Enterprise resource planning

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Almost any discussion of enterprise resource planning (ERP) starts with material requirements planning (MRP) and MRP II systems of the 1970s and 1980s. In the manufacturing environment of old, the original focus was on the “widget”; the ability to produce the product was the focus. Organizations commonly asked the following questions: How many widgets do I need? How long does it take to produce that many widgets? How can I make more widgets? These, of course, were valid questions, but as manufacturing evolved over time, the number of difficult questions increased. Such questions largely focused on the areas of component procurement for the finished widget and on storing the material necessary to make the widgets. Organizations were trying to understand both the finished manufacturing totals and how to get to the finished product.

MRP II added a focus on the planning aspects of this process. These systems integrated capacity, design engineering and management, costs, and long range planning of the enterprise into the equation. Many organizations that implemented this approach instituted mechanisms to correlate the planning and forecasting process with the actual production numbers. This allowed the organization to achieve a higher level of overall efficiency in the manufacturing arena. The real issue is that while the organization had a better handle on the manufacturing aspect of the business, it was still missing integration to the other business components of finance, sales, marketing, customer satisfaction, and distribution, to name a few.

Technologically, ERP is a massive software engine that seeks to provide one seamless interface to all departments, systems, and existing data within an organization so that each department understands how it fits within the organization’s macrostructure and how it impacts that macrostructure. Such understanding is crucial in facilitating enhanced communication among departments, better knowledge management, and improved processes. Such enhancement is the foundation for fundamental business changes.

The overall ERP engine can, and usually does, include a number of elements. At the heart sits a data warehousing structure with data mining and document management capabilities built on top of it. Applications built on this core can include financial applications, business process tracking, human resources planning, and business process modeling and reengineering. Decision support systems (DSS) can also be deployed to provide timely information and analysis to management personnel for use in decision making.

Although there is a huge focus on the technological aspects of an ERP deployment, there must be an equal focus on changing the way an organization functions. Deploying ERP for the sake of ERP can be dangerous. ERP is not simply reengineering systems; it is reengineering the way organizations do business. In Ben Worthen’s 2002 CIO Magazine case study entitled “Nestle’s ERP Odyssey,” Jeri Dunn, CIO for Nestle USA, said, “If you weren’t concerned with how the business ran, you could probably [install the ERP software] in 18 to 24 months. Then you would probably be in the unemployment line in 19 to 25 months.”

CIO’s Drivers for ERP

Let’s look at the classic manufacturing example: order fulfillment. In traditional environments, the customer would place an order, which the customer representative would enter. That system might output to a warehouse where the inventory would be set aside (if available) for the customer. Then, the information from the warehouse would be reentered into a shipping system for delivery, and the inventory system would have to be updated, so that the output would be accurate when it was input into the manufacturing system. Next, the information would be entered into a billing system, which might or might not tie directly into the corporate financial systems. Throughout this whole process, the sales and marketing departments are trying to determine forecasts, manage funnel reporting, and determine future marketing plans. In the meantime, when the customer called back to check the status, the representative could not access the appropriate systems to answer the customer accurately. Needless to say, the customer was frustrated. Such frustration leads to unsatisfied customers, which leads to lower sales.

Now imagine that the above example takes place in an organization with a successful ERP system. ERP sits between all of the systems and users regardless of where they are in the pipeline. It knows all the different data collection points, and it must interface with all of the different formats of the particular data (from legacy 3270 or 5250 application to Windows to proprietary formats). It also intelligently routes the order to the appropriate department at the appropriate time; reducing the number of times a human has to enter data can dramatically reduce errors. ERP also takes all the data and formats it so that each department can perform its required function. For example, customer representatives can see everything associated with the order to fully satisfy the customer.

This example focuses on manufacturing and a product delivery process, but ERP systems can (and usually do) extend well beyond one process. The resources of an organization also include its people, so an ERP system can also integrate payroll, benefits, personnel, and recruitment components. It can incorporate departmental budget information and be used as the vehicle for making and authorizing requisitions for capital goods, business travel, or taking a client to lunch. In short, it can touch virtually any and all business processes within a given organization.

While the benefits of ERP are impressive, deploying an ERP system is a major undertaking for any organization. The surface level reasoning of better order tracking and management aside, some of the real issues that occur during an ERP deployment center on job function. Changing the mentality of the organization’s employees is critical to changing the business process. The corporate goals must be communicated, socialized, and supported. Otherwise, the organization will spend millions of dollars in time, software, and hardware with negligible results.

Generally, the goals revolve around integrating information, perhaps financial or customer-related. Sometimes the goals reflect the desire to manufacture more efficiently. At any rate, many vendors have specialized their ERP offerings for a particular vertical market, and most have modularized their offerings, so that customers do not have to endure the headache of an all-or-nothing approach.

ERP Discussion Points

Several companies have implemented ERP, with varying costs. The META Group reports that the total cost of ownership (TCO) for the average ERP implementation among 63 companies ranged from $400,000 to $300 million. Although the range was pretty wide, the bottom line is that the costs can be extremely high. META Group also estimates that the “heads-down” user (i.e., customer representatives who can access all order details) costs around $53,000. Additionally, implementation timeframes vary widely, from eight months to several years. However, even with high costs and long implementation timeframes, companies are seeing the benefits of ERP. Jeri Dunn of Nestle says Nestle’s annual savings are approximately $325 million, and the implementation is not even complete. Diana Near from The Principal Financial Group reported to CNN.com that it is saving $165,000 alone in salary for reduced staff requirements.

Ultimately, the goal of ERP is to change current ineffective business processes. Despite all of the well-publicized failures, companies are still spending money in this environment. Why? Companies that perform better, know their business better, and react more effectively are in a better position to survive.

ERP Vendors and Verticals

ERP Vendors and Verticals

The visual lists some of the primary ERP vendors and the verticals in which they have shown success.