BA 7301 ENTERPRISE RESOURCE PLANNING

UNIT I INTRODUCTION

Overview of enterprise systems – Evolution - Risks and benefits - Fundamental

technology - Issues to be consider in planning design and implementation of cross
functional integrated ERP systems.

1.1.1. Introduction
ERP is an acronym that stands for Enterprise Resource Planning. ERP software saw
phenomenal interest from the corporate sector during the period 1995-2000. The ERP
market is estimated to be in excess of USD 80 Billion in the year 2000 Many analysts
feel that today’s global business environment - products and services customized to suit
the individual needs of millions of customers, delivered over multiple timelines in a 24X7
basis - would have been impossible without such enterprise software. Undoubtedly ERP
represents one of the most complex and demanding application software in the corporate
environment.

1.1.2 What is ERP?

ERP is a package software solution that addresses the enterprise needs of an organization
by tightly integrating the various functions of an organization using a process view of the
organization.

A. ERP software is ready-made generic software; it is not custom-made for a specific

firm. ERP software understands the needs of any organization within a specific
industry segment. Many of the processes implemented in an ERP software are core
processes such as order processing, order fulfillment, shipping, invoicing, production
planning, BOM (Bill of Material), purchase order, general ledger, etc., that are
common to all industry segments.

B. ERP does not merely address the needs of a single function such as finance,
marketing, production or HR; rather it addresses the entire needs of an enterprise that
cuts across these functions to meaningfully execute any of the core processes.

C. ERP integrates the functional modules tightly. It is not merely the import and export
of data across the functional modules. The integration ensures that the logic of a
process that cuts across the function is captured genuinely. This in turn implies that
data once entered in any of the functional modules (whichever of the module owns
the data) is made available to every other module that needs this data. This leads to
significant improvements by way of improved consistency and integrity of data.

D. ERP uses the process view of the organization in the place of function view, which
dominated the enterprise software before the advent of ERP.

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1.1.3. Why ERP?

In spite of heavy investments involved in ERP implementation, many organizations
around the world have gone in for ERP solutions. A properly implemented ERP solution
would pay for the heavy investments handsomely and often reasonably fast. Since ERP
solutions address the entire organizational needs, and not selected islands of the
organization, ERP introduction brings a new culture, cohesion and vigor to the
organization. After ERP introduction the line managers would no longer have to chase
information, check compliance to rules or conformance to budget. What is striking is that
a well-implemented ERP can guarantee these benefits even if the organization is a multi-
plant, multi- location global operation spanning the continents.

In a sense ERP systems can be compared to the “fly-by-wire” operation of an aircraft.

ERP systems similarly would relieve operating managers of routine decisions and leave
them with lots of time to think, plan and execute vital long-term decisions of an
organization. Just as “fly-by-wire” operation brings in amazing fuel efficiency to the
aircraft operation by continuous monitoring of the airplane operation, ERP systems lead
to significant cost savings by continuously monitoring the organizational health. The
seemingly high initial investments become insignificant in the face of hefty long-term
returns.

At another level, organizations today face the twin challenges of globalization and
shortened product life cycle. Globalization has led to unprecedented levels of
competition. To face such a competition successful corporations should follow the best
business practices in the industry. Shortened life cycles call for continuous design
improvement, manufacturing flexibility and super efficient logistics control; in short a
better management of the entire supply chain. This in turn presupposes faster access to
accurate information both inside the organization and from the entire supply chain
outside. The organizational units such as Finance, Marketing, Production and HRD need
to operate with a very high level of integration without losing flexibility. ERP systems
with an organizational wide view of business processes, business needs of information
and flexibility meet these demands admirably.

1.1.4 Need for Enterprise Resource Planning

Organizations today face twin challenges of globalization and shortened product life
cycle. Globalization has led to unprecedented levels of competition. To face such
competitions, successful corporations should follow the best business practices in the
industry. Shortened life cycles call for continuous design improvements, manufacturing
flexibility, super-efficient logistics control and better management of the entire supply
chain. All these need faster access to accurate information, both inside the organization
and the entire supply chain outside. The organizational units such as finance, marketing,
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production, human resource development etc. need to operate with a very high level of
integration without losing flexibility. ERP system with an organization-wide view of
business processes, business need of information and flexibility meet these demands
admirably. One of the developments in computing and communication channels is
providing tighter integration among them.

1.1.5 Definition of ERP

Researchers and practitioners have defined ERP in many different ways.

Minahan (1998) defines ERP as a complex software system that ties together and
automates the basic processes of a business. ERP has been defined by various authors but
with few differences.

Kumar et al. (2000) define enterprise resource planning (ERP) systems as “configurable
information systems packages that integrate information and information-based processes
within and across functional areas in an organization”

Al-Mashari and Zairi (2000) states that ERP represent an optimal enterprise-wide
technology infrastructure. The basic architecture of an ERP system builds on one
database, one application, and a unified interface across the entire enterprise.

Nah et al. (2001) defines ERP as “An enterprise resource planning (ERP) system is
typically defined as a packaged business software system that facilitates a corporation to
manage the efficient and effective use of resources (materials, human resources, finance,
etc.) by providing a total integrated solution for the organization’s information-
processing requests, through a process-oriented view consistent across the company.”

1.4 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. These theories are popularly known as
‘Classical Inventory Management or Scientific Inventory Control Methods’. Most

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popularly used among them were Economic Order Quantity (EOQ); Bill of Material
(BOM) etc. However these systems had very limited scope.

ERP system has evolved from the Material Planning System of 1980’s. There are various
phases through which this evolution process has gone through. 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-

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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.
Example:

A typical example is a bicycle manufacture. To manufacture 100 units of bicycles, one

needs 200 wheels, 100 foot-pedals, and several thousands of spokes. On a given day, a
plant may have 40 units of complete bicycles in stock, 57 units of wheels, 43 units of
foot-pedals and 879 units of spokes. If the plant is to assemble 20 units of bicycles for the
next 4 days of production, wheels and spokes-is a non trivial problem. If the independent
demand of the spare parts is also to be taken into account, one can visualize the
complexity of it.

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.
Essentially MRP addresses a single task in manufacturing alone. Material requirement
planning (MRP) system was adopted by firms for creation and maintenance of master
data and bill of material across all products and part within an organization. MRP on the
other hand was an outgrowth of bill of material (BOM) processing, which is purchase
order management that utilizes parts list management and parts development.

1.2.3 Manufacturing Resources Planning II (MRP- II)

A natural evolution from the first generation MRP systems was the manufacturing
planning systems MRP II that addressed the entire manufacturing function and not just a
single task within the manufacturing function. MRP II went beyond computations of the
materials requirement to include loading and scheduling. 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.

Typically, the resources considered from 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
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to plan the materials using the traditional MRP II systems. Both MRP system and MRP II
systems were fairly successful in industry. Due to the power of information systems-
databases, algorithms and their integration, organizations did find real support for
efficiently managing the manufacturing function in the eighties.

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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 of management4.

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, workflow management and human resource
management. It is a web friendly application and thus addresses the issue of multiple
office locations.

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1.2.7 ERP – A Manufacturing Perspective

ERP systems evolved out of MRP and MRP II systems. MRP systems addressed the single task
of materials requirements planning. MRP II extended the scope to the entire manufacturing
function. The manufacturing industry traditionally had a better climate to use computers. First of
all the manufacturing community being dominated by engineers had no computer phobia.
Second the extensive use of Computer Aided Drafting (CAD), Computer Aided Design (CAD)
and Computer Aided Manufacturing (CAM) had prepared the manufacturing function to use
computers well, in fact exceptionally well. In fact manufacturing engineers contributed
significantly to the theoretical computer science by way of contributions in the areas of graphics,
computational geometry, significant visualization, feature recognition etc.

Large corporations like General Motors (GM), Ford, Hewlett Packard (HP), and Digital
primarily viewed themselves as manufacturing companies until the 1980s. Naturally complex
MRP systems were considered the ultimate in enterprise information systems. The investments
in hardware and software to manage such complex manufacturing solutions gave these systems a
visibility unparalleled in the industry. Compared to these systems accounting systems, financial
systems or personnel information systems were relatively inconsequential to the organization.

With the globalization of operations and the proliferation of computer networks, it was important
that the manufacturing organizations extend their information system across the supply chain.
The supplier’s information system spread across continents with complex combinations of
hardware and software need to be integrated. Similarly the dealer-distributor network had to be
integrated with the manufacturing information systems. The reduction in product life cycle
necessitated a quick response manufacturing system that had its ears tuned to the market.

This forced manufacturing information systems to have a tighter integration with marketing
information systems. The manufacturing flexibility had translated into mass customization
calling for further integration of information systems. The opening up of several world
economies including that of the Asian giants like China and India, the emergence of trade blocks
and consolidated markets such as European Union paved the need for accounting and finance
functions to be tightly integrated with manufacturing functions. It was not sufficient anymore
just to manufacture and sell but organizations had to arrange for finance, comply with complex
trade restrictions, barriers, and quotas.

The balance sheets needed to account for multiple currencies, multiple export import rules and
regulations, multiple accounting codes, practices, accounting periods. This necessitated further

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integration of accounting and financial information systems with manufacturing systems. In fact
with large capacities built around the world particularly in Asian countries, outsourcing and
contract manufacturing became viable alternative even in the high-tech industries like semi
conductor manufacturing.

Suddenly the need was for an Enterprise Information System that looks beyond the
manufacturing function to address inbound logistics, outbound logistics, manufacturing,
materials managements, project management, quality management, accounting, finance, sales
and personnel management. It was nearly impossible to integrate individual modules of
information systems. What was necessary was a system that addressed the enterprise needs from
the design stage. ERP systems were the natural choice in this changed scenario.

1.3 Benefits of ERP:

(a) Business integration: The first and the most important advantage lie in the promotion of
integration. The reason ERP packages are called integrated is the automatic data up
gradation between related business components, since conventional company information
systems 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 in the case of large companies in particular, the
timing of system structure and directives differs from each product and department /
functions and sometimes they are disconnected.
For this reason, it has become an obstacle in the shift to new product and business
classification. In the case of ERP packages the data of related business functions is also
automatically updated at the time a transaction occurs. For this reason, one is able to grasp
business details in real time, and carry out various types of management decisions in a
timely manner based o that information.

(b) Flexibility: The second advantage of ERP packages is their 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 that
span a company are packaged and can be implemented automatically. To cope with
company globalization and system unification, this flexibility is essential, and one could say
that it has major advantages, not simply for development and maintenance, but also in terms
of management.

(c) Better analysis and planning capabilities: Yet another advantage is the boosting of
planning type functions. By enabling the comprehensive and unified management of related
business and its data, it becomes possible to fully utilize many types of decision support

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systems and stimulation systems. Furthermore, since it becomes possible to carry out
flexibility and in real time the feeling and analysis of data from a variety of dimensions, one
is able to give decision makers the information they want, thus enabling them to make better
and informed decisions.

(d) Use of latest technology: The fourth advantage is the utilization of latest developments in
information technology (IT). The ERP vendors were very quick to realize that in order to
grow and to sustain that growth: they have to embrace 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: The manufacturing nature of many ERP
users makes the issue of process and material costs savings paramount. The main factor
behind these savings is that implementation of the ERP system allows customers to obtain
information on cost, revenues and margins, which allow it to better, manage its overall
material cost structure. This ability to manage costs is best seen in savings that organizations
can obtain in their inventory systems. Customers can perform a more complete inventory
planning and status checking with the ERP system.

These checks and plans reveal existing surpluses or shortages in supplies. Improved
planning and scheduling practices typically 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. The cost of
carrying inventory includes not only interest but also the costs of warehousing, handling,
obsolescence, insurance, taxes, damage and shrinkage.

(f) Reduced manpower cost: Improved manufacturing practices lead to fever shortages and
interruptions and to less rework and overtime. Typical labor savings from a successful ERP
system are a 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. Production
personnel have more time to develop better methods and improve quality.

(g) Reduced material costs: Improves procurement practices lead to better vendor negotiations

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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: Improved coordination of sales and production
leads to better customer service and increased sales. Improvements in managing customer
contacts, making and meeting delivery promises, and shorter order to ship lead times, lead to
higher customer satisfaction, goodwill and repeat orders. 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 technical staff.
Taken together, these improvements in customer service can lead to fewer lost sales and
actual increase in sales, typically 10 per cent or more. ERP systems also provide the ability
to react to changes in demand and to diagnose delivery problems. 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. Underlying
these improvements is fast, accurate invoice creation directly from shipment transactions,
timely customer statements and follows through on delinquent accounts. 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.

The benefits from ERP come in three different forms i.e. in the short-term, medium-term and
long-term. When initially implemented, in a year of the organization going live with ERP, it
helps in streamlining the operational areas such as purchase, production, inventory control,
finance and accounts, maintenance, quality control, sales and distribution, etc. This benefit is in
form of ‘automating’ the transactions which promises accuracy, reliability, availability and
consistency of data.

1.3.1. RISK IMPLEMENTATION:

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Even in a single site, implementing ERP means "Early Retirement Probably." An ERP package
is so complex and vast that it takes several years and millions of dollars to roll it out. It also
requires many far-flung outposts of a company to follow exactly the same business processes. In
fact, implementing any integrated ERP solution is not as much a technological exercise but an
"organizational revolution." Extensive preparation before implementation is the key to success.
Implementations carried out without patience and careful planning will turn out to be corporate
root canals, not competitive advantage. Several issues must be addressed when dealing with a
vast ERP system, and the following sections discuss each of them in detail.

Top Management Commitment

Implementing an ERP system is not a matter of changing softwaresystems, rather it is a matter of

repositioning the company and transforming the business practices. Due to enormous impact on
the competitive advantage of the company, top management must consider the strategic
implications of implementing an ERP solution.

Management must ask several questions before embarking on the project. Does the ERP system
strengthen the company's competitive position? How might it erode the company's competitive
position? How does ERP affect the organizational structure and the culture? What is the scope of
the ERP implementation -- only a few functional units or the entire organization? Are there any
alternatives that meet the company's needs better than an ERP system? If it is a multinational
corporation, the management should be concerned about whether it would be better to roll the
system out globally or restrict it to certain regional units?

Management must be involved in every step of the ERP implementation. Some companies make
the grave mistake of handing over the responsibility of ERP implementation to the technology
department. This would risk the entire company's survival because of the ERP system's profound
business implications.

It is often said that ERP implementation is about people, not processes or technology. An
organization goes through a major transformation, and the management of this change must be
carefully planned (from a strategic viewpoint) and meticulously implemented. Many parts of the
business that used to work in silos now have to be tightly integrated for ERP to work effectively.
Cutting corners in planning and implementation is detrimental to a company.

The top management must not only fund the project but also take an active role in leading the
change. A review of successful ERP implementations has shown that the key to a smooth rollout
is the effective changemanagement from top. Intervention from management is often necessary
to resolve conflicts and bring everybody to the same thinking, and to build cooperation among
the diverse groups in the organization, often times across the national borders.

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Top management needs to constantly monitor the progress of the project and provide direction
to the implementation teams.

The success of a major project like an ERP implementation completely hinges on the strong,
sustained commitment of top management. This commitment when percolated down through the
organizational levels results in an overall organizational commitment. An overall organizational
commitment that is very visible, well defined, and felt is a sure way to ensure a successful
implementation.

Reengineering

Implementing an ERP system involves reengineering the existing business processes to the best
business process standard. ERP systems are built on best practices that are followed in the
industry. One major benefit of ERP comes from reengineering the company's existing way of
doing business. All the processes in a company must conform to the ERP model. The cost and
benefits of aligning with an ERP model could be very high. This is especially true if the
company plans to roll out the system worldwide. It is not very easy to get everyone to agree to
the same process. Sometimes business processes are so unique that they need to be preserved,
and appropriate steps need to be taken to customize those business processes.

An organization has to change its processes to conform to the ERP package, customize the
software to suit its needs, or not be concerned about meeting the balance 30 percent. If the
package cannot adapt to the organization, then organization has to adapt to the package and
change its procedures. When an organization customizes the software to suit its needs, the total
cost of implementation rises. The more the customization, the greater the implementation costs.
Companies should keep their systems "as is" as much as possible to reduce the costs of
customization and future maintenance and upgrade expenses.

Integration

There is a strong trend toward a single ERP solution for an entire company. Most companies feel
that having a single vendor means a "common view" necessary to serve their customers
efficiently and the ease of maintaining the system in future. Unfortunately, no single application
can do everything a company needs.

Companies may have to use other specialized software products that best meet their unique
needs. These products have to be integrated along with all the homegrown systems with the ERP
suite. In this case, ERP serves as a backbone, and all the different software are bolted on to the

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ERP software. There are thirdparty software, called middleware, which can be used to integrate
software applications from several vendors to the ERP backbone.

Unfortunately, middleware is not available for all the different software products that are
available in the market. Middleware vendors concentrate only on the most popular packaged
applications and tend to focus on the technical aspects of application interoperability rather than
linking business processes.

Many times, organizations have to develop their own interfaces for commercial software
applications and the homegrown applications. Integration software also poses other kinds of
problems when it comes to maintenance. It is a nightmare for IS personnel to manage this
software whenever there are changes and upgrades to either ERP software or other software that
is integrated with the ERP system. For every change, the IT department will be concerned about
which link is going to fail this time.

Integration problems would be severe if the middleware links the ERP package of a company to
its vendor companies in the supply chain. Maintaining the integration patchwork requires an
inordinate and ongoing expenditure of resources. Organizations spend up to 50 percent of their
IT budgets on application integration? It is also estimated that the integration market (products
and services) equals the size of the entire ERP market.When companies choose bolt-on systems,
it is advisable to contact the ERP vendor for a list of certified third-party vendors. Each year, all
the major ERP vendors publish a list of certified third-party vendors. There are several
advantages to choosing this option, including continuous maintenance and upgrade support.

One of the major benefits of ERP solutions is the integration they bring into an organization.
Organizations need to understand the nature of integration and how it affects the entire business.
Before integration, the functional departments used work in silos and were slow to experience
the consequences of the mistakes other departments committed. The information flow was rather
slow, and the departments that made the mistakes had ample time to correct them before the
errors started affecting the other departments. However, with tight integration the ripple effect of
mistakes made in one part of the business unit pass onto the other departments in real time. Also,
the original mistakes get magnified as they flow through the value chain of the company.

For example, the errors that the production department of a company made in its bill of materials
could affect not only the operations in the production department but also the inventory
department, accounting department, and others. The impact of these errors could be detrimental
to a company. For example, price errors on purchase orders could mislead financial analysts by
giving a distorted view of how much the company is spending on materials.

Companies must be aware of the potential risks of the errors and take proper steps, such as
monitoring the transactions and taking immediate steps to rectify the problems should they

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occur. They must also have a formal plan of action describing the steps to be taken if an error is
detected. A proper means to communicate to all the parties who are victims of the errors as soon
as the errors are detected is extremely important. Consider the recent example of a
manufacturing company that implemented an ERP package. It suddenly started experiencing a
shortage of manufacturing materials. Production workers noticed that it was due to incorrect bills
of materials, and they made necessary adjustments because they knew the correct number of
parts needed to manufacturer.

However, the company did not have any procedures to notify others in case any errors were
found in the data. The domino effect of the errors started affecting other areas of business.
Inventory managers thought the company had more material than what was on the shelves, and
material shortages occurred. Now the company has mandatory training classes to educate
employees about how transactions flow through the system and how errors affect the activities in
a value chain. It took almost eight weeks to clean up the incorrect bills of materials in the
database.

Companies implementing electronic supply chains face different kinds of problems with
integration of information across the supply chain companies. The major challenge is the impact
automation has on the business process. Automation changes the way companies deal with one
another, from planning to purchase to paying. Sharing and control of information seem to be
major concerns. Companies are concerned about how much information they need to share with
their customers and suppliers and how to control the information. Suppliers do not want their
competitors to see their prices or order volumes.

The general fear is that sharing too much information hurts their business. Regarding
controlling information, companies are aware that it is difficult to control what they own let
alone control what they do not own. Companies need to trust their partners and must coordinate
with each other in the chain. The whole chain suffers if one link is slow to
provide information or access. The management also must be concerned about the stress an
automated supply chain brings within each organization. For instance, a sales department may be
unhappy that electronic ordering has cut it out of the loop, while manufacturing may have to
adjust to getting one week's notice to order changes and accommodate those changes into its
production orders.

ERP Consultants

Because the ERP market has grown so big so fast, there has been a shortage of competent
consultants. The skill shortage is so deep that it cannot be filled immediately. Finding the right
people and keeping them through the implementation is a major challenge. ERP implementation
demands multiple skills -- functional, technical, and interpersonal skills. Again, consultants with

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specific industry knowledge are fewer in number. There are not many consultants with all the
required skills.

One might find a consultant with a stellar reputation in some areas, but he may lack expertise in
the specific area a company is looking for. Hiring a consultant is just the tip of the iceberg.
Managing a consulting firm and its employees is even more challenging. The success or failure
of the project depends on how well you meet this challenge.

Implementation Time

ERP systems come in modular fashion and do not have to be implemented entirely at once.
Several companies follow a phase-in approach in which one module is implemented at a time.

For example, SAP R/3 is composed of several "complete" modules that could be chosen and
implemented, depending on an organization's needs. Some of the most commonly installed
modules are sales and distribution (SD), materials management (MM), production and planning,
(PP), and finance and controlling (FI) modules.

The average length of time for a "typical" implementation is about 14 months and can take as
much as 150 consultants. Corning, Inc. plans to roll out ERP in ten of its diversified
manufacturing divisions, and it expects the rollout to last five to eight years. The length of
implementation is affected to a great extent by the number of modules being implemented, the
scope of the implementation (different functional units or across multiple units spread out
globally), the extent of customization, and the number of interfaces with other applications.

The more the number of units, the longer implementation. Also, as the scope of implementation
grows from a single business unit to multiple units spread out globally, the duration of
implementation increases. A global implementation team has to be formed to prepare common
requirements that do not violate the individual unit's specific requirements. This involves
extensive travel and increases the length of implementation.

1.4 Fundamental Technology of ERP:

When it comes time for your organization to evaluate ERP systems, whether you are replacing a
small business accounting package or an aging ERP, It is important to clarify the components.
Each piece (often called module) of the ERP system delivers different value for your
organization. To get the most from the full system, make sure your evaluation team understands
the fundamentals.

Financial Management

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At the core of ERP are the financial modules, including general ledger, accounts receivable,
accounts payable, billing and fixed asset management. If your organization is considering the
move to an ERP system to support expansion into global markets, make sure that multiple
currencies and languages are supported.
Other functionality in the financial management modules will include budgets, cash-flow,
expense and tax reporting. The evaluation team should focus on areas that are most important to
support the strategic plans for your organization.

Business Intelligence

Business Intelligence (BI) has become a standard component of most ERP packages. In general,
BI tools allow users to share and analyze the data collected across the enterprise and centralized
in the ERP database. BI can come in the form of dashboards, automated reporting and analysis
tools used to monitor the organization business performance. BI supports informed decision
making by everyone, from executives to line managers and accountants.

Supply Chain Management

Supply Chain Management (SCM), sometimes referred to as logistics, improves the flow of
materials through an organization by managing planning, scheduling, procurement, and
fulfillment, to maximize customer satisfaction and profitability. Sub modules in SCM often
include production scheduling, demand management, distribution management, inventory
management, warehouse management, and procurement and order management.
Any company dealing with products, from manufacturers to distributors, needs to clearly define
their SCM requirements to properly evaluate an ERP solution.

Human Resource Management

Human resource management ERP modules should enhance the employee experience – from
initial recruitment to time tracking. Â Sub modules can include payroll, performance
management, time tracking, benefits, compensation and workforce planning. Self-service tools
that allow managers and employees to enter time and attendance, choose benefits and manage
PTO are available in many ERP solutions.

Manufacturing Operations

Manufacturing modules make manufacturing operations more efficient through product

configuration, job costing and bill of materials management. ERP manufacturing modules often

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include Capacity Requirements Planning, Materials Requirements Planning, forecasting, Master

Production Scheduling, work-order management and shop-floor control.

Integration
Key to the value of an ERP package is the integration between modules, so that all of the core
business functions are connected. Information should flow across the organization so that BI
reports on organization-wide results.

1.5 Issues to be consider in planning design and implementation of cross functional

integrated ERP systems:

The problem with ERP packages is that they are very general and need to be configured to a
specific type of business. This customization takes a long time, depending on the specific
requirements of the business. The extent of customization determines the length of the
implementation. The more customization needed, the longer it will take to roll the software out
and the more it will cost to keep it up-to-date.

For small companies, SAP recently launched Ready-to-Run, a scaled-down suite of R/3
programs preloaded on a computer server. ERP vendors are now offering industry-specific
applications to cut the implementation time down. SAP has recently outlined a comprehensive
plan to offer 17 industry-specific solutions, including chemical, aerospace and defense,
insurance, retail, media, and utilities industries. Even though these specific solutions would able
to substantially reduce the time to implement an application, organizations still have to
customize the product for their specific requirements.

Implementation Costs

Even though the price of prewritten software is cheap compared with in-house development, the
total cost of implementation could be three to five times the purchase price of the software. The
implementation costs would increase as the degree of customization increases. The cost of hiring
consultants and all that goes with it can consume up to 30 percent of the overall budget for the
implementation.

Once the selected employees are trained after investing a huge sum of money, it is a challenge to
retain them, especially in a market that is hungry for skilled SAP consultants. Employees could
double or triple their salaries by accepting other positions. Retention strategies such as bonus
programs, company perks, salary increases, continual training and education, and appeals to
company loyalty could work. Other intangible strategies such as flexible work hours,
telecommuting options, and opportunities to work with leading-edge technologies are also being
used. Many companies simply strive to complete the projects quickly for fear of poaching by
head-hunting agencies and other companies.

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ERP Vendors

As there are about 500 ERP applications available and there is some company consolidation
going on, it is all the more important that the software partner be financially well off. Selecting a
suitable product is extremely important. Gartner Group has BuySmart program, which has more
than 1700 questions to help a company choose a suitable ERP package. Top management input
is very important when selecting a suitable vendor. Management needs to ask questions about
the vendor, such as its market focus (for example, midsize or large organization), track record
with customers, vision of the future, and with whom the vendor is strategically aligned.

For a global ERP rollout, companies need to be concerned about if the ERP software is designed
to work in different countries. Also, the management must make sure the ERP vendor has the
same version of the software available in all the countries the company is implementing the
system. Vendor claims regarding global readiness may not be true, and the implementation team
may need to cross-check with subsidiary representatives regarding the availability of the
software. Vendors also may not have substantial presence in the subsidiary countries. It is
important to evaluate if the vendor staffers in these countries are knowledgeable and available. If
there is a shortage of skilled staff, bringing people from outside could solve the problem, but it
would increase the costs of implementation.

Selecting the Right Employees

Companies intending to implement an ERP system must be willing to dedicate some of their best
employees to the project for a successful implementation. Often companies do not realize the
impact of choosing the internal employees with the right skill set. The importance of this aspect
cannot be overemphasized. Internal resources of a company should not only be experts in the
company's processes but also be aware of the best business practices in the industry. Internal
resources on the project should exhibit the ability to understand the overall needs of the company
and should play an important role in guiding the project efforts in the right direction.

Most of the consulting organizations do provide comprehensive guidelines for selecting internal
resources for the project. Companies should take this exercise seriously and make the right
choices. Lack of proper understanding of the project needs and the inability to provide leadership
and guidance to the project by the company's internal resources is a major reason for the failure
of ERP projects. Because of the complexities involved in the day-to-day running of an
organization, it is not uncommon to find functional departments unwilling to sacrifice their best
resources toward ERP project needs. However, considering that ERP system implementation can
be a critical step in forging an organization's future, companies are better off dedicating their best
internal resources to the project.

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Training Employees

Training and updating employees on ERP is a major challenge. People are one of the hidden
costs of ERP implementation. Without proper training, about 30 percent to 40 percent of front-
line workers will not be able to handle the demands of the new system. The people at the
keyboard are now making important decisions about buying and selling -- important
commitments of the company. They need to understand how their data affects the rest of
company. Some of the decisions front-line people make with an ERP system were the
responsibility of a manager earlier. It is important for managers to understand this change in their
job and encourage the front-line people to be able to make those decisions themselves.

Training employees on ERP is not as simple as Excel training in which you give them a few
weeks of training, put them on the job, and they blunder their way through. ERP systems are
extremely complex and demand rigorous training. It is difficult for trainers or consultants to pass
on the knowledge to the employees in a short period of time. This "knowledge transfer" gets hard
if the employees lack computer literacy or have computer phobia. In addition to being taught
ERP technology, the employees now have to be taught their new responsibilities. With
ERP systems you are continuously being trained. Companies should provide opportunities to
enhance the skills of the employees by providing training opportunities on a continuous basis to
meet the changing needs of the business and employees.

Employee Morale

Employees working on an ERP implementation project put in long hours (as much as 20 hours
per day) including seven-day weeks and even holidays. Even though the experience is valuable
for their career growth, the stress of implementation coupled with regular job duties (many times
employees still spend 25 to 50 percent of their time on regular job duties) could decrease their
morale rapidly. Leadership from upper management and support and caring acts of project
leaders would certainly boost the morale of the team members. Other strategies, such as taking
the employees on field trips, could help reduce the stress and improve the morale.

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