ERP Concept

IN today's competitive world many major companies have decided to use a popular tool that has evolved
over the past few decades. ERP, the descendant of MRPII offers the "answer" to the economic and
productivity troubles of manufacturing and service enterprises. Thus, the ERP system has become very
popular as an enterprise management software tool.
In order for a software system to be considered ERP, it must provide an organization with functionality
for two or more systems. While some ERP packages exist that only cover two functions for an organization
(QuickBooks: Payroll & Accounting), most ERP systems cover several functions.
The term ERP originally referred to how a large organization planned to use organizational wide
resources. In the past, ERP systems were used in larger more industrial types of companies. However, the
use of ERP has changed and is extremely comprehensive, today the term can refer to any type of company,
no matter what industry it falls in. In fact, ERP systems are used in almost any type of organization - large
or small.
ERP systems today can cover a wide range of functions and integrate them into one unified database. For
instance, functions such as Human Resources, Supply Chain Management, Customer Relations
Management, Financials, Manufacturing functions and Warehouse Management functions were all once
stand alone software applications, usually housed with their own database and network, can now fit under
one umbrella
As in any integrated System or Unit, the performance of each one of the parts of an Enterprise has an
impact in his cumulative performance results. Specifically, we can say that a 95% performance in
independent vital enterprise elements (Item master, Bills of Materials, Production Master Schedule
Adherence, Inventories Accuracy, Production Orders Accuracy and Purchase Orders Accuracy), will
reflect a cumulative 75% in a ERP environment. This means a percentage of failure possible in
productivity terms. Here is where we should support and combine this useful tool with a business strategy
based on the desired administration tendency or theory.
On this sense, it is vital to note the point on administration before deciding which ERP software is the one
you will be using, you need to have solid administration principles (no matter which administration
tendencies you decide to choose) and strong knowledge of ERP methodology.
This will translate into synergy between areas that will allow organizations to have highly effective
processes with a continuous success. Only by creating a deep understanding of this philosophy you will
have the certainty of obtaining the best results, as well as being in position to face and take proactive
actions for any obstacle you could find in the road. If you have not this reference point, your efforts will
deliver the wrong results.

Evolution of ERP

ERP is an outcome of 40 years of trial and error. It has evolved as a strategic tool because of continuous
improvement in the available techniques to manage business and the fast growth of information
technology.
Prior to 1960s, business had to rely on the traditional ways of inventory management to ensure smooth
functioning of the organization. These theories are called classical inventory management of scientific
inventory control methods. The most popularly known amongst them is EOQ (Economic Order Quantity).
In this method, each item in the stock is analyzed for its ordering cost and the inventory carrying cost. A
trade off is established on a phased out expected demand of one year, and this way the most economic
ordering quantity can be decided. This technique in principle is a deterministic way of managing
inventory.
Along with EOQ, we find various inventory models such as fixed order quantity, periodic order method,
optional replenishment method, etc., which were in practice earlier. These theories were very popular in
pre-MRP era.
In 1960s, a new technique of Material Requirements Planning, popularly known as MRP, was evolved.
This was a proactive manner of inventory management. This technique fundamentally explodes the end
product demand obtained from the Master Production Schedule (MPS) for a specified product structure
(which is taken from Bill of Material) into a detailed schedule of purchase orders or production orders,
taking into account the inventory on hand. MRP is a simple logic but the magnitude of data involved in a
realistic situation makes it computationally cumbersome. If undertaken manually, the entire process is
highly time-consuming.
MRP successfully demonstrated its effectiveness in reduction of inventory, production, and delivery lead
times by improving coordination and avoiding delays, thus making commitments more realistic. MRP
proved to be a very good technique for managing inventory, but it did not take into account other
resources of an organization. In 1970s, this gave birth to a modified MRP logic, popularly known as closed
loop MRP. In this technique, the capacity of the organization to produce a particular product is also taken
into account by incorporating a module called capacity requirements planning (CRP).
In 1980s, the need was felt to integrate the financial resource with the manufacturing activities. From this
evolved an integrated manufacturing management system called Manufacturng Resource Planning (MRP
II).
Transition from MRPII to ERP happened during 1980-90. The basic MRP II system design was suffering
from a few inherent drawbacks such as limited focus to manufacturing activities, assumption of the mass
or repetitive production set ups, and poor budgetary and costing controls.
The shortcomings of MRP II and the need to integrate new techniques led to the development of a total
integrated solution called ERP, which attempts to integrate the transactions of the organization to
produce the best possible plan. Today we see further development in the ERP concept and evolution web-
based ERP.

ERP Benefits: ERP helps midmarket businesses

BUSINESSES all around the world are increasing their reliance on ERP systems as a cost efficient
alternative to their software applications. However, high cost involved in deployment of this marvelous
technology prevents the small/mid size organizations enjoy the tremendous benefits of ERP. Since the
introduction of an affordable, low-cost ERP from eresource ERP, many of the midmarket organizations
also started to administer their businesses effectively using this latest technology.
An ERP package should provide an organization with a solid foundation, incorporating all of the
fundamental aspects of running a business. Expectations run high when an organization deploys an ERP
package - if the solution is a good fit for the company, the company stands to gain tremendous cost
savings and service improvements across the enterprise.
Manual processes are automated, production scheduling is more efficiently managed and inventory is
more accurately assessed. Also, business performance can be measured in a much more holistic fashion
than ever before. This gives executives real-time visibility into all business processes, enabling them to
make better strategic decisions. In short, with the right ERP package, a midmarket company can compete
more aggressively in global markets.
According to a survey an ERP implementation can reduce costs in three primary categories: inventory
costs, manufacturing operating costs and administrative costs. The survey's best-in-class respondents
reported a 21 percent decrease in inventory costs, a 17 percent decrease in manufacturing operating costs
and a 16 percent decrease in administrative costs. The average respondents' reductions were 11 percent, 8
percent and 9 percent, respectively.
Because an ERP solution has its fingers in all aspects of running a business, its benefits are myriad and go
beyond tangible cost reductions. It can improve an organization's customer service and response time
when solving issues. It can solve issues of interoperability among multiple manufacturing locations. It can
standardize and accelerate manufacturing processes in all of a company's manufacturing sites.
It can streamline a manufacturer's order-fulfillment processes. It can facilitate connecting with partners'
and suppliers' enterprise systems. ERP can even help an organization maintain compliance with
government regulations, from hiring practices to environmental laws.
Case studies done on specific ERP implementations reveal a variety of different business-specific benefits.
One of the case studies revealed that by replacing legacy systems with an integrated ERP package, one
travel-accessories manufacturer reduced its inventory levels by 30 percent, reduced its warehouse space
requirements by 38 percent, improved its month-end close process by five days, reduced its DSO (Days
Sales Outstanding) by 44 percent and increased sales by 100 percent without hiring new employees.
Basic ERP Features

COMPARING midmarket ERP packages is not exactly an apples-to-apples type of exercise. Each vendor
wraps its midmarket offering with different functionality, tailored to the needs of the kinds of companies
the solution is intended for and based on the vendor's particular areas of expertise.
However, almost every midmarket ERP suite shares several common modules: BI, CRM, financial
management, HCM, manufacturing operations and SCM. The differences among solutions tend to be
quite granular within these modules. Also, even if different packages offer the same feature - say, sales-
order management - it might not be bundled in the same module; some vendors include sales-order
management in their CRM suites while others package it in their SCM suites.
Key to an ERP package is tight integration between modules, so that all of the core business modules are
related. For instance, manufacturing operations are integrated with customer service, logistics and
delivery.
Business Intelligence
One of the newer components of most modern midmarket ERP packages, BI shines a bright light into the
heart of a company's performance. In general, an ERP suite's analytics or BI tools allow users to share and
analyze the data that the ERP applications collect from across the enterprise from a unified repository.
The end result is more informed decision making by everyone from executives to line managers to
human-resources professionals to accountants. A variety of automated reporting and analysis tools can
help streamline operations, as well as improve an organization's business performance. With greater
control and visibility of data across the enterprise, business leaders can better align the company's
operations with its overarching strategic goals.
CRM (Customer Relationship Management)
CRM has long been a core component of any ERP offering, giving manufacturers a way to improve
customer service by pulling together tools to fulfill customers' orders, respond to customers' service
needs, and often, create marketing campaigns to reach customers.
Most vendors include sales tools to provide customers with sales quotes, process their orders and offer
flexible pricing on their products. Another important CRM component is service management, which may
arm customer-service agents with scripts for talking to customers, as well as allow them to authorize
product returns and search a knowledge base of support information. The third main component is
usually marketing, which may include tools to manage campaigns, create sales literature and develop a
library of marketing collateral.
Additionally, CRM often has tools for account management, SFA, and opportunity or lead management,
as well as self-service tools for customers and an e-commerce storefront builder.
Financial Management
Of all the ERP modules, the financials applications tend to be the most frequently utilized. Across the
board, these include general ledger, accounts receivable and accounts payable, billing, and fixed asset
management. Because many midmarket companies deploy ERP to support efforts at breaking into global
markets, it is imperative that their ERP packages support multiple currencies and languages.
The financial-management applications may also include tools for creating and adhering to budgets, cash-
flow management, expense management, risk management and tax management.
HCM (Human Capital Management)
For the most part, the HCM module includes tools for human-resources management, performance
management, payroll, and time and labor tracking. Some vendors also provide functionality for
administering benefits, managing compensation, dealing with salary taxes, recruiting new employees and
planning workforce needs. Some also include self-service tools for managers and employees.
Even though HCM is generally considered core ERP functionality, some vendors offer it as an add-on
module.
Manufacturing Operations
The manufacturing module is where much product differentiation happens, including industry-specific
functionality. In general, these applications are intended to make manufacturing operations more
efficient and simple. Most vendors support different modes of manufacturing, include configurable
product capabilities, perform different types of job costing and offer a BOM (bill of materials) tool.
Applications often include PDM (Product Data Management), CRP (Capacity Requirements Planning),
MRP (Materials Requirements Planning), forecasting, MPS (Master Production Scheduling), work-order
management and shop-floor control.
SCM (Supply Chain Management)
Of all the ERP modules, SCM has the greatest variability between vendors: It is vast and varied, yet often
adapted to the needs of specific industries. In general, SCM improves the flow of materials through an
organization's supply chain by "managing planning, scheduling, procurement, and fulfillment for
optimum service levels and maximum profitability," according to Lawson Software. Some vendors
segment their SCM into smaller modules. Oracle's JD Edwards, for instance, breaks it down into Supply
Chain Planning, Supply Chain Execution (Logistics) and Supply Management (Procurement).
SCM features tend to include also production scheduling, demand management, distribution
management, inventory management, warehouse management, procurement, sourcing and order
management.

ERP in India

SOME of the first Indian companies to have adopted ERP practices are HLL, ONGC, ESSAR, Godrej
Soaps, Cadburys, BASF, Telco, Maruti Udyog Ltd., Century Rayon, Citibank, ACC, ANZ Grindlays,
German Remedies, Blue Star, Mahindra & Mahindra, Rallis India, Sony India Pvt. Ltd., Ceat Ltd., Indal,
Ford Motors, Kirloskar, Knoll Pharmaceuticals, and Glaxo.
First tier companies (those with a turnover greater than Rs.10 billion) implement ERP to increase internal
efficiency and external competitiveness. Once ERP is established at this level, these large companies begin
to desire similarly increased efficiency from their suppliers. Hence, second tier companies are pressured
to implement ERP, and a trickle-down effect ensues. Powered by the axiom that a chain is only as strong
as its weakest link, Indian industry quickly has recognized that in order to work at maximum efficiency,
ERP must be implemented at all levels.
Initially, the majority of ERP solutions have been marketed to companies with greater than Rs. 2 billion,
and generally, according to industry reports, the total cost of deploying ERP has ranged between 1 and 2
percent of companies' gross sales. Lower cost solutions are available for comparatively smaller sized
companies.
Though the market seems to be very encouraging for ERP implementation, the time-frame for
deployment may be an issue. However, since many companies that have not yet implemented ERP are
leaders in their markets, it reasonably can be assumed that they will go for it within next five years. In
fact, the ERP market should grow at a rate somewhere near the industrial growth rate.
Some industry categories, such as Automotive, Steel, Consumer Durables, Engineering, and Textiles have
shown a very high ERP penetration. This means that these categories represent the greatest potential
markets in next two years - other industries will follow. Figure 1 illustrates the market across various
industries.
Survey of Industry ERP Implementations
ERP implementations completed between 1995 and 1998 in India can give a sense of specific hurdles that
companies may encounter in ERP deployment. Several companies were surveyed, and numerous ERP
professionals were interviewed in order to assess the state of ERP in India.
The results indicate that Indian companies are moving forward with ERP implementation primarily in
response to thrusts from parent collaborators, to revamp in order to meet increased load, or to reduce
lead times and inventory levels, and improve customer satisfaction.
Resistance to change - in the form of fear of the unknown, reluctance to learn new techniques, or IT
department reluctance to change due to attachment to its product - was a major hurdle faced during many
ERP implementations. Additionally, the duplication required in the initial stage, and the intense pressure
exerted on manpower proved to be problematic, as did the level of customization necessitated by
disparities between company requirements and solutions offered by ERP software. This problem is
diminishing due to advances in the software facility models.
Cost overruns also proved to be a pervasive problem with ERP implementations. Since most consultants
charge on a man-hour basis, project time overruns substantially inflate incurred costs. To avoid this
problem, top management must develop the necessary commitment to ERP, and all employees should be
prepared for the change before the ERP implementation process is started. This model should help to
eliminate needless project time and cost ballooning.
ERP in the Service Sector
Transportation, medical care, hospitality, courier service, telecommunication, banking and financial
services, and entertainment represent the major components of India's service sector, and on probing into
the various needs of these groups, it becomes apparent that the courier, transportation, and
entertainment industries do not have specific current needs for ERP. Banking and telecommunication
each have very specialized requirements that the manufacturing-inclined software solutions on the
market would not effectively address. The same holds true for the medical care and hospitality industries.
The service sector has the potential to become an important ERP market within a few years. At this time
ERP implementation in the services sector is very limited - only a few hospitals and banks have done
small-scale experiments. New software and processes will need to be developed to meet the specific
demands of the service industries, so ERP players should begin now to prepare themselves for the
tremendous potential of this future market.
Assessment
The Indian economy has reached a level of maturity that demands advanced technology. Although the
Indian agricultural sector has not yet mechanized and there is little potential need for agriculture-based
ERP in the foreseeable future, the services sector offers a largely untapped potential. With the pace of
developments in the services sector continuing at 7 percent, there is a large scope for ERP in these
markets.
Many Indian industries already have realized the need for ERP solutions, and the industry-related market
growth should match the expansion of the sector as a whole. The maximum potential growth of the ERP
market rests with companies that have a greater than Rs. 2 billion turnover, with smaller companies
positioned to follow directly.
India is developing its infrastructure, ERP manpower requirements can be met, and the Indian mindset is
changing with the times. Certainly, if the national railways could computerize operations, ERP does not
seem an insurmountable challenge. In fact, the Indian ERP market looks very much like a $7.5 billion
opportunity that has decided to take the plunge.
Factors Affecting on ERP

First, there are two factors that affect both the cost of the software and the cost of
implementation:

Number of users. Software is often priced by the number of users. The number of
users is also a factor in implementation cost, as more users generally means more
user functions affected, more business processes affected, and more training
required.
Number of modules/amount of functionality. Similarly, software is often priced
by the scope of functionality included. Software with more functionality is generally
more expensive than software with less functionality. Likewise, implementing
software that supports a broader set of business functions will cost more.
In addition, there are several other factors that affect implementation cost but do not
generally affect software license cost. These include the following:

Amount of data conversion or interfaces required. An organization that can
implement the new system cleanly, without a lot of data conversion from the old
system and without building interfaces to legacy or third-party systems, will get by
with a lot less implementation budget than an organization that requires much data
conversion or integration.
Amount of business change required. An organization with well-defined business
processes that conform to the business processes defined in the software will
generally pay less for implementation than an organization that needs a lot of
business process change.
Skills and availability of the internal project team. An organization that has a
well-formed internal project team with skilled resources will generally pay less for
implementation than an organization that depends mostly on outside contractors to
undertake implementation activities. (The organization with the well-formed team is
also at less risk of project failure.)
Choice of the implementation consulting partner. An organization that engages
the help of a qualified systems integrator (or the vendor's own consulting arm, if so
qualified) will generally spend less on implementation than an organization that
chooses an SI with lesser skills or a poor track record in delivering services within
budget.
There are other factors as well, such as the degree of standardization of business processes
among multiple facilities and the organization's track record in managing cross-functional
business change projects.

"Complexity" of the software may be a factor
Finally, there is one other factor that is a wild-card, in my opinion. That is, the complexity of
the software itself. This may or may not affect software license cost, but it often affects
implementation cost.

This may be easiest to define with an example. SAP and Oracle are two well-know, so-called
"Tier I" ERP systems. It is generally understood that these systems can support the largest,
most complex, most geographically-dispersed organizations. They can support the widest
number of industry sectors. They do this by incorporating a great deal of functionality for
various industries, business processes, and local regulatory requirements. They are highly
configurable. In other words, they are big pieces of software, or as I like to put it, they have
a "big footprint."

This complexity comes with a price. It means that to make use of the system in a specific
organization, many decisions have to be made during the implementation. These decisions
cost time and money to configure the software and test it specifically for the organization's
needs. This drives up the cost of the implementation.

SAP and Oracle are well-aware of this issue and have worked hard over the past decade to
pre-configure their systems for specific industries and use cases. If a customer fits well into
the vendor's pre-configured templates ("accelerators" in Oracle-speak, or "best practices" as
SAP calls them), much of the complexity of the software can be hidden from view.
Customers that fall neatly into the vendor's template can sometimes achieve very rapid and
cost-effective implementations. Both vendors will gladly share references of such with
prospects.

But don't the higher-end software packages still cost more than software targeted for small
and mid-size businesses? This is not always the case. I have seen situations where SAP
and/or Oracle were actually the low-cost bidders. In cases where a software vendor wants
the deal, it is not safe to assume that the higher-end package will cost more. For this
reason, I don't believe software "complexity" in itself is a consistent factor in either software
license cost or implementation cost. As we consultants like to say, "it depends."

Popularity of implementation-to-license cost ratio
So, why do software vendors, customers, or systems integrators continue to use the
implementation-to-license cost ratio? Because, as flawed as the ratio is, it does serve to set
expectations as to implementation cost. To me, the ratio best works in hindsight. If a
system implementation, on average, requires 1.5 times the software cost, a customer better
not be assuming that it can do it for half the license cost.

But to really judge the prospective cost of an ERP implementation project, nothing beats
doing a detailed estimate based on a realistic work-breakdown structure, with realistic
estimates that take into consideration the factors outlined in this post.