Overview of ERP

Overview of ERP

Learning objective

After completing this topic, you should be able to identify the features and benefits of ERP.

What is ERP?

Enterprise Resource Planning (ERP) is a business management practice that uses information technology as a tool to integrate all core business processes. ERP enables an organization to achieve its business objectives.

In ERP, there is only one database through which all the departments of an organization – such as production, sales, finance, logistics, shipping, human resources (HR), and customer service - manage their business processes.

The benefits of ERP are illustrated by looking at the problems faced by a fictitious company.

Suppose you are the production manager of a retail fashion company . All the departments of the company use different information systems that are not integrated with each other. Because of this, you are facing many problems in executing jobs that require interdepartmental communication.

You send a purchase request for the required raw material to the warehouse. The warehouse sends the request to the purchase department, which forwards it to the finance department for budget approval.

Because the departments are not integrated, every time the request moves to the next department, data has to be entered in that department's information system.

This not only introduces several errors, but also adds to the time taken to procure the material. In addition, if you suggest some changes in this process because of a business need, incorporating those changes in all the department's systems will be expensive in terms of time and resources.

The problems faced by your organization can be solved if your company decides to implement ERP.

When you enter the details of material requirements in the ERP system, the information will be readily available to all relevant departments. This will ensure that inter-departmental communication happens instantaneously.

Moreover, data will be entered only once and the department concerned only has to work on that. In addition, if you have to change any aspect of the process, you can update the system accordingly and it will be effective for all the departments.

2. Evolution of ERP

With changing business needs, business software solutions have evolved over the years from Material Requirements Planning (MRP) and Manufacturing Resources Planning (MRP II) to ERP.

Description of the chart depicting the evolution of business software solutions:With the need for greater integration of business processes, business software solutions have evolved from MRP in the 1960s to MRP II in the 1970s to ERP in the 1980s.Description Ends. Business software solutions have evolved because of evolving business needs:

• MRP
• MRP II
• ERP

MRP

MRP was conceptualized in the 1960s and was specifically designed to meet the needs of manufacturing organizations that were struggling to keep down production costs because of inefficient inventory management.

Insufficient inventory adversely affected production schedules, meaning that customer orders were not met. Excessive inventory exposed the organization to financial loss because of storage costs and product obsolescence in addition to tying up cash in unused stock.MRP integrated all the functions of inventory management to reduce production costs.

MRP II

In the mid 1970s, organizations realized the need to streamline their entire manufacturing process to optimize productivity. This led to the development of MRP II. MRP II extended MRP by integrating all the related manufacturing operations of an organization such as manufacturing, engineering, finance, and marketing.

In addition, the reporting system of MRP II helped the management answer "what if" queries. For example, the purchase commitment report could inform an organization if a supplier had fulfilled a purchase order.

ERP

By the late1980s, with unprecedented growth opportunities and more competition than ever before, organizations realized the need to efficiently manage their overall function. This would help them to adapt to changing business needs and to provide better customer service.

ERP systems have also evolved over the years. The earlier ERP systems were designed specifically for manufacturing organizations. The current ERP systems provide standard business solutions for all types of organizations.

Question

Why did ERP evolve as the leading business software solution?

Options:

1. Because it enabled organizations to adapt to changing business needs
2. Because it integrated business processes and resources and helped optimize productivity
3. Because it integrated manufacturing processes and helped optimize productivity
4. Because it reduced production costs by reducing inventory costs

Answer

The need to adapt to changing business needs and the need to integrate all the business processes and resources to optimize productivity led to the evolution of ERP as the leading business software solution.

Option 1 is correct. ERP integrates all the business processes and resources of an organization into one system. Implementing changes on one system is faster, easier, and less expensive than implementing changes on multiple non-ERP systems.

Option 2 is correct. ERP is a business software solution that integrates all the business processes and resources of an organization - such as production, finance, sales, logistics, inventory, shipping, invoicing, accounting, human resource management, and customer service - into one system.

Option 3 is incorrect. The need to integrate all the manufacturing processes of an organization led to the arrival of MRP II. ERP came after MRP II because of the need to integrate all the business processes of an organization.

Option 4 is incorrect. The need to reduce production costs by reducing inventory costs led to the MRP concept. Over the years, MRP evolved into ERP because of the need to integrate all the business processes of an organization.

3. Features and benefits of ERP

ERP is one of the most successful business software solutions because of its salient features, which include

• integrated business processes
• centralized data storage
• centralized management

The key feature of ERP is that it streamlines all the business processes of an organization. ERP integrates different departments of an organization - such as production, sales, inventory, shipping, accounts, and human resources (HR) - into one information system.

The integration of business processes into one system provides many benefits to an organization:

• Reduction in process turnaround time
• Reduction in information loss due to human error
• Real-time business processing

Reduction in process turnaround time

ERP reduces the turnaround time of a process by streamlining information flow across different departments. In addition, ERP automates the complete process based on a defined workflow. This avoids any deviation from the standard process workflow and helps reduce the process turnaround time.

Reduction in information loss due to human error

ERP reduces information loss due to human error. In a non-ERP system, the same data has to be entered multiple times in different information systems. For example, to create a purchase order, the same information is entered in the information systems of the warehouse, the purchase department, and the finance department. A small human error in entering data in any of these departments can lead to the loss of important information.

Real-time business processing

The automated environment of ERP ensures that current data is readily available to everyone in the organization.

An ERP system stores data at a centralized location. It dissolves all the boundaries within an organization.

Centralized data storage provides many benefits:

• Efficient data management
• Increased data security
• Faster access to information

Efficient data management

Storing data at a centralized location enables an organization to efficiently manage the data. In non-ERP systems, data is scattered across the organization, and managing multiple data storage locations is more difficult than managing one data storage location.

Increased data security

ERP increases data security. Because data is stored in one location, applying data security policies becomes easier. Moreover, securing one data storage location is easier than securing multiple data storage locations.

Faster access to information

ERP dissolves the boundaries between all the departments of an organization. All the departments access the same system. Each department can readily access the relevant information through the ERP system and doesn't need to wait for information from another department.

An ERP system provides a company's management with a centralized repository of information from which to manage all the operations of an organization.

This increases managerial control over the entire business. Because everyone uses the same system, management has access to accurate financial and operational information. This helps management take faster and more accurate decisions.

For example, to assess the performance of different departments, management needs only to generate a report using ERP. In non-ERP systems, every department submits its own report. Management then has to make a consolidated report.

Although implementing an ERP system can be costly in terms of time and resources because of its complexity, the long-term payback should make it worthwhile.

Question

Five benefits of ERP are listed here.

Match each benefit of ERP to its corresponding feature.

Options:

1. Access to accurate operational information
2. Faster access to information
3. Increased data security
4. Inexpensive implementation
5. Reduction in information loss
6. Reduction in process turnaround time

Targets:

1. Centralized data storage
2. Centralized management
3. Integrated business processes

Answer

The feature of centralized data storage leads to faster access to information and increased data security. The feature of centralized management enables access to accurate operational information. The feature of integrated business processes reduces process turnaround time and information loss.

Question

Suppose you are in a manufacturing company. Each department working on a customer order enters the relevant data into its own information system and the data transfer between departments takes place manually. The company is facing problems with information loss due to human error and increase in delivery time.

Which features of ERP can solve these problems?

Options:

1. Centralized data storage
2. Efficient inventory management
3. Integrated business processes
4. Integrated manufacturing processes

Answer

The features of ERP that can solve the problems faced by your organization are centralized data storage and integrated business processes.

Option 1 is correct. Centralized data storage only helps in easy management of organizational data. Your organization requires smooth information flow across departments and a one-time data entry system to resolve these problems. Storing data at a centralized location can solve only the high delivery time.

Option 2 is incorrect. Efficient inventory management can reduce the investment in inventory to reduce production costs. This can't solve the problems of information loss and high delivery time .

Option 3 is correct. By integrating all the business processes of your organization, ERP ensures that information flow across different departments is efficient. This decreases the time lag between order placement and delivery.

Option 4 is incorrect. ERP integrates all business processes and not just manufacturing processes. To reduce the time lag between order placement and delivery, it's necessary to integrate all the business processes and not just the manufacturing processes.

Summary

ERP streamlines the overall operation of an organization by integrating all its departments and business processes in one system.

With changing business needs, business software solutions have evolved over the years from MRP to MRP II to ERP. Although ERP was originally designed for the manufacturing industry, the latest ERP solutions integrate the standard business processes of industries outside the manufacturing sector as well.

ERP has become successful because of its key feature of integrating all the business processes of an organization into one system. This ensures the smooth flow of information across the organization to optimize the various functions of the organization.

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