The development of enterprise resource planning systems
- In today’s competitive business environment, companies try to provide customers with goods and services faster and cheaper than their competitor. The key is to have efficient integrated information systems. Increasing the efficiency of information systems result in more efficient management of business processes.
- Until recently most companies had nonintegrated information systems that supported only the activities of individual business functional areas. Thus a company would have a marketing information system, a production information system and so on, each with its own hardware, software and methods of processing data and information.
- Such nonintegrated systems might work well within individual functional area but to achieve a company’s goals, data must be shared among all the functional areas. When a company’s information systems are not integrated, costly inefficiencies can result.
- An Enterprise Resource Planning system can integrate a company’s operations by acting as a company-wide computing environment that includes a database that is shared by all functional areas. Such software can deliver consistent data across all functional areas in real time.
2.1 The evolution of information systems:
- The current ERP system evolved as a result of three things:
- The advancement of hardware and software technology
- The development of a vision of integrated information systems
- Reengineering of companies to shift from a functional focus to business process focus.
2.1.1 Computer hardware and software development:
- The rapid development of computer hardware capabilities has been accurately described by Moore’s low- The number of transistors that could be built into a computer chip doubled every 18 months. That means that the capabilities of computer hardware were doubled every 18 months.
- During this time, computer software was also advancing to take advantage of the increasing capabilities of computer hardware. RDBMS was developed, providing businesses with the capability to store, retrieve and analyze large volumes of data. With spreadsheets, managers could perform complex business analyses without having to rely on a computer programmer to develop custom programs.
- By the mid 1980s, telecommunications developments allowed users to share data and peripherals on local network.
- By the end of 1980s, much of the hardware needed to support the development of ERP software was in place: fast computers, networked access and advanced database technology.
2.2.2 Reengineering of companies to shift from functional focus to business process focus:
- In a process-oriented company, the flow promotes flexibility and rapid decision-making.
2.4 ERP software emerges: SAP and R/3
- In 1972 former IBM systems analysts(hasso plattner, Klaus tschira and hans-werner hector ) formed S-A-P(system analysis and program development).
- SAP founders developed their first software package called system R system RF or R/1.
- In 1978 SAP began developing a more integrated version of its software product called the R/2 system.
- By 1988 SAP had established subsidiaries in numerous foreign countries, established a joint venture with consulting company Arthur Anderson and sold its 1000 the system. SAP also became SAP AG, a publicly traded company.
- 1n 1988 sap realized the potential of client-server hardware architecture and began development of R/3 system. First version of SAP R/3 was released in 1972. SAP R/3 system was designed using an open architecture approach.
- SAP R/3 target very large companies. Acquiring this system is very expensive. Full implementation of all modules can take years.
- The modular design of SAP R/3 is based on business process such as sales order handling, material requirement handling and employee recruiting. When data are entered into the system, data in all related files in the central database are automatically updated.
2.5 New directions in ERP:
- In late 1990s, Y2K problem motivated many companies to move to ERP system.
2.6 Other ERP vendor:
- People Soft: powerful H/R and Payroll Accounting module.
- Oracle: SAP’s biggest competitor.
2.7 ERP for midsize companies:
- Midsize means fewer than 1000 employees. For midsize companies SAP has developed industry solutions, which are specific, preconfigured versions of R/3 tailored for particular industries such as automotive, banking, chemicals etc. because they are smaller and more specific, they cost less than R/3 and can be installed more quickly than R/3.
- Best of breed approaches: ERP software vendors emphasize different strengths within their product offerings. So some companies have opted to integrate modules from different ERP vendors, a design approach called “Best of breed” approach. Because the modules originate from different vendors, companies must have middleware written to connect the disparate software.
- Choosing consultants and vendors: because ERP software packages are so large and complex, one person can’t fully understand a single ERP system. It is also impossible for an individual to compare various systems. So before choosing a software vendor, most companies study their needs and then hire an external team of consultants to help choose the right software vendor and the best approach to implement ERP. After selecting a vendor, the consultants recommend the modules that are best suited to the company’s operations and the configurations within those modules that are most appropriate.
2.8 Advantages of ERP system:
- Business integration: conventional company information system 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.
- Flexibility: Different languages, currencies, accounting standards etc. can be covered in one system, and functions that comprehensively manage multiple locations of a company can be packaged and implemented automatically.
- Better analysis and planning capabilities: ERP allows management to manage operations not just monitor them. The ERP systems already has all the data, allowing the manager to focus on improving processes.
- Use of latest technology: utilization of the latest developments in information technology. e.g. open architecture, client/server technology, internet, e-commerce etc.
2.9 How much does an ERP system cost?:
- Cost of ERP system includes several factors:
- The size of ERP software, which corresponds to the size of the company it serves.
- New hardware that is capable of running complex ERP software.
- Consultants and Analysts fees
- Time for implementation
- A large company, one with well over 1,000 employees , will likely spend $50 million to $500 million for an ERP system with operations multiple countries, currencies, languages and tax laws. Full implementation might take four to six years.
- A midsize company might spend $10 million to $20 million in total implementation costs and have its ERP system up and running in about 2 years.
2.10 Should every business buy an ERP package?:
- ERP packages imply, by their design a way of doing business, and they require users to follow that way of doing business. Some of a business’s operation and some segments of its operations might not be a good match with the constraints inherent in ERP. Therefore it is imperative for a business to analyze its own business strategy, organization, culture and operation before choosing an ERP approach.
- Sometimes a company is not ready for ERP. In many cases ERP implementation difficulties result when management does not fully understand its current business processes and cannot make implementation decisions in a timely manner.
2.11 Is ERP software inflexible? :
- Once an ERP system is in place, trying to reconfigure it while retaining data integrity is expensive and time consuming. That is why thorough pre-implementation planning is so important. It is much easier to customize an ERP program during system configuration and before any data have been stored.
- ERP sometimes does not work well for companies that experience rapid growth and change.
2.12 What return can a company expect from its ERP investment?
- The financial benefits provided by an ERP system can be difficult to calculate because sometimes ERP increases revenue and decreases expenses in intangible ways that are difficult to measure. Also some changes take place over such a long period of time that they are difficult to track. Still the return on an ERP can be measured in many ways
- Because ERP eliminates redundant effort and duplicated data, it can generate savings in operations expense.
- Because an ERP system can help produce goods and service more quickly, more sales can be generated every month.
- In some instances, a company that doesn’t implement an ERP system might be forced out of business by competitors that have an ERP system.
- A smoothly running ERP system can save company’s personnel, suppliers, distr0ibutors and customers much frustration.
- Because ERP implementation take time, there may be other business factors affecting the company’s costs and profitability, making it difficult to isolate the impact of the ERP system alone.
- Because ERP system provide real-time data, companies can improve external customer communications. Better communication can improve the customer relationship and increase sales.
2.13 How long does it take to see a return on an ERP investment? :
- ROI (Return on investment) is an assessment of an investment project’s value that is calculated by dividing the value of the project’s benefit by the value of the project’s cost.
- Some companies claim that an acceptable ROI begins to accrue almost immediately following the ERP system implementation.
2.14 Why do some companies have more success with ERP than do others? :
- Usually a bumpy rollout and low ROI are caused by people problems and misguided expectations not computer malfunctions.
- Some executives blindly hope that new software will cure fundamental business problems that are not curable by any software.
- Some executives and IT managers don’t take enough time for a proper analysis during the planning and implementation phase.
- Some executives and IT managers skimp on employee education and training.
- Some companies do not place the ownership or accountability for the implementation project on the personnel who will operate the system, which lead to situation where implementation become an IT project rather than accompany-wide project.
- The top executives must be behind the project 100 percent for it to be successful.
- ERP implementation brings a tremendous amount of change for the users. Managers need to manage that change well so that the implementation goes smoothly.
- Some companies willingly part with fund for software and new hardware, but don’t properly budget for employee training.
2.15 Additional capabilities within ERP:
- ERP vendors and other software companies are continuing to develop CRM applications that increase the efficiency of the sale force. ERP developers are trying to make their existing systems smarter by extending ERP’s capabilities into more areas of decision support, management reporting and data mining.
- ERP vendors continue to improve software and Internet connections that integrate a business’s internal operations while also integrating the business with its dealers, vendors and customers.
- Netweaver is an application that lets companies add components to their ERP system and also lets external partners access certain parts of the company’s ERP system.
- The internet has become an important way to sell goods and services and will probably become more important in future. Companies will have a continuing need to take orders electronically and to pass them seamlessly to the company’s database. The ERP system can manage the transaction as if it had come in through a traditional method.
- Trading hubs on the web integrate companies ERP system for exchange of goods and services.