendors are working to solve adaptability problems that plague

customers

 Demand for new ERP installations is still going strong

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4.0 Future of ERP (cont.)
4.1 Additional Capabilities within ERP

 Sales production
 Customer Relationship Management (CRM) applications
 Increase the efficiency of the sales force

 Data analysis
 Data mining: statistical and logical analysis of large sets of
transaction data, looking for patterns that can aid decision
making

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4.0 Future of ERP (cont.)
 Internet connectivity
 ERP developers have been incorporating Web-based systems
with their ERP products

 Electronic commerce (or e-commerce)

 Conduct business over the Internet
 Another activity that ERP systems can help manage

 Web services, or service-oriented architecture (SOA)

 Web services: software that enables systems to exchange data
without complicated software links
 Web services make ERP systems easier to manage, especially
when interfacing with other applications and the Web
 Shift from traditional ERP client-server system to service-
oriented architecture is gaining momentum

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