Brief Overview Of ERP

Overview

To be successful in a competitive environment, organizations need to manage information effectively. The management needs accurate information at the right time for strategic planning and decision making. In addition, the various departments of an organization need to be integrated to enable them to share accurate and timely information.

Enterprise resource planning (ERP) helps integrate the working of the various business processes in an organization to ensure efficient management of information and facilitate decision making and strategic planning.

In this session, you will learn about:

Identifying the need of ERP
Identifying the evolution of ERP

Identify the need of ERP: The Era Before ERP Systems

In the era before ERP systems, organizations encountered several problems when handling their processes. Consider the case of ABC Inc., a leading manufacturer of plastic products. Established in 1977, ABC Inc. had several departments, such as Production, Purchase, Sales, Marketing, Human Resource, and Finance. Each department had its defined set of objectives and business processes.

abc

To perform the business processes and achieve their objectives, the departments needed to efficiently manage their data. In the initial years, all data was manually stored and retrieved. This required a lot of paper work. Storage and retrieval of data was also cumbersome and time consuming. As a result, the productivity and profitability of the enterprise suffered.

During the 1980s, the management understood the benefits of Information Technology (IT) and acquired applications specifically designed for each department. As a result, intra-department processing became efficient. The management expected high returns on this investment in terms of increased productivity and efficiency in processes. This could mean a higher turnover and customer satisfaction for ABC Inc.

abc

However, after one year, the management observed that the applications did not reap the expected benefits. The management conducted an open meeting with senior executives of each department to discuss the problem.

(Let us see what they discuss)

Problems with Individual Software Systems: ABC Inc.

system

Hr. Executive Says:

Sales Executive Says:

sale

Marketing Executive Says:

Production Executive Says:

Finance Executive says:

Conclusion:

The committee concluded that the problems existed because each department was using a stand-alone application. To improve its efficiency, ABC Inc. needed to use an integrated information system for all departments.

An integrated information system will ABC to the business processes of all the departments and facilitate timely and accurate information flow among them.

Here is the example integration between sales and finance department.

finance

Tracing the Evolution of ERP:

ERP integrates and automates most aspects of the working of an enterprise. It is a landmark in the enterprise-wide integration of business processes through information systems. However, it is not the first attempt to do so.

The need and attempt to integrate the working of an enterprise began in the 1960s with systems that integrated only a part of an enterprise.

Predecessors of ERP Systems:

The use of information systems to integrate some business processes within an enterprise began with inventory control systems in the 1960s. In the 1970s, organizations wanted to integrate inventory management and production planning. Therefore, materials requirement planning (MRP) systems originated.

system

In the 1980s, MRP evolved into manufacturing resource planning (MRP II) systems that led to ERP systems in the late 1990s. During the evolution from inventory control systems to ERP systems, the number of integrated business processes in an enterprise has increased. Let us discuss each predecessor of ERP systems in detail.

Inventory Control Systems

Inventory control systems are stand-alone software applications that automate the control and management of the inventory in an enterprise. These systems helped simplify the sales, purchase, and production business processes to some extent.

Although the inventory control systems were useful, they had several limitations. For example, they were not able to generate production schedules based on current inventory level. To facilitate such tasks, inventory control systems needed to be integrated with production planning processes. This led to the development of MRP systems.

Materials Requirement Planning (MRP) Systems:

MRP systems are software applications that integrate inventory control and production planning. The aim of an MRP system is to produce a detailed material requirement plan for the production of items based on various inputs, such as bill of material (BOM) and master production schedule (MPS). The outputs of the MRP system determine what material is procured when and in how much quantity so as to finish the manufacturing of the end-product on time.

Although MRP systems helped in production planning, they were prone to incorrect input due to human error, such as unrealistic lead-time estimates or inaccurate data. They also ignored factors such as constraints on the available capacity of human, material, and cost resources. As a result, sometimes they generated plans and schedules that were difficult to achieve.

Understanding ERP:

After using MRP II, organizations wanted to broaden the coverage of business processes and to use MRP II in sectors other than manufacturing. This led to the development of ERP. ERP was an extension of MRP II, providing broader coverage of business processes and applicability to sectors other than manufacturing.

ERP can be defined as a way to plan (P) integration of business processes and information across departments in an enterprise (E) for efficient utilization of resources (R) including human, material, and cost. Before discussing the benefits of ERP, let us understand the associated terminology confusions.