ERP Components

An Enterprise is a group of people which has certain resources as its control to achieve its goal. It acts as a single
entity. This single entity is different from traditional approach. It is an integrated software that integrates many
small modules to become a big organization. These small modules are said to be the components of ERP. It has
the ability to manage many fields like finances, manufacturing , customers, projects and many more. With ERP
systems , we can adapt to changes leading to an improved and efficient working of organizations.
Five Main Components of the ERP system are as follows :
1. Finance :
It keeps a track on all your financial data including Accounts receivable, Accounts payable, General ledger, costs,
budgets and forecasts. It helps to keep a record of cash flow, lower costs, increase profits and make sure that all
the bills are paid on time. The growing complexity of the business makes important the need to have a single
system to manage all of the financial transactions and accounting for multiple business units or product lines.

2. Human Resources (HR) :

It is a software handling all personal-related tasks for managers and employees. Employees play a very important
role in any organization, without them business would not exist. This component is responsible for automated
payments to employees, payment of taxes, generating performance reports, attendance tracking, promotions,
deciding working hours and holiday hours of the staff.

3. Manufacturing and logistics :

It as a group of applicants for planning, production, taking orders and delivering the products to the customers. It
provides you a view of the demanded and achieved levels which is very important to check whether you are
achieving your targets or not. It provides all the stock summary and production plans beneficial for the business. It
includes Production planning , order entry and processing also the warehouse management.

4. Supply Chain Management (SCM) :

A supply chain management is a network of facilities that perform the procurement of the materials and
transformation of these materials into intermediate and finalized products and distribution of these products to the
customers. Planning, Manufacturing, Marketing, Distribution and the purchasing organizations through a supply
chain operate independently. These organizations have their own goals and objectives.

5. Customer Relationship Management (CRM) :

This component interacts with the customers using data analysis to study large amount of information. They target
the audience and observe what is beneficial for them. The component gathers customer data from multiple
channels. Hence, CRM stores detailed information on overall purchase history, personal info, and even purchasing
behavior patterns. The benefit it gains is by keeping a track on the customer’s buyer history and suggesting
additional purchases.

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.
The successful implementation of an ERP system will have many advantages, as indicated
below:

 Business Integration and Improved Data Accuracy: ERP system is composed of

various modules/ submodules where a module represents a particular business
component. If data is entered in one module such as receiving, it automatically updates
other related modules such as accounts payable and inventory. This updating occurs at
real time i.e. at the time a transaction occurs.

Since, data needs to be entered only once at the origin of the transaction, the need for
multiple entries of the same data is eliminated.
Likelihood of duplicate/erroneous data is, therefore, minimized. The centralized structure
of the database also enables better administration and security provisions, which
minimizes loss of sensitive data.
 Planning and MIS: The various decision support tools like planning engines and
simulations functions, form an integral part of an ERP system that helps in proper
utilization of resources like materials, human resources, and tools.

Constrained based planning help in drawing appropriate production schedules, thereby

improving the operation of plant and equipment. As a part of MIS, an ERP system,
contains many inbuilt standard reports and also a report writer that produce ad hoc
reports, as and when needed.

 Improved Efficiency and Productivity: In addition to provision of improved planning,

ERP system provides a tremendous boost to the efficiency of day to day and routine
transactions such as order fulfillment, on time shipment, vendor performance, quality
management, invoice reconciliation, sales realization, and cash management. Cycle time
is reduced for sales to cash and procurement to pay sequences.
 Establishment of Standardized Procedures: ERP system is based on processes of
international best practices, which are adopted by the organizations during
implementation. Department silos are purged, and maverick practices are done away
with. Because of top-down view available to management, chances of theft, fraud and
obsolescence are minimized.
 Flexibility and technology: Due to the globalized environment, where production units,
distribution centers, and corporate offices reside in different countries, organizations need
multi-currency, multi-language and multi-accounting modes, in an integrated manner.
These provisions are available in most of the ERP systems, particularly in products
offered by tier 1 and tier 2 vendors.

ERP vendors are also quick to adopt latest technologies, from mainframe to client server
to the internet. Unlike a bespoke system, Upgrading to latest technology for a running
ERP system is uncomplicated, involving mostly adoption of service packs and patches.
Evolution of Enterprise Resource Planning
Enterprise resource planning (ERP) has evolved as a strategic tool, an outcome of over four
decades. This is because of continuous improvements done to the then available techniques to
manage business more efficiently and also with developments and inventions in information
technology field.
1.2.1 Pre Material Requirement Planning (MRP) stage
Prior to 1960s businesses generally relied on traditional ways of managing inventories to
ensure smooth functioning of the organizations.
ERP system has evolved from the Material Planning System of 1980’s. The various phases of
development of resource planning system in relation to time and evolution of concept of ERP.
Figure 1.1
Stages of ERP Evolution
1.2.2. Material Requirement Planning (MRP)
MRP was the fundamental concept of production management and control in the mid-
1970s and considered as the first stage in evolution of ERP. Assembly operations involving
thousands of parts such as automobile manufacture led to large inventories. The need to bring
down the large inventory levels associated with these industries led to the early MRP systems that
planned the order releases. Such planned order releases ensured proper time phrasing and
accurate planning of the sub-assembly items, taking into account complex sub-assembly to
assembly relationships characterized by the Bill of Materials.
A typical automobile plant with hundreds, if not thousands of parts, has to face problems that are
in order of magnitude even more difficult. MRP systems address this need. Using the processing
power of computers, databases to store lead-times and order quantities and algorithms to
implement Bill-of-Material (BOM) explosion, MRP systems brought considerable order into the
chaotic process of material planning in a discrete manufacturing operation.
1.2.3 Manufacturing Resources Planning II (MRP- II)
MRP II that addressed the entire manufacturing function and not just a single task within
the manufacturing function. MRP II systems could determine whether a given schedule of
production was feasible, not merely from material availability but also from other resource
point of view. MRP II systems would include production facilities, machine capacities and
precedence sequences. The increased functionality enabled MRP II systems provided a way
to run the system in a loop. First it was used to check the feasibility of a production schedule
taking into account the constraints; second to adjust the loading of the resources, if possible, to
meet the production schedules; third to plan the materials using the traditional MRP II systems.
1.2.4 Enterprise Resource Planning (ERP)
The nineties saw unprecedented global competition, customer focus and shortened product life
cycles. To respond to these demands corporations had to move towards agile (quick moving)
manufacturing of products, continuous improvements of process and business process reengineering. This
called for integration of manufacturing with other functional areas including
accounting, marketing, finance and human resource development.
Activity-based costing would not be possible without the integration of manufacturing and
accounting. Mass customization of manufacturing needed integration of marketing and
manufacturing. Flexible manufacturing with people empowerment necessitated integration of
manufacturing with the HRD function. In a sense the 1990s truly called integration of all the
functions of management. ERP systems are such integrated information systems build to meet the
information and decision needs of an enterprise spanning all the functions ofmanagement 4.
1.2.5 Extended ERP(E-ERP)
Further developments in the enterprise resource planning system concept have led to evolution of
extended ERP (E- ERP) or web - enabled ERP. With globalization on one hand and massive
development in the internet technology on the other, need for web based IT solution was felt.
Thus E- ERP is development in the field of ERP which involves the technology of Internet and
World Wide Web (WWW) to facilitate the functions of an organization around the web.
1.2.6 Enterprise Resource Planning II (ERP-II)
ERP II is the advanced step of E-ERP. It is the software package which has strengthened the
original ERP package by included capabilities like customer relationship management,
knowledge management, work flow management and human resource management. It is a web
friendly application and thus addresses the issue of multiple officelocations.

ERP Vendors
During 1990, ERP market was dominated by few vendors namely SAP, BaaN, Oracle,
People Soft and JD Edwards, who were also known as big five of ERP market. The market
was, then, was growing at compound rate of approximately 35%. Fortune 500 companies were
the major customers.
Key focus of ERP vendors, during that period, was to expand functional scope of their product
and provide sharper vertical focus. Manufacturing made up for the largest segment of ERP
spending.
Trend during 2000
IT spending as a whole slumped after the collapse of internet bubble and 9/11 terrorist attack,.
Market for ERP also saturated for fortune 500 companies. ERP vendors started to face financial
difficulties. ERP market went into an upheaval and following trend emerges:

 Increased acquisition and merger activities: Financially stronger ERP vendors started
to swallow their weaker brethren. Private Equity firms also started to play a big role.
BaaN was taken over by Invensys and subsequently by SSA Global.

SSA Global was later merged with Infor, which was supported by a large private equity
company. J. D. Edwards was merged People Soft which in tern was taken over by Oracle
through a hostile takeover.

 Segmenting/diversifying of ERP Market: Due to saturation at top end, ERP vendors

were trying to penetrate medium and small market segments.

The market thus got segmented into tier 1 (large organization), Tier 2 (medium
organizations) and tier 3 (small organization).
 Major ERP vendors started offering products for lower end of the market either through
extension/rationalization of their products or through acquisition.
ERP vendors were also diversifying their product to different verticals. Whereas,
manufacturing provided the major chunk of their revenue, the focus area turned to retail,
public sector, utility, financial sector, and telecom.

 Web enablement: Rising opportunity of ERP vendors was to leverage their existing
products with niece acquisition, to extend beyond their earlier solutions, limited to four
walls of an organization.

The explosive development of internet made possible seamless web based collaboration
by organizations with their vendors and customers, such as “mySap.com” solution from
SAP and e-business suite from Oracle.
Some Key Vendors

 SAP: They are the largest ERP solution provider with more than 75.000 customers and
12 million users and holding around 30% of market share. The flagship Solution, R/3 is
unmatched for its sophistication and robustness.

R/3 software gives an option of around 1000 pre-configured business processes. This
solution is available in all major currencies and languages and can be hosted on several
Operating Systems and Databases.
As mid market option, SAP has brought out, Business All in One, a solution with
industry tailored configurations. SAP offering for smaller organization is SAP Business
One. SAP offers a hosted solution, namely SAP Business by Design, for organizations
lacking IT resources.

 Oracle: Oracle is next to SAP in ERP market breadth, depth and share. It offers a
comprehensive, multilingual and multi currency solution, mostly through its channel
partners.

It is the first to implement internet computing model for developing and deploying its
product.
Oracle also took over various ERP solution providers during 2000 such as People Soft,
JD Edwards, Retek (retail industry solution), and Siebel (customer relationship
management software). It has taken up project Fusion (based on Service Oriented
Architecture) to integrate various products, outcome of which is keenly awaited.

 Infor: Infor is of recent origin and expanded through a number of acquisitions.

Its acquisition of SSA global during 2006 made it a forerunner as ERP solution provider.
SSA global had two strong product lines, BPCS and BaaN. SSA also made a number of
other acquisitions, such as MAPICS, Lily Software Associate and GEAC. SSA is focused
on building, buying and integrating best of breed solutions.
  Microsoft Dynamics: Microsoft, which did not have an ERP portfolio, started by
acquiring a host of ERP products like Navision, Solomon, Great Plain and Axapta.
Excepting Axapta, which is strong in manufacturing and suitable for mid market, other
products are meant for smaller organizations.

Microsoft is much dependent on channel partners, not only for sales and consulting but
also for add on development. Their solutions are closely integrated with their office suit.

Benefits ofERP:
( Business Integration: The reason ERP packages are called
a integrated is the automatic data
) up gradation between related business components.
In the case of ERP packages the data of related business functions is also automatically updated at
the time a transaction occurs. with this reason, managers at different roles and designations are able
to grasp business details in real time, and carry out various types of management decisions in a
timely manner and with more accurately based on thisinformation.
(b) Flexibility: Diverse multi functional environments such as language, currency, accounting
standards and so on are covered in one system and functions that comprehensively managed
multiple locations of company branches can be implemented automatically. To cope with
company globalization and system unification, this flexibility is essential, for development
and maintenance, but also in terms of management.
(c) Better Analysis and Planning Capabilities: 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 stimulation systems. It becomes possible to carry out flexibility
and in real time the feeling and analysis of data from a variety of dimensions, decision makers able
to the information what ever they want in time, thus enabling them to make better and informed
decisions.
(d) Use of latest Technology (IT). The ERP vendors were very quick to realize that in order to
grow and to sustain that growth: they have to implement the latest developments in the field
of information technology. So they quickly adopted their systems to take advantages of the
latest technologies like open systems, client server technology, internet/ intranet, computer
aided acquisition and logistics support, electronic commerce etc. It is this quick adaptation
to the latest changes in information technology that makes the flexible adaptation to changes
to future business environments possible. It is this flexibility that makes the incorporation of
the latest technology possible during the system customization, maintenance and expansion
phases.
(e) Reduced Inventory and Inventory Carrying Cost: ERP system allows customers to obtain
information on cost, revenues and margins, which allow it to better, manage its overall
material cost structure and lead to inventory reductions to the order of 20 per cent or better.
This provides not only a one time reduction in assets (cost of the material stocked), but also provides
ongoing savings of the inventory carrying costs, costs of warehousing, handling, obsolescence,
insurance, taxes, damage andshrinkage.
(f) Reduced Manpower cost: Improved manufacturing practices lead to fever shortages and
interruptions and to less rework and overtime allows 10 per cent reduction in direct and
indirect labor costs. By minimizing rush jobs and parts shortages, less time is needed for
expediting, material handling, extra setups, disruptions and tracking splits lots odd jobs that
have been set aside. Production supervisors have better visibility of required work and can
adjust capacity or loads to meet schedules. Supervisors have more time for managing,
directing and training people.
(g) Reduced Material Costs: Improves procurement practices lead to better vendornegotiations
for prices, typically resulting in cost reductions of 5 per cent or better. Valid schedules permit
purchasing people to focus on vendor negotiations and quality improvements rather than spending
their time on shortages and getting material at premium prices. ERP systems provide negotiation
information, such as projected material requirements by commodity group and vendor performance
statistics. Giving suppliers better visibility of future requirements help them achieve efficiencies that
can be passed on as lower material costs.
(h) Improves Sales and Customer Service: Sales people can focus on selling instead of
verifying or apologizing for late deliveries. In custom product environment, configurations
can be quickly identified and prices, often by sales personnel or even the customer rather
than the technicalstaff. Taken together, these improvements in customer service can lead to fewer
lost sales and actual increase in sales, typically 10 per cent or more. Corrective actions can be taken
early such as determining shipment priorities, notifying customers of changes to promise delivery
dates, or altering production schedules to satisfy demand.
(i) Efficient Financial Management: Improves collection procedures can reduce the number
of days of outstanding receivables, thereby providing additional available cash. Credit
checking during order entry and improved handling of customer inquires further reduces the
number of problem accounts. Improved credit management and receivable practices
typically reduce the days of outstanding receivables by 18 per cent or better. Trade credit
can also be maximized by taking advantage by supplier discounts and cash planning, and
paying only those invoices with matching recipients. This can lead to lower requirements for
cash-on- hand.

Limitations of ERP: Software for Enterprise Resource Planning (ERP) Has Some Drawbacks The following
are some of the software's drawbacks:

Expensive System: The fact that Enterprise Resource Planning (ERP) systems can be so expensive is one
of their main drawbacks. In addition to the actual software and its implementation, additional expenses
may be incurred for computer hardware, updated network equipment, and security software. In order
to select the ERP system that will be the most cost-effective and feature-rich choice for your business, it
is essential to carefully compare the various options available.

Training Inefficiency: In a manufacturing operation, skills, experience, manpower, and the best use of
resources are crucial. Because it is difficult to run your business effectively and smoothly in the absence
of these elements, proper ERP training is essential for the system's proper operation. A lot of businesses
try to save money by not covering enough costs for employee training in enterprise resource planning.
Employees may misuse the technology and lose valuable information as a result of their lack of
knowledge about the particular Enterprise Resource Planning vendor package being used. Degree of
Customization: The ERP systems' adaptability to your company's specific requirements is yet another
drawback. Because some systems offer more customization options than others, the level of
customization that is available can be limited and typically depends on the brand of software chosen.
However, the majority of ERP systems either don't allow for much customization or charge extra for
features that are requested. Therefore, when considering ERP systems, it is essential to take into
account both your company's requirements and the standard features. High Implementation Times: Any
business can find it challenging to implement a new operating system. The duration of the
implementation and training can exceed a year, depending on the complexity of the business
operations. ERP software implementation times and costs must be taken into consideration because
they could disrupt the organization's normal operations and result in a loss of business during that time.
Therefore, when evaluating various ERP or other software that must be implemented, it is essential to
take into consideration the time required for implementation to guarantee significant profits returns.
Departmental interconnectivity: Despite the fact that it may appear to be a benefit, having
departments that are connected to one another can have negative effects on a business. This is
especially true if one department is inefficient because it will cause other departments to be inefficient
as well. The company's overall efficiency may be impacted if one department becomes ineffective. It is
subsequently critical to pick a product that will enhance your organization and work on its effectiveness
to try not to create some issues in various divisions.